An Awful Era For Horses Showcases Why The Bears Remain Adamantly Opposed To American Optimism: The Action For May 3, 2024
The Times showcases the bizarre but profound state of horse racing in its lead story this morning, noting how the quest for victory and fortune has perverted the sport and led to the death of two dozen horses in the past year. The emotional declension of the nation since COVID is as apparent in the resurgence of Trump as in this age old sport, and girds my thesis that productivity will fall and automation surge over the coming years, leading to high unemployment and increasingly parlous politics. But nearly as shocking as the fate of the horses is the Times’ unearthing of a federal agency dedicated to “Horseracing Integrity And Safety.” In the context of rising defense spending and infrastructure and surging deficits the notion that the House and Senate must devote their resources to overseeing this agency puts into relief the ineffectuality of government to achieve any progress domestically or globally. The upshot of so much waste in taxes and political energy is high interest rates for a long time, a context that works against equities at high valuations.
The Times’ stories about domestic and geopolitical declension takes a backseat to the sterling jobs report this morning, which led the bulls to push the market higher until the ISM Services data provided a reality check. The bulls still have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment, including:
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.
Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish for equities.
Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.
High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving economy.
Developed Market FOREX / $US: The dollar is getting weaker against most major currencies (€, ¥ and Renmimbi) and that’s good for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting stronger against the dollar, and that’s good for global growth since many key imports are priced in $.
Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.
But it’s unlikely the market can sustain this rally, as the action yesterday and overnight showed the numerous risks the bulls need to climb over, including:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.
Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.
Liquidity Metrics: Measures of money flow across the globe are trending downwards lately, which hurts equities.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
My current positions include 3M (MMM and its spinoff SOLV), Pfizer (PFE), and a moderate position in SPXU, which nets out to a moderate short position in equities.