Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Cross Asset Strategy

A number of charts are beginning to show some concerns that draw attention to the annual mantra: ‘Sell in May and Go Away’We look at different measures and patterns on each of the three major US indices – Dow Jones, S&amp;P 500, and Nasdaq 100.In all cases there are important indications that a decent correction down is likely this month (and possibly beyond). This period should eventually result in buying opportunities, however first we are likely to see some pain.

A number of charts are beginning to show some concerns that draw attention to the annual mantra: ‘Sell in May and Go Away’We look at different measures and patterns on each of the three major US indices – Dow Jones, S&amp;P 500, and Nasdaq 100.In all cases there are important indications that a decent correction down is likely this month (and possibly beyond). This period should eventually result in buying opportunities, however first we are likely to see some pain.

Technical Analysis

Having seen a decent bounce following the amazingly low NFP print last week, the S&amp;P 500 has not only failed to follow through but now shows signs of weakness as momentum fades. This note highlights key levels or target areas to now look out for.

Having seen a decent bounce following the amazingly low NFP print last week, the S&amp;P 500 has not only failed to follow through but now shows signs of weakness as momentum fades. This note highlights key levels or target areas to now look out for.

Founder & CEO Bond Angle, LLC, Bond Angle, LLC

Vicki Bryan

Founder & CEO Bond Angle, LLC

Bond Angle, LLC

Insightful commentary and analysis on bond markets and market movers, including financial, economic, and industry catalysts and management shenanigans. 

High yield market investment research

Credit

For years now, <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> and its ardent fans haven’t worried that none of its businesses are profitable because it has sold billions of dollars in energy emissions credits to offset its rivers of red ink (see my latest report on this, <a href="https://www.smartkarma.com/insights/tesla-goes-to-record-extremes-to-create-q1-profits" target="_blank" data-smartkarma-citation="insights:50821" rel="noopener">Tesla Goes to Record Extremes To Create Q1 "Profits"</a> on 4/28/21).They dismissed concerns that every penny of cash it has ever banked came from selling said energy credits on top of selling billions in stock to said fans and borrowing even more in debt.Pull these pesky threads and everything can unravel quickly, as I long have warned (for example, in <a href="https://www.smartkarma.com/insights/tesla-the-sky-s-the-limit-until" target="_blank" data-smartkarma-citation="insights:47414" rel="noopener">Tesla: The Sky's The Limit...Until</a> on 1/28/21).Sure enough, <a href="https://www.smartkarma.com/entities/stellantis-nv" target="_blank" data-smartkarma-citation="entities:798:1" rel="noopener">Stellantis NV (STLA US)</a> told reporters this week that it <a href="https://europe.autonews.com/environmentemissions/stellantis-hit-emissions-target-without-teslas-help-ceo-tavares-says?utm_source=dlvr.it&amp;utm_medium=twitter" target="_blank" rel="noopener">expects to meet European emissions standards on its own</a> this year without buying any more credits from Tesla.That creates a big problem for Tesla because lucrative energy credit sales to Stellantis have been the primary source of all of Tesla’s manufactured “profits” since Q2 2019, which created:<ul>
<li>the basis for Tesla’s recent addition to the S&amp;P 500 Index</li>
<li>and its mythological equity valuation</li>
<li>and its ability to sell stock at grossly inflated prices</li>
<li>and its artificially inflated credit rating which lets it borrow with impunity at cheap rates.</li>
</ul>

For years now, Tesla Motors (TSLA US) and its ardent fans haven’t worried that none of its businesses are profitable because it has sold billions of dollars in energy emissions credits to offset its rivers of red ink (see my latest report on this, Tesla Goes to Record Extremes To Create Q1 "Profits" on 4/28/21).They dismissed concerns that every penny of cash it has ever banked came from selling said energy credits on top of selling billions in stock to said fans and borrowing even more in debt.Pull these pesky threads and everything can unravel quickly, as I long have warned (for example, in Tesla: The Sky's The Limit...Until on 1/28/21).Sure enough, Stellantis NV (STLA US) told reporters this week that it expects to meet European emissions standards on its own this year without buying any more credits from Tesla.That creates a big problem for Tesla because lucrative energy credit sales to Stellantis have been the primary source of all of Tesla’s manufactured “profits” since Q2 2019, which created:
the basis for Tesla’s recent addition to the S&amp;P 500 Index
and its mythological equity valuation
and its ability to sell stock at grossly inflated prices
and its artificially inflated credit rating which lets it borrow with impunity at cheap rates.


Global Economist, DeSaque Macro Research

Said Desaque

Global Economist

Delivering Global Macro Investment Insights

DeSaque Macro Research

DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the view to delivering global macro investment insights aimed at providing new ideas to clients.

Said DeSaque has over 26 years of experience working as a professional economist in financial services. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist at Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he eventually became Head of the London Economics Department.

Said takes a very keen interest in international relations, along with their implications for economic development. His research interests include the economic transformation of China and its implications for global capital markets, particularly in the United States. He is a member of Chatham House in London.

The US economy and capital markets have historically been Said’s main focus of attention. He frequently presents his views to institutional investors in diverse geographic locations. In recent years, Said has also been carefully monitoring economic developments in Asia, particularly China and Japan.

Liquidity at US corporations has risen significantly over the past 12-months, partly due to the efforts of the Fed in the wake of the COVID-19 pandemic to make it easier for them to raise cash. Elevated cash balances will provide an important funding source for future M&amp;A activity. 
Legacy issues from the pandemic will impact M&amp;A strategy across sectors differently, notably technology companies will face greater regulatory scrutiny due the greater prosperity they enjoyed during 2020. Shifts in consumer behaviour towards online and digital platforms, particularly in gaming and media, will force companies to acquire content providers. Meanwhile, pledges by governments to "Build Back Better" and keep health care prices down will also spur M&amp;A activity in the energy and health care sectors.
Elevated equity valuations are not currently conducive for private equity firms making acquisitions of public companies at high premiums, but public markets provide ideal exits for earlier leveraged transactions. The short-lived boom in special purpose acquisition companies (SPACS) will underpin a strong pipeline of acquisitions of private companies in 2021, but the need to deploy funds over a 24 month period from their IPO will raise concerns about deal quality.
The much-anticipated rise in M&amp;A will produce higher leverage in the corporate sector, thereby raising fears about loan quality at a subsequent date, particularly for acquisitions by SPACS which could involve the use of leveraged loans. The Fed has pledged to keep financing costs low, while improving economic conditions should prevent a rise in concerns about credit quality, at least for the time being.

Liquidity at US corporations has risen significantly over the past 12-months, partly due to the efforts of the Fed in the wake of the COVID-19 pandemic to make it easier for them to raise cash. Elevated cash balances will provide an important funding source for future M&amp;A activity. 
Legacy issues from the pandemic will impact M&amp;A strategy across sectors differently, notably technology companies will face greater regulatory scrutiny due the greater prosperity they enjoyed during 2020. Shifts in consumer behaviour towards online and digital platforms, particularly in gaming and media, will force companies to acquire content providers. Meanwhile, pledges by governments to "Build Back Better" and keep health care prices down will also spur M&amp;A activity in the energy and health care sectors.
Elevated equity valuations are not currently conducive for private equity firms making acquisitions of public companies at high premiums, but public markets provide ideal exits for earlier leveraged transactions. The short-lived boom in special purpose acquisition companies (SPACS) will underpin a strong pipeline of acquisitions of private companies in 2021, but the need to deploy funds over a 24 month period from their IPO will raise concerns about deal quality.
The much-anticipated rise in M&amp;A will produce higher leverage in the corporate sector, thereby raising fears about loan quality at a subsequent date, particularly for acquisitions by SPACS which could involve the use of leveraged loans. The Fed has pledged to keep financing costs low, while improving economic conditions should prevent a rise in concerns about credit quality, at least for the time being.    

Elevated US Corporate Cash Levels to Underpin M&A Activity, but Leverage Will Rise Still Further

Macroeconomics

Bond investors and the Federal Open Market Committee (FOMC) expect economic growth to be strong in 2021, thereby raising inflationary risks, but the latter anticipates slower expansion next year to justify not having to invoke a monetary policy offset. Meanwhile, despite the idiosyncratic features of the Great Lockdown, there has been a general lack of commentary about the potential risks for economic outcomes to fall short of expectations.
The Great Lockdown highlighted a large divergence between notional and effective demand, a gap which was quickly reduced once restrictions on social gatherings were eased. Political decisions to combat COVID-19 over the past 14 months make forecasting the unfolding dynamics that will underpin future economic growth much more difficult than usual.
<div>The recovery in US aggregate demand was rapid and extremely robust after an extraordinary contraction in 2020 Q2, thereby already reducing the impact of pent-up demand for big-ticket items on subsequent economic growth. Despite production weakness due to supply chain dislocation, automobile and light truck sales have already surpassed their previous cyclical peak. Home sales have held up well over the past year, despite supply shortages, while housing starts have quickly recovered to surpass their highs during the prior expansion.</div>
<div></div>
<div>US capital spending has also recovered very quickly, with the exception of structures, since 2020 Q2. Meanwhile, the recovery in capacity utilisation rates and the average age of the capital stock do not currently suggest that companies will be in a hurry to add to capacity. Companies will need to learn more about the post-pandemic economic environment before committing to large capital spending projects.  </div>
<div></div>
<div>The scope for the US economy to underwhelm expectations should not be under-estimated as testified by the recent decline in bond yields. A flatter yield curve due to slowing growth will, however, provide a more supportive backdrop for growth stocks.</div>

Bond investors and the Federal Open Market Committee (FOMC) expect economic growth to be strong in 2021, thereby raising inflationary risks, but the latter anticipates slower expansion next year to justify not having to invoke a monetary policy offset. Meanwhile, despite the idiosyncratic features of the Great Lockdown, there has been a general lack of commentary about the potential risks for economic outcomes to fall short of expectations.
The Great Lockdown highlighted a large divergence between notional and effective demand, a gap which was quickly reduced once restrictions on social gatherings were eased. Political decisions to combat COVID-19 over the past 14 months make forecasting the unfolding dynamics that will underpin future economic growth much more difficult than usual.
The recovery in US aggregate demand was rapid and extremely robust after an extraordinary contraction in 2020 Q2, thereby already reducing the impact of pent-up demand for big-ticket items on subsequent economic growth. Despite production weakness due to supply chain dislocation, automobile and light truck sales have already surpassed their previous cyclical peak. Home sales have held up well over the past year, despite supply shortages, while housing starts have quickly recovered to surpass their highs during the prior expansion.

US capital spending has also recovered very quickly, with the exception of structures, since 2020 Q2. Meanwhile, the recovery in capacity utilisation rates and the average age of the capital stock do not currently suggest that companies will be in a hurry to add to capacity. Companies will need to learn more about the post-pandemic economic environment before committing to large capital spending projects.  

The scope for the US economy to underwhelm expectations should not be under-estimated as testified by the recent decline in bond yields. A flatter yield curve due to slowing growth will, however, provide a more supportive backdrop for growth stocks.

Sustained Upside Surprises to US Economic Growth? Big-Ticket Spending Recoveries Suggest Otherwise

United States

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

S&P 500 INDEX (SPX INDEX)

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