8/31/26
The
Market
Technical
The good news is
that the S&P bounced of its former all-time high and remains above all
three DMAs as well as being in uptrends across all timeframes. The bad news is
that the recovery was weak and appears to have set a lower high on Friday. Of course, that is a very, very short term
observation and could very well be negated today. However, it bears watching; and if in fact a
new lower high was made that suggests continuing to sit on your hands.
The pain trade is
about to get more painful.
https://www.zerohedge.com/the-market-ear/everyone-waiting-selloff-pain-trade-about-get-very-painful?gift=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJuaWQiOiIxMTIzMzYyIiwic2VuZGVyVWlkIjoiUUhnc3BaZVVFS2E3RHhXM216eFlKbjhaWEFoMiIsImlhdCI6MTc4ODE4MDY1NCwiZXhwIjoxNzkwNzcyNjU0LCJhdWQiOiJ6aC1naWZ0In0.o2QeS7zvp8683LaTi9KM81fy8oBG3NYuc0ktfQ77OvQ
The long bond didn’t
take the Warsh speech so well. I speculate
below that it is possible that a more hawkish Fed could reassure bond investors
that it has inflation well in hand leading to a decline in the long bond. Not so, at least for Friday. On the other hand, the government is accruing
debt at an historic pace, the hyperscalers credit appetite is insatiable, the
Iranian war is pressuring oil prices higher while the Ukraine conflict is
having the same impact on wheat and Trump keeps insisting that ‘tariffs’ is a
beautiful word. Bottom line, the
technicals haven’t changed: TLT is below all three DMAs and in
downtrends across all timeframes;… 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.
GLD sold off on
the threat of higher rates, initiating a challenge to its 200 DMA (now
support). It was not surprising given
gold’s historic inverse correlation to interest rates. The big questions are
(1) just how serious is Warsh about raising rates? and (2) just how deeply
imbedded is inflation given the spiraling federal debt and rising oil and grain
prices. My additional purchase of GDX
last week was not looking so good on Friday.
I am awaiting follow through before taking any action.
https://www.zerohedge.com/the-market-ear/everyone-piled-gold-same-time-then-it-cracked-whats-next?gift=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJuaWQiOiIxMTIzMzgzIiwic2VuZGVyVWlkIjoiUUhnc3BaZVVFS2E3RHhXM216eFlKbjhaWEFoMiIsImlhdCI6MTc4ODE4MDM2OCwiZXhwIjoxNzkwNzcyMzY4LCJhdWQiOiJ6aC1naWZ0In0.8hnuHtx5gCdk-TNbT-uKYPmAf95z9ym3D1mimLmA5h4
The dollar kept on the script of
a more hawkish Fed, rallying hard on Friday and resetting its 100 DMA to support. It proved a great excuse for filling the huge
gap down open from the prior week. That
magnet has now been removed and with UUP remaining in a longer term ‘no man’s
land’, it is still going to take a lot for it to break out of even its short
term trading range.
Friday in the charts.
Friday in the technical stats.
The latest from
Goldman’s derivatives desk.
https://www.zerohedge.com/markets/goldman-derivatives-desk-everyone-buying-calls-nobody-wants-puts-so-buy-gold?gift=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJuaWQiOiIxMTIzMzQxIiwic2VuZGVyVWlkIjoiUUhnc3BaZVVFS2E3RHhXM216eFlKbjhaWEFoMiIsImlhdCI6MTc4ODE4MDA5MywiZXhwIjoxNzkwNzcyMDkzLCJhdWQiOiJ6aC1naWZ0In0.ygAL8RBOgWZYE63yzv0kOWNi5MXJtBmy_Ypt0LFoD0s
Monday morning
setup: US stock futures dropped in thin trading with most traders out as summer
draws to a close, while oil prices jumped after the US and Iran exchanged
attacks for first time in weeks. Brent futures rallied almost 4% topping
$90-handle and WTI contracts rise above $86 a barrel. As of 8:00am ET, S&P
futures dropped about 0.2% and contracts on the Nasdaq 100 dipped 0.1% as most
Mag 7 stocks drop while energy stocks rise (CVX +2%, XOM +2%) with as tensions
resume in the Middle East. Europe’s benchmark Stoxx 600 equity index edged
0.2% lower, with UK markets closed for a holiday. Asian equities fall
across the region. Nikkei sheds almost 1% while the Kospi closed flat,
reversing an earlier loss. Hang Seng drifts 0.7% lower and ChiNext is down
1.3%. The dollar weakens against most FX majors. The yen strengthens back below
160/USD following Treasury Secretary Bessent’s BOJ remarks. Offshore yuan is
0.1% firmer after a small manufacturing PMI beat. Treasury 10-year yields are
flat at 4.72% after Friday's post J-Hole blowout as the curve bull steepens
despite higher energy prices. In commodities, the overnight Middle East
attacks are driving oil prices higher with WTI above $85/bbl and Brent above
$90/bbl. Elsewhere base metals are outperforming precious even as gold
recovered from a $50 drop to trade unchanged around $4,460 an ounce. This
week’s macro data include ISM / NFP with NFP one of 2 key prints (CPI) for the
Fed to determine a Sept hike. Stronger ISM may boost the broadening portion of
the rally. AVGO earnings may boost the Tech / AI theme.
Fundamental
Headlines
The
Economy
Last
week, the US stats were balanced. They
included five primary indicators (two plus, two neutral, one minus) and two price
measures (one neutral, one negative). The
overseas, the data was overwhelmingly upbeat and included one neural inflation
datapoint.
The
US numbers helped lessen my concern about a weakening economy. It doesn’t exactly end it; but my finger is
off the warning light button. The inflation data suggests that my ‘good as it
is going to get but not any worse’ forecast is alive and well.
Last
week’s primary focal points continued on:
(1)
the bond market particularly as it was impacted by
[a] the moves by Bessent’s to place a cap on long term
interest rates. So far, I would say his
success remains in question. True, long
rates remained stable. But {i} he not
yet been faced with a serious challenge from the bond crowd---and perhaps he
never will, though I doubt it {ii}is it even good policy for the Treasury to be
interfering in the management of interest rates which is the domain of the Fed.
https://www.nytimes.com/2026/08/27/opinion/us-treasury-debt-credit.html?unlocked_article_code=1.81A.50D4.ga71G6jDi5EG&smid=url-share
[b] Bessent aside, the economy still has to
accommodate {i} a federal deficit that just crossed the $40 trillion mark and continues
to grow at a rapid pace {ii} the enormous financing needs of the AI buildout. That
combination suggests upward pressure on interest rates due to the sheer volume
of the financing requirements; and says nothing about a growing unease
regarding a depreciating dollar/potential higher inflation.
[c] Fed policy.
As the Universe knows, Warsh spoke at the Kansas City Fed Jackson Hole
conference on Friday. The overall tone
of his comments were hawkish, suggesting higher short term rates. That could also mean higher long term rates,
especially given the lack of concern about the budget deficit on the part of
our ruling class and the insatiable capital appetite of the AI buildout. On the other hand, a more hawkish Fed could
relieve bond market inflation fears resulting in lower or at least stable long term
rates.
https://www.semafor.com/article/08/28/2026/warshs-hawkish-turn-meets-its-skeptics
More.
https://wolfstreet.com/2026/08/28/warsh-speaks-treasury-yields-jump-6-month-to-3-year-treasury-yields-spike/
I am not smart enough to know which outcome is more
likely, so I will just have to wait and see.
I do know that higher interest rates are not good for the economy {raises
the price of growth} or the markets {lower bond prices and a higher discount
rate on corporate earnings}.
(2)
concerns about the health of the AI buildout. Last week,
I listed a number of potential problems.
So I won’t repeat them. I will repeat
my bottom line: What I do know is that [a] the AI buildout is
consuming an enormous amount of capital and represents a meaningful portion of
incremental GDP growth---so any significant performance shortfall would be
painful and [b] a lot analysts smarter than me are questioning the viability
of this spend.
All the above suggests a heightened level
overall economic risk as well as AI industry specific risk. To be sure, that doesn’t mean a worse case
outcome. 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. And I am not running for the hills in the
rest of my Portfolios. That said, I have
my finger on the trigger for several holdings.
And should the economics of the AI buildout become more clouded, I will
take some money off the table,
(3)
in the background remains the issues of the Iranian
and Ukrainian wars as well as Trump’s insistence that somehow tariffs are a
grand economic plus for the economy---all of which are a burden to economic
growth.
Bottom
line: the prospect for not just a slowing in the rate of economic growth but
perhaps stagflation has appeared on the horizon. Not yet enough to warrant a
change in my outlook but enough to have my finger on the warning light.
A Goldilocks economy?
https://scottgrannis.blogspot.com/2026/08/a-goldilocks-economy.html
US
From Friday:
The August
Chicago PMI came in at 47.1 versus consensus of 58.3.
The August consumer
sentiment index was 51.7 versus expectations of 51.0.
https://www.advisorperspectives.com/dshort/updates/2026/08/28/consumer-sentiment-falls-in-august
International
July Japanese YoY
housing starts were up 8.2% versus estimates of up 7.9%; July YoY construction orders fell 13.4% versus +5.8%.
The August Chinese
manufacturing PMI was 49.8 versus predictions of 49.7; the August services PMI
was 49.0 versus 49.5; the August composite PMI was 49.5 versus 50.2.
August German
preliminary CPI was up 0.2% versus forecasts of up 0.3%.
Other
Updated jobs data.
https://bonddad.blogspot.com/2026/08/the-gold-standard-qcew-jobs-report.html
Iran
Overnight news.
https://www.zerohedge.com/geopolitical/oil-tops-91-us-diesel-crack-near-100-us-iran-strikes-resume-tehran-claims-supertanker
Fiscal
Policy
Social Security
math.
https://www.marketwatch.com/story/this-new-social-security-math-could-lead-us-down-a-dangerous-road-3c44d7d7?st=2hya3S
AI
More analysis of data water and electricity
usage.
https://fee.org/articles/the-truth-about-data-centers/?utm_source=newsletter&utm_medium=email&utm_campaign=fee-daily
Wall Street tomfoolery?
https://quoththeraven.substack.com/p/the-daejon-love-stock-market?r=1ng8jx&utm_campaign=post-expanded-share&utm_medium=web
Investing
The latest from BofA.
https://www.zerohedge.com/markets/hartnett-contrarians-are-waiting-these-two-coming-events-flip-risk?gift=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJuaWQiOiIxMTIzMjg3Iiwic2VuZGVyVWlkIjoiUUhnc3BaZVVFS2E3RHhXM216eFlKbjhaWEFoMiIsImlhdCI6MTc4ODEyOTEzNCwiZXhwIjoxNzkwNzIxMTM0LCJhdWQiOiJ6aC1naWZ0In0.49awPn9pN3zN9tGOdpGQoioTJ8XynE0c6qQKTHDdk28
News (but not a Buy recommendation) on Stocks
in Our Portfolios
What
I am reading today
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