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Is Wall Street Overheating?

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Is Wall Street Overheating?

Many expressions describe a heated situation: if you can’t stand the heat, get out of the kitchen; some like it hot; it’s getting hot up in here.

They are all in our vocabulary for a reason – people can gauge when an atmosphere has become slightly to exceedingly warm. 

Is this what is happening on Wall Street? 

And what are the causes for this temperature climb that might lead to a melting down?

The Dow Industrial charts have shifted into warp drive. 

As can be seen below, the period that is under view here is September 2015 to this month, July 2016. 

This profile very much meets the criteria for a hyperdrive shift.

wall street 1

Some signs of agitation are beginning to be felt on Wall Street in the wake of these new moves. 

In fact, the chart above could very much be a mirror of the sense of concern felt by analysts and investors.

More than a few Wall Street strategists and analysts have voiced words of caution over the past few days. 

This is a pattern that lends itself to various degrees of unsettling worry. 

Some of these trends are:

  • Equities are climbing ever higher
  • All signs point to the market rapidly becoming overheated.

The Dow Jones Industrial Average (also known as DJIA, the Industrial Average, the Dow Jones, ^DJI and just, the Dow) is one of the indices that was created by the Wall Street Journal editor and Dow Jones & Co co-founder, Charles Dow, over one hundred years ago. 

It is currently owned by S&P Dow Jones Indices. 

It calculates the sum of all the component prices divided by a divisor – that changes whenever one of the component stocks have a stock dividend or a stock split.

Last Wednesday the Dow Jones Industrial Average recorded a seventh highest close ever logged in succession. 

And according to the data on file at Dow Jones, this will make it the longest run of continuous closing highs since the March 15, 2013, eight session run.

This run was not confined to the DJIA, however.

  • Blue chip gauge recorded a ninth gain in a row for consecutive sessions
  • COMP, +0.52% (Nasdaq Composite Index) ended trading with an all new highest level for 2016.
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On viewing the chart below, it can be seen that the Nasdaq Composite Index has maintained continuous high closing levels.  

wall street 2

Finishing at a record level of 2,175.03 last Friday, the S&P 500 Index had a wider stock market retreat in the prior session.

Not exactly word on the street, but an opinion and voice that is clocked as a potential crowdsource opinion, by analysts and investors on Wall Street: Dr. Lev Borodovsky, who writes on the current financial newsfeed website The Daily Shot, refers to CNN’s index of “fear and greed.” 

This sounds like a movie title but is used to show that greed is approximately at a two-year high.

The chart below is an indication what is the driving motivator in the markets currently:

wall street 3

Dr. Lev Borodovsky indicates that with greed levels running so high, it could mean that the market is possibly unaware that it is overextended and has become alarmingly complacent. 

It would follow, that from this posture, the market would be in a bad position and under prepared to handle a shock fall or rapid market adjustment.

Wall Street has its gauge of fear too.

The CBOE VolatilityIndex (5.65%) is one of the key measures of the expectations in the market for the near term volatility conveyed by the S&P 500 SIO prices. 

Other measures of volatility are being referenced as also showing signs of extended exuberance.

Greed and Fear indices are the two emotional states that are intrinsic when relating to the subject of the unpredictability of the stock market. 

The vulnerability that is linked to those two states can be as a result of investors having a small comfort level because of market instability. 

Or maybe, in this case, having too much comfort and confidence. 

Both emotions, without oversimplification of the facts, can have a total and deleterious effect on both the stock market and investors portfolio.

Tom McClellan, another well-known market technician, stated in a post last Tuesday, that a potential “Fourteen-day choppiness Index” which tracks the profile of a short term trend, indicates that Wall Street uptrend may be getting tired. 

He goes on to further explain that any extremely linear path for the index will imply that the current trend is perhaps likely to end shortly. 

But when choppier and more volatile action occurs, it, of course, will suggest the opposite.

The 14-day Choppiness Index is reprinted below:

wall street 4

The small reading that can be seen above in Tom McClellan’s index shows a relatively straight line and linear movement. 

His Choppiness Index, at present, is at the lowest level recorded for the last two decades.

What Tom McClellan goes on to say in his July 19, 2016, post re the volatility measure – is that the readings last Monday were at the lowest ebb since February 12, 1996. 

And the instance in 1996 marked a price top not attained again until three months after.

Upward or downward linear trends are exhausting. 

They require a lot of energy from either a bearish market or a bullish market for everything to stay information and step. 

The natural state of the markets is to drift towards entropy, so brief interludes like this trend towards the extreme organization, cannot last for long.

The upshot of all this in McClellan’s opinion is that things will snap back lower soon. 

He maintains a relatively bullish long term and an average outlook for stocks.

Another financial commentator who also is a graduate school finance professor, both at New York University and Georgetown University, Salil Mehta, posts that the further the Wall Street’s fear gauge falls below 12 – the higher the probability is that stocks will fall alongside. 

Flicking back to the VIX (CBOE Volatility Index)  at 11.77, they say it is approaching a near one-year low.

The chart below displays this small point:

wall street 5

The graph that Mehta’s uses indicate that at current levels:

  • There is about a 20% chance that the market will go lower
  • The market is now more susceptible to falling.

He goes on to say that it is dangerously close to the floor, but probabilities are higher that it won’t go lower on VIX but may instead spike up on a risk-off day at 11 on the VIX. 

That is a relatively mysterious way of saying that there is a higher chance of a further drop NOT occurring.

It goes without saying, that record highs for stocks make investors and analysts nervous. 

This is exacerbated by the persistent concerns about global growth in the wake of the shock Brexit results and the departure of the United Kingdom from the European Union. 

In the ensuing market upheaval, $12 trillion in government bonds were pushed into negative yield territory. 

This was documented by Fitch Ratings.

This whiplash action for stocks trending from the Brexit reaction doldrums to the now record highs has resulted in a few nagging doubts in the minds of many investors. 

A Bank of America Merrill Lynch monthly fund manager survey recently recorded that investors are benching the highest proportion of holdings in cash funds since 2001 (approximately 5.8%).

Chief market strategist for Asbury research, John Kosar, said on Wednesday that although he does not see on long term pull back destined for equities, the market is, however, due for a retreat.

He goes on to further state that this is exemplified by the Chicago Board Options Exchange put/call ratio and the VIX. 

These are a measure of both bearish and bullish bets that are on the market. 

Kosar predicts that the five-day moving average of the put/call ratio shows signs that the market is becoming less bearish. 

This trend tends to precede a market downturn.

Bull Market Supporters 

Not all Wall Street observers are expecting the sky to fall just yet. 

Some are even predicting that markets will make a powerful move even higher.

BTIG market technical analyst Katie Stockton, stated in a research note last week, that the S&P 500 index SPX, +0.46% is one step away from actualizing a long term trend that may see it break out to 2,400. 

She has been waiting for the large cap gauge to be registered 2 Friday closes above 2,135. 

This is likely to happen soon, given its 2,173 close last Wednesday.

To be sure, chief market strategist at New Albion Partners, Brian Reynolds, follows a different opinion by making the case that most investors are shoveling up protection against a possible market fall. 

It is not able to be seen how massive the market stumble could be at this point if it happens at all. 

This is the reason why prices are being driven higher in three-month VIX futures.

Is this a display of caution? 

Or is this fear that the future is indeed holding some sudden monster crash? 

Crowded bets are driving VIX futures higher, and that may just force bears to concede, especially if the record rises for stocks continue unabated.

Reynolds goes on to say that bearish investors now pay over 50% extra for 3-month protection as opposed to what is paid for the spot VIX. 

That is an enormous premium to pay for just the thought that there is a possibility that things may go wrong.

But could a reluctance to spend this extra protection end in artificially buoying up the stock market?

On the charts that Reynolds’ uses for his analysis, the three-month futures for the volatility gauge and spot price for VIX are shown to be at their widest levels.

Looking back to 2012, 2013 and 2014 – expected disasters did not materialize then either. 

So, while the spread could increase shortly, it is highly unlikely to persist for more than a month or two. 

This is because of the costs that are involved, as was made clear above. 

When the hammer does not fall, bearish investors are likely to cover their positions in the out months.

And bears will have to go into hibernation for a while.

Some analysts and investors have taken a more measured approach to the recent stock elevations. 

Nicholas Colas, the Chief market strategist at Convergex, said last Wednesday that all of the hyperventilation and concern about a possible fall in stocks on the back of the fact that records are being hit daily does not necessarily guarantee that the S&P 500 and the DJIA will follow suit and trade lower.

Colas calls it the “Monte Carlo fallacy” as there is no predictability in a coin toss or spin of the wheel. 

All probabilities start at zero. 

So whether some trends have been predicted in the past, it does not follow, in the law of averages, that any expected fall of the dice can reflect an expected result.

As seen in the vast variety of opinions flying around Wall Street at the moment, the reliability of this recent run in stocks can serve as absolute confirmation that few strategists and pundits know with any certainty, exactly where the market is heading. 

So there is no real reason to get out of the kitchen because of the heat just yet.

 

Business

IRS, Treasury Department and Department of Labor Give Guidance on Small Business Leave and Tax Credit

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IRS, Treasury Department and Department of Labor give guidance on small business leave and tax credit

The U.S. Treasury Department, Internal Revenue Service (IRS) and the U.S. Department of Labor (Labor) have announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees.

This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.

The Act will help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members.

The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways

* Paid Sick Leave for Workers

* For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable.

* Complete Coverage

* Employers receive 100% reimbursement for paid leave pursuant to the Act.

* Health insurance costs are also included in the credit.

* Employers face no payroll tax liability.

* Self-employed individuals receive an equivalent credit.

* Fast Funds

* Reimbursement will be quick and easy to obtain.

* An immediate dollar-for-dollar tax offset against payroll taxes will be provided

* Where a refund is owed, the IRS will send the refund as quickly as possible.

* Small Business Protection

* Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

* Easing Compliance

* Requirements subject to 30-day non-enforcement period for good faith compliance efforts.

To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

Background

The Act provided paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

Paid Leave

The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis. An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee’s pay. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

Paid Sick Leave Credit

For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days. For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Child Care Leave Credit

In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Prompt Payment for the Cost of Providing Leave

When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.

Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.

Examples

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

Small Business Exemption

Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Non-Enforcement Period

Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period.

For More Information

For more information about these credits and other relief, visit Coronavirus Tax Relief on IRS.gov. Information regarding the process to receive an advance payment of the credit will be posted next week.

© Copyright 2020, The Courier, All Rights Reserved.

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Consumers

US Consumer Spending Up Modest 0.2% in February

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US consumer spending up modest 0.2% in February

WASHINGTON (AP) — Americans increased their spending by a modest amount in February but the expectation is that spending will be hit hard in coming months reflecting the shutdown of the American economy by the coronavirus.

The Commerce Department reported Friday that spending edged up 0.2% in February, matching the January gain but below the 0.4% increase in December.

Personal incomes rose a solid 0.6 percent in February, matching the January gain. Those strong increases are likely to fall-off as millions of Americans lose their jobs although the Senate has passed a $2.2 trillion economic relief package that would cushion the blow by providing checks of up to $1,200 to individuals and expanding unemployment benefits.

The hope is that the relief package, which was expected to clear the House Friday, will keep the economy from falling into a deep recession because of the shutdowns. The Federal Reserve has also moved to slash its key interest rate to a record low near zero and is providing billions of dollars in support to keep credit flowing.

Economists have said all these efforts will not be enough to keep the country out of a downturn, but they could help promote a stronger and quicker rebound once the virus is contained.

A key inflation measure was up 1.8% for the 12 months ending in February, according to the latest data, below the Fed’s 2% target. The absence of inflation worries has allowed the central bank to focus on supporting economic growth.

Consumer spending accounts for 70% of economic activity but surveys are already showing the virus is having a big impact on the biggest driver of the economy. Coresight, a data research firm, found that almost half of U.S. consumers — 47% — are now extremely concerned about the outbreak, up 10 percentage points in just one week.

“With high-frequency data showing a collapse in economic activity over the past couple of weeks, overall consumer spending is likely to have plummeted in March,” said Andrew Hunter, senior U.S. economist at Capital Economics.

Hunter said he was expecting around a 40% decline in consumer spending in the April-June quarter.

Many economists believe that a recession has already begun although they are forecasting it could be a short one, lasting only two quarters, if the government’s efforts to contain the coronavirus are successful.

The Trump administration is hoping to get the new programs in the $2.2 trillion relief package up and running quickly. Treasury Secretary Steven Mnuchin said Friday he wanted to get a program to supply small businesses with bank loans operational in a week and IRS payments of up to $1,200 per individual being sent to households in three weeks.

Asked in an interview on Fox Business Network about the record 3.3 million applications for unemployment benefits reported on Thursday, Mnuchin said, “These numbers matter because people are losing their jobs.” But he said the government programs in the rescue bill should either get people back to work or supply financial support until they can find new jobs.

The 1.8% 12-month rise in the inflation gauge tied to consumer spending has been below the Fed’s 2% target for more than a year and now is expected to fall even lower with the drop-off in economic activity and a big fall in energy prices.

The spending report said that the personal saving rate rose in February to 8.2% of after-tax income, the highest level in 11 months and up from 7.9% in January.

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Economy

Stocks Close Higher Again, Cap Best 3-Day Run Since 1931

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Stocks Close Higher Again, Cap Best 3-Day Run Since 1931

The Dow Jones Industrial Average climbed more than 1,300 points on Thursday to close the day up 6.4%, continuing its record run and tallying its biggest three-day gain since 1931.

The Dow has climbed more than 20% in the past three days and the S&P 500 is also up more than 20% since Monday’s close as well.

Stocks got a double shot of good news on Thursday, as the Senate passed the $2 trillion economic stimulus bill that will help the country recover from the devastation caused by the coronavirus.

The House of Representatives will try to get the bill passed today, although it will require a voice vote, since most of the representatives have left Washington amid the outbreak. House speaker Nancy Pelosi said the bill will be passed “with strong bipartisan support.”

If the bill passes as expected, Treasury Secretary Steve Mnuchin hopes to get the stimulus checks into the hands of Americans within three weeks.

“We’re determined to get money in people’s pockets immediately,” Mnuchin said.

Also helping push stocks higher were comments from Federal Reserve Chairman Jerome Powell, who hinted that there’s more the Fed can do if called upon to help the economy recover.

Appearing in the Today show, Powell said “We still have policy room in other dimensions to support the economy. We’re trying to create a bridge from a very strong economy to another place of economic strength.”

He added, “When it comes to this lending, we’re not going to run out of ammunition, that doesn’t happen.”

Some investors, however, aren’t convinced that the rally is sustainable.

Ken Berman, a strategist at Gorilla Trades says “Even though equities were squeezed higher into the close, credit markets continue to diverge substantially. You could almost smell the burning shorts on Wall Street [Thursday], but as credit spreads remain wide, one has to wonder how much ‘real’ buying is behind this week moves, besides the bailout-induced short-covering.”

And Gregory Faranello, the head of US rates trading at AmeriVet Securities, adds “This is going to be an economic fallout. We’re seeing in two weeks what we would normally see maybe in a year and a half or two years.”

Much of the doubt surrounding the market’s ability to sustain a rally comes from the abysmal weekly jobless claims report yesterday.

Despite a record number, the market, at least temporarily, shrugged off the historically bad number.

The reason?

It wasn’t as bad as expected.

The Labor Department reported that jobless benefit claims had soared to 3.28 million last week, marking the worst week ever by a very large margin.

The previous record was 695,000 set in October 1982 during the recession.

Yesterday’s report more than quadrupled that number, yet the market still surged higher because it wasn’t as bad as the 4 million claims that some expected, including Citibank.

Even with a record number of jobless claims yesterday and expectations for things to get much worse in the second quarter, the stock market shrugged off the bad news.

There’s a reason for that, according to Randy Frederick, vice president of trading and derivatives at Charles Schwab.

“The markets and the economy don’t run in parallel. The market’s running way ahead of the economy. The markets don’t care about what’s happening today, the market cares about what’s happening six months from now.”

Time will tell if the stock market can continue to be optimistic about the future if the reported numbers keep deteriorating and millions of Americans become unemployed.

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