Consumer Confidence At An 18 Year High… GDP At A 4 Year High…

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By: Kent Engelke | Capitol Securities

Consumer confidence unexpectedly rose in August to the highest level since October 2000. Confidence was expected to decline from July’s level but instead surged, the result of jobs. The expectation’s gauge also climbed to a six-month high, also the opposite of the forecasted view.

Generally speaking, I regard sentiment surveys as a “backward-looking” indicator stating where we have been not where we are going. With this written, however, I forgot the last time I read a positive headline. Can I suggest there is a disconnect between reality and the media? Is all media just noise and job availability and rising home values trump everything?

Second quarter GDP was revised higher to 4.2%, the greatest growth in four years. The forward-looking indicators are suggesting momentum is continuing into the third quarter with consensus now suggesting growth over 4.5%. Wow!

Because of this growth, it appears inflationary pressures are accelerating over the Federal Reserve speed limit of 2.0%. All must remember the committee stated it would “tolerate” several quarters of inflation over the prescribed limit.

Yesterday the Federal Reserve published a paper stating the uncertainty over the persistence of inflation would call for a stronger response than previously thought in order to ameliorate any damage that may hit the economy. The Fed utilized 1967 as a case study for this paper, an era similar to that of today. Many economists blame the lack of an aggressive Fed that created the environment for the inflationary 1970s.

Returning back to the here and now, Bloomberg commented yesterday there is a breakdown between the stock-VIX correlation, eerily echoing the conditions of early 2018.

As widely discussed a reason for the early year sell-off and the collapse of the VIX was rising interest rates.

In my view today there is an “either/or” sentiment in the treasury market defined as prices are either going to fall considerably or rise moderately. Generally speaking, the conviction is about equal on both sides of the equation.

As noted many times, a majority of bulge bracket firms have warned about a potential decline in equities, a decline ranging anywhere from 5% to 25%, the result of the very crowded “index” trade. Data states FAANG are responsible for an incredible 68% of the NASDAQ 2018 rise.

Some institutions are taking action to profit from this potential decline as the short interest in FAANG is up 40% during the past year. It was reported bearish investors have shorted about $37 billion of the FAANG group. One, however, has to put this data into perspective. FAANG is worth about $3.83 trillion so the percentage short position is not significant, a rounding error.

Trading today should be muted given it is the day before a three day holiday. I am certain the election will become a major talking point starting Tuesday, the traditional commencement of election season.

Last night the foreign markets were down. London was down 0.41%, Paris was down 1.03% and Frankfurt was down 0.70%. China was down 0.46%, Japan was down 0.02% and Hang Sang was down 0.98%.

The Dow should open weaker after more tough talk on trade. The 10-year is up 2/32 to yield 2.85%.

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