The Morning Call
10/12/26
The
Market
Technical
The S&P had a
see saw week, closing above its all-time high on Tuesday, then falling back
below it on Wednesday (negating the break), then back above it again on Friday.
If it remains there through the close on Wednesday, the challenge will have been
successful. The rest of the technicals suggest success: it remains above all
DMAs and in uptrends across all time frames. Still, there are some minor
negatives. (1) a minor gap up open at the ~7684 level, (2) breadth remains
horrible and (3) the bond Market is not being particularly supportive. At the
moment, I see no reason to get beared up. On the other hand, the bond market’s
pin action makes me nervous as do the fundamentals (fiscal policy, monetary
policy, war, oil, tariffs). So until I see more convincing upside momentum, I
will continue to sit on my hands.
While the bond market
rallied last week, the longer term pin action remains pretty dismal. TLT
continues to trade down across all timeframes and is below all three DMAs. That
suggest that the bond boys are much less sanguine than stock investors about
inflation, interest rates, the course of oil prices, the federal deficit and the
financials of the AI buildout. I don’t see anything that would suggest a reversal
in either the aforementioned numbers or bond market sentiment… for
the long bond to rise enough to even challenge the upper boundary of its very
short term downtrend is going to take a series of very positive developments.
Gold was on the
same roller coaster ride as stock and bonds. While it finished up on the week, it
remains below all three DMAs and has now reset its short term uptrend to a
trading range. There are a number of conflicting forces playing on the price of
gold; and until it can break the current string of lower highs and lower lows,
I am on the sideline.
https://talkmarkets.com/article/gold-reclaims-4200-as-weak-us-sentiment-revives-bullion-demand
Death of the old playbook.
The dollar’s pin action is improving---making a
nice series of higher lows and higher highs. It is now in about the middle of a
wide short term trading range, So, very short term the bias is up---which will likely
continue as long as rates are rising and the rest of the world is having fiscal/interest
rate problems---while longer term it is neutral.
Friday in the charts.
https://www.zerohedge.com/markets/hormuz-hurricanes-hikes-hiccups-ais-accounting-trump-puts-war-election-timer-junk-quietly?gift=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJuaWQiOiIxMTI3ODI2Iiwic2VuZGVyVWlkIjoiUUhnc3BaZVVFS2E3RHhXM216eFlKbjhaWEFoMiIsImlhdCI6MTc5MTU3NzI0NSwiZXhwIjoxNzk0MTY5MjQ1LCJhdWQiOiJ6aC1naWZ0In0.G4ziRPn4o7ohxRfBY-gash_swaFC2qwv-tjWIqcKFJQ
Friday in the technical stats.
https://www.barchart.com/stocks/momentum
https://www.barchart.com/stocks/market-performance
https://www.barchart.com/stocks/sectors/rankings
https://www.barchart.com/stocks/signals/new-recommendations
The latest from
Goldman.
Monday morning
setup: US futures are flat, with S&P contracts clinging to small gains and
the Nasdaq slipping into the red as memory stocks slide, after a weekend of
contradictory geopolitical headlines whipsawed oil (see below). As of 8:00am
ET, S&P futures were 0.1% higher at 7,865 while Nasdaq futures were down
0.1%. Dow futures are up about 0.1%. That follows a Friday session in which the
S&P rose 0.6% to cap a 1.2% weekly gain (after a record close on Wednesday)
and the Dow jumped 0.8%. In premarket trading, Meta leads the Mag 7 higher
(+1.8%) while memory names slide, with Micron down 2.1% after Samsung and SK
Hynix tumbled more than 4% in Seoul with buyback
quotas now largely completed; T-Mobile rebounded 1.1% on a Raymond James
upgrade after Friday's SpaceX-spectrum puke, CCC Intelligent jumps 8.3% on
buyout talks with GTCR and Elliott and IREN rises 5% on a reported cloud deal
with Anthropic. The day's driver is oil (again), and the market can't decide
which war to price: WTI is up 1.2% at $93.00 and Brent is at session highs,
above $106 having traded in a $102.33-$106.17 range, as Iran insists Hormuz
stays shut until all seven of its conditions are met and Trump mulls joining
Saudi strikes on the Houthis. There is no cash Treasury trading today for
the Columbus Day holiday; Treasury futures drift lower led by the ultras,
implying slight bear steepening, while bunds and gilts are higher (10Y gilt
yield down 4bps to 5.41%, bund down 2bps to 3.46%) as diesel prices fall
following US efforts to release Russian fuel to the market. The Bloomberg
dollar index is steady with the Swiss franc the weakest G10 currency and the
pound outperforming ahead of PM Burnham's speech on EU ties, while India's
rupee jumped more than 1% after the RBI's strongest support measures since the
2013 taper tantrum. In commodities, spot gold slipped to a $4,168 low, silver
is near $60.70, copper extends Friday's rebound as Chinese buyers return from
Golden Week, Dutch TTF is firmer at up to €82.90/MWh and US natgas is down 2.5%
to $3.14. Bitcoin reversed from a peak of $84,260 to trade near $83,300. There
is no US economic data today; Fed speaker slate includes Hammack (12:10pm). The
US cash bond market is closed for Columbus Day; stock markets are open.
Fundamental
Headlines
The
Economy
Last
week was a slow one for US stats. What there was, was slightly negative with no
primary or inflation numbers. Overseas, the data was more plentiful but also
slightly downbeat with one neutral price measure. These reports keep both my
forecasts for growth (muddle through) and inflation (good as it is going to get
but not any worse) on track.
The
economic issues that I continue to fret over are:
(1)
what is the appropriate monetary policy given that
a good deal of the upward inflation pressure is the result of supply shortages
[primarily oil] versus demand pull?
On its
face, it suggests a Fed reticent to raise rates because the problem [inflation]
will cure itself as supply shortages are reconciled. The problem number one is that
the conflicts in Ukraine and Iran are destroying infrastructure [production
facilities, refining capacity, pipelines] and depleting global oil reserves to
such an extent that supply shortages are not going to be alleviated when, as
and if those conflicts end. Indeed, depending on the ultimate disposition of tanker
transit out of the Persian Gulf and the Red Sea, a new permanent cost [transit
fees] could be added to the price of oil.
Second,
as these conflicts drag on, at some point, the mind set of consumers and
businesses becomes attuned to the oil shortage induced inflation and view it as
more permanent, increasing the need for Fed action.
Oil
reserves hit rock bottom.
Third,
not all inflationary pressures are the result of supply shortages. The
egregious national deficit and the enormous AI buildout spend are juicing economic
growth with the former clearly an unnecessary accelerant.
Fourth,
Trump’s tariffs flow directly into the price of goods.
https://www.cnbc.com/2026/10/08/inflation-tariffs-trump-fed-consumer-goods.html
Finally,
the risks from poor monetary policy and the level of interest rates are not
confined to the US. Europe and Japan are also having their issues which could
potentially compound our own---increasing the odds of a stumble in the global
fixed income market.
In
short, I think that the Fed has a very tight rope on which to walk. And given
its historical record of instituting the wrong policy at virtually every
junction, I would be remiss if I didn’t factor in the likelihood of another policy
mistake.
Interest rates and the
demand for money.
https://scottgrannis.blogspot.com/2026/10/thinking-about-higher-interest-rates.html
(2)
the health of the AI buildout. In this letter, I have
noted numerous potential problems: [a] the accounting of the buildout---enormous
off balance sheet financing, [b] as well as the sheer magnitude of the
financings [c] the level of future revenue needed to provide a sufficed return
on investment and [d] the lack of any evidence showing increased productivity
of the AI providers. At this moment, I am not smart enough to know whether any
of the concerns will prove valid. But I believe that until there is some
visibility to the resolution of these issues, some caution is necessary---both
from the macro point of view as well as the company specific. My position
remains unchanged: I continue to hold positions in both the chip
manufacturers and the hyperscalers---although their performances has been such
that I have Sold Half of virtually every stock. That said, I have my finger on
the trigger for several holdings. And should the negative case appear the more
likely outcome, I will take some more money off the table.
Massive capital destruction.
I want to emphasize that the issue that I am focused on is the economics
of the AI buildout not the doomsday ‘we will all be dead in ten years’ variety.
I made clear …. that I am quite cynical about the motivations of the doomsayers
whether they are from the industry (who want the government to impose
regulations that would squash potential competition) or government (who never
lets a crisis go to waste in order to impose further on our collective liberties)
https://thehill.com/opinion/technology/6131723-ai-online-scam-losses/
My
bottom line remains unchanged: my doubts on the trajectory of the
economy/inflation/AI buildout are increasing. That said, there are always risks/potential
economic/Market valuation worries and, to date, none have become openly
manifest. So, as long as earnings growth remains strong and the economy
continues to grow, I can’t see a recession or a major Market sell off. Higher
inflation and the Fed’s response to it is another matter.
https://www.capitalspectator.com/us-economic-growth-expected-to-strengthen-in-q3-gdp-report/
US
From late Friday:
The October
preliminary consumer sentiment index was 46.3 versus forecasts of 47.6.
https://mishtalk.com/economics/consumer-sentiment-current-conditions-index-drop-to-record-low/
International
Other
The US economy: AI and everything else.
https://bonddad.blogspot.com/2026/10/the-us-economy-right-now-ai-vs.html
Iran
Overnight news
Fiscal
Policy
Repeated Treasury interventions risk erosion
of credibility.
https://giftarticle.ft.com/giftarticle/actions/redeem/f8eaf61e-0a2b-450b-b886-f23bd3652b42
It is a depressing time to care about free
markets.
https://www.advisorperspectives.com/articles/2026/10/08/depressing-time-care-free-markets
The Financial
System
Can
anyone trust private credit valuations?
The status of commercial real estate debt.
https://wolfstreet.com/2026/10/08/status-of-the-commercial-real-estate-debt-and-who-owns-it-in-2026/
Investing
The worse borrowers in America.
https://trendlabs.com/the-worst-borrowers-in-america/
Update on valuations.
The equity premium has vanished.
https://www.zerohedge.com/markets/equity-risk-premium-has-vanished-and-stocks-arent-cheap
The latest from BofA.
News (but not a Buy recommendation) on Stocks
in Our Portfolios
What
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