Can US markets get more cheaper or richer? and More

1. US consumer spending is at decade highs. They may not be happy spending $9 for a beer, but they would spend even $10 because they haven't for a long time. And this spendthrift nature in consumer spending is making the recovery this time very unique. US households are sitting with $2.4 trillion of cash and deposits. And a large chunk of this money is being invested into the markets and thus they are earning handsome returns on cash they got for free. This can have serious implications on inflation and its nature.

2. Hedge Funds are increasingly switching their portfolios to bet on the richly valued private companies. Earlier this space was primarily dominated by the PE/VC players.

3. Robinhood, the company that itself was the tool for the meme stocks, rallied by almost 81% in a single day, causing many trading halts on NASDAQ. This was after many retail investors drew their cash out to bet on the OTM options and then the market makers, the options sellers, to remain delta neutral buy the stock in heavy denominations.

4. This week, the Fed commented on the strong economic outlook, and thus have started preparing for the tapering. This stance led to a 6bp jump in the UST 10Y. The Fed says that it sees the economic conditions meeting its requirement for a taper. So what are these economic conditions:

   1. The real GDP grew by 6.5% in the second quarter. This is a great positive for the corporate earnings.

   2. This was further reaffirmed by the numbers of the companies reporting above expectations earnings and sales numbers. This profit will fuel the CAPEX and thus in turn the nominal GDP in the coming months.

5. Ems have started raising tapering. They had more room to cut rates and thus went deep and bounced back soon to fend off any inflation overruns. Ideally this should have led to EM rates outperformance, but we didn’t see this.

6. We see EM/DM growth projections diverging as we progress ahead with time. This is concerning as this divergence could again be an inflexion point in the EM,DM debate. We might see growth concentrating in the DMs and capital fleeing the EMs. Once the Fed starts tapering, EM central banks will have to follow suit, so would the Ems be ready by then?

7. Furthermore, in the S&P 500 companies, the number of companies with a BUY recommendation as a ratio of the 500 companies is highest ever. We have reached almost 85% BUY ratings. This is the highest ever in the history of the index.

8. Reflation trade went against the best for major hedge funds this summer. But why were the hedge funds so deep in short government debt? Also, what was in the steepeners that they couldn’t leave them even after they were deep red. Some analysts say it is because the market is now looking beyond the post pandemic world and they see growth contraction then. And hence we see the biggest drop in the 5Y yields.

9. Shipping charges have more than quadrupled from the last year levels. This highlights the supply chain disruption. This rise in freight is leading to an overall increase in consumer products.

10. If I were to invest in a container derivative, I would have 10x value of the trades today, leading to 900% profit in a year.

11. The UST 10 Yr forecasts have been cut to 1.8 percent for year end from the 2 percent mark. Thinking of implications this rally may have on the equity markets is very critical for where we start next year. As they say it is not about the target year end projection of the treasury rates but the way in which the yields move. If the rates move sharply, investors might flock money out of equities and rush to buy havens and this might again pull back the yields to sub 1.8 levels.

12. Given the treacherous landscape in the investment management space, more and more companies are outsourcing their money management to names such Vanguard, BlackRock. This implies that there is concentration of AUM with few hands and thus a lot of the market activity will be driven by the same set of principles and thesis.

13. Interesting Charts: