Don't need to talk about
About love and blues
Round, round, up and down
Moves so fast, never touch the ground
High, high touch the sky
Don't come down, don't make me try
Lost in space or any other place
Living my dream on the moving train
-Lewis, Riley, Guns (LA Guns) 1988
Slow motion. The breath leaves the body. Out with the old. Equity markets largely gave back a bit of ground on Friday, and on rather large trading volume at that. We did see that coming. We warned ourselves as we had warned each other that that last day of the month could be, or would be, atypical. Is it, or was it really atypical though? Or was this negative action more premonitory?
The S&P 500 gave back 0.72% on Friday, closed flat for the week, but stands up 11.32% year to date. The Nasdaq Composite similarly surrendered 0.86% for the day, turning the week negative, down just 0.39%, while still up 8.34% over just one-third of the year. That's right, from large-caps to small-caps, the Nasdaq indices (The Nasdaq 100 stands +7.55%) are this market's laggards, running at an annualized pace of acceleration to the upside of 22% to 25%. The Dow Jones Transportation Index is already up 22.71% for the year after enjoying a fine week (+1.4%) even if that index did so alone. You see the Transports finishing the year up a cool 68% this year? No? How 'bout you in the back? No? Me neither.
Still nice and slow. Fresh air enters the lungs. Clean oxygen reaches for the various outposts within the body before those capillaries thirst uncomfortably for more. The first estimate for first quarter GDP may not have been as high as some hoped for, but certainly did show a policy fueled acceleration. Jobless Claims seem to be creeping in the right direction, but still run too high. Durable Goods Orders grow, but below expectations, even with all of the liquidity, all of the fiat sloshing around this economy... even with more, supposedly on the way.
Where has all this "money" if you want to call it that, gone? The Federal Reserve's balance sheet has grown from $4.1 trillion in February of 2020 to $7.8 trillion in April of 2021. M2 Money Supply has grown (seasonally adjusted) from $15.4 trillion in February of 2020 to $19.9 trillion in March of 2021. Yes, they seasonally adjust money supply. You might think that money might just be a simple total. Think again.
So... we know that enough of this newly minted cashola went into the many programs created by both the U.S. Treasury Department as well as the Federal Reserve Bank since the start of the pandemic as a means of economic life support. Not to mention into the pockets of the masses, who have also been able to put off if need be, having to pay for certain necessities of life, such as shelter at someone else's expense.
Hence, we have savings, created by periodic outbursts in personal income as seen in March. Some of this liquidity has turned into the flow of capital. The stock (equity) and housing markets say (burp)... thank you very much. Still, as seen on Friday morning... Ben Bernanke's favorite measure of consumer level inflation, the PCE price index (That the Fed has stuck with now through two successors) remains rather stubborn. Even with all of this kerosene poured on what should be a bonfire, the headline PCE price index for March 2021 only showed inflation of 2.3%, and just 1.8% at its rotten core.
Why, you ask? The St. Louis Fed tracks the velocity of M1 stock money supply in ratio form to illustrate the frequency of that which currency is exchanged to purchase goods and services domestically over a given unit of time. The information displayed by the St. Louis Fed uses quarterly readouts. Q1 2021 velocity reads out as 1.198, slower than even the preceding more pandemic-impacted quarters. Just for reference, this readout for Q1 2020 was good for 5.247, and completely pre pandemic velocity (Q4 2019) at 5.486. Pre-GFC (Great Financial Crisis), the Q4 2007 readout printed at 10.678 just in case you were wondering.
I mean, don't kid a kidder, Sarge... we see corporate earnings. According to FactSet, 60% of the S&P 500 has reported their first quarter performance. 86% of reporting corporations have beaten earnings expectations, while 78% have beaten on sales. The blended rate (reported plus projected) rate of earnings growth for Q1 2021 now stands at an incredible 45.8%, up from 33.8% just one week earlier when 25% of the S&P was in the books. That's how much corporations have gapped higher their own profitability. Amazing. Earnings growth for the season was projected at just 23.8% in aggregate for the S&P 500 ahead of the earliest releases. Understand that. This means that even those who study these firms the closest and have the most access to granular type information simply had no clue. No clue at all. How about forward looking PE ratios?
That simple, but often used metric for equity valuation now stands at an even 22 times. One week ago, prior to some of the largest and highest profile earnings beats, that number was 22.5 times. Ahead of the season, it was something like 23.5 (not actually looking it up) times. Earnings have risen to meet valuation, but there is indeed some movement of valuation toward earnings expectations as well. Consensus view for Q2 has moved higher to expected earnings growth of 53.8% on revenue growth of 18.1%. Yes, the rest of the year and the full year have all been adjusted higher.
Sarge... I Have a Question
Actually two questions. Sarge, what if the community of analysts are this far off again? Could this be the greatest year of all-time? What if they are off by a mile again, but in the other direction? Good questions, tough to answer. The market has stutter stepped, no doubt as April came to a close. Corporate execution has been excellent and is expected to just keep getting better.
What do we know? We know that the FOMC is as accommodative as they are going to be for quite some time. Any future changes will be to draw down this accommodation. We know that fiscal policy on the deficit spending side has been expansive, and that large plans exist to expand such policy much further. That is priced in. What passes after negotiation is not. We know however that the final product will be smaller than what has been proposed. Then there is the taxation side of fiscal policy. It's only responsible if spending is imminent... to pay some of it ourselves and not put it all on our descendants. Right? I mean, we are going to love our children, grandchildren and great-grandchildren, aren't we? If they stood before you, would you ask them to pay your mortgage? This is the same darned thing.
I am not going to tell you that higher taxes are going to stop a bull market in its tracks. I am going to tell you that there is no possible way that higher taxes are helpful from the market's perspective. We can have the Demand Siders or Keynesians fight about multipliers with the Supply Siders and the Austrians who are not the same thing but probably would be allies right now. Just bear in mind that in the end, the first nation that moves to a hard asset backed currency will dominate Forex markets and ultimately global trade. Know too that if John Maynard Keynes were around today, facing these debt levels, he might not support what has become known as Keynesian economics. Keynes never supported deficit spending with these kinds of deficits in mind nor at these debt levels because they were inconceivable at the time.
Now, I Have a Question
Earnings expectations are through the roof. We have just discussed this. Inflation is still historically low, but waking up, and inflation expectations going out a little over a year are closer to 4% than they are to 2%. This is prior to any increase in velocity, which is coming as governors and mayors across America realize that they have successfully destroyed entire economic ecosystems and now try to quickly salvage whatever remains.
We know that raw materials have... aka "commodities" have already undergone tremendous inflationary pressure. Margin squeeze, not margin call, that's something else. But margin squeeze in other words, reduced profitability based on higher input costs is coming. These costs will be passed on to the consumer? Okay, but wait, we haven't done higher corporate taxes yet? Or higher taxes on international earnings. Those will squeeze margin too.
Oh, but there is so much pent up demand. Everyone is going to go on vacation and spend on the good things in life, right? Well, there is pent up demand, by lenders, and landlords alike for money they have been owed for a year. That week in the islands may have to turn into a weekend in the Poconos, and that weekend in the Poconos may have to turn into a barbecue, while that barbecue turns into continuance of public assistance.
Now I do see at least some of this current and coming bout with consumer level inflation as "potentially" transitory. Now, you have to think hard here, because the politicians, the heads of agencies and the clowns on Wall Street with something to sell you are not going to think for you. What if the coming pop in velocity is "transitory", but higher taxes are not. What if inflation is (or is not) transitory, but the scar it leaves on an entire generation is not? Scars heal, but never completely.
They Don't Know
Over the weekend, Treasury Secretary Janet Yellen told you that "I don't believe that inflation will be an issue, but if it becomes an issue, we have the tools to address it." I don't doubt Janet Yellen as an academic economist, but readers must bear in mind that this academic economist was completely lost in her attempts to create inflation as Fed Chair and had no idea why the Phillips Curve did not work in real life the way it did in the Fed's modeling.
Warren Buffett of Berkshire Hathaway (BRK.A) , (BRK.B) also spoke to you over the weekend. He told you "We can't buy companies as cheap as we can buy our own, and we can't buy stocks as cheap as we can buy our own" Even as Berkshire Hathaway apparently slowed significantly the firm's own share repurchase program in the first quarter. Hmm.
Both Janet Yellen and Warren Buffett have been around the block a few times. I have been around the block a few times. You have been around the block a few times. None of us, not a single one of us has ever been around this block before. Pay attention.
By The Way...
I held a fun little Twitter poll overnight. I asked, "What firm had posted the best first quarter so far? 224 of you responded over less than seven "zero-dark thirty" hours. Not bad. Amazon (AMZN) won at 49.1%, Apple (AAPL) finished second at 26.8%. "Other" came in third place at 13.8%, while Facebook (FB) came in fourth at 10.3%. I wanted to include Microsoft (MSFT) , but the template only had four slots available, and I felt the need to keep "Other" as a choice.
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (Apr-F): Flashed 60.6.
10:00 - Construction Spending (Mar): Expecting 1.9% m/m, Last -0.8% m/m.
10:00 - ISM Manufacturing Index (Apr): Expecting 65.0, Last 64.7.
The Fed (All Times Eastern)
14:10 - Speaker: New York Fed Pres. John Williams.
14:20 - Speaker: Federal Reserve Chair Jerome Powell.
Today's Earnings Highlights (Consensus EPS Expectations)