More Market Bloodshed To Come? | Michael Lebowitz

Palo Alto Networks

Across the shows: 2 speakers in other episodes, 1 bullish and 1 bearish calls, past 30 days

• Michael Lebowitz · RIA AdvisorsBullish

  Palo Alto Networks is a stock worth buying again; his firm added 1% after selling it six months ago.

  As part of rebalancing, Lebowitz's firm bought up to 1% of Palo Alto Networks. They had sold it about six months earlier and say they are kicking themselves for that sale. They describe cybersecurity as a sector they have been looking to add to, which is why they bought back in. The rationale is thin and is mostly based on the earlier sale and a sector-level preference.

  “We bought up and we added 1% of Palo Alto Networks, kicking ourselves for selling it in the first place six months ago whenever we sold it.”at 1:38:55

US stock market outlook

• Michael Lebowitz · RIA Advisors

  Stocks should trend higher through year-end on buybacks and rebalancing, but next year looks riskier as rate hikes bite.

  He expects the market to trend upward for the rest of the year, supported by the buybacks and rebalancing flows still to come. He does not call the Nasdaq's roughly 15% drop a correction, describing it as a consolidation given how volatile the Nasdaq is versus the S&P or defensive sectors. He flags the 200-day moving average as a key level: a broad, all-red selloff that breaks it would signal a regime change. He is more worried about next year, when the rate increases of the past five months start to bite harder.

  “Generally, I do think we trend upward through the rest of the year. A lot of buybacks need to happen, rebalancing... I'm more worried about next year than the next couple months.”at 21:09

• Michael Lebowitz · RIA Advisors

  The flat S&P 500 hides deep stock-level losses; 60% of constituents hit bear-market declines this year.

  Lebowitz says the S&P 500 has gone nowhere since early May, apart from a four-day rally in early August. His own work shows 60% of S&P 500 stocks have at some point this year fallen 20% below their peak for the year, which is a bear-market level. He concludes the index is hiding a lot of churn, so investors need to watch sectors and individual stocks as well as the index. He calls this year more important than others for that analysis.

  “I did some work. There have been 60% of S and P 500 stocks that at some point this year have been 20% below their peak level of the year.”at 1:15:37

• Michael Lebowitz · RIA Advisors

  Bias is a decent year-end, but the 200-day moving average is the key level and technicals override the bias.

  After the sell-off the S&P 500 traded well below its Bollinger Bands and sat on its 200-day moving average. RSI, MACD and Williams %R were deeply oversold, so he expects a bounce. He sees the 200-day as the key level for the next few days to a week, with the 50-day as the next level if it reclaims that. He notes the lower Bollinger band was declining, which weakens the usual pattern of snapping back inside the bands. His bias is that the market can still have a decent end of year, but he says technicals take precedence over bias if they disagree.

  “Yeah. That's my bias. Again, you know, bias gets thrown out the window. Technicals take precedent.”at 1:21:02

• Michael Lebowitz · RIA Advisors

  Growth and value keep swapping leadership; mega-cap growth now oversold, so his model rotated into growth.

  Over the prior 20 trading days large-cap growth fell about 10% while value rose. Conservative sectors (health care, staples, real estate) were up about 9% against a tech sector down about 18%, which he uses to explain the market's flat churn. On his relative-strength grid, mega-cap growth had moved from very overvalued to very undervalued over six or seven weeks, while large-cap value had moved the opposite way and become overbought. He says the two behave as negatively correlated pairs and that the extremes don't last. His factor rotation model told them to buy growth and sell value on Monday, and they acted on it. He admits the model was early, since growth had a strong day the day before the sell-off, but says it has been accurate.

  “You could see that mega cap has gone from being very overvalued to being very undervalued, and VTV is almost going the opposite direction.”at 1:28:11

US Treasuries & yields

• Michael Lebowitz · RIA Advisors

  Fed hikes should push long-term yields down by raising disinflation and slowdown odds, so bonds could keep rallying.

  If the Fed hikes as expected, short rates rise but the ten-year should fall. The Fed's tightening raises the odds of disinflation and weaker growth, which the long end prices in. The long end is effectively cheering the Fed to keep hiking and make a policy mistake, while the short end wants a pause. The long-term bond market has already responded positively to the last hike, and continued expectations of one or two more hikes could keep bonds rising.

  “Brings them down. Because the Fed is basically pushing the... It's increasing the odds of disinflation and lower economic growth.”at 33:04

• Michael Lebowitz · RIA Advisors

  Not convinced yields have bottomed; the rally just retraces a downtrend, and a double bottom in yields remains possible.

  Yields had been trending steadily lower until a few months ago, and the recent rally only brings them back to where that trend would have taken them, so it does not establish a bottom. The market's tone has changed, and fears about deficits and the dollar losing reserve status have faded. Term premium, not breakeven inflation, drove most of the earlier yield spike. Yields could still fall toward 2%, but a double bottom, a common and reliable technical signal, would mean a new rise in yields.

  “[I] am not convinced that we have seen a bottom or a top in yields.”at 36:11

• Michael Lebowitz · RIA Advisors

  Bonds at ~5% yields look attractive; higher yields would self-correct, and a 5-year offers asymmetric upside.

  Yields near 5% are very attractive to pension funds, endowments, insurers and individuals. Rising yields are already hurting the economy: hyperscalers are issuing equity instead of debt, which eases long-end supply from corporate and Treasury debt. He argues higher yields beget lower yields, so yields are unlikely to keep climbing. On a 5-year bond bought at 5%, a rise to about 6.1-6.2% within a year just breaks even. A fall to 4% would earn roughly 9%. A move to 6% would mean the economy is probably in trouble, with disinflation and financial pressure on borrowers, and a move to 2% would mean stocks are struggling and bonds can be sold at a gain. He says he is not saying yields have peaked and they could go higher, but the skew favours bonds. His firm bought the new 5-year Treasury at 5% and may add more.

  “If you had bought the five year bond at 5%, if yields go up to about six ten, six twenty in one year, you're breakeven. ... If yields drop to 4%, you'll get your 5% coupon and you'll make 4%, 4.5%, you'll make call it 9%.”at 44:40

US elections & politics

• Michael Lebowitz · RIA Advisors

  The election outcome did not materially change the AI or market outlook; anything expected was already priced in.

  Democrats and Republicans both want to slow data-center build-outs, but the pressure comes mostly from local and state officials who run permitting. Lebowitz argues that the expectations held before the election are not materially different from those after it. Markets price in what is known, so an election outcome that was anticipated should not move prices, and the selloff therefore cannot be explained by the election.

  “It's just that what we knew before the election and what we knew after in my mind is not material... Different. And that's what matters. If the market knew it before, it was priced in.”at 7:59

• Michael Lebowitz · RIA Advisors

  Campaign promises from either party mostly go unfulfilled, so investors should not overreact to election rhetoric.

  Lebowitz says the election is top of mind for markets and raises the questions of whether Trump will work with Congress and how both parties will posture as the campaign begins. Adam Taggart adds that candidates on both sides almost never deliver on their promises. Lebowitz agrees that candidates say things that may excite or concern voters, and that most of it never gets done. His practical takeaway is to temper emotions. He offers no detailed evidence beyond this general pattern.

  “Most often none of it gets done. So on either side, temper your emotions.”at 1:40:51

AI bubble & tech valuations

• Michael Lebowitz · RIA Advisors

  Some AI stocks are bubbles, but hyperscalers can fund AI spending from non-AI profits, so calling the top is premature.

  He accepts that some stocks are in a bubble and that many AI companies won't survive. The large hyperscalers, however, are earning huge amounts of money outside AI, so they can support heavy AI spending. Earnings forecasts have not collapsed. He therefore thinks it is too early to call the top in AI-linked megacaps, and he says technicals are the signal to watch: a breakdown would prove him wrong.

  “there are certainly some stocks that are in a bubble. But these companies, these hyperscalers... They're making so much money outside of AI. They can support this.”at 16:04

• Michael Lebowitz · RIA Advisors

  Beaten-down tech stocks looked cheap after the selloff, and the skew of returns seemed positive for buying them.

  After Thursday's selloff, he and Lance wanted to add to beaten-down tech stocks, as they 'just recognize things got very cheap' and the skew of returns looked more positive. Those stocks opened 8-10% higher the next morning, so they missed the entry and did nothing as the market recovered half the losses. The plan was to add only on the margin, as a trade on cheapness and not a fundamental or political call.

  “we both kind of wanted to jump into a couple of the tech stocks that have really gotten creamed.”at 25:47

US rates & the Fed

• Michael Lebowitz · RIA Advisors

  The Fed will hike in December; the market already prices 80-90%, and Fed rhetoric points to a hike.

  The market prices an 80-90% chance of a hike. Barring a large move such as oil falling to around $70, a sharply lower unemployment revision or negative payrolls next month, he expects the Fed to hike, since that is what the Fed wants and has said. He disagrees with the Fed for skipping October: if it is worried about inflation, it should not pause for a month while waiting for a hike that takes many months to work. The hike is already priced in, so it should not move assets much. A sharp market decline could change the Fed's decision.

  “I suspect they will hike. That's what they want to do. They made that pretty clear.”at 32:06

• Michael Lebowitz · RIA Advisors

  Bank reserves dipping below $3T and collateralized funding above fed funds signal mild liquidity strain.

  Bank reserves have dipped below $3 trillion, the level the Fed considers comfortable, so banks are less able to make loans, which affects both the economy and markets. SOFR, the collateralised overnight rate, has traded 5-10 basis points above the uncollateralised fed funds rate, which is unusual because the two normally trade together. His new liquidity gauge has moved toward tighter liquidity, from 5.23 a month ago. He sees this as partly intended, since the Fed is trying to drain liquidity and reduce demand. He calls it not alarming but worth watching, and compares it to 2019, when liquidity was drying up before the Fed eased and restarted QE-style purchases.

  “bank reserves have dipped below $3,000,000,000,000 which is the level of comfort for the Fed. Not much below 3, but it has dipped below.”at 1:04:11

Credit markets

• Michael Lebowitz · RIA Advisors

  Munis offer attractive tax-equivalent yields, but are less liquid and more opaque than corporates; buy with care.

  After tax, a muni yielding roughly 3.5% pre-tax can be worth about 5-5.5% tax-equivalent, especially for investors in high-tax states. Munis pick up yield over Treasuries, much like corporates. Their risks are lower liquidity, since bid-ask spreads are wider and selling can mean accepting a worse price, and opacity, since it is hard to track a small issuer such as a water district elsewhere. Munis also carry credit risk: they default less often than corporates, but their yields can jump on concerns. Munis track corporate spreads to some degree. His firm uses tools and is comfortable with its own muni holdings. All else equal, though, he would rather buy a corporate bond.

  “Maybe you can buy a high grade corporate bond at five thirty or municipal bond when you add in the tax benefit at five thirty, five forty. They're all worth considering.”at 54:20

• Michael Lebowitz · RIA Advisors

  Credit spreads are rising, with CCC near multi-year highs and single-B starting to widen; a watch item, not alarm.

  BBB spreads over Treasuries are about 116 basis points, up from about 95 in September. That is in the 98.5th percentile over three months, around the median over five years, and in the bottom 15th percentile over twenty years, so the level is not extreme. CCC spreads are at about the 88th percentile over twenty years and are the second highest since COVID, a more worrying signal. He says a broad problem would show up from the bottom of the credit ladder first, and single-B spreads have started to rise over the last week or two while double-B is still negligible. He is watching whether it spreads. He says spreads are a gauge of liquidity and that he now checks them daily, but they do not keep him up at night.

  “What is a little more disturbing is CCC. ... twenty years, it's in the eighty eighth percentile. So it's pretty high.”at 59:27

AI infrastructure & data centers

• Michael Lebowitz · RIA Advisors

  Data centers will still get built despite state permit freezes, because they're too valuable and could move abroad.

  Texas, one of the top two data-center states, has frozen permits, but the new governor says projects already under construction will proceed and she is only reviewing the process. Pressure to slow the build-out comes from both parties, and the decisions sit mostly with county and state authorities rather than Congress or the White House. Data centers are far too valuable to stop; if the US blocks them, they will be built in Mexico or Canada. He says there is a large backlog of demand and many projects already underway, so he is not sure a slowdown story is right.

  “We're going to have data centers. They're far too valuable. And if we don't, they'll be in Mexico or Canada or somewhere else. They will get built.”at 5:37

Market sentiment, positioning & volatility

• Michael Lebowitz · RIA Advisors

  Thursday's selloff was a technical unwind of positioning and margin calls, not a fundamental or political shock.

  Fundamentals were largely unchanged by the election. Wednesday's sharp rally in hyperscalers (Amazon, Microsoft up roughly 5-6%) was followed by Thursday's collapse, while chipmakers and other out-of-favour names had already lagged the day before. Hedge funds were likely caught offside and forced to cover margin, possibly with some funds pushing names down to trigger a cascade. Bonds, gold and the dollar did not rally as safe havens, which argues against a genuine crash in tech driven by fundamentals. He concludes that it looks technical, though he says nobody knows for sure.

  “that's where I think it was much more technical, unwinding of positions, margin calls, whatever triggered it.”at 8:13

US jobs & labor market

• Michael Lebowitz · RIA Advisors

  One strong jobs report is not a trend; the labor market is stagnant, with no hiring and no cushion against layoffs.

  Past job numbers have been revised down heavily, so one month cannot be trusted. He wants three or four months of strong payrolls, plus improving ADP, JOLTS, ISM and regional Fed surveys, before he would call the labor market improving. Seasonal adjustment has been unusually messy this year. The market is in a no-hire, no-fire state, which is fine until layoffs start, because there is no hiring to absorb those who lose jobs. The report gives the Fed slightly more reason to hike.

  “One month does not make a trend. These numbers have been revised so much lower over the last couple of years that you can't put stock into one month.”at 29:30