In his Daily Market Notes report to investors, while commenting on the rise in unemployment claims, Louis Navellier wrote:
Q2 2021 hedge fund letters, conferences and more
Crude Oil Prices Plunge
Interestingly, the plunge in crude oil prices may be somewhat related to the fear of a global economic slowdown as the Covid-19 Delta variant spreads, but United Arab Emirates’ (UAE) recent push to boost its output is expected to be followed by other OPEC members, since they are notorious for cheating on their quotas. I should add that seasonal pressures typically weigh on crude oil prices, since, commencing in September, worldwide demand naturally drops, because there are more people in the Northern Hemisphere than the Southern Hemisphere, so I do not expect crude oil prices to resurge anytime soon.
Greenlight Capital Full Q2 2021 Letter: Einhorn Thinks Inflation Is Here To Stay
David Einhorn’s Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund’s letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
The biggest beneficiary of the Covid-19 Delta variant fear are bond yields, since the 10-year Treasury bond decisively “cracked” the 1.2% level last week. This means that either inflation fears are ebbing or there is a flight to quality as the Covid-19 Delta fears spread. I believe that although energy prices are moderating, the Covid-19 Delta fear of the global economy slowing is the biggest culprit behind falling Treasury bond yields. The next big test for Treasury bonds will be the “bid to cover ratio” at the upcoming Treasury auctions to ensure that there is sufficient institutional demand at current ultra-low yields.
Speaking of interest rates, the European Central Bank (ECB) on Thursday boosted its bond buying (i.e., quantitative easing) and raised its inflation target to 2%. In my opinion, the ECB just confirmed that interest rates will remain negative for the foreseeable future, since it is highly questionable if inflation will ever hit 2% in the euro-zone.
In the wake of last Monday’s sell-off, I have been getting a lot of questions about the potential next big tipping point that could trigger a market correction. Since positive second-quarter earnings seem to be working and helping to shore up stock prices, the biggest risk that I foresee is merely market mechanics; specifically, ETF spreads. If we get into any extended, multi-day sell-offs, ETF spreads all too often spin out of control. As a reminder, when trading ETFs, just go to Morningstar.com and check the “Intraday Indicative Value,” which tells you any premium/discount compared to the actual ETF price.
What Does A Market Want?
The stock market can’t make up its mind. Does it want high yields or low yields? Something does not compute. The reason for this confusion is that inflation numbers are rising and interest rates are falling, which is not how it usually works. But since we have the most extreme intervention in the history of financial markets, in Japan, the euro-zone, and the U.S., some of the QE money from the ECB and the Bank of Japan ends up in the U.S. Treasury market, in addition to the Fed’s own QE money, pushing yields lower, as inflation rises.
It cannot be stressed enough that the U.S. Treasury yield curve is positive, unlike some other yield curve situations in the euro-zone and Japan. This allows financial institutions to make money, despite U.S. real rates being negative after inflation. So, if banks can make money by borrowing short (as indicated by the 2-year note yield) and lending long (as the 10-year yield indicates), it doesn’t matter that real rates are negative. How about them apples?
The Commerce Department on Tuesday announced that housing starts rose 6.3% to an annual pace of 1.643 million in June. I should add that building permits declined 5.1% to an annual rate of 1.598 million in June. Lumber prices have also declined 70% since June, after surging 125.3% in the first five months of 2021, so oscillating lumber prices may have adversely impacted building permits.
The National Association of Realtors on Thursday announced that existing home sales rose 1.4% in June to an annual pace of 5.86 million. Median home prices hit an all-time high of $363,300, which is the highest level since the S&P CoreLogic Case-Shiller index commenced back in January 1999. Interestingly, the sale of homes priced between $500,000 to $750,000 rose 81% in the past 12 months, while the sales of home over $1 million surged 119%. As a result of the strong sales activity in high-end homes, median home prices are now increasingly being impacted.
The Rise In Unemployment Claims
The Labor Department announced on Thursday that weekly unemployment claims in the latest week rose to 419,000. This was a big surprise, since economists were expecting weekly unemployment claims to decline to 350,000. Continuing unemployment claims in the latest week declined to 3.236, which represents the lowest level for continuing claims since March 2020. The best way to describe the latest weekly unemployment claims is “uneven.”
The Fed now has more “excuses” to remain accommodative due to the uneven progress in the labor market, so next week’s FOMC statement will be closely scrutinized for any significant policy change. Since the ECB was dovish with its statement on Thursday and boosted its quantitative easing, I expect that the Fed will also have a dovish FOMC statement. This means that “Goldilocks” is expected to continue, which is a combination of an accommodative Fed and strong economic growth.
Last Monday, value stocks, like airlines, cruise ships, hotels, and energy stocks were crushed over news that the Covid-19 Delta variant was spreading in unvaccinated countries. In contrast, British Prime Minister Boris Johnson implied that “If we do not reopen now, when will we ever reopen?” and proceeded to open the country on what is being called “Freedom Day.” Frankly, I think last Monday’s plunge in the Dow Industrials was a gross overreaction, because if anything, Britain, Israel, and the U.S. are an oasis compared to the rest of the world, due to their high vaccination rates.