My big brother, Jeff (OrmontUS), used to say, “Quality is always in style.”
But what is quality?
https://www.wsj.com/finance/investing/why-nvidia-a…
Why Nvidia and Other AI Stocks Have Lost Their ‘Quality’ Status
A popular ETF dropped Big Tech stocks, which gets at an important issue: Is the bet on artificial intelligence a vast potential profit pool, or a money pit?
By James Mackintosh, The Wall Street Journal, Dec. 7, 2025
…
The $48 billion iShares MSCI USA Quality Factor (ticker: QUAL) and Invesco’s $15 billion S&P 500 Quality (SPHQ) specialize in what the investment industry has dubbed quality companies. The exchange-traded funds invest only in companies that show they are safe and steady on financial measures including high profitability and low leverage.
The benchmarks that these two ETFs use to measure quality have a crucial difference, which leads to one having much more exposure to the major artificial-intelligence stocks. …
Accruals are a way to gauge how much of reported earnings are based on sales that generate cash right away, rather than money owed by customers in the future or other noncash items. Cash today is obviously preferable to a promise that money will come through in the future. Things can go wrong. Customers go bust, economies change.
The S&P index behind the fund uses accruals as one of its three indicators, because high accruals are sometimes a sign of trouble ahead…
Big Tech companies are pouring hundreds of billions of dollars into AI without a clear path to profit, eating into their cash on hand and increasingly needing borrowing to finance it…
A separate academic finding used by neither ETF has long established that when companies splurge on capital spending, as the AI firms are now, their shares typically lag behind the rest of the market in the future…
A strategy of just buying the most profitable stocks trading at lower valuations, on average beat combined measures with accruals, stability of earnings or other tricks…Don’t buy bad companies, and don’t buy the most expensive companies… [end quote]
Buying stocks at lower valuations will avoid bubbles that drive valuations (price/ earnings) into speculative heights. The Price to earnings ratio based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), is in a historic bubble. The shape resembles the 1999-2000 dot-com bubble. The heavy capital investments with no clear path to profits also resembles the dot-com bubble. Early investors were wiped out although the internet eventually became the driver of profits. This was also true of earlier bubbles, such as railroads.
https://www.multpl.com/shiller-pe
The successful strategy of buying low-load index funds only works as long as the index is not in a bubble that will pop. When (if) the tech stocks that represent 40% of the SPX fall they will drag the whole index down with them.
The $48 billion iShares MSCI USA Quality Factor (ticker: QUAL) and Invesco’s $15 billion S&P 500 Quality (SPHQ) specialize in what the investment industry has dubbed quality companies. The exchange-traded funds invest only in companies that show they are safe and steady on financial measures including high profitability and low leverage. But SPHQ uses accruals as one of its key indicators which led it to drop the AI companies. I wouldn’t consider either of these funds “lower valuation” since their P/E is over 30. But it does show how details in the prospectus matter since they have big price swings between them.
The stock indexes are rising again and VIX is low. The Fear & Greed Index has risen to Fear (from Extreme Fear). The trade is risk-on as SPX and junk bonds are rising while the 10 year Treasury is falling. (Yield is rising.)
The Treasury yield curve is rising even though the options market expects the Fed to cut the fed funds rate in December. Remember that the fed funds rate is an overnight rate but the markets control the longer yields (barring QE or QT from the Fed which is currently on hold). The real 10 year Treasury yield (TIPS) is the highest since 2008. Could the yield rise? Yes, if the government issues so much debt that the market won’t absorb it.
Financial stress is rising gradually. The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows that financial conditions are loose and stable.
Economic activity in the manufacturing sector contracted in November for the ninth consecutive month, following a two-month expansion preceded by 26 straight months of contraction, say the nation’s supply executives in the latest ISM® Manufacturing PMI® Report.
Economic activity in the services sector continued to expand in November, say the nation’s purchasing and supply executives in the latest ISM® Services PMI® Report. The Services PMI® registered at 52.6 percent and is in expansion territory for the ninth time in 2025. Services are 70% of the economy.
The Cleveland and Atlanta Fed’s inflation watches show that inflation is still much higher than the Fed’s goal of 2% and not improving.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 was 3.5 percent on December 5. That is a strong growth rate though their model suddenly dropped over the past few weeks.
Because of the government shutdown the BLS is behind on its statistics. ADP, the payroll processing company, said that private employers shed 32,000 jobs in November. Job creation has been flat during the second half of 2025 and pay growth has been on a downward trend. November hiring was particularly weak in manufacturing, professional and business services, information, and construction.
High inflation and a strong economy should cause the Fed to hold the fed funds rate constant but they are under enormous pressure to cut from President Trump. The weakness in hiring is the excuse they will use.
Speaking of quality, METARs need to be aware that stablecoins do not have the same quality as the USD they are touted to be equivalent to. Stablecoins are not FDIC insured. The growth of stablecoins could destabilize the banking system.
https://www.nytimes.com/interactive/2025/12/07/bus…
Your Money Could Soon Be Tied Up … … In This $300 Billion Crypto Market
By Aaron Krolik, The New York Times, Dec. 6, 2025
There’s a new type of money spreading rapidly across the internet, propelled by the crypto boom. It’s supposed to be worth a dollar, but it’s not issued by any government. Called a stablecoin, it is a digital currency that is subject to very little legal oversight — and its growing popularity has recently transformed it into a $300 billion market.
You can use stablecoins to buy things online, make investments or send money abroad with minimal fees…
Now, stablecoin issuers are some of the biggest purchasers of Treasury bills. Circle and Tether together hold roughly $136 billion in T-bills, according to an analysis of their financial statements, putting them on par with large nations and institutional investors…
With the passage of the GENIUS Act, the Trump administration’s signature crypto policy, the adoption of stablecoins is projected to skyrocket.
The Federal Reserve estimates that the total market could be worth $3 trillion in five years. That’s nearly the entire 2024 gross domestic product of France, according to the World Bank… [end quote]
Here’s how stablecoins could upset the Treasury market. The value of cryptocurrency crashes, pushing investors into stablecoins, in part to help them cash out of their investments. As crypto continues to tumble, stablecoin companies begin to sell Treasury bills in order to pay back customers. T-bills, as a result, lose their value, affecting bank and money market fund reserves.
There’s way too much borrowed money in the system. Stock margin is at an all-time high. This is driving asset prices into bubbles. Bitcoin is crashing but it’s so volatile that it’s hard to know whether that’s noise or real.
The METAR for next week is sunny.
Wendy
https://stockcharts.com/freecharts/candleglance.ht…
https://stockcharts.com/freecharts/candleglance.ht…
https://stockcharts.com/freecharts/candleglance.ht…
https://www.cnn.com/markets/fear-and-greed
https://stockcharts.com/freecharts/yieldcurve.php
https://www.chicagofed.org/research/data/nfci/curr…
https://fred.stlouisfed.org/series/STLFSI4
https://www.cmegroup.com/markets/interest-rates/cm…
https://www.ismworld.org/supply-management-news-an…
https://www.ismworld.org/supply-management-news-an…
https://www.clevelandfed.org/indicators-and-data/i…
https://www.atlantafed.org/research/inflationproje…
https://www.atlantafed.org/cqer/research/gdpnow
https://adpemploymentreport.com/