Economic Outlook

Half-Truths Are Half Lies By Definition

“When one side of a story is heard and often repeated, the human mind becomes impressed with it insensibly” – George Washington

Daughter- Can I go out with friends?

Father- Have you asked your mother?

Daughter- Of course I have.

Father- Okay, have fun.

In the plot above, the daughter only tells her father half of the truth. She fails to disclose that her mother said “no.”

Like the daughter’s craftiness, many markets are surging on narratives built on just one side of a story. For speculators and gamblers, that seems to suffice. For investors aiming to build and preserve long term wealth, we suggest understanding every side of a story.

Of the many tales we hear to justify record equity valuations, low-interest rates are among the more popular. Make no mistake, low interest rates provide benefits to stock prices. However, that is only half of the truth. We now present the other half of the story that few tell.

Opportunity Cost

There is a popular narrative that says stocks should do well simply because bond yields are pitifully low. The basis behind the argument is simple math comparing historical stock returns versus current bond yields. The fact of the matter is that historical average returns and expected stock returns are often quite different.

The calculation of expected returns is primarily a function of the price of an asset. The higher the price paid, the lower your expected returns and vice versa.

As we wrote in “You’ve Got To Ask Yourself One Question. Do You Feel Lucky?” current expected equity returns are near 0, as valuations are extreme. Statistically based expected returns are vastly different than the “we hope for” expected returns spewed by cheerleaders in the financial and social media outlets.

The article presents four popular valuations methods and the expected returns based on the historical relationship between valuations and 10-year forward returns. In each case, the current valuation has a strong statistical correlation with the coming 10 years of returns.

We extend that analysis by comparing those return expectations to yields on Treasury and corporate bonds.

The intersection between the same color vertical and trend line denotes the expected return for the respective valuation method. We show Ten-year U.S. Treasury yields and BBB-rated corporate bond yields with the dotted horizontal lines.

The table below the graph summarizes our findings…CLICK for complete article

US Air Passenger Traffic Skids Again, Delta & American Warn of Declining Bookings

L-Shaped Recovery for Air Lines. Staking their future on a vaccine.

American Airlines on Friday, and Delta Air Lines on Thursday, warned about once-again slowing bookings. The highly profitable business air travel segment remains essentially in zombie-status, but leisure travel perked up a little in recent months, and over Thanksgiving inched up further by a microscopic amount. But total travel remains woefully down from last year even during the best day, and is now heading lower again.

The number of passengers going through TSA checkpoints to enter the secured areas at US airports during the post-Thanksgiving week through Saturday, December 5, compared to the same weekday in the same week last year, showed the deterioration: between -64.2% and -69.2%. And what the airlines warned about is a decline of bookings from these already low levels.

The chart shows the total number of TSA checkpoint screenings in 2020 (red) and 2019 (green) for each day and the seven-day moving average (bold lines). The four spikes of over 1 million daily screenings over the Thanksgiving travel period (Friday Nov 20; Sunday Nov 22; Wednesday Nov 25; and Sunday Nov 29) were a pale imitation of last year’s spikes during that time, but on the best of these days, Nov 22, the year-over-year decline narrowed to -54.9%, which was the least worst collapse since the collapse of the airline business started in March: CLICK for complete article

‘The Third Wave’: Stock Market Update For The Week Ahead

The Past Week, In A Nutshell

What Happened: In light of hopes for a sustained economic rebound, U.S. broad market indices pushed to new all-time highs.

Remember This: “[T]he third wave is now hitting the economy harder than we thought and that the damage is likely to keep adding up in coming months, until we get vaccines widely deployed,” said Brad McMillan, chief investment officer for Commonwealth Financial Network.

“The two key factors in how bad it will get are whether infection growth crests and whether the federal government steps in with another round of stimulus.”


During much of the week, participants lacked the conviction to break through to new highs.

However, conditions markedly improved after Thursday’s long liquidation on Pfizer Inc news flushed out weak-handed participants, and responsive buyers surfaced. The quick recovery of the balance-area high suggested the news was immaterial.

During Friday’s regular trading, initiative buyers extended range — through the $3,682.00 balance-area high — separating and accepting value above the week-long balance-area.

Therefore, given the acceptance of higher prices, participants must monitor whether S&P 500 spends time trading above the $3,682.00 balance boundary. An initiative drive below that figure would portend a potential response at the $3,667.75 high-volume node. Auctioning further below that value would denote a clear change in conviction. The line in the sand is the $3,640 balance-area boundary. Auctioning below that figure puts the rally on hold.

All in all, though sentiment and positioning imply limited potential for upside, the S&P 500 remains in an uptrend after confirming a multi-month balance-break.


In a commentary, Nasdaq’s Phil Mackintosh discussed new proposed actions from the SEC…CLICK for complete article

Blain’s Morning Porridge, Dec 3 2020: Market PTSD

How Great is 2021 going to be? 

Strategizing about markets is a really, really fun way to start the day. I wake up with something to do and think about every day! I often get asked about when do I find time to write the Morning Porridge. Does it take all my time? Nope. I down tools on it by 9.00 am most days. I really do have a day-job – financing private debt and equity deals. Yesterday was spent working out how to restructure a UK aerospace and satellite launch project, and then how to present an infrastructure deal in the most effective way to potential investors.

Occasionally something big happens in markets that sets the Morning Porridge’s tone for the coming day, but most days it’s freshly produced from personally sourced global ingredients, or from thoughts leaping off the pages I scour as I wake up. Some days I have a very clear idea what I’m going to write about, and others, I wake up wondering what is there to say that hasn’t already been written about where the markets are going next.

Occasionally a theme or an idea will germinate or fester slowly in my head and it takes me a while to think it through and develop it. I’m having one of these days… I’m trying to think through the Consequences of the Year of the Pandemic. My thinking is its nowhere near complete.. and I’m beginning to scare myself.

The coronavirus has been the defining theme of 2020 – but what did it actually reveal in terms of markets? Its set the narrative. Everything else reacted to it. We saw enormous shifts in terms of policy and business strategies. All these shifts have consequences on future demand, supply, investment and growth, but also on expectations. Markets think its over so they are enthusiastic. Get back in the box…CLICK for complete article

Some Reasons for Caution

Our model gave a recent warning of a potential market top coming soon and we sent subscribers a strategy to protect their portfolio. Below we show a few charts that allow investors to see some reasons for concern here.

The first chart shows the daily purchase and sell transactions by corporate insiders – officers, directors, and holders of more than 10% of company shares. The SEC requires these shareholders to report purchases and sells within two days of a transaction. As we can see on the chart, during the massive sell-off…Click for full article.

“The CBC’s attitude to economics journalism is the same as an adolescent’s attitude to household chores. They figure if they do it badly enough, they won’t be asked to do it again.”
– Stephen Gordon, Laval Economist