We decided to wait till the FOMC meeting to release this week’s letter so that we could capture the most important event of the week. It’s not that we didn’t expect a few of the tech giant earnings would be painted with bullishness, but we felt maybe the earnings didn’t really matter.
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.
Last week we saw the technology laden NASDAQ market drop over 10% from its prior week high, hitting 6906 down from a high of 7728 a week earlier. We have spoken at length over the last few letters how insiders and institutions have been selling out of technology positions but retail seems to be picking up what they are putting down. This kind of action where the weak hands are buying from the strong hands is a notorious set up for a market set back and last week did not disappoint.
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.
The FOMC decided to raise rates another 25bp to a high mark range of 2.25%. We applaud the continued move; however, we feel that we could be doing more and doing it faster. Holding interest rates or real rates still negative, some 10 years after the 2008 crisis is deeply concerning. All too often people focus on the Fed Funds rate, but the real rate, the FF less inflation, is still negative. Rates are still very accommodative...although the FED left that word out of the statement today. Watching Powell is like watching your Accounting professor discuss reconciling the balance sheet on a late spring afternoon. He and the FED continue to use words like transitory, gradual and appropriate, a decade into a recovery and we are still using these words. The dot plots are all calling for continued hikes peaking around 3.25/3.65%. We view this as highly opportunistic and we do not think the global economy nor the domestic economy will be able to absorb such a short rate given the sheer size of global debt growth. For those that haven’t seen, we often use our own “dot plot” picture: