Macro Update: And A Fundamentally-Sound Theme To Exploit…

Just finished our weekly formal macro exercise, and for the 9th consecutive week our overall assessment has not deteriorated. I.e., things improved during 6 of the weeks off of the June-1st bottom, stayed flat during 3.

This week saw our PWA Index’s score improve by 3.21 points to -33.33. 
The two areas experiencing score-changing improvement were business capex (capital expenditures),
and the Chemical Activity Index:
Here’s from the Census Bureau’s narrative on the latest capex numbers:

New orders for manufactured durable goods in June increased $14.0 billion or 7.3 percent to $206.9 billion, the U.S. Census Bureau announced today. This increase, up two consecutive months, followed a 15.1 percent May increase. Excluding transportation, new orders increased 3.3 percent. Excluding defense, new orders increased 9.2 percent. Transportation equipment, also up two consecutive months, led the increase, $9.2 billion or 20.0 percent to $55.3 billion.

Per the CB’s note, transportation equipment new orders have been big. While heavy truck sales, relative to their own history (a separate component of our index), weren’t enough to move our overall score, 
they clearly weighed prominent in the Census Bureau survey:
With regard to the Chemical Activity Index; I was looking for continued gains in the inputs related to residential construction materials, although, per the summary from the source below, those results were soft. All in all, I believe “mixed”, is an apt descriptor — although the report was positive enough to move our needle on the component from negative (-1) to neutral (0):

Production-related indicators were mixed in July. Despite improvement in new home sales, housing starts and building permits, trends in construction-related resins, pigments and related performance chemistry were soft. Reflecting a recovery in light vehicles and other industries, resins and chemistry used in durable goods were mixed. Plastic resins used in packaging and for consumer and institutional applications were mixed. Performance chemistry strengthened, while U.S. exports were mixed. Equity prices gained, and product and input prices strengthened. Inventory and other supply chain indicators turned positive.

As we’ve discussed herein, while there are clear signs of improvement emerging (see my commentary on credit markets yesterday), we have to be cognizant of the historically-unique global circumstance we find ourselves in. The data show personal incomes actually rising while literally 17 million Americans (all-time high) remain on the unemployment rolls. Which of course speaks to the “universal income” programs whose existence are being debated in Washington, as I type. 
The latest sentiment surveys suggest consumers are all too aware of what’s ultimately to come:
I shared my view in several posts this week that the Fed absolutely cannot allow the dollar to appreciate markedly, or sustainably, anytime soon…. well, frankly, forever for that matter. If, that is, they’re going to keep the immensely-leveraged financial markets afloat. Therefore, as investors we want to own things priced in dollars, for sure! 
Well, we want to own things priced in dollars that are not levered to the hilt, or subject to direct central bank manipulation, that is. Commodities, for the most part, fit that description nicely. 
While our core target mix does indeed have us in stocks (54%) — but we’re hedging against a major decline using put options — we’re definitely looking for good entry points to increase our commodities exposure (presently 23%) right here. The commodities data we track for our macro index have been confirming our suspicions of late:
Bloomberg Commodity Index:
CRB Raw Industrials Index:
In closing, allow me to shift gears and offer up a note to self I penned 3 weeks ago:

7/11/2020: Whether they outright say them, or simply state their case without resorting to what are dubbed the most dangerous 4 words of all-time-Wall-Street, “it’s different this time” is what today’s raging bulls firmly believe.

It — human nature and how it impacts markets — clearly is not (different this time).

Humans’ ability to believe what they want to believe, investors’ ability to mine the data that fits their positioning — be they bulls referencing fund flows or, yes, bears referencing fund flows — the madness of crowds, be it folks who individually would never dare rob an electronics store, but in a group would kipe a TV in broad daylight, or investors who wouldn’t dream of buying Tesla stock at $500 but are now rushing in with the mob at $1,500.

While it may indeed be “different this time”, I, as I stated above, assure you human nature is not. Now, whether or not this go-round ends in tears as have bubbles past of course remains to be seen. When it comes to stocks we’ll continue to over-weight the defensive sectors and hedge accordingly until our assessment of general conditions says it’s safe to reengage (whether that’s at higher or lower levels from here). In the meantime, there are clearly fundamentally-sound themes — such as, again, a weakening dollar’s impact on commodity prices — we can exploit.
Have a wonderful weekend!



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