YWR: When a Canary is not a Canary.
Everyone is looking for canaries in the coal mine.
Signs the whole market is about to unravel.
So it makes sense to dedicate November’s Killer Charts to why these supposed canaries in the coal mine are not canaries and why the market will keep going higher.
I put together 33 slides with the following sections:
S&P Earnings Estimates
US Economy
Positioning
Credit Trends
The full presentation is available at the bottom of the post and all our previous monthly Killer Charts presentations are available in the YWR Presentation Library.
Public Service Announcement: Invest in stocks not the ‘economy’.
Everyone has economic anecdotes about something or other; a story about how the consumer isn’t doing well. It’s sad, but in the end if it doesn’t show up in earnings, it doesn’t matter. We invest in stocks not the ‘economy’.
I don’t want that to sound impersonal and cold. Things are tough for many struggling to get by even though on the outside it looks like they are employed and doing fine. I know.
The confusing paradox which is tripping up many investors, but not you, is that the market is going up anyways. Even while consumers feel terrible. It’s why we say ‘Bad is Good’.
It’s what we learned in Africa and why we track earnings data like a hawk.
Seven Highlights
#1 Estimates are getting revised… upwards!
We just had Q3 earnings. When all was said and done what did analysts do to their numbers? Estimates went up.
Consider also that these sell-side analysts are human beings too. They too are surrounded by the pervasive air of negativity. Which means they don’t want to look like naive idiots who don’t ‘get it’ and were probably cautious about their upgrades.
#2 S&P 500 Revenue growth is surprising positively.
These earnings beats aren’t below the line financial engineering, it’s top line driven. It’s what we’ve been saying.. we have a boom going on (What if the AI Bubble is a Capex Boom?).
Somehow in the last 2 months, when all this deceleration was supposed to be happening, revenue growth for the market accelerated from 6% to 8%.
And check out revenue acceleration by sector. It’s not just tech. It’s broad based.
#3 Q3 GDP is coming in hot!
4% GDP growth in Q3??? Why do we keep talking about a recession when GDP is overheating? No wonder the Fed has second thoughts about cutting.
#4 Managed Money is net short oil.
Which is a good set up for energy stocks to be the next commodity to move.
#5 High Yield Spreads don’t hear any canaries.
Tri-Color Auto, First Brands, BDC’s trading below NAV… supposedly credit markets are imploding.
We all know the lesson from 2008. Extrapolate first, ask questions later.
Yet despite all the noise and anxiety, high yield spreads haven’t budged. For some reason the high yield market doesn’t see any canaries in the coal mine.
Yes, private credit may have expanded too quickly and deployed money into things they shouldn’t have, although it’s hard to know what they are doing because it’s private. In the end that’s their problem (and Harvard’s). I don't see systemic contamination risks to banking system or public high yield markets, which have been more conservative. I’m actually the opposite. I’m waiting for banks to join the party.
#6 High Yield Default rates are at low levels and trending down.
High yield default rates, leveraged loan default rates, and US bankruptcies are all at low levels with nothing sinister happening. Maybe private credit funds are a blessing for High Yield. All the dodgy loans went to private credit funds.
#7 US Bank Q3 results show credit trends improving.
Barclays, JP Morgan, Capital One, Wells Fargo.. their Q3 results all showed the same thing. Credit costs are low and down year over year. If there is a credit problem they don’t see it.
The slides for JPM, COF, WFC are in the presentation (at the bottom of the post)
Oh, and here is a bonus reason the market goes higher.