Yellen Transitory Speech Hits Commodities

 

Hey There  Income Hunters,

 

Nervous much?

 

Money flowed into gold and bonds and out of commodities and financials yesterday, suggesting unease in the market.

 

It may have been driven by Treasury Secretary Jenet Yellen pounding the table about inflation being transitory and going back to normal by the second half of 2022. 

 

Yet in May of this year she said the return to normal would be the second half of 2021.

 

I’ve got news for you … next June her opinion will change again because inflation will stay elevated for years. 

 

Biden’s announcement to make a decision on Jerome Powell’s status as Fed chairman in four days may have also added some volatility yesterday. The odds continue to show a probable Powell reappointment (70%).

 

I think the three remainin Fed seats that need to be filled are of huge importance for the Democrats and those changes could be a major shock to the market.

 

I’ll cover that and more today at 11:30 a.m. today during a Power Income Hot Read event.

 

This is a critical time in the markets as the Fed could change dramatically in the weeks ahead and cause major disruptions in the market. I’ll reveal the most likely scenario and the trades I plan to make. See you there …

 

Today, we’ll look at trends in volatility heading into a holiday week and some signs that there are cracks showing in the foundation of the market.

 

Impact on Volatility into Holidays

 

As you can see from the graph below, the VIX trades off into the holiday and rallies coming out of it. 

 

The specific numbers over the past 10-years for Black Friday are:

 

  • 7 days into Black Friday VIX is down an average 3.82%

  • 10 trading days after Black Friday the Vix is up 5.02%

 

First Signs of Credit Stress

 

The all-important credit spread signpost is flashing a warning sign.

 

Notice the investment-grade BBB rated spreads breaking above the downtrend for the year.

 

 

High Yield Spreads Diverging from Stocks

 

I think this signpost is significant because a higher cost for corporations to fund their business will eventually hit profit margins and stock valuations. Definitely something to watch. 

 

 

Secondary Equity Offerings on the Rise

 

      • SoftBank and Silver Lake Partners will sell stock in a secondary offering
      • Mercadolibvre MELI yesterday filed for a secondary common stock offering
      • DoubleVerify Holdings Inc. (DV) Launches 8M Share Secondary Offering
      • NKLA files to sell 29.04M shares of common stock for holders
      • Custom Truck (CTOS) Announces 12.3M Share Secondary Offering of Common Stock
      • STepStone Group prices secondary offering of 4.5 mln shares

The increase in secondary offerings may signal a trend to fund via stock offerings as rates rise.

Recent reports also indicate that some new issues have been coming cheap to secondary issues, which has not been the case all year. 

The Dollar Rally is also a Warning

The rally in the dollar is another drain on liquidity because so many non-US lenders lend in dollars and their margins get squeezed as it rallies. 

The dollar also represents the price of leverage, which is rising and may continue as QE is reversed. 

I actually see resistance for DXY up at 96.30, so it will be important to see it fail up against that level or it may cause a larger move out of risk assets into bonds and gold. 

Bring It Home

 

My highest conviction trade continues to be the precious metals. 

 

I think the Fed situation is incredibly important and I see any decision from Biden transforming the Fed into a more easy, less independent entity.

 

This will be a very inflationary scenario that would push long-term bond rates higher with silver and gold being the best performers. By their price action yesterday, I would say investors are already looking ahead and are reallocating into precious metals. 

 

With $10 trillion sitting in financial assets, that is the move to get ahead of.

 

Live and Trade With Passion My Friends,

 

Griff

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