This week was flush with activity as markets tried to bounce back from last Friday's sell off amid increased tensions in the Middle East and signs a deal might actually get done. Investors should realize there is no such thing 
as a "perfect" market to put money to work. This week's musings are inspired by the 1987 movie "Mannequin." Here is some trivia about the film:
- The movie wasn't a smash hit, but it did earn more than $42 million on a $6 million budget. However, the movie did receive an Academy Award nomination for Best Original Song for "Nothing's Gonna Stop Us Now" by Starship. The song reached #1 on the Billboard and U.K. charts.
- Before filming began, Kim Cattrall spent six weeks posing for a Santa Monica sculptor to capture her likeness for the six mannequins used during filming. Cattrall said she did a lot of body-building to maintain a "streamlined" physique.
- This was the second of three movies featuring both Andrew McCarthy and James Spader. They appeared together in this movie, "Pretty In Pink" (1986), and "Less Than Zero" (1987). McCarthy also directed Spader in the television show "The Blacklist" and made an uncredited appearance in an episode of the show as Spader's character's pilot.
- Actor G.W. Bailey, who plays security guard Felix, stated that the actors did silly stuff during filming including double takes over lines and ad-libbing because they thought the movie would never be released - just straight to video. The director encouraged them to keep it up as it was the vibe he wanted to create.
- Meshach Taylor, who plays the flamboyant window dresser Hollywood Montrose, was the only "straight" actor who auditioned for the role.
- The film's director, Michael Gottlieb, got his inspiration for this film from his teenage years working as a Macy's stock room employee.
- One of the mannequins used in the movie has been restored by the South Fellini department store, also located in Philadelphia where the "Prince & Company" store scenes were shot. The fake store "Prince & Company" is an actual department store, formerly called John Wanamakers, now a Macy's store.
Here's what we've seen so far this week...
Wacky Or Balanced? A common theme running throughout the movie "Mannequin" is that everyone thinks Jonathan (Andrew McCarthy) is crazy, while his fellow window designer Hollywood (Meshach Taylor) just thinks he's creative. That's probably where investors are with this market. With every headline, the market swings one way or another. This week was no exception. On Tuesday, the President vowed to 
respond to the downing of a U.S. helicopter over the Strait of Hormuz by Iran.1 Markets finished lower on the news. Then, on Wednesday, Trump stated that he was considering more military action against Iran2 with markets dropping more than 1%. After strikes were accomplished on Wednesday evening, the President stated he was considering further strikes for Thursday, then immediately pivoted to cancelling the strikes and stated a deal was agreed upon by both the U.S. and Iran.3 The deal is said to include discussion points agreed to in principle by both sides, approval at the highest levels of Iranian leadership, an end to the U.S. naval blockade of the Strait of Hormuz, and 
a signing date/time to be announced. Equity markets rallied by more than 1% on the news, while the price of oil and the value of the dollar declined. As we have previously stated4, it's rather straightforward that markets have been driven by the conflict between the U.S. and Iran since it started and a resolution could help lower the price of oil and, subsequently, the rate of inflation. Wednesday's release of the May Consumer Price Index showed inflation increased +0.5%, in-line with expectations.5 However, for the second consecutive month, the amount of inflation decreased versus the prior month. The largest component of inflation remains energy, and if you were to take out the largest three CPI sub-components in May - Gasoline (+7.0%), Fuel Oil (+3.8%), and Airline Far (+2.7%) - inflation would have increased by only
+0.1% instead of +0.5%.6 The market is highly sensitive to the idea of a binding resolution to the conflict and the byproduct of inflation declining. Just last week, the probability of a rate hike in either October or December of this year had risen to greater than a 65% probability. After Thursday's news that a deal might be getting finalized, the rate hike probability for October fell to only 39% and a December rate hike fell to a 65% probability. A signed deal could bring the rate hike odds to near zero and a subsequent drop in oil/inflation could bring a rate cut probability back into play by year-end. This scenario could lead to a rise in the price of "risk" assets at the same time as SpaceX, OpenAI, and Anthropic set to go public with their respective company stock.
No Such Thing As A Perfect Market. Andrew McCarthy's character in "Mannequin" has to deal with the fact that Kim Cattrall's character Emmy only comes to life when they are alone. No one can see her as anything else but a mannequin. Such is the way of investing. Just like the imperfect relationship, so too is the imperfect market. Investors have been told before that concentrations in tech stocks would end 
the bull market run. In June of 2017, Goldman Sachs compared the FANG stocks to the Dot.com bust.7 On June 9, 2017, the top five stocks in the Nasdaq 100 Index - Apple, Google, Microsoft, Amazon, & Facebook - dropped by more than 3%. At that time those stocks represented 45% of the index. One year later, the Nasdaq 100 was up more than 21%. Just last week, the top five stocks in the same index - Nvidia, Apple, Google, Microsoft, & Amazon - were down nearly 3% and they represent approximately 49% of the index. Time will tell if those same stocks are higher a year from now. The reason markets have been shaky lately, other than the continuous stream of conflating headlines, is that the fear of Fed rate hikes and geopolitical shocks are two of the very things that can end a bull market run. Market 
bubbles tend to burst from any or a combination of the following - Fed rate hikes, liquidity squeeze, external geopolitical shock, regulatory changes/scandal, or valuations peak. As we've already noted, Fed futures are dropping in regard to a potential rate hike. A deal to end the Middle East conflict, which could be signed as early as this weekend8, would reduce geopolitical shocks. In previous posts, we've noted how corporate earnings and revenue justify the rise in equities.4 So, that leaves liquidity or credit squeeze and regulatory changes. There appears to be no current liquidity or credit squeeze as credit spreads remain very low today, unlike previous pre-recessionary periods when spreads moved higher by more than 90% on average over slightly more than 2 months. That leaves a regulatory policy change or scandal 
as the unknown risk at this point. This could involve AI or an issue related to private equity as a potential culprit. However, we would likely see changes in the other risks as a result, which we are not seeing currently. Something to keep an eye on would be investor buying appetite, especially in light of the AI-related IPOs set to go public over the next several months. SpaceX is set to start trading today. It is valued at perhaps the largest IPO in market history. Soon to follow is OpenAI, perhaps later this month, and Anthropic as early as October. These IPOs could consume a lot of capital in the market, leading to buyer overload. Currently, the amount of margin debt, which is the purchase of stocks or other eligible securities using the securities you own as collateral, has certainly moved higher over the past couple of years. However, the level is still below the Dot.com peak in March of 2000 and the peak in February of 2008. When margin levels neared the Dot.com peak in September of 2021, markets suffered losses the following year. For now, investors should adjust their expectations and not chase after positions that exceed their stated risk tolerance.
Click here to see the original music video for the Oscar-nominated song from "Mannequin"...
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