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

“You’ve got to know when to hold ’em, know when to fold ’em, know when to walk away, and know when to run. — Kenny Rogers, The Gambler

Overnight

Broadcom should replace Tesla in the ‘Magnificent 7,’ says Interactive Brokers’ Sosnick (CNBC)

Surgeon General calls for warning labels on social media platforms (Axios)

IRS crackdown takes new aim at partnerships’ maneuvers (WSJ)

M&A-focused hedge funds have outperformed all other strategies YTD (RT)

PE firms smart to exploit weak debt covenants, Marathon CEO says (BBG)

Goldman and Evercore ramp up US stock outlook (YH)

SCOTUS to hear shareholder lawsuit against Nvidia (RT)

Deutsche Bank counting on IB hiring spree to pay off (FT)

Milan stock exchange workers set to strike over Euronext’s divestments (FT)

India pulls in tech giants for its AI ambitions (FT)

Global metal supply chains are diversifying away from China (RT)

Western’s flagship bond fund is lagging 97% of bond funds (BBG)

Regal takes short position in Australia’s biggest bank (BBG)

Trafigura to pay $55M over fuel oil manipulation (BBG)

U.S. Treasury and IRS to close $50B tax loophole on partnerships (RT)

Apple will shut down its BNPL program (BBG)

Stripe to let employees cash out of stock for third time (BBG)

GE Aerospace CEO declined Boeing CEO job (WSJ)

UBS offers to repay 90% to clients hit by Greensill implosion (FT)

China’s property investments fell 10% YTD in May (RT)

Zyn suspends online sales amid investigations (WSJ)

U.S. bans exports by Oregon freight-forwarder in warning shot to industry (WSJ)

Midsize companies are big business for Wall Street’s megabanks (WSJ)

Goldman raises S&P 500 year-end forecast, citing strong earnings growth (CNBC)

Corporate tax rate spurs political fight with more than $1 trillion at stake (WSJ)

A big bond rally is promising help for home buyers (WSJ)

IMF warns of ‘profound concerns’ over rising inequality from AI (FT)

A buyout gone wrong creates fireworks in the private credit market (FT)

Deutsche Bank counting on investment bank hiring spree to pay off (FT)

Pressure mounts on senior bankers as discontent in junior ranks simmers (FT)

Ukraine urges bondholders to accept markdown on more than $20bn of debt (FT)

Archegos trader’s damaging testimony sets high stakes for Hwang (BBG)

U.S. SEC’s crypto enforcer David Hirsch quits (CD)

Maybe less red tape? (FT)

The first two years of Russia’s war in Ukraine have produced at least 175 million metric tons of carbon dioxide emissions, equal to ~$32 billion in damages (SA)

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

June is proving to be a strong month, and our S&P 500 5,500 target remains intact.

Manheim used car prices likely to highlight that inflation is falling like a rock.

More in the Macro Minute Video linked HERE.

TECHNICAL

As mentioned last week, more than half of the S&P’s major 11 sectors have been lower over the last three months, while 3 of the 4 major sectors which rose 1% in Monday’s low-volume trading (Discretionary, Financials, Technology, and Consumer Staples) remain in short-term downtrends from April and/or May peaks.

Overall, it’s thought that Technology might be approaching a short-term area of resistance this week following a strong comeback over the past month. While uptrends have not shown evidence of any waning in current trends, factors such as seasonality, DeMark exhaustion, as well as cycles show the possibility of a short-term peak in price, which might play out after this week’s Quad expiration. 

While it’s difficult to suggest anything more than a minor 2-3% pullback into July, it’s imperative that sectors like Financials and Healthcare start to show some evidence of strengthening sooner than later, as both have been under pressure since April. At the same time, our thesis of a weakening U.S. Dollar and Treasury yields looks to be materializing, and this should be supportive of risk assets into the early Fall. Thus, 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

Bloomberg ETF expert Eric Balchunas moved up his target date for the ETH ETF launches to July 2nd, based on the pace of interactions between the SEC and ETF issuers. It appears that the SEC staff has already sent issuers comments on the S-1s, and that these comments are relatively light, indicating they could be addressed this week. While this is not a major shift from the prior expectation of July 4th, reading between the lines suggests that many had anticipated a further deferral into summer. The ETH/BTC ratio rallied for the first time in several days over the weekend following Balchunas’ optimistic outlook.

Tether, the leading stablecoin issuer, has launched Alloy by Tether, a digital asset backed by Tether Gold. Alloy by Tether introduces a new category of tethered assets designed to ensure stability by pegging to reference assets through over-collateralization and secondary market liquidity. The first token, aUSDT, tracks the US dollar and is over-collateralized with Tether Gold (XAUT 1.14% ), backed by physical gold deposits in Switzerland. This combination allows users to engage in transactions backed by actual gold without selling their gold reserves. Operating on the Ethereum Mainnet, Alloy by Tether supports transparent management of tokens and collateral through smart contracts, paving the way for potential expansion into yield-bearing products and integration into institutional portfolios under regulated oversight in El Salvador.

Click HERE for more.

First News

Heel by Which Thetis Held Achilles Only Body Part Not in Play. The U.S. has received about a third of global capital flows since the pandemic. In a sense, this is where the U.S. shines economically: when there’s a global demand shortfall, America is best positioned to make up the gap, and conveniently these demand shortfalls coincide with demand for dollars. A trade deficit means that the rest of the world accumulates claims on U.S. assets, of which the U.S. has riches manifold to offer the world. The default safe assets are issued by the U.S. Treasury; at the other end of the spectrum, the most conventional risk assets – your large-cap growth stocks, PE, and hedge funds – are also disproportionately offered by the U.S. This stable equilibrium stays one as long as the country issuing the global reserve currency also has a disproportionate share of the fastest-growing multinational firms.

Speaking of disproportionate amounts of the world’s reserve currency – a record amount of cash is sitting in money market-mutual funds, which tend to pay better than 5%, risk-free. Although it’s been a good year for stocks, with the S&P 500 up ~14%, it has not been without drama. SPX has sputtered significantly lately, with the gains for the year dwindling from 10% to 4% in a matter of weeks in late March and April.

On the one hand, such volatility is part and parcel of stock investing; on the other, for those who get queasy easily, the safety of money market mutual funds is compelling these days – especially since they’re paying, on average, 5.12% annualized, per money fund trade publication Crane’s. (Some funds pay 5.35% or more.)

The Investment Company Institute, the mutual fund industry’s trade group, says cash in money funds hit a record last week, climbing to $6.12 trillion.

Until the Fed delivers those rate cuts the market keeps expecting, since yields on money-market funds are closely tied to the short-term interest rates the U.S. central bank controls, it is understandable how, for some, the incentives to sit in cash have the peace-of-mind-inducing advantage of being compellingly orthogonal to the risk of investing in a stock market that, at least in part, seems to be on a trajectory of giving up its Q1 gains.

One other incentive would have to do with something known as the ‘Buffett Indicator’, rooted in the premise that the value of the U.S. stock market is tethered in some fundamental way to the overall productive capacity of the U.S. economy and, by extension, the publicly traded companies whose profits depend on American growth. The indicator is the total stock market capitalization – i.e. the total value on paper of the stocks that are publicly traded – as a share of GDP.

Buffett laid out his thinking on the indicator in a speech published in Fortune magazine back in late 2001, as the market deflated from the tech stock boom.

“The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.”

Today, on the back of the dizzying promise of AI and the hype cycle swirling madly around it, we find ourselves in another tech boom. At least according to the Buffett Indicator, stocks seem to be overvalued. That is not a reason to sell, as, for the largest companies, globalization has expanded profit-making opportunities to the entire world, meaning that the U.S. economy may no longer be the best denominator in Buffet’s equation. After all, the Sage of Omaha popularized this metric before China was even admitted to the WTO.

^{Thetis Immerses Son Achilles In The Waters Of The River Styx. Antoine Borel}

The market can stay overvalued for a long time while delivering outsize returns to investors as it does. Still, amid all the AI-related excitement, Buffet’s common-sense stat may be worth casting an eye on once in a while. The Diff, Sherwood