I've heard a rumor about a shakeup in Chinese leadership -- and I feel in all likelihood it is b.s. -- but I am sure you will hear about it over the weekend, if there's anything to it.

If true it would cause some chaos, but it could be likely that the economy would be reopened (which may be bullish) ... again, if it's not all b.s.

There was a mild respite in the late afternoon rally from the lows.

Breadth improved:

Despite that it was a horrible day and week.

Thanks so much for reading my Diary during these trying times.

I try constantly to deliver an objective and understandable outline of the landscape for the markets, the global economy, interest rates etc.

I hope I succeeded (at least a bit!) and that I was helpful in your personal process of trading and investing.

Enjoy the weekend.

Be safe.

Let's go Yankees and let's go Aaron Judge!

Happy New Year to all my Jewish friends! Roshklahoma! - YouTube

I am out of OIH, for a push.

Scott Galloway's No Mercy/No Malice, "House of Cards."

Listen to Kara Swisher and Scott Galloway at the 59 minute 30 second mark: Pivot: Queen Elizabeth, Code 2022, and Return of the Dawg! on Apple Podcasts. 

I am long small (PINS) .

I have covered my short (C) calls.

Here is the (god awful) breadth at 12:30:

I took a trading long rental of VanEck Oil Services ETF  (OIH) at around $203. 

This will be a very short term trade - measured in hours/days.

* In times like this, discipline trumps conviction

We are now in a period in which risk control is of paramount importance - for, at times like this, discipline trumps conviction. 

In early September's column, "A Pessimist Sees the Difficulty in Every Opportunity, An Optimist Sees the Opportunity in Every Difficulty", I added two additional market challenges to a list of existing headwinds, some of which were starting to improve in directional or rate of change terms - a firming US Dollar and rising bond yields. 

These two additional factors have grown more worrisome in the last few days - as a reverse currency war has escalated and, in turn, global bond yields have leaped higher. This has taken equities below the low end of my expected trading range for the balance of the year. 

If the trend of these variables continue it is a potentially toxic market cocktail - as a rising US dollar threatens US corporate profits and higher yields are a competitive threat to equities. 

With investors selling with increased aggression, panic now appears to be emerging. 

Risk management in a heightened regime of volatility and cascading prices means that a good investment manager should have a keen eye on his portfolio's VAR ("value at risk"). 

For the reasons listed above - and given my risk appetite and profile - I am maintaining my net long exposure at a still relatively low level of 28%.

I have an awful virus this morning.

I will try to play thru being hurt but there is no guarantee.

I plan to try to take a nap midday.

Stay tuned.

The S&P Index is -23% and the Nasdaq Index is -31.5% year to date.

For now, our Trade of the Week -  (MSFT) - seems to be one of the better tech trades and the first to rally when the market stabilizes.

Picking at (WFC) , (C) ,and (BAC) on a scale lower.

Upside

- (CAMP) +3.5% earnings
- (ATXI) +5% reverse split
- (SPRO) +3% momentum
- (ISPC) +4% new CFO
- (FUBO) +2% upgrade
- (SONX) +37% offering
- (LITM) +14% MoU with LG Energy to develop supply chain for EV batteries in US

Downside

- (DOCU) -3% hires Google exec Allan Thygesen as new CEO, effective immediately
- (COST) -3% earnings
- (SCHL) -4% earnings
- (EDAP) -11% secondary
- (TRVI) -2% secondary
- (BA) -2% to pay $200M settlement in SEC's 737 MAX investigation
- (EWU) -4% mini budget

There was nothing treasonous or even traitorous about the trading on Wall Street on Thursday, but even though the range was quite narrow, it was a bit treacherous. Early on the market churned back and forth and was a bit indecisive, we noted much of that in this late morning update:

Late Morning Update 09.22.22 - Markets continue to churn as traders try to gauge the impact and, to some degree, the immediate direction of bond yields. The wide swing of central bank rate changes has introduced new indecision into markets and has reintroduced some concern as to possible systemic stresses as currencies and other stresses begin to pull on things.

Traders will also see as we move further into the day and get closer to the actual Autumnal Equinox at 9:03 tonight, does that exert any sense of influence or direction on the market. Believe me, folks will have their magnifying glasses out after 1:00 p.m. and see what the afternoon tends to bring. Slightly impressed that the actual geopolitical stresses (Putin etc.) seem not to be exerting any immediate influence. So, as I say, they worry about financial systems and currencies.

We will watch very carefully each tick in the afternoon. Let's go over some of this morning's numbers.
__________

The Dow briefly broke below the 30,000 level. That could become important as we move into the afternoon. Also, Bitcoin sold off smartly in the morning, taking it below supposedly important support at $18400. On further weakness that will be watched. Again, the worries there are systemic to cryptocurrencies. The yield, of course, will continue to be important and they remain high. As we go to press, the yield on the ten-year is 3.71%, which is putting pressure on things. If they can get back down below 3.65%, that may ease some of the pressure. Even though the markets are becoming smartly oversold, the VIX is not moving up.

Traders will get rope burns from their Rosary Beads, hoping to push the VIX above 30 to give them a minor buy signal that the market is oversold. Let's see what the afternoon and the proximity of the Autumnal Equinox brings. Stay safe. Arthur The bulls were pretty much on the defensive all day, managing some slight and slightly indecisive gains. We were waiting for some indications of influence of the Autumnal Equinox, but we thought that might show up starting at 1pm, but after 1pm the market was as indecisive as it had been for much of the day. The final hour did have the market turn negative, but not horrendously so, and it would be hard put to claim that was indicative.

What it still leaves open is the fact that the Autumnal Equinox is most associated with a change of direction and that is about 60% to 65% of the time. And, when it is not showing a change of direction, which was not strongly indicative, because it closed down again as it had been, next comes an intensification of direction. And, yet while they did sell down at the close, it was not horrendous, so that left us guessing throughout the night and to see where we stood in the morning. So, we look for clues in what the market elsewhere did overnight. Overnight, global equity markets are showing rather pronounced nervousness going into the weekend and into Rosh Hashanah.

The Asian markets are notably weak with the standout weakness in places like Hong Kong and India, but even Japan and Mainland China are down as the concern continues to grow about potential currencies disruptions around the globe. European markets are worried about much of the same thing and they too are showing weakness, pretty much across the board. London, Frankfurt, Paris are all shaky and not only do we have Rosh Hashanah this weekend, Sunday will also bring an election in Italy. And is assumed a right wing coalition may come out of that, but not the sort of right wing coalition we here in the US assume and so it may bring some disruptions to diplomacy.

The markets are at an interesting level, the US equity futures are clearly negative this morning and in pre-dawn trading the Dow futures are looking for down 250 point opening, if it were to close there I think that would be a lower close than the June closing low in the Dow. As we had said the last trading day before Rosh Hashanah is usually shows a bias to the downside, although not necessarily very heavy. We will watch if they do weaken significantly and the Dow closes down more than 350 points. I would have to give a tip of the hat to the Autumnal Equinox with that last hour selloff yesterday. Combined with that kind of weakness, if it turns out to be what we see today.

The US economic calendar is very light, we get some PMI data this morning, both the Manufacturing and Services and somewhat unusual afternoon panel from the Federal Reserve, Powell will do the introduction and Lael Brainard will be the mistress of ceremonies. And since it's pretty much design to get input we don't expect new revelation from the Fed. So, we will watch very carefully to see if the selling weakness intensifies in an already oversold market.

As it parallels with 1962, even with the Cuban Missel crises, in that year they didn't violate the June lows. And as we reported thanks to our insightful friend Jonathan Stephens. In 1962 the sell on Rosh Hashanah tradition did not work, and add caution to the Republicans, in 1962 the Democrats lost less than a handful of house seats and maintained control over both houses of congress. As the Chinese curse goes "may you live in interesting times".

You know the drill, stay close to the newsticker, keep your seatbelt fastened. Stay very nimble, very alert and try very hard to stay safe. Have a wonderful weekend, and for those of you observing Rosh Hashana, have a Happy New Year.

This morning a massive rise in global yields is creating a near panic in global equities and chaos in the world's currency markets - "a reverse currency war." 

Stock futures have abruptly dropped in the last two hours,  taking cash well below the lower end of my trading range. 

Adjusting for the decline in futures - the S&P Index (year to date) is down by about -23% and the drop in the Nasdaq Index is approximately -32%. The average stock is down closer to -30%. 

Though currency, fixed income and equity markets seem to be close to capitulation, for now it seems appropriate to sit tight with my exposure of about 28% net long.

It's again all about bonds and the dollar driving things and the moves are really getting violent. Starting in Asia, the Australian 2 yr yield spiked by 25 bps to 3.38%, a 10 yr high. Their 10 yr yield was up by a like amount. The UK 2 yr is skyrocketing by 35 bps and is up 74 bps this week alone to 3.88%, a 14 yr high. The 10 yr yield is up by 24 bps to 3.74%.
The Italian 2 yr yield is up for a 9th straight day by 13 bps and by 50 bps during this time frame and their 10 yr is up by 18 bps. The German 10 yr yield is back above 2% for the first time in 9 years, up by 7 bps today to 2.04%. US yields in turn are jumping higher and I've talked about the interrelationships between global bond markets a million times as you've heard.
Bottom line, all those years of central bank interest rate suppression, poof, gone. These bonds are trading like emerging market bonds and the biggest financial bubble in the history of bubbles, that of sovereign bonds, continues to deflate. If the world's central bankers didn't decide to play god over the cost of money, we wouldn't be now going thru the aftermath.These moves in FX are nuts too with developed market currencies trading like third world currencies. The pound is down by 1.9% today alone vs the dollar and by 3%+ this week. The euro is lower by 2.5% this week. These are huge one week shifts for developed market currencies.

These moves in FX and bonds just feel like capitulation type action, in the short term I emphasize, and I wouldn't be surprised if we're on the cusp of a reversal.

UK 2 yr Yield

I've highlighted the need to watch the LSTA leveraged loan index closely and it's now trading back at a 2 month low. These floating rate bonds of junk rated credit is now a huge market of $1.4 Trillion according to Morgan Stanley, with a lot of these bonds having been packaged into CLO's, and that is double the size of 2015. Of note too, 3/4 of this market has a credit rating below BB. Stating the obvious, the rate shock is going to impact the most those that borrowed floating rate and didn't hedge

LSTA

These were some of the key quotes from the FedEx earnings conference call last night: "We saw a decline in our volumes during the first quarter, which accelerated in the final weeks. Our softening volumes in Asia and the US were predominantly due to the economy, while the shortfall in Europe was both economic and service related. Therefore, we had costs in the system for volumes that didn't materialize."

And more on shipping rates overseas, "Starting with Asia, our results were impacted by macroeconomic weakness. Our lower demand is consistent with the broader market, with ocean and air freight rates under pressure in recent weeks. A good indicator of how quickly the market changed in Asia is to review the spot rates coming out of Hong Kong and Shanghai. In June and July, spot rates were between 20% and 40% higher y/o/y, respectively. In early August, these rates fell to single digits, and by the end of the month, Shanghai had plummeted to a 10% decline y/o/y, while Hong Kong rates were flat...In Europe, the economy was weaker than we anticipated, and service further pressured our results."

Ahead of the US PMI today from S&P Global, the September Eurozone composite index fell to 48.2 from 48.9 as expected with both manufacturing and services declining.

They said this about the contraction, "Although only modest, the rate of decline accelerated to a pace which, barring pandemic lockdowns, was the steepest since 2013. Forward looking indictors, such as new order inflows, backlogs of work and future output expectations, point to the decline gathering further momentum in coming months...Soaring energy prices meanwhile added further to companies' cost burdens, and also limited production in some cases, pushing survey price gauges higher to indicate a renewed acceleration of inflationary pressures."

The UK manufacturing and services PMI for September was 48.4 from 49.6 last month. That is under the estimate of 49. S&P Global said "Companies report that the rising cost of living, linked to the energy crisis, and growing concerns about the outlook are subduing demand and hitting output levels to an extent not seen since 2009, barring the pandemic lockdowns and initial 2016 Brexit referendum shock. Forward looking indicators meanwhile deteriorated further in September. Both the new orders and future expectations gauges have descended to levels which have rarely been weaker in the past, and are consistent with a deepening downturn as we head into the fourth quarter. Inflationary pressures continue to run higher than at any time in over two decades of survey history prior to the pandemic."

There is no sugar coating any of this.

Also out of the UK was last night when we saw the consumer confidence index from GFK for September and it fell to -49 from -44. This is another record low dating back to the 1970's. "Consumers are buckling under the pressure of the UK's growing cost of living crisis driven by rapidly rising food prices, domestic fuel bills and mortgage payments."

This move in UK rates (and the decimation of the English pound) are unprecedented and leading to panic in fixed income and equities:

Uh-oh...
Per Goldman:

US Equity Views: Higher rates, lower valuation: Reducing S&P 500 year-end 2022 target to 3600 and exploring scenarios for 2023

22 September 2022 ' 8:46PM EDT

The expected path of interest rates is now higher than we previously assumed, which tilts the distribution of equity market outcomes below our prior forecast. The S&P 500 index actually reached our previous year-end target of 4300 in mid-August, but the rate complex has subsequently shifted dramatically. The higher interest rate scenario that we now incorporate into our valuation model supports a P/E of 15x (vs. prior forecast of 18x) and implies a year-end (3-month) S&P 500 target of 3600 (-5%) and 6-month and 12-month forecasts of 3600 (-5%) and 4000 (+6%).

Equity valuations have closely tracked real interest rates until recently. Real yields have soared from 0.4% to 1.3% during the past month and could reach 1.5% by year-end. For context, real yields were negative 1% at the start of the year when the S&P 500 index hit an all-time high of 4800 and traded at a P/E of 21x. The tightest yield gap between equities and rates since the pandemic further tilts the balance of risks to the downside.

The outlook is unusually murky. The forward paths of inflation, economic growth, interest rates, earnings, and valuations are all in flux more than usual with a wider distribution of potential outcomes. Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook.

We previously published that in a recession falling S&P 500 EPS could cause the index to decline to 3150 (-17%). A 11% drop in EPS would be consistent with modestly negative real GDP growth and the 13% median EPS drop during prior recessions. Under a "hard landing" scenario, the yield gap would rise and the 3-, 6-, and 12-month S&P 500 targets would be 3400 (-10%) / 3150 (-17%) / 3750 (-1%).

In the near term, investor focus will soon turn from valuation to earnings. The surprisingly high August inflation reading was a pivotal event for macro investors regarding the path of Fed hikes. The analogue for stock investors is 3Q earnings season where record high profit margins will be under scrutiny.

Recommended investment strategies. Elevated uncertainty argues for defensive positioning. Surging rates means short duration (GSTHSDUR) will outperform long duration (GSTHLDUR). Own stocks with "Quality" attributes such as strong balance sheets, high returns on capital, and stable sales growth (GSTHQUAL).

Investors have been looking at the wrong places over the last month.

Instead of focusing on peaking inflation and S&P 500 earnings, a reverse currency war has developed and taken front stage (see my comments on the euro and British pound in my "Overnight Futures" post this morning):

From Bramo:

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

* The grind lower continues as S&P 500 futures dropped throughout most of the evening, with an acceleration to the downside in the morning.

* Gold, which collapsed last week and early this week, continues to weaken again, down $20.70. I still can't work it up to buy.

* Brent oil down by $1.81 to $88.67.

* Soft commodities are broadly lower, which aids a decline in inflation (but the equity markets are now focused on interest rates, not commodities).

* Central banks continue to sell Treasuries to support their currencies, placing pressure on US bonds. (Unless there is something like a Plaza Accord there is little that can be done over the short term)

* The euro is at 97.68 against the US Dollar here on Friday morning. The English pound is lower as well. (In early 2022 I warned of this sort of escalation in currency "wars" - I should have continued with the theme!)

*Bond yields continue to represent the greatest risk to equities, and with rates spiraling ahead equities grow harder to value. Bond yields (the equity market's nemesis) are likely responsible for a portion of the market's drubbing recently, and are ever higher. The yield on the 10-Year is +4.4 basis points to 3.754%. I added to Treasuries on yield strength during the last few months.

* The S&P oscillator gapped lower on Wednesday (finally breaking out of a range) and last night moved to an even more oversold -7.04%. 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 +11 and bottomed at -39. At 6:12 a.m. ET futures were -31 handles.

Nasdaq futures peaked at +34 and bottomed at -147. At 6:13 a.m. ET futures were -116 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:

Fortune Favors the Bold

Dumb and Dumber : The Errors and Past Assumptions of the Federal Reserve (and Others) Know No BoundsRealMoney

Here were Thursday's trades:

* Sep 22, 2022 ' 09:38 AM EDT DOUG KASS

4 Adds

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

* Sep 22, 2022 ' 09:55 AM EDT DOUG KASS

FDX, DIS

I added to (FDX) and (DIS) on weakness. (Sold out of FDX on gap higher, in response to an early EPS release)

* Added to SPY, QQQ

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

Themes and Sectors

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