It was another downcast day in the markets.

While the averages were only down by about 1%, breadth was God awful -- in other words, there was more damage than meets the eye:

I did some buying and some selling -- leaving my net long exposure virtually unchanged.

Thanks for reading my Diary.

Enjoy your evening.

Be safe.

Our Trade of the Week is +$4.10/share on the day at its high for the session. 

I will be on a research call between 3:30 and 4:15 pm. 

Radio silence. 

Break in! 

FedEx (FDX) announces early - just now and not after the close - and guides to higher cost saves. 

I sold most of the stock at above $158 versus the stock I bought during the last two days... for a small profit.

And I just sold the balance of my FDX.

* History is littered with very smart people saying very stupid things.

After listening to Fed Chair Powell yesterday, it is time, once again, to resurrect an old column. 

Here you go... 

"Remain calm, all is well."
- Kevin Bacon, "Animal House"

There are three classes of observers that I have been most critical of over the years - Perma Bulls, Perma Bears and The Federal Reserve.

All three are filled with hubris, generally well educated - but are "often wrong and never in doubt."

Which brings me to one of the stupidest views, held with strong conviction and possessing dangerous economic and social ramifications - Fed Chairman Jay Powell, Treasury Secretary Janet Yellen and the Fed's view (circa 2021) that inflation would be "transitory."

Let's go to the tapes!

* Powell in April, 2021 and July, 2021.

* Yellen in October, 2021

The characterization of inflation as transitory - frequently and deeply disagreed with in my Diary last year - by Yellin, Powell and the Fed's approximate 200 PHds in economics will likely go down as the worst inflation call in the history of the Federal Reserve.

Back in 2017 I described the Fed's, and others', misplaced arrogance and ignorance in a column, "Dumb and Dumber" which bears repeating - considering the dire consequences of wrong-footed assumptions:

History is littered with very smart people saying very stupid things.

Here are some examples of quotes that their authors would like to take back:

* Irving Fisher (economics professor at Yale University in 1929): " Stocks have reached what looks like a permanently high plateau."

* Albert Einstein: "There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will."

* The president of Michigan Savings Bank urging Henry Ford not to invest in The Ford Motor Company: "The horse is here to stay but the automobile is a novelty, a fad."

* Ken Olsen (president of Digital Equipment and MIT graduate): "There is no reason for any individual to have a computer in their home."

* Tom Watson, IBM chairman (1943): "I think there is a world market for maybe five computers."

* Bill Gates (2004): "Two years from now spam will be solved."

* You Tube Founder Steve Chen: "(I am worried that) there's just not that many videos people want to watch."

* Robert Metcalfe (inventor of ethernet): "I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse."

* Darryl F. Zanuck (founder of 20th Century Fox studio): "People will soon get tired of staring at a plywood box every night."

* Clifford Stoll (astronomer and author of Silicon Snake Oil (1995): "Nicholas Negroponte, director of the MIT Media Lab, predicts that we'll soon use books and newspapers straight over the Internet. Uh, sure!"

* And another head scratcher From Bill Gates: "No one will need more than 637KB of memory for a personal computer. 640KB ought to be enough for anybody."

* Linus Torvalds (founder of Linux): "Really, I'm not out to destroy Microsoft. That will just be a completely unintentional side effect."

* Steve Ballmer, former Microsoft CEO (2007): "There's no chance that the iPhone is going to get any significant market share. No chance."

* Steve Jobs (2008) in discussing Amazon Kindle: "The whole conception is flawed at the top because people don't read any more."

* New York Times (1936): "A rocket will never be able to leave the earth's atmosphere."

* Henry Morton, president of Stevens Institute of Technology on Thomas Edison's light bulb (1880):"Everyone acquainted with the subject will recognize it as a conspicuous failure."

* Variety passing judgment on rock 'n roll (1955): " It will be gone by June."

* Book publishing executive writing to J.K. Rowling (1996): " Children just aren't interested in witches and wizards anymore."

* Astronomer Simon Newcomb (1888): "We are probably nearing the limit of all we can know about astronomy."

* Newsweek predicting where popular holidays will be in the late 1960s: "And for the tourist that really wants to get away from it all, safaris in Vietnam."

* Senator James Inhofe (R-Ok) in 2004: "God's still up there. The arrogance of people to think that we human beings would be able to change what HE is doing in the climate is to me outrageous."

And over a decade ago we had some unique pearls of wisdom from...

Dumb

"All this time I've been going through such pain and personal ANGUISH ... SUCH HELL, for NOTHING!"

"Life is a fragile thing, Har. One minute you're chewin' on a burger, the next minute you're dead meat."
-Lloyd, "Dumb and Dumber"

Dumb: Ben Bernanke, the former Federal Reserve chairman, who famously made the following statements shortly before The Great Recession during the 2005-07 period:

"We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though." (July, 2005)

"With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly." (November, 2005)

"Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise." (February, 2006)

"At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency." (March, 2007)

And to cap all these extraordinarily stupid quotes over the years, yesterday at a presentation in England we got ...

Dumber



"You just earned your seat at the head table. And we already got the tuxes."
-Lloyd, "Dumb and Dumber"

Dumber: Janet Yellen, the current chairman of the Federal Reserve, who made the following inane statement yesterday in London that, no doubt, will down in the annals of history:

"Would I say there will never, ever be another financial crisis? ... You know, probably that would be going too far, but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be."
-Janet Yellen

I don't know whether I should laugh or cry.

At midday the sky on Long Island is as dreary as the markets. 

Doing nothing after my initial buys.

High of day = (MSFT) . 

From the acorn grew the oak?

Cost basis of my Index ETFs purchased today: 

* (SPY) $375.63

* (QQQ) $281.11

We are now about 175 S&P handles below the mid afternoon highs in the S&P Index yesterday. 

Think about it - that is a span of only about 3 1/2 hours of trading.

I am up to 29% net long in exposure compared to 25% at the end of August.

At 10:20 am:

Stinky Breadth

View Chart »View in New Window »

Biggest Movers

View Chart »View in New Window »

Heat Map

View Chart »View in New Window »

At least for now, the best acting large cap tech stock is (MSFT)   +$2.10/share in a sea of red.

It's my Trade of the Week.

Wells Fargo remains bullish on (MSFT) following the Power Platform Conference. 

Maintaining overweight with a $350 price target - ambitious!

I added to (FDX) and (DIS) on weakness.

I added to (SPY) $376.70, (QQQ) $282.40, (AMZN) $117.65, and (META) $141.81 on the weak opening.

Upside

- (SPRO) +160% (GSK enters exclusive license agreement with Spero Therapeutics for late-stage antibiotic asset, Tebipenem HBr; Spero to reseive $66M upfront and GSK to acquire $9M in share of Spero)
- (MOB) +13% (secures $0.4M order from existing US customer)
- (PHIO) +12% (releases preclinical data demonstrating PH-762 enhances persistence of T cells for tumor cell killing as presented by Helmholtz Munich at the 9th Immunotherapy of Cancer Conference)
- (HOOD) +6.5% (reportedly SEC set to allow payment for order flow deal for brokers)
- (LI) +6.3% (to launch Li L8, a six-seat premium SUV in China on Sept 30)
- (DB) +5.4% (affirms FY22 high-end Rev guidance citing continued momentum)
- (DYNT) +5.2% (earnings, guidance)
- (CLXT) +4.5% (exploring strategic alternatives)
- (TALO) +4.4% (acquires EnVen Energy, a private operator in the deepwater US Gulf of Mexico for $1.1B in cash and stock)
- (CRM) +2.5% (affirms long-term targets at Investor Day)
- (FUL) +2.2% (earnings, guidance)
- (TM) +2.1% (plans to produce 800K vehicles in Oct; Provides Oct-Dec volume guidance, affirms FY22 global volume)
- (LLY) +1.6% (Unit Loxo Oncology Inc Receives US FDA NDA Supplemental 7, 8 approval for Retevmo)

Downside

- (TOPS) -14% (files to sell up to 2M units priced at $4.50/unit; announces 1-for-20 reverse stock split)
- (MDWD) -11% (announces concurrent registered direct and private placement offerings priced at-the-market of ~$30M)
- (PTN) -3.7% (earnings)
- (DRI) -2.5% (earnings, guidance)
- (SQ) -2.2% (Mizuho Securities Cuts SQ to Neutral from Buy, price target: $57 from $125)
- (ACN) -2.0% (acquires enterprise resource planning ecosystem firm Inspirage from RLH Equity Partners)
- (KBH) -1.7% (earnings, guidance)
- (SCS) -1.3% (earnings, guidance)
- (LEN) -1.2% (earnings, guidance)

* And so does fortune favor the brave in dispassionately following the calculus of upside reward vs. downside risk in a heightened regime of volatility

* Investor sentiment has rapidly fallen with lower stock prices - AAII bears are at the highest since March, 2009, while bulls have fallen to the lowest level since April

* Uncertainties and lower stock prices are the allies of the rational buyer

* I continue to see an attractive reward vs. risk ratio and I plan to expand my net long exposure further

Fortune favors the bold is the English interpretation of a Latin proverb which means that those who take risks often reap great rewards; those who are courageous are often the most successful.

Yesterday's remarkably volatile trading session, and reversal lower, caught many off guard and has contributed to an increasingly pessimistic view of the markets. Note the S&P oscillator gapped to a higher negative number and now stands at -5.16%, breaking out of its recent two week range. 

That rapidly rising negative investor sentiment is manifested in a sudden collapse in Bulls and a sudden climb in Bears as detailed this morning by Peter Boockvar: 

AAII today said that Bulls fell 8.4 pts w/o/w to just 17.7 and that is the lowest since April. Bears rose to 60.9, up by 14.9 pts. That is the most amount of bear since March 2009 when it got as high as 70 right at the bottom. Yesterday, Investors Intelligence said Bulls fell to 30 from 32.4 while Bears rose to 31.4 from 28.2.

The CNN Fear/Greed index closed yesterday at 31 vs 40 one week ago. Bottom line, strictly from a contrarian standpoint, the AAII data is pointing to a market bounce because of the extreme read. We are only talking though short term because sentiment data is so fickle.

AAII Bears

This chart on the intraday action in the Nasdaq Index is an illustration of the heightened volatility and the dramatic reversal from the post Fed rally.

The proximate cause for the reversal was the notion that the Fed plans to raise more and will stay high for longer. 

As someone who is starting to see the glass as being more half empty now, the Fed's pronouncement is defining what might be the end of a hawkish era and not the beginning.

To me, we have already seen a lot of discounting. The time to be concerned about The Fed was late 2021 -- when I did, see my 15 Surprises for 2022 -- and not in late 2022, after the damage to the capital markets has largely transpired. 

As noted in Daily Affirmations - Meet Captain Obvious:

"As I have written recently, it appears many of my concerns are arguably starting to be discounted as the consensus finally has adopted the aforementioned challenges that lie ahead.

This is occurring at a time in which some of those concerns are lessening (e.g. clear signs of peaking inflation, inflation, supply chain bottlenecks, the Ukraine conflict, etc.) and as investor sentiment sours.

Buy at the sound of cannons... sell at the sound of trumpets."

Yesterday's downturn took the S&P Index slightly lower... 10 handles or only -0.25% below the low end of my projected balance of year trading range forecast. Remember, precision as I have repeatedly written, is not intended. 

For months I have suggested that Treasuries provided a superior return relative to equities and I carried a low net long exposure. 

In the last week, after a -20% to -30% drop in the S&P Index many are embracing the notion that TINA ("there is no alternative") had fled the room and that TATA ("Treasuries are the alternative") - and for conservative investors with conservative risk appetites/profiles, this continues to make sense, particularly with the recent climb in yields of short-dated Treasuries. 

As for me, I am slowly and incrementally embracing the drop in equities - for the reasons mentioned in my Diary this morning and over the last two weeks - as an opportunity for capital gains. 

Disregard everything I have written this morning if you are a momentum-based and reactionary investor with a very near term timeframe. This market does not conform to your criteria and is not for you! 

Disregard everything I have written if you find the volatility offensive relative to your risk appetite. Again, this market is not for you either!

But if you are an investor with an intermediate view like myself, opportunities are, arguably, accumulating - as potential reward vs. risk is improving. 

Avoid The "Noise"

One final note, try to avoid the often hyperbolic/made up daily post market narratives - which have recently become post mortems - they will not help you in the formulation of intermediate term investment strategy. 

As I often write investment wisdom/vision is always 20/20 when viewed in the rear view mirror. 

It is far better to do your research and analysis as this "homework" will prepare you for better times.

Following the Fed rate hike, we saw hikes today from the BoE (50 bps as expected), the SNB (75 bps as expected), the Norges Bank (50 bps as expected), the Bank of Indonesia (50 bps vs 25 bps that was expected), the central bank in Taiwan (12.5 bps as expected), the Hong Kong Monetary Authority (75 bps as they match the Fed) and the BSP in the Philippines (50 bps as expected).

With respect to the SNB, because some thought they would hike by 100 bps, the Swiss Franc is selling off sharply in response, by 1.6% vs the dollar and by 2% vs the euro (biggest one day drop in 7 yrs). Also, while the SNB is now out of NIRP, Governor Jordan is still a believer in the experience as he said today that they could return there if needed. At least Jordan is taking no lessons learned from the inflation mess they all contributed to.

The Bank of Japan did nothing as expected and one has to wonder if it's not just stubbornness on the part of Kuroda rather than a rational policy at this point. The yen sold off initially but for the first time since 1998, the Finance Ministry intervened and bought yen and below is the intraday chart on it. Intervention failed miserably in 1998 and it will again this time. The Finance Ministry said they "will take necessary steps against any excessive moves in the Forex market."

On the decision to stand pat on policy, Kuroda said "There's absolutely no change to our stance of maintaining easy monetary policy for the time being. We won't be raising interest rates for some time." And, "We will take additional easing measures without hesitation, if necessary." Amazing that he still thinks it matters.

In response to the stand pat monetary policy, the 10 yr JGB yield fell 2.2 bps to just under .24%. The 40 yr yield was down by almost 2 bps. The FX intervention has the dollar down against many other currencies too but also because of all the central bank hikes that followed the Fed.

While the BoE hiked by the 50 bps to 2.25% that was mostly anticipated, some thought that they would go 75 bps and 3 BoE members voted to do so. One actually wanted just 25 bps. The pound is trimming its rally as we didn't get the 75 bps but is still up a touch. The 2 yr yield is up by 10 bps to 3.49% but a few bps off its intraday high of 3.51%. Interestingly too, the BoE said they will start the outright sales of gilts beginning on October 3rd and that is why gilt yields across the curve are higher on the day. The 10 yr yield is up by 10 bps too on the day.

In the BoE statement, they said that inflation could peak at 11% in October rather than the 18% previously forecasted because of the Energy Price Guarantee initiative implemented by the new PM. The lack of more aggressiveness from the BoE is because of the dance they are trying to do with not slowing the economy too much while it absorbs the energy price challenge. They also seemed to have taken comfort in that Energy Price Guarantee.

The outlier, outside of the BoJ, continues to be the Turkish central bank who in the face of 80% inflation, aka hyper inflation, cut its overnight rate by 100 bps to 12%. And not surprisingly the Turkish lira is lower again as Erdogan seems intent on destroying the standard of living of his citizens all because he doesn't like high interest rates.

Intraday Yen move

As the US market's attention has shifted to the economic consequences of the rapid pace of monetary tightening, the 2s/10s spread is inverting further today by 4 bps to 57 bps.

2s/10s

AAII today said that Bulls fell 8.4 pts w/o/w to just 17.7 and that is the lowest since April. Bears rose to 60.9, up by 14.9 pts. That is the most amount of bear since March 2009 when it got as high as 70 right at the bottom. Yesterday, Investors Intelligence said Bulls fell to 30 from 32.4 while Bears rose to 31.4 from 28.2.

The CNN Fear/Greed index closed yesterday at 31 vs 40 one week ago. Bottom line, strictly from a contrarian standpoint, the AAII data is pointing to a market bounce because of the extreme read. We are only talking though short term because sentiment data is so fickle.

AAII Bears

The only data point of note overseas was French business confidence in September fell 2 pts m/o/m to 102 as expected. Confidence declined in manufacturing, services, retail and wholesale trade. The employment component rose while construction was unchanged. Overall confidence is at the lowest since April 2021 but France will get thru the winter much better than Germany and some others because of their high energy contribution from nuclear.

French Business Confidence

This table is a good resource for short term position traders:

View Chart »View in New Window »

I have again been adding to (MSOS) and its constituents this week:

Here is a chart on the intraday move of the Nasdaq:

* The market (and money) never sleeps -- and neither do I, it appears!

* After travelling nearly 190 S&P handles during the trading day, it was a volatile evening and morning session. S&P futures were lower most of the evening, with the largest drop just about when I went to bed. A rally from the lows has ensued to about breakeven.

* Gold, which collapsed last week and early this week, continues to stabilize. Flat action today (-$0.30). I still can't work it up to buy.

* Brent oil has risen modestly +$0.57, to $90.43.

* Soft commodities are little changed.

* Bond yields (the equity market's nemesis) and likely responsible for a portion of the market's drubbing recently, are ever higher. The yield on the 10-Year is +3.2 basis points to 3.544%. I added to Treasuries on yield strength during the last few months.

* The S&P oscillator gapped higher, finally breaking out of a range and to a more oversold -5.16%. The oscillator has been a good short-term trading tool over the last few months!

"Workin' on our night moves
Trying to lose the awkward teenage blues
Workin' on our night moves
In the summertime
And oh the wonder
Felt the lightning
And we waited on the thunder
Waited on the thunder."

- Bob Seger, "Night Moves"

I described the importance that overnight futures trading holds for me here. It is a guidepost to my strategy in the regular trading session.

Moreover, the overnight/early morning futures hold opportunities as they are (1) inefficient, though liquid, and (2) it seems fear and greed is often exaggerated outside the regular trading session.

S&P futures peaked a +27 and bottomed at -49. At 6:12 a.m. ET futures were -2 handles.

Nasdaq futures peaked at +81 and bottomed at -149. At 6:13 a.m. ET futures were -27 handles.

Here is a synopsis to some of my columns I believe were important, or in the event you were out yesterday! The principal intent is to review the logic of my market moves and other factors:

Home, Home on the Range

A Volatile Ride on the Fed Coaster

Signs of Lower Inflation

Here were Wednesday's trades:

Apologetically, I couldn't post fast enough as my activity was heightened (read: crazy) in one of the most volatile sessions I can recall (and in which the S&P travelled about 190 handles!)

* Premarket trades - added to (SPY) , (QQQ) , (MSFT) and (AMZN) in premarket

* Added to (FDX) , (MSFT) , (AMZN) , (SPY) and (QQQ) into weakness in the afternoon.

* Added to a number of (MSOS) constituents.

* Initiated a (META) long. Sold calls against a portion of this holding.

* When the S&P rose by over 50 handles I sold off a small portion of my Index ETF positions and bought what I sold back when the S&P dropped about 80 handles (I was too early with the benefit of hindsight) only to see a 120 handles drop from the initial Fed euphoria.

From my friends at Miller Tabak:


Thursday, September 22, 2022

The Fed Finally Wises Up

The September FOMC meeting represents the FOMC, a year too late, coming to terms with what it will take to tame inflation. The 75 bps increase in the Federal Funds rate is far less important than the new Summary of Economic Projection's (SEP) guidance that the Federal Funds rate will peak around 460 bps. This matches our own forecast of 450-475 bps from early June through last week, when we bumped it up to 475-500 bps.

We were most surprised by the SEP's forecast for a December 2022 Federal Funds rate of 440 bps, likely entailing a 75 bps hike in November followed by 50 bps in December. December will be too early to judge how well interest rate hikes are working to slow demand. By going so fast, the Fed is acknowledging that there is no chance that a Fed Funds rate below 4% will be high enough to bring inflation down. We agree. It is, however, a marked departure from recent FOMC member comments (e.g. Chris Waller's comment that "if inflation suddenly decelerates" than the Fed might stop "at less than 4%")

Prior to today's meeting, both CME Fed Funds futures and the Treasury yield curve suggested that the Fed would start lowering rates in 2023 with rapid declines in 2024. This was always fantasy. The Fed will have to stay near the peak of the interest rate cycle for 6-12 months making late 2024 or early 2025 the most likely time for the first rate cut. The SEP doesn't go this far. Raising the December 2024 forecast from 3.4% in June to 3.9% is a huge improvement, as is Chairman Powell's statement that "the historical record cautions strongly against prematurely loosening policy."

We have put the odds of a U.S. recession through 2023 around 40% with a peak unemployment rate of 4.7%, higher than the Fed's prediction of 4.4%. We are not changing these estimates. If anything, today's Fed decision very slightly lowers the risk of recession. The Fed was eventually going to have to issue this guidance, and it is best to do so as soon as possible. Doing so might end the process where the Fed, and, markets, are constantly raising expectations of interest rate hikes and may even, if inflation data is better than expected, finally allow the Fed to surprise on the dovish side. We also agree with Powell's assessment that record job vacancies and recovering labor productivity will make the real economy unusually resilient to higher rates.