Report (Premium Edition) 08-16-2021

Key Market Trends

Tip: Use this as a quick guide on the short-term direction (1-2 weeks) of key markets. It is not a signal to buy or sell, just to show the trend. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term. I started making this section years ago because once had a client that would call me nearly every day asking the direction of the markets.

S&P 500 Sector Trends

Tip: Use this section to know the performance of various sectors, weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

REIT Alert: Due to Covid-19, there is a large percentage of people that have not paid rent or mortgages. We are very worried about the effect it could have on real estate investment trusts’ (REITS) value. Even though the sectors may trending bullish, we believe that REITs could have a significant drop in value.

Key Drivers for the Week of Aug 9, 2021

TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

• Fall of Afghanistan to Taliban
• Surging covid/Delta variant, rising mitigation measures threaten growth
• Downside risks to growth likely to temper QE tapering worries
• Stunning collapse in U.S. consumer sentiment offsets stellar July jobs data
• U.S. headline retail sales likely to reflect drag from chip shortages
• U.S. production, Philly and Empire PMIs, housing starts; FOMC minutes due 
• Canada CPI, retail sales; housing starts, existing home dales, shipments due 
• China industrial output, retail sales, fixed investment headline 
• Japan preliminary Q2 GDP, industrial production, trade, National CPI awaited
• Eurozone inflation data due, second look at Q2 GDP
• UK slate has employment, earnings, retail sales, CPI

Stocks & ETF Watch List

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing beta (beta). Our list is updated monthly to help provide our readers with timely insights. Readers should do their own research before making any investment. In order to make our report easier to read, we are now including the stocks as lists for readers in separate posts.

• Inflation Stock Picks: List of stocks that we think should perform better in a rising inflation environment. Click here
• Auto Parts Stock Picks: Auto parts companies are likely to see their stocks rise as the average age of cars and light trucks increased from 11.9 years in January 2017 to 12.2 years in January 2021, according to new data from IHS Markit. Below are the top auto parts companies that investors should buy now before the profits roll in. Click here.
• Solid Picks: This group of stock/ETF picks is likely to experience growth and perform well into the near future. Click here.
• Dividend Stocks: List of stocks that have excellent dividends and business performance. Click here.
• Dividend Growth Stocks: List of stocks that have a history of growing dividends. Click here.
• Dividend ETFs Picks: This list of ETFs is selected for their ability to pay dividends. Click here.
• Dogs of the Dow: This list of DOW stocks based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used the price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. Click here.

Week Ahead: Fall of Afghanistan, Taper, Inflation & Covid D

Like many Americans, I watched in disbelief the last couple of days as the Taliban took over Afghanistan.  

The fall of Afghanistan is a complete reflection of the Biden administration which is a leadership and putting America first…makes me furious.

It is like we are in a bad movie when the actors do the opposite of what needs to be done. Rather than building a strong military and ensuring American’s best interests were being honored, they focused on how “woke” the military was.

As a Marine, I find this attitude is dangerous, but any opposition to this insanity is silenced.  An example is when Twitter shut down President Trump but allows the Taliban to coordinate and communicate their efforts of real insurrection. That being said, I will try to give you the best analysis of the situation from an investor’s point of view.

1) The first effect I see regarding Afghanistan’s failure is the erosion of the macro power and influence of the United States.  This is likely to be lead to both significant geopolitical and economic impacts.  

American allies can no longer count on us to come to their aid, and our enemies will likely “bully” countries into agreements contrary to the US. These agreements will include critical oil and mineral rights.

2) The second effect I see is the erosion of the US Dollar as the default world currency.  This is closely related to the first and will likely occur over a longer term when other currencies become mainstream.  

China and Russia have been trying for years to replace the Dollar. The Chinese Yuan is gaining traction in use. The Dollar could likely lose 20% or more to Yuan in trading in just the next ten years. This will cause the value of the Dollar to decrease.

3) The third effect I see is the loss of opportunity for the $3 trillion dollars of minerals in Afghanistan.  China will likely “buy” these as they have done similar in Africa and South America. This will be America at a huge disadvantage in the long term when they need to make batteries and electronics.

Bottom line

The fall of Afghanistan is just one of the many effects of bad leadership. It is one of the many signs that the US is being outmaneuvered and will likely play a smaller role in years to come. China is the clear long term winner.

Turning to the markets.

A couple of major market dynamics were highlighted by recent data and will remain in force near term. The surge in covid/Delta variant infections looks to be a more serious drag than initially presumed, and along with headwinds from inventory shortages and supply chain disruptions that are impacting production and prices, support concerns that growth has topped out.

On the other hand, the downside risks to growth will temper taper talk and keep core central banks in ultra-accommodative posture as they assess the extent of the damage, especially as various mitigation measures are being reinstituted.

There is a heavy dose of key data ahead, but the numbers may have little impact on the markets or monetary policy given the heightened uncertainties due to the newness of the Delta wrinkle and the global response.

NORTH AMERICA

In the U.S. the stunning plunge in July consumer sentiment largely wiped out the recent good news from the recent jobs report and shifted the narrative to a weakening in growth. And it eased rising worries that the FOMC could announce QE tapering as soon as the September 21-22 FOMC meeting. Fedspeak had turned more hawkish in recent weeks given the robust recovery, the strengthening labor market, and rising price pressures. But the sentiment data suggested the Fed will remain sidelined for several months at least, and especially since Fed Chair Powell has been concerned about downside risks which are now manifesting. We could get further insights into Fed thinking, especially with the pick up in hawkish sentiments, with the FOMC minutes. Treasury yields richened measurably on Friday as a result with the 10-year diving 8.2 bps to 1.277%, with the bond down 7.6 bps to 1.929%, and the 2-year 1.6 bps lower at 0.207%. Wall Street posted small gains as the Fed outlook turned more dovish again, but with new record highs on the Dow and S&P 500.

Retail sales (Tuesday) will be the data focus. We expect a -0.6% July decline in headline sales and a -0.2% decline in the ex-auto figure, following respective June gains of 0.6% and 1.3%, as the March pop from stimulus checks continued to unwind. Also, unit vehicle sales slowed further in July largely due to inventory constraints. We expect a steady pull-back in retail sales into the end of Q3 as the powerful boost from Q1 stimulus lessens, though sales should remain solid on the ongoing recovery in the sectors most dramatically hit by coronavirus restrictions in Q2 of 2020. Additionally, back-to-school and back-to-work sales should be strong as parents may be catching up for a missed year. And it’s been reported that Americans gained 7.5 lbs on average through the pandemic, and the 42% who reported a weight gain showed an average increase of a whopping 29 lbs so there may be many Americans shopping for clothes before returning to the office!

Also on this week’s docket are August Empire State (Monday) and Philly Fed (Thursday) PMIs. The former is projected falling -18.0 points to 25.0 after jumping 25.0 points to an all-time high of 4.0 in July. The latter is seen bouncing 3.1 points to 25.0 in August after falling -8.8 ticks to 21.9 in July. It was at a 48-year high of 50.2 in April. These diffusion indexes will be supported into late-2021 as factories face the need to rebuild inventories. Industrial production (Tuesday) is seen rising 0.4% in July, as it did in June, supported by gains in manufacturing and mining, but a drop for utilities. We expect the vehicle assembly rate to rise to a 9.4 mln pace in July from 8.9 mln in June, though there are still big headwinds from ongoing semiconductor shortages. Rounding out the economic calendar are the August NAHB (Tuesday), July housing starts (Wednesday), and jobless claims for the week ended August 14 (coincides with the BLS survey week).

Earnings are slowing but there are important announcements on tap, highlighting the retail sector. Monday has BHP, Roblox, Tencent Music, and Oatly Group. On Tuesday there is Walmart, Home Depot, Sea Limited, Agilent Technologies, Alcon, and Amcor. Then on Wednesday NVIDIA reports, along with Cisco Systems, Lowe’s, Target, TJX, Analog Devices, Synopsys, Robinhood, Keysight Technologies, ZTO Express, Bath & Body Works, and Weibo. Thursday brings Applied Materials, Estee Lauder, Ross Stores, Bilibili, and Kohl’s. Friday has Deere.

Canada’s data docket is busy this week. The CPI and retail sales reports stand out in the crowded lineup. CPI (Wednesday) is expected to accelerate to a 3.4% rate (y/y, nsa) in July from the 3.1% annual pace in June. The index is seen rising 0.3% in July on a month comparable basis, matching the 0.3% gain in June. As in the U.S., the report is likely to further stoke market fears that the inflation surge will prove to be more durable than monetary officials expect. Retail sales (Friday) are projected to rebound 4.5% in June after the -2.1% drop in May while the ex-autos aggregate is anticipated at a 5.0% gain from the previous -2.0% fall. Meanwhile, manufacturing shipment values (Monday) should climb 1.9% in June following the -0.6% drop in May. Wholesale shipment values (Monday) are seen contracting -2.0% in June after the 0.5% gain in May. A robust housing market should leave housing starts (Tuesday) with a 280.0k pace in July from the 282.1k rate in June. The release of the July existing home sales report is expected on Monday. The BoC’s Senior Loan Officer Survey will be released on Monday. The next announcement is on September 6, with no change in the current policy setting expected. Further tapering is anticipated this year, but uncertainty surrounding the impact of the delta variant has sharply diminished the chance for further tapering in September.

ASIA

China’s eroding growth outlook is contributing to the global angst. Momentum has already been slowing and it is likely to decelerate further now that the spike in country’s zero-covid policy has shut down swaths of the economy (including its third largest port), while limiting mobility and damping domestic consumption. Goldman Sachs and Nomura have cut GDP expectations given the hard-line response from the CCP, despite the relatively few Delta cases seen in the country this month. Elsewhere, Southeast Asia, including Malaysia, Thailand, Indonesia and Vietnam continue to struggle with rising infections and restrictions, which will undoubtedly impact economic activity for the time being. This week’s regional calendar is relatively light, but features some key reports from China, including July industrial output, retail sales, and fixed investment. Japan has the first look at Q2 GDP, along with the July trade report and July national CPI. Elsewhere, a light mix of trade, prices, and employment data dot the calendar. For central banks, Bank Indonesia is expected to leave policy unchanged, with rates at 3.50%. The RBNZ is expected to hike its OCR to 0.50% from 0.25%. The Bank abruptly ended it QE purchases beginning on July 23.

In China, July industrial output (Monday) is expected to slip slightly to an 8.1% y/y growth rate from 8.3% previously. Production has been slowing since surging to a 14.1% clip in March. July retail sales (Monday) are penciled in little changed at a 12.0% y/y pace from 12.1%. It has decelerated from 34.2% y/y in March. July fixed investment (Monday) should slow to 12.0% y/y from 12.6%. It is down from 35.0% in February. Preliminary Q2 GDP is due from Japan (Monday) and is expected to rebound to a 0.7% y/y growth pace, following the -3.9% contraction in Q1. Revised June industrial production is also due (Monday). The June tertiary industry index (Tuesday) is seen rising 0.2% versus the -2.7% drop previously. The July trade report (Wednesday) should see the surplus widen slightly to JPY 400.0 bln from JPY 383.2 bln. July national CPI (Friday) is forecast rising to a 0.2% y/y rate overall, rebounding from the prior -0.5% decline in June. The core rate is projected climbing to a 0.3% y/y pace following the previous -0.5% drop.

South Korea July PPI (Friday) is penciled in at a 6.4% y/y clip, unchanged from June. The 6.6% rate from May was the fastest since August 2011. Indonesia’s July trade balance (Wednesday) is expected to see the surplus widen slightly to $1.5 bln from $1.3 bln. Bank Indonesia meets Thursday, and is expected to leave its 7-day reverse repo rate unchanged at a record low 3.50%. The Bank had cut rates by 150 basis points since January 2020 and has pledged to keep rates low in order to mitigate the current Covid outbreak. The Bank is unlikely to cut rates further, however, in order to support the rupiah.

Australia’s docket has July unemployment (Thursday) expected to see a 50k increase in employment after the 29k June gain. Risk is to the downside given the re-imposition of lockdowns amid the Delta outbreaks. The unemployment rate should tick up to 5.0% from 4.9%. Q2 wage cost index is due Wednesday, seen rising 2.0% from the 0.6% increase in Q1. The minutes from the August 3 policy meeting are due Tuesday, while assistant governor Kent will speak to the 2021 FX markets conference on Friday. In New Zealand, the RBNZ meets on Wednesday, with a 25 basis point rate hike expected following the decision to end QE at the last meeting. This would leave the OCR at 0.50%. A 0.25% rate has been in place since the 75 bp slashing on February 2020. A hike would be the first time the Bank has increased rates since 2014. Control, for now, over the Covid pandemic has seen the domestic economy recover. Q2 PPI is due Wednesday.

EUROPE

Eurozone: it is going to be a week of backward-looking data releases, which are unlikely to change the overall picture, or give a clearer idea on the tapering discussion at the ECB. The second reading for Eurozone GDP (Tuesday) still doesn’t have a full breakdown and we don’t expect a major revision to the preliminary numbers, which showed overall economic activity rising 2.0% q/q in Q2. There were sizeable cross-country variations, largely related to different levels of virus restrictions and while we still have to wait for the breakdown, it is already clear that consumption was the main driver. Production meanwhile is struggling amid capacity constraints and supply chain disruptions, which have hit car manufacturers in particular. Orders meanwhile are piling up and that should see companies through any slowdown in global activity related to the rapid spread of the delta variant, which in any case is likely to be temporary.

In Europe and the U.S., high vaccination rates are likely to prevent the type of lockdowns seen earlier in the pandemic, also because in order to encourage the vaccine uptake governments are pressured to create some advantage for those fully vaccinated and putting everyone under the same type of lockdown would be detrimental to the overall success of the rollout.

Final Eurozone inflation readings (Wednesday) meanwhile are also likely to confirm preliminary reports, which would leave the headline rate for July at 2.2% y/y. That is above the ECB’s target, but largely due to base effects related to energy prices and Germany’s temporary cut to the VAT rate last year. Headline rates are likely to continue to nudge higher in coming months and could come close to 5% in Germany, but are expected to drop back again next year, with central banks currently not expecting serious second-round effects.

Whether this will hold true will of course depend on labor market developments, but while there are employment numbers for the second quarter out as well, these are again too backward-looking as they are heavily impacted by wage support schemes, which will only be phased out later in the year. Only then will officials be able to get a clearer picture on the underlying situation and the impact the pandemic has had on participation rates.

U.K.: the calendar is relatively busy this week, highlighted by monthly labor data (Tuesday), and July data on inflation and retail sales (due Wednesday and Friday, respectively). UK unemployment is expected unchanged at 4.8%, while average household earnings are expected to rise by a solid 8.7% in the rolling three-month y/y rate after rising 7.5% y/y in the month prior. Headline July CPI is expected to ebb to 2.3% y/y from 2.5%, while July retail sales is seen rising by 0.5% m/m, unchanged from the June rate. As or near expected data should maintain market expectations for BoE tightening in 2022.

Switzerland: The calendar this week is quiet, featuring July trade data (Thursday).

Data Week of August 9

We have a solid release schedule in the middle week of August. We expect a retail sales pull-back in July as we further unwind the lift from stimulus checks, while business inventories climb in June, as seen in May. We face a continued uptrend in industrial production through July. The Empire State index is assumed to fall in August from an all-time high in July, while the Philly Fed index rises from a firm July level, as businesses scramble to rebuild inventories. We expect modest July gains for both housing starts and permits, though to rates that are below 15-year highs in Q1.

Week of August 16

The markets were looking for a topping pattern in the July inflation reports, and the CPI data added weight to the notion that at least some price gains are transitory. We saw a flattening in airline and used car prices, after a 3-month stretch of outsized gains through Q2. New vehicle prices surged 1.7% in July, though it seems likely that these gains will reveal a flattening that lags used car prices, as the assembly rate recovers from semiconductor shortages. The topping pattern was also apparent in the July trade price report, where we saw broad restraint in price gains beyond a continued climb in petroleum prices.

Apparel prices in the CPI report also flattened in July. Yet, retailers are now reporting strong back-to-school sales, and some parents may be catching up for a missed year. Also, it’s been reported that Americans gained 7.5 lbs on average through the pandemic, and the 42% who reported a weight gain showed an average increase of a whopping 29 lbs (Source: American Psychological Association). There may be many Americans shopping for clothes before returning to the office!

Beyond these flattening patterns, the remaining CPI components continued to post solid gains, leaving a mixed message from that CPI report despite some encouraging signs. In contrast, this week’s PPI report showed dramatic upside surprises across all the major service sector metrics, and the 1.0% headline and core price gains in both June and July left two consecutive record core price increases for a survey that dates back to 2009. It’s clear that we’re seeing no letup in shortages and supply chain disruptions via the wholesale price survey, even if airline prices are stabilizing as they trend back toward pre-pandemic levels, and used car prices have reached an apparent ceiling, even though the vehicle market remains super-tight.

We now expect 2021 Q4/Q4 PCE chain price gains of 4.3% for the headline and 3.6% for the core that lie well above the full FOMC forecast range from June of 3.0%-3.9% and 2.7%-3.3% respectively. We expect big upward forecast revisions in the September SEP, alongside a trimming in Q4/Q4 GDP growth estimates due to release of the Q2 data since the June FOMC, with figures that likely undershot the estimates of all the FOMC members. Capacity constraints are the story on both the inflation and GDP front, as a policy-induced aggregate demand overshoot is lifting nominal values despite “real” output constraints. One might think this would hasten the Fed’s tapering, though centrists at the FOMC will probably focus mostly on the real GDP undershoot, with the assumption that price gains are still “transitory.”

Empire State/Philly Fed Index: 25.0/25.0

The Empire State index is assumed to fall to a still-solid 25.0 in August from the 43.0 all-time high in July, versus a 7-month low of 3.5 in January. The Philly Fed index is seen rising to 25.0 in August from 21.9 in July, versus a 48-year high of 50.2 in April and a previous 11-month high of 30.1 in January. Levels will likely remain robust. These diffusion indexes will be supported into late-2021 as factories face the ongoing need to rebuild inventories, following the huge Q1-Q2 spending boost from coronavirus vaccines and two rounds of stimulus payments. Demand for most industries has rebounded well above pre-pandemic levels.

Retail/Ex-Auto Sales: -0.6%/-0.2%

We expect a -0.6% July retail sales headline drop with a -0.2% ex-auto figure, following respective June gains of 0.6% and 1.3%, as the March pop from stimulus checks continued to unwind. We saw a 2.4% increase for the CPI gasoline index that should lift service station sales. Unit vehicle sales slowed further however, to an inventory-constrained 14.8 mln pace from 15.4 mln in June and a 16-year high of 18.5 mln in April. We expect a steady pull-back in retail sales into the end of Q3 as we unwind the powerful boost from Q1 stimulus, though we expect an ongoing recovery in those sectors most dramatically hit by coronavirus restrictions in Q2 of 2020. Real consumer spending is expected to grow at a 3.3% rate in Q3, after rates of 11.8% in Q2 and 11.4% in Q1.

Industrial Production: 0.4%

Industrial production is projected to rise 0.4% in July after climbing 0.4% in June. We saw June increases of 1.4% for mining and 2.7% for utilities, but a -0.1% decline for manufacturing. In July, we expect increases of 0.7% for manufacturing, 0.5% for mining and a -1.5% drop for utilities. We expect the vehicle assembly rate to rise to a 9.4 mln pace in July from 8.9 mln in June, with big headwinds from ongoing semiconductor shortages. We saw a 0.1 mln trough pace in April last year, versus a 3.7 mln prior trough in January of 2009 that marked the start of the auto bankruptcies. Mining output should continue to rise, alongside the uptrend in the Baker-Hughes rig count. Capacity utilization should rise to 75.7% from 75.4% in June. Industrial production expanded at a 5.5% clip in Q2, and we expect similar growth rates of 5.8% in Q3 and 4.8% in Q4.

Business Inventories: 0.8%

Business inventories are expected to grow 0.8% in June after a 0.6% May gain. Our forecast incorporates a 1.0% rise for factory inventories and a 1.1% wholesale increase, alongside a 0.3% retail climb as seen in the advance report. Sales should grow 1.3% in June, after a -0.3% dip in May. As-expected readings would result in the I/S ratio holding steady at 1.26 for a second month, up from a 9-year low of 1.25 in April, versus an all-time high of 1.72 in April of 2020. We saw a -$165.9 bln liquidation rate in Q2 that subtracted -$77.6 bln from Q2 GDP growth, though we expect a big $16 bln boost for these figures in the next GDP report. Inventories are rebounding sharply into Q3. We’ve seen inventory liquidation in four of the six quarters through Q2. Inventories started to unwind pre-pandemic as earlier tariff front running reversed course before the big COVID hit, leaving room for a sustained inventory rebound through the rest of 2021.

Housing Starts: 1.650 mln

Housing starts are expected to climb to a 1.650 mln pace from 1.643 mln in June and 1.546 mln in May, versus a 15-year high of 1.725 mln in March. Permits are expected to improve to 1.660 mln from 1.594 mln in June, versus a 15-year high of 1.883 mln in January. We saw a new 15-year high for new home sales in March, and prior 14-year highs for pending and existing home sales in 2020. The MBA purchase index marked new 15-month low at the end of July, versus a 12-year high in mid-January, as lean inventories have crimped sales while boosting prices. Permits have followed a solid growth path that began in Q2 of 2019, fueled by low mortgage rates, with a further pandemic-lift from lower rates and migrations from cities. We expect a 1.660 mln average for starts in Q3, another new high following new recent highs of 1.599 mln in Q1 and 1.575 mln in Q4. We expect a 1.685 mln average for permits in Q3 that falls short of the 1.788 mln average in Q1.

Initial Jobless Claims: 365k

Initial jobless claims are expected to fall -10k to a 365k new cycle-low, after a drop to 375k from 385k, versus a 368k prior cycle-low in both late-June and early-July. Claims likely tightened into early July but widened since then due to a counter-swing relative to the auto retooling seasonal pattern, which likely didn’t occur much this year due to semiconductor shortages. Claims averaged 393k in July, after averages of 394k in June, 428k in May, and 582k in April. The 424k July BLS survey week reading slightly overshot last month’s reading of 418k, but was an improvement against the 444k in May, 566k in April, 765k in March, and 847k in February. We assume a 750k August payroll rise, following a 943k July gain.

Continuing claims fell by -114k to a 2,866k new cycle-low in the week of July 31, following an upwardly revised 2,980k figure. We expect continuing claims to rise 34k to 2,900k for the week ending August 7. Continuing claims have fallen sharply over the past two weeks, and the drop is due for some correction. Continuing claims are on track to fall by a relatively large -440k between the July and August BLS survey weeks, after drops of -116k in July, -199k in June, -42k in May, -188k in April, -628k in March, -409k in February, and -555k in January.

Leading Indicators: 1.0%

The leading economic index likely rose 1.0% in June, led by continued strength in claims, permits and ISM orders data, after big stimulus-fueled gains of 0.7% in June, 1.2% in May and 1.3% in April. The index continues to reverse the huge 2020 pandemic drops of -6.3% in April and -7.5% in March. We expect gains across most components in June.