A Heads-Up Week
Monday, 17 January, 2022
Published irregularly, as conditions dictate.
Friday’s retail sales data is absolutely damning, and demonstrates, along with the softening in other important metrics (e.g., Industrial Production) that we are already in a recession or on the precipice of it.
Remember that in addition to an inverted yield curve (which we are not seeing - yet), other major indications of pending recession (in addition to low unemployment) are seeing YoY crude oil prices greater than 80% (a condition we saw from September thought December) indicating a pending recession, as well as the very timely YoY CPI > 5%, which (which has been the case from June until now). Now that the economic numbers are softening - especially retail sales as the consumer is 70% of GDP in America, I expect we will see an “official” start of the recession marked as the first quarter of this year.
Furthermore, the Fed is in a position where they must raise rates aggressively. The difference between the two year note and Fed Funds, when it gets more than 50bps in favor of the note, has always been met with a hike in the Discount Rate. Until recently, it was just under 50 bps, but now has shot up to about 93 bps. If things continue like this for another week, and we get beyond a full parentage point in the two year, I’d look for a 50 basis point hike into he discount rate to realign. Everyone is complacent regarding the exigency of rate hikes here, and the Fed may not be so complacent.
None of this bodes well for the economy or equities. As I mentioned, the big thing to watch now is NYSE new lows. When a selloff begins, and going into and through it, New Lows expand to 5% of total issues traded on a given day, and pretty much stay there throughout the decline.
The Proprietary “FloorBanger” signal uses new lows in its calculation, and is the only factor int he calculation this week that isn’t known in advance to be positive for a selloff. If new lows exceed 5% of total issues, we are likely in a major selloff. Shown below is the Floorbanger signals, of late, in red. These are usually proceeded by Hindenburg signals, in blue, with the Hindenburg setup validating a Floorbanger Signal, which are may likely be seeing into this week. If we do, the selloff is on:
In short, the economy is giving it up, we are falling headlong into a recession right now. Stocks are likely to crumble and in a fashion far more quickly than most would believe. If we see new lows above 5% of total issues traded on NYSE we must assume that we are in the drop itself - these things come about very stealthily.
On another note, one of the metrics which shows a greatly over-values market is the Schiller CAPE ration, the ten year average of real (inflation-adjusted) earnings to the current price.
First, let’s take a look at the dividend yield on the broad indexes like the S&P for the past century and a half:
Now, let’s invert the scale for the dividend yield, and make it lognormal:
It eerily resembles the chart for the CAPE ratio over time:
Dividend yields have, historically, clearly mirrored the ten-year real PE.