Good Morning, Traders and Investors welcome to another edition of the Magnelibra Markets Podcast. Today’s episode #42 is entitled “What Is the Payroll Report Really Telling Us?”
Quick Disclaimer: The following podcast is for educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and may not be appropriate for all listeners.
So for those of you who read our pre NFP post we put out, we noted that the equity markets, in particular the Nasdaq index have been struggling to keep pushing higher. In fact 4 out of the last 5 weeks now, including last weeks close on the weekly charts for the Nasdaq futures have been down bars.
Yes we know Friday’s payroll data put an end to what could have been a massive down day and weekly down bar or candle, but of course the payroll number came in at +303k a whopping 4-Sigma beat over the expected 200k number. Despite a decent rally in equites especially the Nasdaq, this was not enough to bring it positive on the week:
We have now also potentially broken a very key up trend line, the FOMO line if you will and we suspect a move below 17850 would be significant for bears at this point. For the bulls, they will consider this a consolidation move and will continue to buy until forced out, which will come on a break down below 17850 we believe.
So with that in mind, let’s dig deeper as to what that payroll report really told us. Well for one thing, we continue to see the US govt pile on the workers in Socialist fashion and no, this is not a boom for our economy when the government is your leading jobs creator, this is a kin to pulling money out of your left pocket and putting it into your right pocket. Our government should not be in the business of growing itself, but rather should be in the business of fostering healthy private sector job creation, well that does not seem to be the case. We know consumer balance sheets are getting strangled by every trip to the gas pump and grocery store. What we see from the jobs data is that many have resorted to taking on part time jobs just to keep up and its noted in this chart from the BLS taken from Zerohedge:
That doesn’t look like a healthy economy to me, it looks as if last ditch efforts both by employers and laborers just to get by! We also know by the data that all the jobs are going to non native workers, another net negative for the overall jobs picture and who can deny the fact that illegal immigration has now become a serious problem. The big question we have is why does the Biden administration want to repopulate the United States? Why bring in and house, pay for and fund such a process when many natural citizens are already having a hard enough time, we add more fiscal strain to our budgets?
So all in all what the jobs data tells us is that its all political smoke and mirrors. Make something look like something it is not. What matters is the headline number, its like fake it till you make it kind of mentality, but if nobody says anything, why bother changing anything.
When we look a bit further into some of the basic macro fundamentals of our economy, we know the massive deleveraging is there but is masked by the trillions in freshly printed Covid money still. For instance look at this charge off data:
Also look at the Commercial Real Estate Non-Current data:
We see in every city CRE being dumped for 60, 70 cents on the dollar and we know pension funds are taking it on the chin with this stuff, most likely insurers as well. Perhaps this is the real reason the FOMC needs rates to stay elevated, they need a monetary transfer mechanism from the state to the private sector and it comes in the form of higher net risk free interest up take. Free money if you will for the cash rich pension and insurers, hell they both should just start issuing debt to park money right back into MMMFs or TBills, Why not? Someone is certainly taking advantage of the higher rates because MMMFs continue to grow their assets:
So if we add MMMFs and Deposits from above we get around $11 Trillion, now if we have a risk free rate of 5.5%, that is $605 Billion in risk free interest…that plugs a lot of gaps, how much debt is actually arbitraged for a profit now at this level? Trillions of course and what happens to this arbitrage if rates plunge to say 1.5% again? Well that $605 Billion in risk free money is now only $165 Billion a reduction of 73%!
So maybe just maybe rates aren’t high for the reasons you think they are high, Magnelibra believes that the FOMC is transferring wealth from the state to the private sector via this mechanism, think of the US Govt’s $34.5 Trillion debt pile and an average 3.5% rate…that means the US govt is paying out $1.225 Trillion in interest per year…what a subsidy no?
Ok now you know the data, let’s get into the Subscriber Trackers, starting with the settlements from last Friday:
We see the bonds were hit off that NFP number and equities were bid, The US dollar was stronger slightly, energies were mixed with Crude holding above that $86 level. Both Gold and Silver had good days with Gold topping near $2350.
The US yield curve was weaker with the 2Y sector taking the brunt of the selling with yields rising 8.6bp on the day:
As far as our Futures Model Tracker, one change from Friday is the reduction in the J6 or Yen long by 1 contract:
As of Friday’s close and when looking at our MEGA8s Tracker, it is official Tesla is out of our MEGA8 basket and it has been replaced by Broadcom, symbol AVGO. What you will notice with this tracker is by adding AVGO instead of TSLA the group this year has performed about 5.5% better. We do not adjust that data when we remove a company for another one, we simply just add it in. Last weeks hedge worked out very well and this week we will target the QQQ 446 call 4/12 expiry at 3.00 or better to hedge this basket:
Here are the MEGA8 market cap charts now with AVGO instead of TSLA:
As far as the MEGA8s chart its a battle between the buyers and sellers in a consolidation move before the next directional breakout:
Here is the QQQ chart and its the market we target for hedges usually for that MEGA8 basket:
Yes the QQQ is up some 80% from the 2023 lows, but from the 2022 highs, its up only 10% and this is with trillions and trillions of Covid stimulus monetary and fiscal!
Ok our final chart is the SP500 vs Nasdaq futures we like the SP500 here and believe a major move higher is coming, one that could take a year or more to transpire:
Ok we have inflation data in the form of CPI and PPI data later in the week so keep an eye out for those, for our subscribers we will continue to bring you our trackers and relevant content to continue to improve your market intelligence and expand the way you view investing and trading.
We made this one a freebie podcast and we hope you enjoy our content. We hope the way we cover and track these markets allows you to dig deeper and find other avenues to invest your capital, to form unique baskets of equities, to then be able to formulate some interesting hedges. Remember, there are no free lunches, in order to maximize your profitability you have to take some risk, its inherent to the game. Risk taking doesn’t have to be scary, if you formulate your strategy in a way that makes sense, that limits your risk somewhat to maximize your potential then you will ultimately benefit in the long run. Many believe parking money in safe assets is all they need to do, but in reality, especially in the long run, but not diversifying into various Risk bases structures, you actually end up costing yourself a lot of potential in the long run. Remember break everything down into percentages and some small part of your investment plan should be to take a good amount of risk, or a massive asymmetrical return. If you don’t do things like that you will never realize your full potential. Its all about proper risk adjusted returns and being static with anything, is never a good thing! Till next time
