It's Right Under Your Nose
Last week it was all about Powell's "hawkish pause." This week, it's about the market taking a pause. Is this an unwinding of progress equities have made over the past 3 consecutive weeks, or a pause in sentiment that accompanies equity rallies? We believe, the answer is right there under our proverbial noses.
Speaking of noses, this week's inspiration comes from the 1987 surprise hit "Roxanne." The movie was a modern take on "Cyrano de Bergerac," a play by Edmond Rostand in 1897. The following entails some trivia about the movie:
As stated, the movie is based on the play about Cyrano, but he was also a real person. De Bergerac was a French novelist, playwright, and scribe who lived in the middle 1600s. While not an especially attractive person, his nose was much smaller than portrayed in the movie/play.
The film had a low budget of $12 million, less than the typical Hollywood budget at the time. Yet, the film posted a gross box office of $40 million worldwide. It's listed on the American Film Institute's "Top 100 Funniest American Movies."
The fake nose took approximately 90 minutes each day to apply, but only 2 minutes to remove. Steve Martin (C.D. Bales as Cyrano) said, "God how I hated that thing."
The names of the 3 main characters stayed nearly consistent with the play. C.D. Bales has the same initials as Cyrano de Bergerac. Chris, the handsome suitor for Roxanne, is short for "Christian" of the same role in the play. And, Roxanne is the same as the main love interest in the play, only spelled with two "n"s instead of one.
In the film, C.D. Bales is challenged to come up with 20 jokes about his nose (based on his challenger's expert dart throw). After he tells 18 jokes, he asks the onlookers, "How many is that." To which they answer, "Fourteen!" He goes on to tell six more jokes, making 24 in total.
Here's what we've seen so far this week...
Well, Here We Are, Just The Three Of Us. One of the most entertaining points in "Roxanne" is when C.D. Bales has to tell 20 jokes about his large nose. At Joke #4 he states, "Personal: well, here we are, just the three of us." Bulls, Bears, and the Fed Chairman have battled this week as the Fed has signaled two more rate hikes this year.
This week, Powell testified before the House Financial Services Committee. At this point, his statements don't seem to match up, so you have to read between the lines. Chairman Powell stated in his testimony this week that the fight to combat inflation "has a long way to go." If they Fed is so hawkish and has much further to hike rates, then why the "pause?" Oh, and don't call it a "pause" because, according to Powell, "We never used the word 'pause,' and I wouldn't use it here today." You say pause, I say skip, let's call the whole thing off!
We covered last week how the Fed's new projections of unemployment and GDP growth do not compute. If unemployment were to increase as much as the Fed's 2024 projection calls for, there would not be positive growth in GDP. What's more, Powell's testimony doesn't make sense. He was questioned about how we got here at this stage of interest rate hikes and economic growth. He stated the "pandemic" was the root cause. Wrong! It was the government's flawed response to the pandemic - artificially low interest rates, quantitative easing, and government deficit spending - that drove inflation higher and left the job market 3 years to normalize.
The market's perception of Fed Policy stands in contrast to what Powell is publicly stating. In March, economists and investors were expecting rate cuts to begin as early as June of this year. Projections have shifted, due to a better-than-expected economic picture, and now investors see rate cuts beginning in December of this year. While we do not fall in that camp, the point is that the market is not falling in line with that the Fed is publicly projecting. This leaves room for equities to continue moving higher.
Smell The Coffee. Another joke told in the movie by C.D. Bales about his nose is, "Aromatic: it must be wonderful to wake up in the morning and smell the coffee...in Brazil." We have a saying that you need to "wake up and smell the coffee" when something is eluding us or we're not paying attention. Well, that's how some investors are acting in this economic environment. Those that are still in the bearish camp aren't seeing the entire picture.
First, Corporate Leverage does not resemble anything like it did prior to the 2000 and 2007 bear markets. Prior to those bubbles, corporate leverage was steadily or rapidly rising. Today, corporate leverage is on the decline, which indicates the lack of a leverage bubble.
The consumer is also not stretched too thin. Household Debt for both consumer loans and mortgages is no where near the elevated levels of 2000 or 2007. Liquidity is also at reasonable levels. Excess Liquidity can give us a signal about the level of equities and other risk assets from a pricing standpoint.
In 2000 and 2007, the level of excess liquidity did not support stock prices. In 2007, excess liquidity was moving sideways, while in 2000 it was falling. Today, the level of excess liquidity is rising (improving). This indicates that the level of equity prices are not overly extended.
Last week, we noted that the Coppock Curve has given us a longer-term buy signal. Another indicator is the Hindenburg Omen. This signal measures the number of stocks making new one-year highs. Prior to 2000 and 2007, the number of stocks on the Nasdaq Composite giving this signal was elevated to say the least. Today, none are making new one-year highs, meaning that the index has plenty of runway to move higher. Take some time to stop and smell the coffee, because things look pretty good at this stage. But, the data is always subject to change.
Here's the scene from the movie that inspired this week's Musings...
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