Bulls and bears make money. Pigs get slaughtered.

Equity markets – last week and looking forward:

U.S. equity markets hit the “pause” button last week in their relentless trade higher. The Dow Industrials gave back 171 points or 0.57%, the S&P 500 slipped 35.66 points or 0.96%. The Nasdaq Composite gave back 86.36 points or 0.69%. Friday’s Dow Industrials close above 30k, at 30,046, and Nasdaq Composite close well above 12K at 12,377.87 were both encouraging to see.

And although many early investors in ABNB and DASH became multi-millionaires overnight, I am growing increasingly concerned about valuations, investor behavior, and how this all ends. In last week’s note, I suggested that a 10% pullback was on the horizon in coming weeks. This past week’s IPO frenzy only confirms my unease. There is clearly a great deal of money being thrown at IPOs – so much money in fact that the basic premise of some recent IPOs is beginning to make less and less sense to me from a valuation standpoint.
I am reminded of the dot.com bust of 1999. It ended horrifically. I should know being an NYSE member and active floor broker at the time. And it is not simply the fact that two IPOs last week wildly outperformed expectations to the upside. The calendar is telling us something as well. The sheer number of IPOs hitting the street should also be cautionary. Furthermore and incredibly, according to Eric Savitz in Barron’s this past Friday:

“There are still another 500 unicorns—private companies with $1 billion-plus values—waiting in the wings.”

Markets do not have a conscience. If investors are willing to assume risk, markets will provide it. I stand by my call for a 10% in coming weeks. Long term I remain very constructive on markets. In the near term am growing increasingly cautious.

Last week’s economic calendar highlights:

As I pointed out in last week’s note, the economic calendar was light.

The Consumer Price Index (CPI) reading for November was released last Thursday. On an M/M basis, it was 0.2%. On a Y/Y basis, it was 1.2%. Both readings are well below where the Fed would like them. That said, I think it is rather constructive that the CPI was positive at all. Weekly Jobless Claims Initial – Level came in well above the 724 K consensus, 853 K. Initial Claims ,137 K, were significantly above Econoday consensus and a cause for additional concern.

On Friday we received the Producer Price Index – Final Demand reading for November. The readings were very close to Econoday consensus. M/M it was 0.1%. Y/Y, 0.8%. Ex-Food & Energy M/M 0.1%. It hardly comes as a surprise to see such tame readings.

This week’s economic calendar highlights:

A theme that runs through this week’s calendar is regional manufacturing. The Empire State Manufacturing Index, Philadelphia Fed Manufacturing Index, and Kansas City Fed Manufacturing Index are all released this week.

On Tuesday morning we receive the Industrial Production data for November from the Federal Reserve. It is expected to reflect a degree of relative softness in the economy – at least in comparison to September and October. In October for example, the Industrial Production data was still relatively encouraging. Manufacturing (M/M) was running at 1.0% and the top-line industrial production (M/M) was 1.1%. Though Capacity Utilization was 72.8%. The Econoday consensus for November’s topline Industrial Production (M/M) data is 0.3%. Manufacturing Output (M/M) is expected to slip to 0.4%. Capacity Utilization is expected to tick up to 73%. In short the data, we have been receiving from various agencies and bureaus, continues to confirm that which we are most concerned about. The economy is exhibiting signs of a double-dip in performance. Unfortunately for us, the congress of the United States continues to perform as expected and in so doing is leaving the American worker, small business owners, and the American economy in the lurch – without the covid-19 relief funds needed to re-ignite the economy.

The last FOMC Meeting of 2020 begins on Tuesday and, as is standard, wraps up on Wednesday afternoon. The FOMC Announcement is 2:00 PM and the Fed Press Conference is held at 2:30 PM, on Wednesday. Both the FOMC Announcement and the Fed Chair Press Conference have the potential of being market-moving though I do not think that will be the case this week.

Retail sales data for November is also released Wednesday. Retail sales (M/M) are expected to turn negative (-0.3%) based on Econoday consensus. In October retail sales were fractionally positive (0.3%). Ex-Vehicle (M/M) they were 0.2%. November’s results are expected to be 0.1%. The flash Composite Purchasing Manager’s Index (PMI) for December is released Wednesday morning. In all three verticals of the report, there is expected to be incremental weakness.

November’s Housing Starts and Permits are out Thursday morning. There is little month-over-month change expected. October’s Starts, 1.530 M, are expected to be matched in this report. Permits are expected to tick higher to 1.550 M from 1.545 M. Weekly Jobless Claims for the week ending 12/12 are expected to drop to 806 K.

A sign of the times: New York City’s famed 21 Club to shut down. NYPost report by Ian Mohr and Elizabeth Elizalde (flickr photo: wallyg)

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