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Oil markets are outraged, and many institutional analysts are hinting that something is about to happen, or at least providing wording. We'll look at some of these in a moment, but let's also briefly look at how we stand in the face of terrorism. The United Kingdom has decided to release five terrorism suspects on bail.
This question wasn't on my bingo board. But when it comes to Iran, which we wanted to focus on, we meet Araghchi , the Iranian Foreign Minister . He's a bit more aggressive guy compared to the president of Iran. Today he is meeting with mediators. The United States will not be present, which makes some people nervous, although we, you know, expect that Donald Trump has already supposedly made his demands, and now it's about negotiating a response from the Iranian side.
Now, in the Wall Street Journal article at the bottom of one of its articles, we hinted a little bit at what's left in these negotiations, because there are three main things that Iran wants. They want to lift the naval blockade. They want their captured Iranian billions of dollars, and they want sanctions on oil, air travel, or something else to be eased, right?
So that in this way they could actually maintain the functioning of their economy. The United States wants nuclear inspections, and so, late last week, we heard the president of Iran say, "Hey, look, we're open to nuclear inspections." And then the IAEA came forward and said, “Hey, we can resume inspections pretty quickly.
We are ready." They were all encouraged and excited. But Donald Trump said, "Well, the Iranians agreeing to open the Strait of Hormuz for 7 days in response to the blockade, sanctions and financial aid would have been an acceptable deal last year ." Donald Trump now suggests, "Ah, I want more, actually." The Wall Street Journal hints that it's more.
The Wall Street Journal writes right here that Trump no longer wants to return it in response to unfreezing billions of dollars of Tehran's own funds. I think Donald Trump looks at it from the perspective of: I don't want to look like Obama. Obama gave them back their own money. I don't want to be the guy who gives them their own money back.
Okay, until the elections. Uh, you know, it feels strangely like we're getting closer. I know it sounds crazy, but I mean, when we hear good news about the willingness to conduct weapons inspections, uh, inspect a mountain of pickaxes. God, that would be a game changer. It gives me great confidence, uh, that hopefully we're not moving in the direction of trying to build a bomb.
And what we're talking about now is giving them back their own money. This is a delay now. It gives me confidence that we're closer, but it definitely doesn't feel that way, does it? It seems a bit crazy to say something like that on a day like today, when the market is falling off the cliff, and I understand that .
I understand. But not only that, look at 10-year-olds. The 10-year rose 7.8 basis points. We just broke through the quarter past five mark. The entire market, meaning the two-year bond yield, also rose by eight basis points. The yield curve is flat at 31 basis points, but , brother, the two-year, one-year and 10-year Treasurys are up eight basis points today.
So , I understand. It sounds like I've gone completely crazy. I don't mean to offend by that word, but it sounds like, you know, what Wall Street Bets would say: " This guy's gone crazy, you know, when yields go up nine or eight basis points." The market is falling off a cliff. By break we mean line 735 right here on the cues.
Well, it looks like we're trying to get back to that. Boy, that was a bit of a steep drop. And then, having said that, well, it seems like things are actually getting a little closer. But it really is when we actually look at the details. Now, when we look at what institutional experts are saying , this is what happens next .
They say something has to change when it comes to the levels that everything is at now. Regarding profitability, but not necessarily just levels, it's the rate of change. And that's where we're going to look at a few parts of SocGen right here. So, let's look at some of them in parts. First, it's easier to be bearish today than to be...bullish.
They argue that this is not the top yet, and that the markets in general are truly bearish right now, more so than we have seen historically. I marked the day of liberation right here in terms of bearish sentiment. The higher this line, the more bear people there are. The initial war sentiment is right here, and right where we are now.
So, we were directly talking about the bearish sentiment in this market. The market is relatively bearish. Many people are nervous about diesel crack spreads . And interestingly, SocGen actually reports that crack spreads can fall very quickly, sometimes by -60% within 3 months. So sometimes there is less reason to panic.
Maybe not something so incredibly bad, and something that can recover quickly. They also argue that the Federal Reserve is likely to be behind the curve, which is now leading to this sense of peak hawkish sentiment . And we see real labor productivity trending upward since 2022, with retail sales per employee at an all-time high for the S&P 500.
However, bond yields , as at peak bond yields, rarely predict any shocks to the economy. What the shock to the economy suggests was similar to what we saw last week, which is that something always breaks. There are always these spikes in yields, this first derivative, the rate of change, when these yields are rising rapidly, like right now, historically 16 out of 16 times, as we said last week, something has broken.
Here's another example of where you could see these spikes, how you got to the Orange County default, that was in the mid-90s, that's when the Fed had to turn around and go back to...oh, we went up too fast, we went too far. Uh, peak tech and media, then you had peak housing, you had Silicon Valley banking, and then of course we have this other kind of rapid growth in returns .
Uh, and that could lead to some destruction. So, essentially, a credit event. Although they argue that the underlying economy is still showing productivity growth. And here are some of the topics that SocGen is raising, uh, that in addition to that note, although right now, uh , overall, it's like the calm before the storm, they're saying that the U.S.
economy has seen the biggest upward revision in growth expectations for 2027. And so, even though there seems to be a lot of bearish sentiment right now, the underlying economy seems to be holding, uh, at least at these aggregate levels. When you look at aggregate labor productivity, when you look at aggregate, uh, you know, wage growth, when you look at aggregate retail sales, the fact that people continue to spend money is actually quite impressive.
Now, to be fair , there's an employment report coming out on Friday that a lot of people were looking at and saying, "Hmm, yeah. Yeah, well, is it really going to hold up? " Well, let's look at some expectations for that, and then we'll go back to the SocGen article here. So, on Friday we have ADP, uh , or sorry, on Friday we have the employment report, which is expected to be 90,000 nonfarm payrolls , uh, on Friday.
This is well above the pace of about 20,000 per week that we had been planning, probably closer to 15,000 per week on average with ADP. So at 90,000 you have about 22,000 per week, which is a pretty good pace. The number of private sector employees is expected to be 87,000, and wage growth is expected to be 0.3.
So far, as far as we can believe the government figures, it seems pretty good. The weekly ADP report won't be out this week because we'll get the monthly ADP report on Wednesday the 30th, which is strange because it's still September, but we'll get September data. In any case, we expect a 74,000 reading in the monthly ADP report on Wednesday.
So, two employment reports this week. Private report on Wednesday. And it will be at 5:15 in the morning. Is it 5:15 or 5:30? Uh, it's one of those morning ones. Maybe 5:30. But anyway, uh, and then on Friday we'll also get the employment report at 5:30. Yes, I think that's exactly right. It's 5:30 a.m.
for the employment report on Friday and 5:15 a.m. for ADP on Wednesday, California time. Anyway, back to ...So those are some of the catalysts this week that should reiterate that the economy is basically doing well, at least from an employment perspective. This has now prompted JP Morgan to copy "Boy Meets Kevin" and switch to a bullish view on US stocks, apparently based on the Iran deal.
You need a deal with Iran. Until you make a deal with Iran, you will have problems. We already know that. Old news. But JP Morgan moved to bullish from neutral, citing stronger-than- expected economic activity, abandoning its cautious stance, likely due to those PMIs we got last week. Uh, October is historically the most volatile month for stocks.
And the topic of artificial intelligence will likely remain. Back to SocGen, here are their thoughts on the distribution. They argue that now it could be 60% stocks, 20% commodities, 20 % fixed income. I don't blame the stocks . I'm a big fan of buying these falls that we had. You know, we bought the dip at 700, bought the dip at 710, bought the dip at 715 on Qs.
Even the 735 line, buy the drop. You know, we're at 732 right now. So it's kind of a DCA implementation process, I think, leading to a hopeful deal with Iran. If we don't make a deal, we'll all be in trouble. But anyway, my opinion on the allocation is that it's still a bit much, although I'm optimistic about the stock.
I think that's a bit much, the stock. And commodities, especially copper , are highly correlated with the state of the economy, driven by spending on artificial intelligence. So, I actually feel like these rates are very correlated here, stocks and commodities, if you look at copper, which they mention here as one of their long positions.
Uh, I'm, as you know, more like 85% real estate and 15% cash and durability. Uh, and that doesn't mean I'm generally pessimistic . Stocks, I think, will look like a buying opportunity in the stock market over the next 6-24 months. But I think the risks are greater the closer the stock market is to the top than in the area of cheap real estate, but that's normal.
You shouldn't believe it. Uh , I think areas with low inventory and low construction capacity are closer to their bottom. Florida and Texas still have work to do . But in any case, they argue to buy the dip on the mid- cycle rise. I agree with that. As for long goods, it's long copper. I don't have a particular opinion on this , other than I think it has to do with artificial intelligence and they say you need to buy the depreciation trade, so wait a long time for gold.
I personally argue that gold peaked during the time of Varsh, and Varsh will not be a money printer. Many people believe that Warsaw will be forced to move to quantitative easing. It's possible, but I think he'll be the guy who looks us in the face and says, " I have a task force working on this ." And there will be a lot of suffering between the crisis and quantitative easing, because it will take a lot of effort to convince this guy to print money.
And that will be tough for gold. In reality, it's just deflationary, not inflationary. But in any case, cybersecurity must continue to grow. Nvidia apparently announced agent surveillance software this morning. I think I really believe that cybersecurity should be focused on that. Well, apparently Nvidia also offered its buyback, which helped Nvidia break through the 227 mark.
But SocGen believes we could see a return to return on investment (ROI) for free cash flow for hyperscalers in 2027. We actually did a little bit of analysis on Microsoft this morning and some of the strengths and weaknesses. Uh, and in the Microsoft analysis we did this morning, there are some hints about what's happening with, um, other software companies.
Now, when it comes to betting expectations, it's worth, um, looking at some of those betting expectations. So unfortunately, the Federal Reserve, uh, let me show you this here . The Federal Reserve, unfortunately, well, I would say the bond markets on behalf of the Federal Reserve, unfortunately, are still projecting a rate hike of 3.83 between now and next year, uh, which is not very good.
Uh, that would mean we're predicting almost five rate hikes . I mean , the economic data we got was pretty solid. So I understand the desire to raise rates. But, I will tell you, you know , the odds in the market right now are that we will definitely get the next rate hike by January 2027 . So, right now, according to the Fed, we have a 68% chance of a hike.
This will put you right before the election. It might be easier to give up here if you think the Iran deal will happen because the trading volume is 3.7 million . And you can give up here, where the chance is now only 32%. So, I think a lot of it depends on what happens with Iran. But let's continue looking at this SocGen article.
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This morning we're looking at Microsoft. They still have about $15 billion in free cash flow per year. But one thing that was really notable about Microsoft is that they don't actually have enough money to pay their bills now for a year. Now their cash flow makes up for that, but I think it's really remarkable that if I go to their balance sheet, let's look right here.
I have their income statement , balance sheet. I have about $95.8 billion in deals or accounts, not including deferred revenue. So, I've already deducted their deferred income. This means that we have $95.8 billion in actual current liabilities that need to be paid over the next 12 months. And they have about $76.8 billion in cash.
So, you're really relying on that free cash flow to actually pay your bills. Which is a bit strange. Honestly, for Microsoft. Anyway, continuing the SocGen article here. SocGen argues here that price-to- earnings ratios could have declined as bond yields rose . But they say stocks look expensive compared to bonds.
Of course. And that makes sense, especially given how much bonds have risen. Essentially, this says that if we expect the stock market to return, say, 7%. Let's say this. And you can get a 5% risk-free rate on Treasury bonds, your equity risk premium here is only 2%. You only get an additional 2% compensation for taking a risk with stocks.
Why would you do that? In other words, even though the price/ earnings ratio is very low, you are in a bit of a tight spot right now, where unfortunately, due to the high cost of bonds, it looks very desirable to buy bonds right now. Perhaps that's why we're seeing so much pressure on stocks right now, because the yields are really so high.
It is likely that something will eventually break in the form of a credit shock, but will it drag the entire economy down? Probably not. Not yet. And keep in mind, one of the reasons I'm personally bullish on stocks, but with a smaller portfolio, is that I believe that when the economy starts to go down, not in the next 6-12 months, but when the economy starts to go down, that's going to be really bad for the stock market.
But in any case, rising long-term earnings per share expectations support valuations. And that's true. Right now we still have a lot of upside built into our expectations for the stock. For that matter , one of the reasons why you're seeing a slight slowdown in the growth of some memory names like Micron or SanDisk.
Well, it's not memory, it's NAND flash memory, but in some of these related names, these previously more commercialized names that people say, "Oh, it's different now." One of the reasons you're seeing them soften a little bit is because, well, you have Micron's earnings report tomorrow , but there's this fear, well, we know that if high-speed memory prices peak in 2027, and there's more supply, and suddenly you know you don't have the pricing power that you used to have.
Rightly? People want to see growth. But you see significant growth in many corporations. In fact, you see it so much that SocGen calls it greedy. They're essentially saying, "Hey, people have high inflation expectations, so why not raise prices?" So, the growth in profits as a percentage of GDP indicates that people are raising prices, uh, more than cost-push inflation, which is stimulating spending.
Cost-push inflation, that's it, cost-push inflation–that's this red line right here. This is how much it costs you to produce your goods and services. But what you are charging is the blue line. So the more you see this spread here, the more you see this inequality, the more companies are going to say, "Oh, well, that must mean corporations are greedy." So, in any case, the bull market will end, but when ?
And I agree with that. I agree that at some point the AI bubble will burst, and that will be terrible. And the reason I say it's terrible, and I always want to make this clear, is because, you know, I'm relatively high on the bearish-bullish scale right now, but I'm also under no illusions. Well, I appreciate the " bearish-bullish" scale, because I think that all this shock over the last 10 years, my God, it's gone up almost...
I mean, according to Bloomberg, it's gone up almost 10 basis points today. This is madness. Yes, 10 basis points per day to 5.27 is a small caption here. This is madness. Well, in my opinion, such shocks create short-term fear, panic, fear of Iran, there is so much bearish sentiment right now. You'll look at CNN's greed and fear regarding the latitude indicator.
To me, this is all a glaring possibility. I mean, you have an extreme fear of latitude. He collapsed in September. Put-call options indicate fear. The demand for junk bonds is consistent . But the stock price, the strength of the stock price at the fear level, the number of companies hitting lows on the New York Stock Exchange - this is extraordinary fear.
Impulse at the level of fear. You are in the fear indicator here. A lot of pain, actually. For me, these are buying opportunities. So, I think you have this buying opportunity that will lead us to this beautiful, glorious V- shaped recovery pretty much over the next 6 to 12 months. But this is exactly what pushes us into a real bubble.
This is the euphoria on which you set your trailing stops. And then you take your darts off the top, not now. And unfortunately, that's what makes me so bearish on gold, because I think Kevin Warsh is just going to cut rates, not print money. This is my opinion. Based on my study of Kevin Warsh's history, he's a guy who lowers the stakes.
He's a guy who's a fan of zero-sum bets. He's not a guy who prints money. And that has really big implications for, well, the bullish real estate market and the bearish gold market. Simply by definition. OK. Why does this work? Well, because if gold is a devaluation trade, and they don't print money, and you don't devalue the currency, then that trade doesn't work.
And if you have disinflation, which you fight only with interest rates , not with money printing, or worse, deflation, which is generally economically bad, then what happens is that bond yields, ahem, in the bond market have to fall even further to compensate for the lack of money printing, which actually leads to interest rates being lower than ever before, even at the Fed's zero lower bound.
In other words, you can drop to zero at the Fed and think, "Oh, well, that's the level." No, the market is functioning. 10- year Treasury bonds could fall even lower. I know it's crazy to think about right now, considering this is actually the highest level since 2002. This seems a little crazy, but that's okay.
I just always want to be as clear as possible in my thinking. So what could burst the bubble? Well, the monetary tightening cycle has begun, and in the last 11 out of 14 cases it has ended in a recession. The biggest risk is that the Fed believes they are behind the curve. Um, if the Fed is convinced, I wrote, they may raise the rate too aggressively.
Greenspan raised rates aggressively, and the latest hike was the last straw for the dot-com bubble. And in the mid-90s they raised the rate from 3% to 6% and then backed off, lowering it to 5.25 because they went too far, but you still have 4 years before you actually have a market crash. So it's not always a sign that they're, you know, ready to fall off the cliff immediately.
Which is good. We talked at the beginning of the segment about something having to change. So let's touch on this. This something has to change not only depends on the direction of the de-escalation in Iran that we talked about, but they also say the following: Um, we haven't seen, uh, let's see. Where is it?
Right here. Since 2000, we haven't seen two measures where less than 50% of S&P 500 stocks exceeded their 200- day moving average. That's what we have now. And for 9 consecutive days, there have been more 52- week lows than highs. Both of these problems have not been observed since 2000. Which, in their opinion, is definitely a sign of stress.
Now they seem to believe that something that can be bought under the Iran deal will actually be at the discretion of consumers, buying names like EAT, Golf, Burlington, and Yeti. They could all be beneficiaries of a major recovery . But we have a risk of big red before that, given that this was released over the weekend, who knows, maybe this big red–this is the whole sea of red that we have in the stock market.
Regarding Bitcoin, keep in mind, it is very important that we hold this line right here and continue to approach it. This is the kind of bounce you want to see Bitcoin go up to the 102 level, and overall , it looks like we're, oh, wow, now rejecting 735. It shows how important this line is. By the way, a perfect bounce on this line on Thursday, and now we reject it.
So, quite importantly, mark 735 if you have n't already marked it . Okay, let's take another look at the Treasury yield , because it's so bad, it's almost gloating, you know? It's like, "Oh, look at this." It has stabilized a bit. 0.78. This is about where we were earlier in the segment about these eight basis points, these are eight basis points.
5.26 for five and a quarter to 10 years, pretty impressive. So with that, I have just one favorite thing I want to say. .
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