A daily market update from FS Insight — what you need to know ahead of opening bell

“Human history becomes more and more a race between education and catastrophe.” ― H.G. Wells

First news

• While increasing, the national debt is increasingly becoming the topic of fashionable and uncomfortable conversation on Wall Street and the Beltway.

Overnight

• Israeli forces rescued two hostages from Rafah, in an overnight raid. link
• Yellen to meet with ECB President Lagarde today. link
• Credit card, auto loan delinquency rates rise in NY Fed report. link
• U.S. deficit will soar in the next decade, new projections show. link
• Nigeria mourns death of CEO of Access Bank and ex-chair of NGX Group (the Nigerian Stock Exchange) in California helicopter crash. link
• New zero-carbon ironmaking process uses saltwater: cost-effective, polluting, potentially promising. link
• Ex-head of Nigeria’s central bank faces 20 fraud charges, 10 years in prison. link
• Chinese firms responsible for 90% of bitcoin mining deals made with Ethiopia’s electric operator. link
• U.S. congressional report faults VCs for backing blacklisted Chinese companies. link
• Israel reacts to Moody’s downgrade over impact of Gaza war. link

Charts of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

Here are the key factors for whether stocks can continue to remain strong near-term:
– Earnings –> 81% beat = good
– Fed –> Slower to cut = mixed
– Inflation/macro –> Jan. CPI = unknown
– Valuation –> 15.8X ex-FAANG = good
– Technicals –> Breadth expanding = good
– Flows –> Tons of dry powder = good
– Sentiment –> Angry bears (those who feel stocks are disconnected “from their reality”) = good

Click HERE for more.

TECHNICAL

Equal-weighted SPX looks to be on the verge of turning up vs. SPX.

Another stellar week for stocks, which showed increasing evidence of a broader-based rally being closer to getting underway. As many know from the past month, the SPX and QQQ rally to new highs has been driven by just a handful of names. However, it appears that this could be changing, and we suspect that next week provides the time where Equal-weighted S&P 500 gauges could bottom out vs. SPY. At present, this divergence isn’t too problematic given no evidence of leading stocks turning down, and SPX and QQQ maintaining recent uptrends. Equal-weighted SPX managed to close Friday at the highest levels in nearly two years, and arguably should help jumpstart a broader rally while many are fearing markets have become too overbought.   

Click HERE for more.

CRYPTO

We discuss last week’s outperformance of Bitcoin miners, examining how recent price movements reaffirm the sustained high-beta relationship with Bitcoin. Additionally, we explore considerations of mining cost profiles post-halving.

Click HERE for more.

FIRST NEWS

Today’s First News story is not only highly topical, but also the first in a two-part series.

^{A pin tracking the U.S. National Debt on a day in November, as worn by Rep. Thomas Massie (R-Ky.). PHOTO: ANNA ROSE LAYDEN/GETTY IMAGES. WSJ.}

Black Swanning, Part I. It’s people like onetime George Soros protégé and former hedge fund manager Stanley Druckenmiller or ‘bond king’ Jeffrey Gundlach who habitually sound the alarm on the (un)sustainability of U.S. debt, and some tend to dismiss the views of these investors and others like them as supporting a pecuniary agenda. Yet when the Fed Chairman broaches the topic – the ears, they perk up.

In a 60 Minutes interview last week, Powell said, “In the long run, the U.S. is on an unsustainable fiscal path… mean[ing] that the debt is growing faster than the economy… Effectively, we’re borrowing from future generations. It’s time for us to put a priority on fiscal sustainability.”

This call follows hard on the heels of Bank of America CEO Brian Moynihan saying that it’s ‘time to stop admiring the problem’ and instead do something about it, JPMorgan Chase CEO Jamie Dimon dubbing U.S. debt the ‘most predictable crisis’ in history, while The Black Swan author Nassim Taleb asserts the economy is in a ‘death spiral’.

Do Americans, who, if debt were divided per capita, individually ‘owe’ over $100,000, need to be so concerned? Are they? Last year, Pew Research found that “reducing government debt” was a key concern for 57% of the 5,152 people surveyed – up from 45% in 2022. That makes sense, as the national debt was coming down precipitously for most of 2022 and rising just as radically for most of 2023.

Realistically, the concern would turn to worry if the U.S. were suddenly unable to sell $1.7 trillion in annual debt anymore, whether it’s because the interest on offer was seen as not high enough, or there was concern about the borrower’s ability to repay.

The Congressional Budget Office (CBO), which released its 10-year budget outlook this week, forecasts that, assuming no changes to current law, the national debt will grow 84%: from $26.2 trillion in the last fiscal year to $48.3 trillion in 2034. Debt as a share of GDP will rise from 97.3% currently to 116% in 2034. In its entire history, the U.S. added $22.3 trillion in debt through 2021, and is projected to add as much over the next decade. Still, 116% is not nearly the highest the D/GDP has been.

According to data released by the U.S. Treasury, the national debt topped $34 trillion for the first time ever in early January, just over three months after surpassing the $33 trillion mark. Congress has slow-walked the issue of deadlines three times since the end of September as it works out how to fund the government, and as more and more prominent financial figures draw attention to  the ballooning national debt.

Under the latest stopgap measure, passed in January, funding for four federal agencies will expire on March 1. Funding for the rest of the government is set to run out a week later.

President Biden and House Republicans went head to head on the borrowing limit in spring 2023, avoiding a collision with the ugly prospect of furloughing federal employees and potentially imposing cuts to entitlement programs mere days before the U.S. was set to default. Fitch Ratings still downgraded the U.S. credit rating from AAA to AA+ in August, citing the increasing burden of the national debt and repeated partisan standoffs over the debt limit.

For comparison

Over this past weekend, Fitch’s competitor Moody’s lowered Israel’s sovereign rating from A1 to A2, in the country’s first ever downgrade (while also lowering Israel’s debt outlook to negative due to the risk of the conflict with Hamas spreading to other fronts). At the same time, Bank of Israel governor Amir Yaron pointed out that, even per Moody’s own assessments, Israel’s debt-to-GDP ratio should peak at 67%. Based on the country’s past experience with geopolitical crises during periods of higher government debt, this level should not lead to any delay in repayments.

In other words, Israel estimates that, at the worst possible point in its current economic predicament, its D/GDP ratio is not likely to engender further downgrades, while the U.S. – whose D/GDP already exceeds 97% and which is itself becoming increasingly embroiled in a couple of geopolitical crises – has already been downgraded by one major agency and given a warning by another. In November, Moody’s lowered its outlook on the U.S. credit rating from stable to negative, which signifies an increased risk of that rating being downgraded over the next one to two years.

In other words, ratings agencies may or may not remain continually pliable in always looking on the bright side of life in the U.S.

(to be continued)

The Hill, WSJ, Fortune, cbo.gov