Let’s dig into some of the Q4 bank earnings that came out last week. First up Bank of America which posted its largest full year profit in history $28.15 billion. (WSJ) So how did they accomplish such a feat, well let’s just see what their interest rate differential was, i.e. what are they paying depositors compared to the risk-free rate they earn off those deposits.
As we noted in last weeks letter, the equity markets looked locked and loaded to test their crucial supports and they did just that. The SP500 tested the 2550 level and the Nasdaq the all-important 6495 level, both markets saw minor follow through. All eyes are dependent upon what the FED does on Wednesday as the markets still see around a 68% chance of another 25bp hike. We read in the WSJ on Monday an Op-ed from Stan Drunkenmiller and Kevin Warsh and it can be summed up via this quote, “the central bank should pause its double-barreled blitz of higher interest rates and tighter liquidity.” As much as we respect the both of them, we disagree whole heartedly.
This is going to be a quick note with some charts due to the Thanksgiving holiday week. We continue to see bounces being sold into in terms of the equity markets. Our readers have been well informed of our sentiment and despite expecting this to continue, we do expect some bounces to occur now and then. The larger global macro theme hinges on the FEDs continued hikes and deteriorating global cohesion theme.
This week’s note will begin by reiterating our bullish theme on the Natural Gas market. We have been clamoring for weeks about both the technical and fundamental backdrop that continues to underpin this Bull Run.
This last week was full of reports of wide spread over valuations across the gamut of both global equity markets as well as global bond markets, especially Europe. Now we aren’t talking about some bobble headed main stream media types, we are talking about titans, the likes of Ray Dalio, Stan Drunkenmiller, Jeff Gundlach all relaying the same theme, “well above historical norms.” We even read a great piece on the PEG ratio from Fasanara Capital, which stated that the PEG, which is a statistical measure of how expensive a stock is relative to its ability to generate earnings, is well above 1999 highs and probably rightfully so given the plethora of cheap financing from zero rates, unprecedented HY rates and of course continued tax breaks. All that said, the pressure from the rhetoric from the guys we just mentioned should begin to mount, as they most certainly have an agenda attached to such warnings.