The Dark Side of Reflation

Feb 17, 2017 | US Economy, US Equities

Higher economic growth usually translates into higher bond yields, higher stocks and rising oil prices; but, too much of a good thing is bad for stocks. Over the past few weeks, we’ve shown that our stock/bond RSI signal has triggered. We now have an Inflationary...

Financials Rally at Odds with Credit Cycle

Jan 6, 2017 | US Economy

Financials have been the biggest winners since the Trump election  The S&P Bank ETF KBE has rallied 29% since the election.  We’ve written about financials over the past few weeks, but it is worth highlighting again. While we may see financials rally in the short...

Higher Yields a Vulnerability for US Housing

Dec 2, 2016 | US Economy

Higher US yields are already leading to higher mortgage rates in the US.  Building permits are one fo the best leading indicators for housing, and mortgage rates themselves lead building permits.  The next chart shows the modest recovery in building permits is likely...

Higher Inflation Expectations to Favour Equities over Bonds

Nov 28, 2016 | US Economy

(from our Tactical of November 8th 2016) Bond yields have been rising in most countries, and yield curves have steepened across the developed world.  As the top chart shows, the rise in nominal yields has come from a rise in inflation breakevens, while real yields...

Credit Spreads and Equity Volatility to Rise

Nov 12, 2016 | US Economy

(from our Tactical report of 1st November 2016) Equity volatility and credit spreads are almost perfectly correlated. In part this is because equity is a perpetual option on the solvency of a firm. When credit becomes stressed, equity volatility jumps as well. You can...

Retail Stocks to Suffer Due to Higher Inflation

Oct 28, 2016 | US Economy

Retail sales will suffer in the months ahead due to rapidly rising medical and rental CPI.  Whenever rental and medical costs have risen significantly in the past, they have led to a big decline in retail sales.  You can see from the chart below that Medical CPI plus...

Real Yields Wildly Mispriced Given Stagflation Light

Oct 7, 2016 | US Economy

The US now has the worst combination of outcomes, poor growth and rising inflation.  Bond yields are now the most negative they have been in almost forty years.  Only in the 1970s during stagflationary episodes were real yields this negative.    We don’t see a high...

Lower ISM Ahead, Weak Read for Stocks

Sep 23, 2016 | Featured, US Economy

The ISM Manufacturing Index came out at the beginning of the month and offers a dim view of the next three months for US manufacturing as well as for stocks.  The key data we focus on in the ISM is the relationship between New Orders to Inventory.  The ratio leads the...