Weekly Research Recap

Bianco Research  •  Charts of the Week  •  September 23, 2022

Below are selected charts and excerpts highlighting some of the research we have published recently.

Based on Powell’s comments, most rates across the yield curve have to move 50 to 100 basis points higher. The 3-month T-bill would have to move 150 basis points higher. What does this mean tactically? With rates far below the inflation rate, the yield curve (bottom panel below) should remain in its -30 to -50 basis point range as the entire yield curve shifts higher in parallel. (Report Originally Published September 23, 2022)

 

 

Normally a market should include a “Hopes and Dreams” component because companies have flexible structures and can re-make themselves over time. As the chart above shows, this component has fallen with the market decline while current book value and future earnings value have remained mostly flat.  The next chart below shows the percentage of the S&P 500’s valuation that is characterized by this component. Even though “hopes and dreams” peaked in late 2021, this component is still at elevated levels comparable only to the tech bubble in early 2000. (Report Originally Published September 22, 2022)

 

 

Thanks to immigration and to a lesser degree globalization, real (after inflation) wages have been trending sideways for nearly half a century (orange line). The blue line shows nominal (before inflation) wage growth. This chart implies most of the nominal wage gains are merely offsetting inflation. (Report Originally Published September 21, 2022)

 

 

History is on the market’s side. The orange line in the chart below shows the highest projected terminal funds rate (the maximum rate based on the fed funds futures contracts out 10 months from that date.). The blue line is the actual funds rate. The table shows the highest projected terminal rate versus the actual terminal rate. Yes, the market overshoots the terminal rate. But, especially in the last two rate hike cycles, it only does so by less than 50 basis points. The market also does a decent job of projecting when the fed funds rate will peak. Currently, the forward curve is projecting the fed funds rate will peak seven months into the future somewhere around 4.50%. History suggests it is far too early and far too low a current target fed funds rate to look for the terminal fed funds rate anytime in the next few months. In other words, market-based short rates, like the 2-year yield, are probably headed even higher. (Report Originally Published September 20, 2022)

 

 

The largest share of the net equity purchases came from France and Japan. Meanwhile, the largest sellers of US equities were the UK and the Cayman Islands. Caribbean countries, such as the Caymans, are often associated with hedge fund activity whose origin is likely more accurately attributed to the U.S. Due to the London’s stature as a financial hub, flows attributed to the UK are also often seen as hedge fund activity moreso than true foreign flows. This suggests hedge funds and money managers were selling even as the S&P produced 9%+ total returns on the month. Based on returns in August and September, they appear to have sold at the right time. (Report Originally Published September 19, 2022)