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

“It is only in the mysterious equation of love that any logical reasons can be found.” — John Nash Jr.

Over the Weekend

Fed’s Kashkari says ‘reasonable’ to predict a December rate cut (RT)

U.S. equity funds see largest weekly outflow in eighteen months (RT)

U.S. import prices and consumer sentiment slide (RT)

Bond traders worry liquidity will worsen as U.S. deficit grows (RT)

EM bond rally threatened as hawkish flags multiply (BBG)

U.S. home sales fall to the lowest level in a decade (RT) 

Record $668mn loan boosts hopes for Miami’s luxury housing boom (FT)

Activist Starboard Value has stake in Autodesk (WSJ)

Fisher Investments strikes deal with Advent (WSJ)

Investors fear long stretch of calm in markets can’t last (WSJ)

A surging IRS penalty is costing Americans billions; how to avoid it (WSJ)

Global defense groups hiring at fastest rate in decades amid record orders (FT)

ECB in no rush to discuss French bond rescue (RT)

BOJ held rates and will trim bond buying (RT)

Pension funds face liquidity test as PE slows (WSJ)

Investors scooped U.S. growth stocks and dumped value stocks last week (RT)

U.S. exec pay rises at fastest rate in fourteen years (FT)

Miner Codelco insists it can reverse copper production slump (FT)

Sam Altman says OpenAI could become for-profit corporation (TI)

Clearview AI offering equity stakes to settle privacy class-action (NYT)

AXS files to launch weekly, monthly and quarterly leveraged ETFs (FT)

Chinese companies rush to tap U.S. convertible bond market (FT)

Early repayments shrink China’s MBSs market by 65% (FT)

Adidas is investigating bribery allegations in China (FT)

Apple, Meta to face E.U. charges under landmark tech rules (RT)

Apple supplier TDK claims solid-state battery breakthrough (FT)

Russia overtook U.S. as gas supplier to Europe in May (FT)

Billionaire under sanctions could get $300mn in controversial U.S.-Congo deal (FT)

Australia’s trade with China surges to record level after tariffs lifted (FT)

Rachel Reeves to seek ‘improved’ U.K.-E.U. trade terms if Labour wins election (FT)

Serbia set to give green light to Rio Tinto lithium mine (FT)

Boeing and Airbus bought plane sections with falsely certified metal (FT)

Ikea examines U.S. production boost amid global trade disruption (FT)

Wells Fargo bet on a flashy rent credit card; it’s costing the bank dearly (WSJ)

Brazil thought it was safe from natural disasters; then came the flood (WSJ)

Argentina: is this time different? (WSJ)

Thames Water, the U.K.’s largest water utility, loaded up on debt to pay investors dividends while failing to upgrade London’s Victorian-era sewers (WSJ)

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

The macro reports last week reinforce our view that inflation is falling like a rock.

This is supportive of stocks, as this points to lower interest rates into YE, and thus expanding P/E multiples. Thus, we remain constructive on stocks into month-end and see S&P 500 exceeding 5,500. There are reasons to be constructive on stocks near-term, which we discussed recently.

• The 6 supports/catalysts for the month of June:
  – first, high probability of June being a positive month (seasonal below)
  – second, favorable inflation data points:
  – third, low utilization of leverage, measured by NYSE Margin Debt
  – fourth, $6 trillion and growing cash on sidelines – still!
  – fifth, persistent pessimism on the market and the U.S. consumer
  – sixth, EPS season shows AI spending/transformation still strong.

And if the seasonal median gain of +3.9% is correct, the S&P 500 could possibly touch 5,500 during the month. We still stick with what is working:

• AI   NVDA 0.83%  CDNS -0.41%  ARM AMD -0.41%  AIQ 0.17%
• Ozempic-related  LLY -0.06%  NVO -1.13%
• Financials and Industrials XLI -0.50%  XLF -0.94%
• Bitcoin & Proxies: BTC MARA 3.22%  PYPL -0.96%  COIN 0.18%  MSTR 0.02%  SMLR -2.28%
• Feb Stealth: Small-caps IWM -0.39%  IJR -0.25% .

Click HERE for more.

TECHNICAL

S&P and QQQ remain pointed higher, and despite being mildly overbought, should still be able to push fractionally higher early this week ahead of a possible short-term top. Treasury yields look to have followed through on the early weakness seen last Wednesday, and it’s thought that a falling U.S. Dollar and Yield scenario generally should be supportive of risk assets into the Fall. However, given that more than half of S&P’s major 11 sectors have been lower over the last three months, it’s not incorrect to say that Technology domination has camouflaged the market’s skittishness seen in many sectors. Near-term, a run-up into next week might pave the way for a minor stalling out in Technology. However, it’s expected that weakness in the back half of June should prove short-lived and make SPX attractive for further gains into August.

Click HERE for more.

CRYPTO

Ava Protocol, an EigenLayer Actively Validated Service (AVS) focused on Web3 automation, raised $10 million in a seed round with investor participation from Electric Capital, Shima Capital, Taisu Ventures, and others. The funding will be used to expand its operations and technology stack.

A recurring theme throughout Funding Friday is the focus of many development teams on improving the crypto user experience to the point where it feels like using a regular mobile app. Over the last few months, intents-based solutions have grown in popularity as an innovative way to transact. Ava Protocol (formerly OAK Network) is taking the same approach with its intent-centric infrastructure, focusing on supporting private, optimized, autonomous transactions.

Ava uses “super-transactions” that combine multiple smart contract calls into a single operation, allowing for execution of complex workflows. Its super transactions are enhanced with MEV protections and increased confidentiality. Ava hopes to improve the web3 industry with things like scheduled and recurring payments, stop-loss orders, streaming rewards, and more. Super transactions execute based on triggers such as time, price changes, and smart contract updates. With secure and efficient automatic transactions, Ava Protocol hopes to bring simplicity and a more pleasurable experience to all Defi users. Ava Protocol is currently in its testnet phase with plans to launch its native token, AP, in conjunction with its mainnet launch.

Click HERE for more.

FIRST NEWS

Cigar Just a Cigar Dept. One would think that the rise of actuarial tables and present-value calculations in early modern England happened in a commercial context, i.e. with people angling to obtain an advantage over one another – yet it turns out that a widespread early application of the tables was in a religious context. Good works are a pillar of the church; at the same time, it was important that the transaction didn’t just provide a physical and spiritual good, but worked well as well. Imagine that someone was donating an income-producing asset to a church and, in addition to all the good feelings, the church itself, as well as the donor, wanted a good deal. 

Of course, religion and finance are both fields that attempt to arbitrage, if you will, the tradeoff between one’s actions now and those actions’ positive/negative consequences/externalities/internalities over what is essentially an indefinitely long future. Sometimes the connection is quite literal and immediate; in those instances where a connection is less readily recognizable, our ability to recognize patterns is key to making sense of the world. At the same time, we’re prone to seeing patterns that aren’t there. After all, sometimes a coincidence is just a coincidence. How to know when?

Faces on the Moon

Humans have an exceptional gift for recognizing patterns, which makes us a hypothesis-generating species. As the regularities we perceive in our world allow us to explain the past and to anticipate the future, it is to this ability to identify the causal relationships between disparate events that human civilization owes its scientific and technical achievements.

And yet, it’s not all logical sunshine and rational rainbows. Often enough, we draw connections unsupported by the evidence out there. We aren’t always good at recognizing genuine randomness and, conversely, are too ready to assume that two things that occur at the same time must be linked (correlation vs. causation). The result is that we pick out patterns that aren’t meaningful, in the sense of reflecting any actual underlying relationship between things. In other words, we read too much into statistical noise; e.g. we see faces on the surface of the Moon.

To be fair to us humans, it’s not always easy to distinguish between meaningful signal and statistical noise. It’s reasonable, after all, to consider whether what looks like a face is actually a face. We are neurologically biased in favor of finding face-like patterns, and dramatically underestimate the probability that what looks like a face might be random lines on a surface. (And so, in the absence of other compelling reasons to think a surface has a face drawn on it, the fact that it looks like a face is likely a coincidence.)

On the other hand, it takes creative intelligence and detailed knowledge to pick out patterns, whether real or not, that others don’t see – a kind of ‘nerdery’. Conspiracy theorists espouse some pretty far-out ideas, but one thing they have going for them is that they tend to have considered their subject more thoroughly than most people who dismiss their theories correctly – if a little too out of hand. The reason most of us aren’t Flat Earthers is not necessarily that we’ve thoroughly acquainted ourselves with the evidence for the Earth being round. On the other hand, the reason people draw implausible connections is not because they’re fundamentally stupid – but rather because they lack a specific skill in assessing evidence. Call them bad at thinking critically.

Putting it to work

One meaningful tangent to consider is how to put together an organization whose goal is to produce insights others wouldn’t come up with, given that organizations are initially defined by the people who start them, and ultimately defined by which traits they select for and against – i.e. the company culture. The trick is that an organization is not going to thrive if it also excludes the kinds of people who are good at producing insights, and so it’s important to consider the tradeoffs of hiring disagreeable nerds, many of whom can sometimes be difficult to be around. Looking at things in a utilitarian or Coasian light, we could say that every organized group of people is an effort to make personal pathologies as un-pathological as possible, i.e. to engage in the kind of sociological arbitrage that aggregates individual negative externalities (nerds annoying those around them) and converts them into a collective positive internality (nerds’ qualities being put to good use for the benefit of the organization).

Religion and finance redux

Coming back to the ability to thread connections to draw plausible vs. implausible conclusions, it’s important to recognize that the people who insist that “there are no coincidences” or that “everything happens for a reason” tend do so for psychological or emotional reasons, i.e. preferring an explanation for patterns or events that generates an illusion of understanding or control, to conceding that contingency plays a significant role in our lives. It could be a visceral distaste for the conventional or for the opinions of experts, a general distrust of authority, or a need to show the world the sophistication and independence of one’s thinking, it could be other factors.

And yet there are coincidences. Good financial forecasters, like good historians and good scientists, recognize the role that chance plays. It could well be that, in some metaphysical sense, everything is connected or determined; at the same time, the idea that everything happens for an intelligible reason isn’t always helpful in explaining things. We can’t entirely discount the presence of obscure patterns or hidden forces at work behind events. At the same time, while leaving room for the existence of surprising connections between things, neither should we accept those connections as real until we see strong evidence. Needless to say, that’s why financial research – however much it’s aided and improved by intuition – should always be rigorously evidence-based. TheDiff, Telling The Future