US Strategy Weekly: Oh Media!

Media Hyperbole

It is widely known that there is political bias in the mass media, but we continually see signs of bias in the financial press as well. The bias tends to be bullish or optimistic, which may seem constructive and comforting, but it can also be dangerous if it is misleading to the public and/or investors. We have pointed out several situations in the past and there was more this week. In particular, we just read a headline from an international news source that shouted in bold letters “US consumer confidence rebounds, house prices maintain upward trend.” We had just finished writing the back pages of this report, so we knew what these economic releases contained, and this headline did not match what we learned from the data.

This headline sounded like the economy was on the verge of an economic rebound. However, within the article it did state that “the Conference Board said its consumer confidence index increased to 102.0 this month from a downwardly revised 99.1 in October. Economists polled by Reuters had forecast the index dipping to 101.0. The improvement in confidence was concentrated mostly among households aged 55 and up. Consumers in the 35-54 age group were less optimistic about their prospects.”

The fact that the 35-54 age group was less optimistic than those over 55 is noteworthy since this age group is of prime working age and has children in school, a combination that makes them core consumers and important drivers of the economy.

What was not made transparent in this article was that October’s index had initially been reported to be 102.6. This means the consensus estimate for November was 101.0 implying a decline in sentiment. And the only reason November’s index of 102.0 was better than forecasted was the large negative revision in October’s index, to 99.1. In our opinion, there is a bit of a sleight of hand to say that November’s confidence was a positive surprise and/or represented a rebound. Plus, the University of Michigan consumer sentiment index for November showed consumers were clearly worried, especially about higher inflation. The main index fell 2.5 to 61.3, present conditions were 2.3 lower to 68.3, and expectations fell 2.5 to 56.8. All in all, none of this supports a headline that says consumer confidence is rebounding, in our opinion. See page 6.

In terms of suggesting there is an upward trend in house prices, it is more of the same. The article was referencing housing data from the Federal Housing Finance Agency (FHFA) which does not measure home prices but calculates an index (1991=100) which is defined as a weighted repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties. It is a broad-based index but does not represent actual home prices. We doubt that the journalist understood this. Moreover, the FHFA index is released a month later than most other home price data, i.e., the article was referencing September data when data for October and surveys for November had already been released. See page 5.

As for the trend in new home sales and prices, according to data from the Census Bureau, sales were lower in October versus September, but up 17.7% YOY. New house inventories were at their highest level since January and the total months of supply of housing was 7.8, back to August’s level. But in terms of home prices, Census data showed that the average new single-family home price fell 10.4% YOY to $487,000 while the median price fell nearly 18% YOY to $409,300. This data does not support the international news article, but it does support the negative NAHB survey results reported for October and November. See page 4. In sum, do not believe everything you read.

Media Neglect

Not getting much attention by the media are the risks appearing in the Chinese economy. Most investors know about China’s property crisis and its impact across China is immense and ongoing. However, foreign investors have been souring on China for most of this year, and recent data shows strong evidence that the global trend of diversifying supply chains and other de-risking strategies are having a negative impact on the world’s second-largest economy. In the July-September period, China recorded its first-ever quarterly deficit in foreign direct investment, a sign of capital outflow pressure. See page 7. According to Rhodium Group (, the value of announced US and European greenfield investment into China dropped to less than $20 billion last year, from a peak of $120 billion in 2018, while investment into India shot up by some $65 billion or 400% between 2021 and 2022.

Given this backdrop, it is not surprising that Chinese President Xi Jinping recently met with President Biden at the Asia-Pacific-Economic-Cooperation (APEC) Summit in San Francisco. Investment in China has dropped to historic lows, and President Xi attended the Summit in San Francisco to promote China’s economy. However, the data suggests that foreign firms are not only refusing to reinvest their earnings in China but are selling existing investments and repatriating funds. This trend could put further pressure on the yuan and dampen China’s economic growth in the long run. It also reduces China’s need to invest dollar inflows, which helps explain China’s decreasing demand for US Treasury bonds.

In terms of China’s economic activity, a survey released by The Conference Board showed that more than two-thirds of responding CEOs indicated that China’s demand has not returned to pre-COVID levels. Forty percent of respondents are expecting a decrease in capital investments in China and a similar proportion are expecting to cut jobs. In sum, corporations will become more dependent upon US consumers for top-line growth in the future.

Market Update

Not much has changed this week. The charts of the popular equity indices remain bullish with the first level of resistance seen at the July highs and the most important resistance found at the all-time highs. The near-term levels to monitor are 4600 in the SPX (July high) and the 1820-1827 area of the Russell 2000 index where the 100-day and 200-day moving averages merge. These short-term challenges are yet to be tested. However, while moves above these levels would be favorable for a year-end rally, the all-time highs are the real source of resistance. In our view, the longer-term trading ranges remain intact. See page 10.

Beware What You Wish For The consensus believes rate hikes are over and rate cuts, accompanied by a soft landing are in store for 2024. Yet, today’s rapid Fed tightening cycle would be most comparable to the early 1950s or the early 1980s. In both cases, Fed tightening led to multiple recessions. And while the stock market is currently rallying based upon the view that rates have peaked and will soon decline, the decline in interest rates following a tightening cycle has usually appeared in tandem with a recession. In short, the current stock market rally appears to be celebrating the onset of a recession, whether it is aware of it or not.

Gail Dudack

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The Other Magnificent 7

The OTHER Magnificent 7

The Magnificent 7 have lived up to their billing.  We would contend, however, there is an “OTHER” Magnificent 7 with as good or even better charts both medium-term and, especially long-term.  Smaller in market-cap they don’t drive the market averages, and therefore don’t seem to get the attention they deserve.  While we’ve chosen seven, we easily could’ve chosen another seven that fit this criteria.

Frank Gretz

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US Strategy Weekly: A Tale of Two Cities

Happy Thanksgiving to all! We are grateful for many things, but most of all the friendship and loyalty of our clients. Wishing you the best that Thanksgiving represents gratitude, family, friendship, and great food!!

Momentum Shift

After a strong four-week advance off the October lows, US equities retreated this week. Part of the retreat was due to a string of weak earnings reports from retail companies, but stocks also stalled from a lack of news that could move stocks higher. Even a positive earnings report from chip designer, Nvidia Corp. (NVDA – $499.44), failed to impress, and the stock traded lower in after-market trading. Nvidia noted in its earnings report that it faces challenges in both Israel, where employees are being called up for active duty, and in China, where sales will be affected by US export controls. The release of FOMC minutes confirmed the consensus view that the Fed is apt to be on hold, barring any bad news on the inflation front. This is a positive factor, but it has already been discounted by rising stock prices.

However, the technical condition of the market did improve in the last week. Trading on November 14 recorded a 91% up day, i.e., volume in advancing stocks represented 91% of total NYSE volume. In addition, the NYSE total volume for the day rose above the 10-day average. This combination displayed a positive shift in conviction. (Note that our indicators use NYSE volume versus composite volume to separate day trading and professional hedging from actual buyers and sellers.) The 10-day average of daily new highs rose to 122, above the 100 benchmark that helps define an uptrend, while the 10-day average of daily new lows fell to 79, below the 100 benchmark. This combination also reversed a negative trend that had been in place since mid-September. See page 12.

Nevertheless, our 25-day up/down volume oscillator is at a negative 0.40 reading this week and neutral. See page 11. This lackluster response, despite several strong days of upward momentum, does not surprise us since it is in line with our view that the market is long-term trendless. Our view that the equity market will remain in a wide trading range, a substitute for a bear market, has not changed.

The charts of the popular equity indices continue to be bullish with the first level of resistance seen at the July highs and the second level of resistance found at the all-time highs. The key levels to watch in coming days are 4600 in the S&P 500, which is roughly the July high and the 1830 area of the Russell 2000 index where the 100-day and 200-day moving averages merge. These levels pose near-term challenges for these equity indices and will help define the strength of the current advance. The favorable seasonality of the November, December, and January months are in the stock market’s favor, but it was disappointing that the Russell 2000 index was the worst performing index in this week’s pullback. We do not expect year-end strength to carry the indices to new highs and this suggests that the long-term trading ranges will remain intact.

The Economy is a Tale of Two Cities

Strategists can be broken down into two distinct groups of those looking for a recession and those looking for a soft landing. However, the underlying data drives this division.

The positive factors include October’s headline CPI showing a 3.2% YOY rise, the PPI for finished goods falling 0.4% YOY, and the price of crude oil down 3.8% YOY. This combination makes a lower inflation outlook seem probable. Some inflation benchmarks are still higher with core CPI at 4% and core PPI at 3.2%, but overall, most inflation benchmarks are now below the long-term CPI average of 3.4% YOY. In short, inflation is lower, and if not yet at 2%, it is still below average. See page 3. This coupled with a job environment that is neither robust, nor weak, makes a soft landing credible.

However, this would be the first time in history that inflation at or approaching a double-digit pace, was not followed by a series of recessions. And it would be the first time that the real fed funds rate did not have to rise to 400 basis points before an inflationary trend was reversed. See page 4. We believe the jury is still out whether the current 200 basis points in the real fed funds rate will cure inflation. See page 4.

Neither the last recession nor economic recovery were normal business cycles. The recession was the result of a mandated shutdown of the economy and the recovery was the result of historic stimulus policies by both the administration and the Fed. Does this mean it will be different this time? It is difficult to tell. Inflation is a cruel tax on the lower end of the income spectrum, and this is what sparks a recession. We can see this in the current economy, which is a tale of two cities, i.e., the wealthy and the poor.

Retail sales were down slightly in October, but up 2.5% YOY. However, if adjusted for inflation, real retail sales fell 0.7% YOY in October and were negative for 10 of the last twelve months. Negative real retail sales is typical of a recessionary economy. See page 6.

Consumer credit growth has been decelerating all year, which is not a surprise given the rise in interest rates and interest costs. However, the most disturbing development is the increase in the number of people taking hardship withdrawals from their 401k plans. Wells Fargo & Co. (WFC – $42.60) reported a rise in such withdrawals last week and Fidelity National Information Services Inc. (FIS – $53.90) reported a similar trend this week. These withdrawals are a sign that many households are in very poor financial shape. Moreover, it suggests that future consumption trends will likely slow in the US. This is in line with weak reports from retailers in the third quarter. See page 7.

The housing market had been a boost to the economy in the first half of the year, but that has changed in recent months. Existing home sales were 3.79 million in October, the slowest pace in 13 years. Housing affordability is at its lowest level since 1985 and the NAHB survey is at its lowest levels since the start of the year. It is clear that rising rates are taking a toll on housing. See page 8. The 2023 economy has been a division of the haves and the have-nots, and the question is will higher income families keep the economy afloat in 2024, or not? It is an important question since the recent rally has carried the averages back to a relatively rich level. S&P Dow Jones consensus estimates for 2023 and 2024 are $214.65 and $242.73, respectively, down $0.53, and $0.60, respectively, this week. LSEG IBES estimates for 2023 and 2024 are $220.38 and $244.98, down $0.24, and $0.33, respectively. Based upon the IBES EPS estimate of $220.38 for this year, equities remain overvalued with a PE of 20.6 times and inflation of 3.24%. This sum of 23.84 is fractionally above the 23.8 level that defines an overvalued equity market. Note: based upon the S&P estimate of $214.65, the 2023 PE is even higher at 21.1 times.  

Gail Dudack

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So Who Are You Going to Believe … Powell or the Market

DJIA:  34,945

So who are you going to believe … Powell or the market?  Just last Thursday afternoon Powell cautioned the Fed may not be through.  The new media spokespeople, Ken and Jamie, echoed the same admonition.  Meanwhile, stocks were up 10–to-1 on Tuesday.  One day is always just that, but it hasn’t been just one day.  Two weeks ago saw five consecutive days of 2-to-1 numbers, and a couple better than five to one.  Those numbers are hard to ignore, impossible to ignore if you know technical history.  Certainly Powell believes they may not be through, and they may not be.  The market believes he’s through, that rates have peaked and inflation as well. Could the market be wrong – it happens.  When it happens, it shows up in price action, unlike what we’re saying now.

Rallies like this often are explained, demeaningly, as short covering.  Who really knows, but by the look of some recent outsized moves in beaten down stocks, this certainly appears to be the case.  Then, too, what decent rally didn’t start with short covering?  And who really is to say? What we think of as short covering may more simply be “sold out” stocks lifting.  Often confused is just why these beaten down stocks lift.  It’s not about some sudden massive new buying interest, it’s because the sellers are done.  It doesn’t take all that much buying to lift prices when sellers are out of the way.  And we’re talking about stocks where there are plenty of losses, which already may have seen their tax loss selling.  In any event, why prices lift is not our concern, it’s the fact they do that matters.

In a market like this, who needs some stinkin’ Utility?  With the Mag 7 all the rage, any discussion of Utility stocks seems out of place.  Perhaps therein lies reason enough for a discussion and, in fact, the stocks have performed well of late.  At the start of October about 60% of Uts hit a 12-month low.  The stocks remain in long-term downtrends but have recovered somewhat.  It has been more than two months since 20% of the stocks have been above their 200-day average – the longest period since 2008.  Over the last 70 years, 17 times the sector went as many sessions with so few stocks in uptrends.  Most preceded medium-term gains, only two lost more than 5% in the next two months according to  In early October more than 60% of the stocks rose above their 50-day, an encouraging sign.  Also encouraging, Utilities are just one of the rate-sensitive areas benefiting from the apparent peak in rates.

What kind of Middle East war is it that can’t rally oil? Then, too, we’ve often cautioned the stock market is no place for simple logic.  That said, Defense stocks are holding their own or better, to the point of making the relevant ETFs, XAR (124) & ITA (116) look attractive.  General Dynamics (245) still seems one of the best of the household names.  Pharma has had a tough go of it for some time, and this week even Eli Lilly (589) gave way to Tech and the down and outs.  It and Novo Nordisk (100) still look attractive.  Thursday was a disappointing day for a number of stocks, especially Walmart (156) which dragged down most of retail – Macy’s (13) unable to save the day.  There was no better chart Wednesday night than WMT.  It’s enough to make us wonder if we should go back to our old job in the steel mills.  As you know we think price gaps are important, but they are so when they change the prevailing trend.  Certainly Thursday broke Walmart’s short-term trend but it remains more or less in a trading range going back to June.  Long-term the break is a flesh wound.

What’s to become of Tech?  As we sit here in full Y1K compliance, holding our rotary cell phone, it’s a bit beyond us.  Then, too, it’s not Tech, but the Tech stocks we ponder.  Tech is unto itself what the great meteor was to the dinosaur – as we speak, there’s a guy in a garage in California with a better whatever.  The stocks are fine for now, we just wonder who is left to buy.  They go up until they don’t, and that’s when they’re over- loved and over-owned – usually around the time they start giving them names like Nifty-50, dot-coms, maybe even Magnificent Seven?  Meanwhile there is a group of stocks we’ve called the Other Magnificent Seven. Most lack the market-cap to drive the Averages, and therefore live more quiet lives.  With long-term uptrends and good medium-term patterns, they are every bit if not more attractive than the Mag 7.  Names include Cintas (553), Parker Hannifin (426), Visa (249) and some lesser knowns like Motorola Solutions (317).

Frank D. Gretz

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US Strategy Weekly: Goldilocks Rally

Kicking the Can Down the Road

A stopgap spending bill that would extend government funding at current levels into mid-January was passed hours ago. This gives House lawmakers time to craft several detailed spending bills that will cover everything from the military and defense allotments to scientific research. Some Republicans on the party’s right fringe were frustrated that the bill did not include the steep spending cuts and border security measures they sought; nonetheless, the bill was passed with help from the Democratic side of the House, and it pushed the potential of a government shutdown into the New Year.

However, the partisan gridlock seen in Congress is not over and this is what led Moody’s to lower its credit rating on US debt from “stable” to “negative” last week. Moody’s pointed to economic risks including high interest rates, the government’s steadily-growing debt pile, and political polarization in Washington as reasons for the downgrade. Treasury Secretary Janet Yellen voiced disagreement with Moody’s shift, nevertheless, this implies she is blind to the ballooning deficits that now point to long-term fiscal risks. Burgeoning federal debt has recently provoked fresh warnings from economists, politicians, and credit-rating agencies.

Monthly fiscal deficits surged during the COVID shutdown and then fell on a year-over-year basis as stimulus payments began to fade and people went back to work and started paying taxes. However, a 12-month sum of monthly deficits began growing again this year and showed a 135% gain as of July 2023. This declined to a 29% YOY gain in October once Californian individual tax payments came due. Nevertheless, deficit spending is on an ominous trend, and particularly worrisome since the debt ceiling has been suspended until 2025. Not surprisingly, last week’s $24 billion sale of 30-year Treasury bonds (part of the government’s $112 billion debt sale) drew weaker-than-expected demand. This resulted in a yield of 4.769%, or 0.051% higher than the yield in the pre-auction trading in order to entice buyers. Primary dealers, who buy up the supply not taken by investors, had to accept 24.7% of the offering, more than double the 12% average for the past year. All in all, it was considered a bad performance, and it shows how rising debt levels will eventually push interest rates higher.

Moody’s had been the only one of the three main assessors with a top rating for the US. Fitch Ratings downgraded the US government credit rating in August following the latest debt-ceiling battle. S&P Global Ratings stripped the US of its top score in 2011 amid that year’s debt-limit crisis.

Here Comes Goldilocks

The equity market had a muted response to these debt risks, probably due to the fact that the economy has been surprisingly resilient. Yet it had a wildly bullish response to October’s CPI release. October’s headline CPI was unchanged for the month and up 3.2% YOY. This was down from 3.7% YOY in September and better than the consensus expected. However, if you look at the major components of CPI the only segments showing weaker than headline inflation were fuels & utilities, transportation, education & communications, and apparel. See page 3. There is still work to be done to get inflation down to the Fed’s target of 2%.

More importantly, core CPI rose 0.2% in October and was up 4% YOY, down slightly from September’s 4.1% YOY. Service sector inflation was still high at 5.1% YOY in October, down from 5.2% YOY in September. See page 4. What is clear from the history of inflation cycles is that it takes years for inflation to fall back to average or less after a sharp spike in rising prices. Inflation has been decelerating for 13 months and the consensus is declaring victory. This week equity traders began to discount an expectation that the Federal Reserve has not only ended its tightening cycle, but that rate cuts are on the horizon in the first half of 2024.

Some optimists suggest that inflation is already at 2% if housing, which lags home prices, is eliminated from the CPI equation. We doubt this is true and we doubt that consumers would agree or that renters are seeing only a mere 2% rise in rents. What is in fact helping to dampen service inflation is the recent decline in medical care services. But note that most medical services, including medical insurance, are repriced in the fourth quarter, so this favorable trend could shift in coming months and push core CPI higher at year end. See page 5. In short, this week’s rally is ushering in a Goldilocks scenario which we believe is unlikely.

Warning Signs

There are warning signs of economic weakening. The NFIB small business optimism index fell 0.1 point in October recording its 22nd month below the long-term average. A long below-average reading is typically a sign of a recession. What we noticed in the last NFIB survey was that sales fell to their lowest level since July 2020, i.e., during the COVID recession, and earnings fell to their second lowest reading since June 2020. See page 6.

In recent weeks we reported that credit card balances increased to more than $1 trillion and newly delinquent rates on credit cards are at the highest level in over a dozen years. In addition, a Bank of America report indicates that a growing number of “cash-strapped Americans” are using their retirement nest eggs for emergency funds. The number of Bank of America 401(k) plan participants taking hardship distributions in the third quarter was 18,040, an increase of 13% between the second and third quarters and the highest level in the past five quarters since Bank of America began tracking this data. This ominous trend shows that while many financial commentators emphasize the “resiliency of the US economy” there is a growing segment of the population experiencing financial stress. The economy may be weaker than some suspect.

Big Technicals

The charts of the popular equity indices are surprisingly bullish after this week’s big price rise. The first upside resistance in most indices is found at the July highs, and the next resistance would be the all-time highs. This week the Russell 2000 index had it best performance since November 2020, rising 4.5% after October’s inflation report, but the index will encounter important resistance around the 1830 area where the 100-day and 200-day moving averages merge.

We remain cautious. Seasonal factors are usually bullish in November, December, and January, and this dramatic surge in prices could be hedge funds jumping ahead of what is seen as a seasonally strong equity market in order to lock in gains prior to yearend portfolio pricing. It does not appear to be a broad-based demand for equities. Either way, our view of the market is unchanged. The trend is neither bullish, nor bearish, but stuck in a broad trading range which is a substitute for a bear market decline. We have been expecting this trading range to persist until inflation is under control. In short, traders may be jumping the gun.

Gail Dudack

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One is Nothing but Five…That’s Something

DJIA: 33,891

One is nothing but five…that’s something. There are plenty of good one-day rallies. In fact, because of the compression in prices, many of the best one-day rallies come along in bear markets. Putting together five consecutive good days as we did last week, that’s something else. For us, good days are always about the Advance/Declines, not the Averages. A/Ds last week were at least 2-to-1, and two were 5 and 6-to-1. The consistency matters here, but so too does the degree, matching some historically significant levels. This week has been a bit more inconsistent, but this kind of momentum doesn’t turn in a hurry. Rallying bonds of course seems more than coincidence, and there’s the tail wind of November and December. Never something to be relied on, seasonality works best this time of year. Rates have peaked! Don’t believe us, believe those who should know, the rate sensitive stocks – the Financial ETF (XLF-34), the Regional Bank, ETF (KRE-41), and the Homebuilders ETF (XHB-76) have rallied sharply. These measures now are above their 50-day averages, no guarantee but clearly an important change. While a healthy financial sector may be important to the economy, their sheer number makes them important to the technical background. You might say for the market that’s one less worry. There remains, of course, the little problem of war, the problem being it doesn’t remain little. Then, too, it’s hard to worry when Oil seems oblivious. Defense stocks act well enough on their own and seem more than a hedge. Aerovironment (120) and L3Harris (181) are among the many that look attractive. Meet the twins – Adobe (578) and Broadcom (911). What they may have in common funnymentally is above our paygrade and,more importantly, not our interest. The charts we know by the look are Tech, and similar in a couple respects. Since they are twins or so we say, we’ve only displayed ADBE. The recent little breakout aside, the charts here are pretty much that of the monitor in a hospital room – alive, but not ready for release. Another perspective, again equal for both, is the look of a weekly chart. Still trading ranges, but of note here is what happened when they came out of similar patterns in mid-May. The breakouts in those patterns were the starting point for significant moves higher. Rather than the Rorschach test that are the daily charts, the weeklies show the ingredients for a significant moves higher. Remember Peter Lynch? He once upon a time ran Magellan Fund, and so well he became a bit of a pop rock star. For a manager of a mutual fund that size, that was quite a feat. His philosophy/advice was to buy what you know. Of course, he made most of his money in Fannie Mae which you may recall was an obtuse hedge fund no one really knew – and eventually self-destructed. Meanwhile, we were introduced recently to a company called Toast (14). If you’ve dined out at all, in apparently any part of the country, you will be familiar with this point-of-sale product. Doing in-depth fundamental research as is our way, we’ve asked countless waiters about this product. It gets rave reviews. That said, good to remember stocks are not their companies – the stock has been a poor performer. After last week’s rather spectacular numbers, this week’s A/Ds have turned a bit sloppy relative to the Averages, which is always how they should be judged. All things being equal this would be a concern, but all things are not exactly equal, such were the numbers last week. In part the numbers reflect the ongoing weakness in Oil shares, of which there are many and therefore have their impact. And CathieWood’s collection of the down and out can’t be up 18% every week. Still, we don’t make excuses for the numbers. More than the Averages the A/Ds hold the key to the market’s health. Powell said nothing new Thursday, in fact his comments were pretty much those of last week that led to a sharp rally. The weakness seemed a function of the week’s sloppy numbers and should prove temporary.

Frank D. Gretz

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US Strategy Weekly: A Primer on Debt Ceilings and CRs

As we near the end of the calendar year, we know that seasonal factors favor a stronger stock market. However, we also recognize that the outlook for 2024 is clouded by the Ukraine/Russia and Israel/Gaza wars, the uncertainties surrounding the presidential election in November 2024, questions about monetary policy, nagging inflation, rising credit card balances, rising credit card delinquencies, questions about the health of the US consumer, the ability of the US Treasury to fund ever-growing levels of debt, and most importantly, the prospect for corporate earnings.

Yet, what may soon jump to the top of the list of concerns will be the possibility of a government shutdown. This will not be a debt ceiling debate. On June 3, 2023 President Biden signed a bill that suspended the government’s $31.4 trillion debt ceiling until January 2025, in other words, until after the presidential election. Nevertheless, while there is currently no limit to how much the US government can borrow, Congress is required to approve government spending. Historically this has been in the form of a budget proposal originating from the President for the fiscal year (October 1 through September 30). Typically, this budget then goes to the House Ways and Means Committee which creates its own budget, details are debated and negotiated by both houses of Congress and passed. However, Congress has only completed this process in a timely manner three times in the last 47 years. The last time was the budget for the fiscal year ending in 1997.

Continuing Resolutions

The alternative to this process is a continuing resolution (CR). Continuing resolutions are temporary spending bills that allow federal government operations to continue when final appropriations have not been approved by Congress and signed by the President. Without final appropriations or a continuing resolution, there could be a lapse in funding that results in a government shutdown. This is the situation Congress will soon be facing, again. On September 30, House and Senate lawmakers passed a short-term budget extension to avoid a shutdown at the start of the new fiscal year which began on October 1 but that deal will expire on November 17. In short, lawmakers will be back in the same legislative predicaments they faced in mid-September in less than 10 days.

At present, House and Senate leaders have not made meaningful progress on a full-year budget deal or short-term compromise plan. The new Speaker of the House, Mike Johnson (Republican – Louisiana), has said that budget cuts or other policy riders will be included in upcoming proposals from his chamber but Senate Majority Leader Chuck Schumer (Democrat – New York), has called those ideas a dead end. Political analysts suggest there are three choices for Speaker Johnson. He could push for a simple funding bill that would move the November 17 deadline into next year without any strings attached. He could pair government funding with GOP priorities linked to immigration or other policies like cutting federal spending. Or Johnson could propose a “laddered CR” that would extend government funding for different agencies for different periods of time. This would allow lawmakers to favor certain parts of the government over others. For example, defense and homeland security spending would be placed ahead of other agencies. Still, without a continuing resolution, active-duty troops will not be paid any salary and hundreds of thousands of federal employees will be furloughed.

We suggested this once before, but we think Congressional salaries should be sacrificed for every day of a government shutdown. It might improve productivity in Washington DC.

Credit Card Woes

Recent data from the New York Federal Reserve revealed distinct pockets of weakness in the consumer sector and this could impact future economic activity. Total household debt balances grew $228 billion in the third quarter across all types of borrowing, particularly for credit cards and student loans. Credit card balances increased $48 billion in the quarter and $154 billion on a year-over-year basis. It was the eighth consecutive quarter of year-over-year increases and the largest increase since the NY Fed began collecting data in 1999.

This expansion in consumer debt helps to explain the surprisingly high GDP growth seen in the quarter, but it is coming at a cost. Credit card delinquencies increased from the historical lows experienced during the pandemic and topped pre-pandemic levels by the end of the quarter. Mortgages, which comprise the largest share of household debt, have delinquency transition rates that are below their pre-pandemic levels; nevertheless, auto loan and credit card delinquencies have surpassed their pre-pandemic levels. The rise in credit card delinquencies is being led by Millennials, whereas Baby Boomers, Generation X, and Generation Z have delinquency rates closer to 2019 levels. Delinquency rates have been increasing in each income quartile but are rising fastest for lower-income credit card holders. Those with combined balances over $20,000 have the highest delinquency transition rate, but fortunately these balances represent only 6% of credit card holders. Not surprisingly, delinquencies are rising most quickly for consumers with auto and student loans.

Haves and Have-Nots

In the second half of the year, the winding down of fiscal stimulus, the rise in interest rates, and the resumption of student loan payments, began to impact households, particularly the lower-income category. Still, the post-pandemic expansion has been an unusual one and continues to be a story of the haves and the have-nots. Seen from one point of view, higher income households have been going to Taylor Swift concerts, enjoying expensive cruises, and traveling the world for fun. Lower-income households have been battered by high inflation and are having trouble paying their mortgage, paying rent, putting gas in their car, and paying for their children’s education. The third quarter GDP of 4.9% did not feel all that special from their perspective.

This week we also review vehicle sales, Conference Board consumer sentiment (seven out of 10 consumers expect a recession in the next 12 months), ISM indices, the employment cost index, and S&P earnings. See pages 3-7.

Technical Update

The Russell 2000 index spent only two trading days below the key 1650 support level, which was too brief to confirm that the breakdown in the index was significant. This is good news since a breakdown would have meant much lower prices for the overall market. In upcoming weeks, the most important index could be the SPX as it trades between its 100- and 200-day moving averages, which represent resistance at 4400 and support at 4251. See page 8. The 25-day up/down volume oscillator is at a positive 0.90 reading this week and neutral, after recording an 89% up day on November 2, on volume that exceeded the 10-day average. See page 9. However, this indicator did not confirm the advance in August nor the weakness in October. This is in line with our long-held view that the equity market remains in a broad neutral trading range.

Gail Dudack

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A Bad Market…Or Just Another Bad October

DJIA:  33,839

A bad market … or just another bad October.  Actually, it has been a bad consecutive three months.  Despite that the S&P closed October sporting a gain near 10%.  When this first 10 months are that strong odds are some 70% November will be higher.  Then, too, “sell in May” should’ve been buy in May and sell in August. Probabilities are not certainties.  However, clearly there is a change for the better, and it started with Monday’s rally.  We never trust up openings in down markets, and every up opening last week saw the rally fade. Monday’s rally did not do so, a simple thing but change is important.  The rally has its flaws like the weak Semis and mediocre A/Ds, but lacking a real washout that’s not a surprise.  Then, too, the updraft during the Powell speech was impressive.  The key now is follow through, so far so good.

What we have seen is by no means a washout low.  What looked to be give-up sort of declines in many stocks, certainly was not evident in something like the VIX – at a peak of 23 well short of the 30-35 you might have expected in a washout.  Stocks above their 200-day did fall to the mid-20s, a level that has been reached only 17% of the time since 1928.  Certainly good enough for a low, but not the 17 of the low last October.  What did get pretty washed out was Tech other than the so called Magnificent 7, the Semis especially. The Technology ETF (XLK-170) saw only 3% of its components above their 10-day average.  To that you might say they pretty much got to everything, typical at a low.  The Mag 7 came through this pretty well, particularly Microsoft (348) and in a bit of a surprise, Amazon (138).

When it comes to wars, defense stocks are tricky.  Ukraine was a long time in the offing, and the stocks saw little reaction.  The 9/11 attack was sudden, as was October 7, and therefore a big reaction.  Stocks discount, but they’re not psychic.  They didn’t see coming 9/11 or 10/7.  After 9/11 defense stocks rallied, but then faded.  Then, too, 9/11 was more an event than a war, the war came later.  Here we have an event turned into war, but for stocks still more event than war.  Defense stocks had their initial surge and so far are holding up and more. Technically speaking, most of these stocks gapped higher, which should hold if they are indeed going higher.  These are good charts but we look at them not so much in terms of the current situation but what might be forthcoming.

What kind of war is it that can’t rally Oil?  The US Oil Fund is some 5% below its 9/27 peak.  While that’s the commodity, stocks have more or less followed, in some cases for their own reasons.  Among those reasons were the mega deals announced by Exxon (109) and Chevron (149), weakening the stocks and the ETFs that hold them.  We rarely buy weakness and don’t recommend it, and we don’t like to buy stocks under their 50-day average.  All that aside, Chevron at its recent low was some 12% below its 50-day, which for Chevron is about a lifetime.  Different stocks relate differently to moving averages like the 50-day, so 12% here is nothing relative to stocks more volatile.  Keep in mind too, the 50-day often acts as support and resistance for stocks, some more than others.

The Fed meeting was the nothing burger everyone had expected, and Powell’s little diatribe the same.  Typically, the market waits until the speech is done before doing whatever it is going to do.  Wednesday saw the rally start before that, when it seemed satisfied he wasn’t going to get in the way.  The backdrop here was more impressive than the rally itself, but Thursday’s better than 7-to-1 up day was impressive all around.   Obviously just about everything lifted, rate sensitive shares on the hope bonds have peaked.  The downtrodden, so to speak, were particularly big winners, hinting of short covering.  Then, too, what good rally didn’t start with short covering?  If you found last week’s mention of Verizon (36) a little too staid, kick it up a notch with IBM (147) – the patterns are the same.

Frank D. Gretz

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US Strategy Weekly: Caution is Wise

Federal Debt Distress

There are many things to worry about this week. At the top of the list are the wars in the Middle East and in Europe, which are proxy wars for any and all democratic societies, and which could have an impact on the price of crude oil. Earnings season has been a mixed bag and results have not been confidence-building. The Federal Reserve meets this week, but we doubt there will be any change in the fed funds rate given the uncertainty of the world’s geopolitical situation. However, one of our main concerns is the rising level of government debt, the lack of political will to change current trends, and what this will mean for the future of interest rates. Total outstanding US debt has grown from $31.5 trillion in June to $33.17 trillion recently. And this level is up from $23.2 trillion in pre-pandemic 2020, which equates to a shocking 43% increase in 3 ½ years. Meanwhile, Congress seems willing to put this issue on the back burner.

This year the Treasury sold roughly $1.56 trillion of new Treasury bills through the end of September and the bulk of this materialized after Congress suspended the debt ceiling in June. This week the Department of the Treasury announced its estimates of privately held net marketable borrowing for this year’s fourth quarter and next year’s first quarter. The Treasury indicated it expects to borrow $776 billion in privately held net marketable debt in the current quarter, down $76 billion from its July estimate, due in large part to projections of higher receipts. Since this new estimate is lower than what was previously announced, the bond market responded favorably to the news.

But borrowing will increase. The Treasury also indicated it plans to borrow $816 billion in privately held net marketable debt in the first quarter of 2023, assuming their projections of cash on hand are correct for December 2023. Treasury yields, especially on longer-dated securities, have risen in step with growing bond supply and supply is expected to continue to grow. By the end of fiscal 2028, White House forecasts show gross debt rising to $42 trillion, a 28% increase from current levels, and debt held by the public rising to $34.5 trillion, a 33% increase. See page 3.

There are many problems related to growing deficits. The first risk is that supply drives interest rates higher, but eventually, high levels of debt become a Catch-22. Interest payments on the debt increase deficits and raise interest rates which increase the interest payments on the debt, and so on. As we noted last week, while defense spending grew 7%, to $774 billion in FY 2023, interest payments on the debt increased 33%, to $711 billion. At this pace, interest on the debt will overtake defense spending in fiscal 2024.

Another warning sign is the high level of short-term government debt. The TBAC, or Treasury Borrowing Advisory Committee recommends keeping Treasury bills at 20% or less of total outstanding marketable US government debt. However, the current level of short-term debt already exceeds 20% which increases the rollover risk as interest rates rise. See page 4. In sum, the market may be too complacent about interest rates, particularly as the Fed leaves rates unchanged after two consecutive meetings, but we see the potential for the bond market to upset the stock market in the months ahead.

Economics: A Strong September

The advance estimate for GDP in the third quarter was a surprisingly strong 4.9% and this follows a 2.1% gain in the second quarter. Consumer spending was an important source of growth as well as inventories. Residential investment made its first positive contribution to growth since early 2021. See page 5. In line with this was good news about September’s personal income. It rose 4.7% YOY, disposable income rose 7.1% YOY, and real disposable income rose 3.5% YOY. Real personal disposable income has now been positive for nine consecutive months. However, personal consumption expenditures rose 5.9% YOY, which explains why the savings rate fell from 4.0% in August to 3.7% in September. See page 6.

It is worth noting that September’s 3.7% saving rate is well below the 2000-2023 average of 5.7% and this suggests that the current rate of consumption is unsustainable. In addition, rising interest rates continue to pressure consumption. Personal interest payments were up 48% YOY in September and currently represent 2.8% of personal consumption. See page 7.

Therefore, we were not surprised that consumer sentiment indices were uniformly weak in October. The Conference Board confidence index fell from 104.3 to 102.6, with present conditions weakening from 146.2 to 143.1. The expectations index fell from 76.4 to 75.6. The University of Michigan sentiment index declined from 67.9 to 63.8, while present conditions fell from 71.1 to 70.6. The expectations component was much weaker, falling from 65.8 to 59.3. All in all, October has not been a good month for many households. See page 8.

Technical Breakdown

The deterioration in the technical charts of all the popular indices was obvious this week. However, the most significant development was the sell-off in the Russell 2000 index below the 1650 support level. This breakdown has not yet been confirmed since the index rebounded to 1662 on October 31, nonetheless, the pattern is worrisome. A confirmed breakdown will be a sign of lower prices for the overall market and the likelihood of another 5% to 10% downside risk. See page 10.

The 25-day up/down volume oscillator is at a negative 0.81 reading this week and neutral, after being in oversold territory for two consecutive trading days on October 20 and October 23 and for three out of four consecutive days on October 5 to October 9. It may surprise some readers that this oscillator did not reach an extreme oversold reading after last week’s decline; however, the lack of a consistent oversold reading continues to suggest that the equity market is in an extended trading range. Keep in mind that broad trading ranges are often substitutes for bear markets and are simply another way for prices to come in line with valuation. See page 11.  

The 10-day average of daily new highs is currently 34 and the 10-day average of new lows is at 454. This combination is negative with new highs well below 100 and new lows well above 100 since we assume 100 is the benchmark for defining the market’s trend. The NYSE advance/decline line fell below the June low on September 22 and is now 40,491 net advancing issues from its 11/8/21 high. July was the first time in two years that the disparity between the AD line’s peak and current levels was consistently less than 30,000 net advancing issues. However, in recent weeks this disparity has increased well above 30,000 issues once again. See page 12.

Last week’s AAII readings showed a 4.8% decline in bullishness to 29.3%, and an 8.6% increase in bearishness to 43.2%. Bullish sentiment is below its historical average of 37.5% for the 9th time in 11 weeks. Pessimism is above its historical average of 31.0% for the 8th time in 10 weeks. After hitting a negative one-week reading the week of August 2, the 8-week bull/bear spread is now neutral and closing in on a positive reading. We remain near-term cautious but sense a good intermediate-term buying opportunity is approaching.  

Gail Dudack

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