Week Ending February 12th, 2021

The stocks continued to rise last week supported by the fiscal stimulus expectations  amid Trump's impeachment trial. On Saturday  Senate has acquitted Trump in the impeachment trial, which has highly been anticipated by the investors. 

The core CPI data for January remains unchanged as reported last week. The initial unemployment claims fell to 793,000 on seasonally adjusted basis, in the week ending on February 6th. While University of Michigan's sentiment index fell to the lowest reading of 76.2 in the early February since hitting 74.1 in August 2020 because the consumers expectations index fell to 69.8 in February from January's reading of 74.0. Crude oil continued to rise and  hit $59.82 on Friday amid ongoing supply cuts.

The stocks are trading at all-time highs, and I think new catalysts are needed to push them higher from these levels because all the good news has already been priced in the market. Stocks have been the only option for investors so far. 

Although breakeven inflation rate has been on the rise, 5 and  10 year Treasury breakeven hit 2.35% and 2.21% respectively on Friday, I think investors' expectations about the future expectations of inflations are little out of proportion as I think inflation is more a function of labor market than the size of the stimulus or the pent-up demand. Moreover, I think coronavirus is going to stay with us in some form for couple more years even though we end up vaccinating the entire population.

Week Ending February 5th, 2021

Contrary to my expectations, the stocks came back up last week. I thought the GameStop/Redditt saga will linger on for more days but at present it appears that the worries have disappeared. And once again fundamentals have prevailed and pumped up securities prices got corrected to levels closer to the intrinsic values. Maybe the markets need a bigger catalyst to clear the frothiness. Although the fiscal stimulus expectations, distribution of the vaccine and emergence of new strains continue to blur the path forward.

On economic front the January 2021 jobs report disappointed as US economy only added 49,000 jobs. Although initial claims, a more timely measure of the labor market declined to 779,000, on seasonally adjusted basis in the week ended on January 30.

I continue to stick to the  bearish expectations until labor market improves by a lot as household spending is dependent on labor market strength, and US economy is all about consumer spending. I am aware that corporate results have been pretty good so far and are expected to grow in the future and we are going to stay in the ultra-low  interest rate environment.

I advise investors to stay diversified and  not to chase speculative  manias. Fundamental analysis and basics of economics always determine the assets prices. 

Week Ending January 29th, 2021

What a volatile stock market it was last week, the new crowd headed by the self-claimed top notch experts on Reddit and other social media sites started a war against the established market participants. I feel neither the leaders of such online forums nor the hedge funds will be at a loss when the dust settles, the average investor will end up holding pumped up stocks.

Fundamental analysis will never lose against the so called crowd of online communities. I remember a 1929 story when a shoe shiner gave stock tips to Joe Kennedy and Joe  being a wise investor decided to get out of the stock market. The present situation is not entirely similar to 1929 circumstances, but investors should be vigilant.

The compliance departments of broker dealers should keep track of the symbols which are being pumped up by the social media forums and try to stop or restrict trading in those securities where made up stories about certain stocks do not correlate with underlying fundamentals. Otherwise the similar kind of pump and dump schemes orchestrated by the online chat rooms would be every day's news. I know it's not accurate to call this pump and dump until we have proof of false information being spread by a few with intention to defraud, as everybody knows it’s a speculation for sure at the moment. I think moderators of such online communities should be regulated persons.

Jerome Powell reinforced his message that economic outlook remains uncertain after 2 days meeting last week. He also expressed that Fed does not have any intention to taper its purchases at present.

As expressed by me last week, I think all the available good news has already been priced in. I am hoping that this meltdown continues next week.

Week Ending January 22nd, 2021

It was another good week for equities, major indices hit new highs on Thursday before pulling back on last Friday, while Treasury yields remained steady over the week. Biden became the 46th President of United States, his inauguration took place on Wednesday without any violence or major protest. I think  markets are pricing in lesser chance of tax hike this year it seems, as Biden is looking more interested in reviving the economy. He is pushing for $1.9 Trillion stimulus plan which is currently getting a lot of resistance from Senate Republicans who are concerned about size of the stimulus plan and long term government deficit levels.

Biden reversed many of the last administration's decisions including Trump's decision to leave W.H.O and Paris Climate deal. Biden repeated his goal of vaccinating 1 million persons a day in the first 100 days of his presidency which calmed investors' nerves who look concerned about slow distribution of vaccines. Daily new cases and hospitalizations moderated a little bit last week but danger of much more infectious strains looms.

Seasonally adjusted initial claims remained stubbornly high at 900,000 in the week ending on Jan 16. National Association of realtors reported last Friday that Existing home sales rose in December  and in 2020 as a whole. Existing home sales in 2020 rose by 5.9% from 2019 due to low interest rates and the pandemic induced buying although the listings remain at historic lows.

I think all the good news has already been discounted in the market. The companies' earnings, size and frequency of stimulus bills this year can only provide positive surprises. 

Week Ending January 15th, 2021

Stocks ended the week lower as investors are trying to assess uncertainties related to economic recovery in 2021 , possible path of the coronavirus and new coronavirus strain in particular and future lockdowns. Also the distribution of the vaccines is falling well short of the expectations, which is effecting the investors' sentiment.

President Elect has announced a $1.9trillion fiscal plan to counter the effects of virus. I feel that  effectiveness of stimulus is dependent not on the dollar value but  on how these funds are spent .The seasonally adjusted initial claims rose by 181,000 to 965,000 in the week ending on January 9 as reported last week. Initial claims act as proxy for layoffs so it is evident that we are very far from pre-pandemic employment level.

As reported last week the core CPI increased only by 0.1% in December 2020 and the annual core CPI remains  at 1.6 % although Fed eyes PCE as the correct inflation measure. On the other hand the 10 year treasury yield and 10 year  breakeven inflation rate, have been rising due to rising commodity prices and the weak dollar and  expectations of uptick in inflation due to fiscal stimulus.

I think expectations of rise in inflation will be realized only if labor market recovers at a faster pace in 2021, speedy vaccination  or development of herd immunity  and people spending the stimulus checks to increase demand of goods.

Otherwise If the long term yields keep on rising at a faster pace and the fed starts to pause or taper the purchases later this year then I think the equity prices will come under greater pressure apart from quick correction which is already due as I think valuations have run far ahead of the underlying fundamentals .

Week Ending January 8th, 2021

The stock indices continued to march higher in the first week of the year. The stocks tumbled  earlier in the week but resumed the upward journey on Wednesday. Democrats won the run-off elections in Georgia on Wednesday. Saudi Arabia shocked the energy market with new supply cuts. The US Capitol was stormed by rioters on Wednesday and the situation was taken under control by the National Guard later that day.

The stocks have been continuing to shrug off all the negative news. But I feel the negative sentiment is building up slowly. The non-farm payroll report was another shock last week as it was reported that 140,000 jobs were lost in December 2020. But the unemployment rate remains at 6.7%,  While the seasonally adjusted initial claims fell by 3000 to 787000 in the week ended on January 2nd.

I think what will happen if the new day traders learn the art of short selling as it will prove to be more fun for these novice traders. These new born traders are the key I think to the next meltdown. They have enjoyed the uphill journey so far, why won't they participate in the downhill ride. It's just a matter of transmission of this idea to a large base of these traders.

Fundamentally market seems to have priced in smooth economic recovery this year. But very smooth economic recovery seems unlikely to me as danger of new waves and new strains continue to lurk around us. Now Democrats have clear majority in both the houses, let's see how many times one gets stimulus checks this year.

Week Ending January 1st, 2021

What a wild run we had in the stock market in 2020. Stocks took a deep dive in first quarter last year and then climbed back up again and surpassed the previous highs seen before pandemic. While the unemployment rate has improved a lot but the economy is still recovering from the shock and it’s after currents. Technology sector took the lead and pulled the indices back up.

Let's talk about the future and 2021 in particular, the economy is dependent on stimulus and the ultra-accommodative   monetary policy, the unemployment rate is far better but nowhere near the pre pandemic level, Trade tariffs remain in place, China has become unstoppable it seems. We are still fighting the virus although there are vaccines available. Virus is mutating and producing new more communicable strains. Core PCE Inflation is hovering around 1.4%, but I think we can expect uptick in inflation in the latter half of 2021, due to so much liquidity in the market. The uptick in inflation can cause pause in Fed bond buying later this year.

Stocks are trading at all-time highs and I feel they have run ahead of the fundamentals by large margin and too quickly due to flood of liquidity, thanks to Fed. The stocks are due for correction in the short term, as  stocks need to catch up with the reality.

I am also aware that there is no place except stocks for the investors. And this accommodative monetary policy is going to be in place for at least 1-2 years and people will be receiving more stimulus checks in near future. Recovering unemployment rate will also help the consumer spending.

I advise investors to follow strategies which help to protect as well as capture most of the upside in the stock market in 2021.

Week Ending December 18th, 2020

The stock market is only focused on the new stimulus bill, it appears. Whenever there is any positive development on stimulus talks, stocks move up. I feel that even if Congress passes the new proposed bill, it won't be enough as economy needs more relief packages like this in near future.  It was reported last Thursday that the unemployment claims remain high despite all the positive news about the vaccine. The seasonally adjusted unemployment claims reached 885,000 in the week ending on December 12th.

Federal Reserve's total balance sheet has expanded to $7.36 Trillion as of December 16, from almost $4 Trillion approximately in February this year. The pace of the bond buying by the Fed has been phenomenal. Last week FOMC assured the investors that it will continue to buy the Treasury and Agency Mortgage backed securities at current pace .I think this unprecedented amount of  liquidity has resulted in inflated equities prices.

I don’t think it’s a good environment to short the stocks as the momentum behind the stocks' rally can last for many weeks ahead. But it seems prudent to wait for any correction which is highly likely in coming first 3 months 2021. 

Merry Christmas & Happy Holidays!

Week Ending December 11th, 2020

Equities ended last week lower as recovery in employment growth appears to be stalling and as talks over another round of stimulus continue to drag. As almost all analysts are saying that we are entering a new bull market , I don’t think the bull markets start with stimulus bills and slow employment growth. The magnitude of the animal spirits can be assessed by looking at the new IPOs’ wonderful openings. Airbnb and Doordash shares opened sharply higher once trading began last week. I am confident about the US economy but I think in the near term stocks are due for a correction.

Last week Labor Department reported that initial jobless claims rose to 853,000  in the week ending December 5th. But the University of Michigan's gauge of consumer confidence rose to 81.4 in the two weeks ending on December 9, from 76.9 in November.

Factors like  accommodative monetary policy mixed with fiscal stimulus, anticipation of higher corporate profits  supported by cost control measures, very low inflation and distribution of the vaccine, all favor equities. Moreover stocks are the only place left to get decent return in this environment. But I think when everyone is greedy, the sophisticated investors should remain vigilant.

Week Ending December 4th, 2020

Stocks went further up last week. Energy stocks performed well after 'OPEC plus's meeting ended with an agreement to ease output cuts more gradually than planned before. On last Wednesday, UK approved the use of coronavirus vaccine. Scientists have also started to find the answers for very less number of new cases in Asia while new cases have been soaring at a great pace in Europe and North America.

Rising hopes of new stimulus bill emerged last week as on last Tuesday as a bipartisan group of senators proposed a $908 billion relief package. Mnuchin also asked the legislators to use the unused $455 billion of CARES act. He had asked the Fed to return these funds to Treasury previously. On Friday it was reported that only 245,000 non-farm  jobs were added in the month of November. This number signals the slowing pace of economic recovery . The unemployment rate went down to 6.7% due to the falling participation rate.

I reiterate that investors should cut down their equity exposure going into next year. As stocks are at historic highs and look very costly on absolute basis. Many analysts are comparing this current market scenario with the mid-late 2009 period when the last bull market started. But I think it is not a good idea to compare different economic periods, as now we are already at the lower bound and Fed has already exhausted almost its entire  toolkit. Moreover the economy depends on the stimulus which Jerome Powell regularly is asking for.

Sometimes it feels like US Economy is undergoing Japanification process . And it seems possible that US Fed will be buying stocks in near future like it has started buying junk bonds.