Another desultory day with (weak) market breadth:

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The primary culprit was the rise in global bond yields and the weakness in non-U.S. currencies.

My net long exposure increased very, very modestly, based on buys made when the market was under duress in the early going and then again late in the day.

Thanks for reading my Diary today.

Enjoy the evening.

Be safe.

Recent buy, (PINS) , is green in a sea of red.

The biotech fund (XBI)  is now down $20 from its recent high and back to where I made some sales (and technicians got heated up about the sector).

I would get interested (again) in the low $70s.

From Charlie: https://compoundadvisors.com/2022/10-chart-monday-9-26-22

*Stocks rally modestly as bonds stabilize

All the men come in these places
And the men are all the same
You don't look at their faces
And you don't ask their names
You don't think of them as human
You don't think of them at all
You keep your mind on the money
Keeping your eyes on the wall

- Tina Turner, Private Dancer 

The markets (especially of a Nasdaq-kind) just experienced a small rally -- likely based on a slight decline in bond yields.

At least we have a picture of what can happen if the quantum rise in rates reverses.

Today's (awful) breadth:

Remember the excitement for travel ( (DAL) and (UAL) ), entertainment ( (LYV) ) and lodging ( (HLT) ) stocks earlier this year as the impact of Covid was waning?

Well, look at these stocks.

I have been doing a lot of research in the last week for the purpose of culling out some opportunities.

Buying more short-dated Treasuries as yields go parabolic.

Bond yields are advancing again, weighing on equities.

We will not see stock market stabilization, until we see fixed income stabilization.

The bulls and bears are in a major tug of war. The heavily oversold condition (stocks under 50-day and 200-day moving averages and deterioration in breadth and so on) presents a possibility of a short, smart bear market rally one-week or maybe two.

Midday musings from Sir Arthur Cashin:

Conversely, concerns about currencies and geopolitical, plus lingering fears about a negative structural surprise in the financial system are pulling on the other end. The odds very slightly favor the chance of a bear market rally, but we may have to take it day by day and milestone by milestone.

For today, let's look at some of the numbers.

So far, the bulls have avoided breaking below Friday's intraday low and/or other proximate support. They did managed to get the VIX up above 32, which is helpful to the bulls. If they can actually punch it up to 35, that might help kick in a rally.

The afternoon should be of interest. Keep your eye on the yields. The question is should we punch up above 3.77%, which could put pressure on things or move down to 3.70, which might help the bulls, but the game is on the table.

Watch carefully and stay safe.

Stay safe.

Arthur

Today I added aggressively to six month and two year Treasuries.

Microsoft (MSFT) , last week'sTrade of the Week, is the "world's fair" again today.

I'm buying the Financial Select Sector SPDR (XLF) at $30.75.

After selling Alphabet (GOOGL) at higher prices, I have re-established a small long holding at $99.

i am now long growthy names GOOGL, (META) , (AMZN) and (MSFT) .

I am trading too actively to do a thorough opener today, so I will do one Tuesday!

Here are today's trades so far:

Added to AdvisorShares Pure US Cannabis ETF  (MSOS) , SPDR S&P 500 ETF (SPY) , Invesco QQQ Trust (QQQ) , Meta Platforms (META) , Amazon (AMZN) , Microsoft (MSFT) and Disney (DIS) .

Just another manic Monday says my good friend Peter Boockvar, chief investment officer with Bleakley Advisory Group.: 

The dramatic plunge in the pound and Gilts is unbelievable and to the point where at least the pound is likely a buy. The 14 day RSI is down to just 15 and the 7 day is at just 8. The 14 day is matching the lowest since March 2020 and January 2016 before that which was a few months before the Brexit vote. The 2 yr Gilt yield is spiking by 58 bps and is now up 100 bps in just two trading days to 4.54%. The 10 yr yield is higher by 28 bps and up by 60 bps in two days to 4.11%. I get the budget blowout of very expensive energy subsidies at the same time taxes will be cut across the board (preventing the corporate rate from going up, cutting the high top tax rate, reducing the stamp tax, eliminating the bonus cap for bankers, etc...) but these are all steps that will make the UK very long term competitive which would in turn invite a lot of investment. The FTSE 100 is down by .8% and the FTSE 250, mostly domestic based companies, is down by 1.5%.

The bond weakness in the UK is also a global theme again today and it started again in Asia overnight.

I will say this on the fiscal condition worries the markets have about the UK. Just imagine if that attention at some point shifts to the US with our out of control debt and deficits situation.

Post Fed meeting there is a lot of Fed talk this week from both voting and non-voting members. Powell, Brainard, Collins, Bostic, Logan, Evans, Bullard, Kashkari, Daly, Bowman, Williams, Barkin, and Mester will all be giving us their thoughts. We know that many are looking for signs of buckling knees in their fight against inflation because of the growing economic impact. We'll also see if there are any dollar comments.

The Japanese September composite PMI rose back above 50 at 50.9 from 49.4 in August. The components though were mixed as services rose to 51.9 from 49.5 but manufacturing slipped to 51 from 51.5. S&P Global said "A further loosening of restrictions aided an expansion in September, but overall growth remains subdued as inflationary pressures and deteriorating global economic growth weigh on activity in both the manufacturing and services sectors...Looking ahead, businesses are reporting concerns around the economic outlook amid steep cost pressures and the rising likelihood of a global economic downturn. The remarkable weakness we've seen in the year to date in the yen continues to push up price pressures, with companies struggling to fully pass on these higher cost burdens to clients. Subsequently, business confidence slumped to a 13 month low in September."

So, it is still the aggressive monetary stance of the BoJ that is resulting in the yen weakness but to cover himself BoJ Governor Kuroda comes out today and says about the Finance Ministry buying of yen, "The intervention was conducted by the finance minister's decision as a necessary means to deal with excessive moves and I think it was appropriate. The intervention and monetary easing are complementary." Complementary?! The 10 yr JGB yield closed right at .25% and continues to test the BoJ. Of note though, the 40 yr yield is breaking out to the upside, jumping by 10 bps, a huge move for them, to 1.57%. That is the highest since September 2015. Continue to watch the 40 yr as it's the furthest out on the JGB yield curve and thus the least manipulated by YCC.

40 yr JGB Yield

The September German IFO business confidence index fell to 84.3 from 88.6 and that was well below the estimate of 87. The current assessment fell 3 pts m/o/m and the Expectations component was down by 5.3 pts to 75.2. The IFO said succinctly, "Sentiment in the German economy has deteriorated considerably...The German economy is slipping into recession." No argument here.

IFO

Lastly, on the heels of the now hotel quarantine free shift in Hong Kong for incoming visitors (although more needs to be done to allow them to go out to bars and restaurants immediately instead of waiting 3 days), tour groups from mainland China can now finally visit Macau again. Another step to a broader China reopening we all must hope for, for the sake of the global economy.

Upside:
-Pacific Gas & Electric (PCG) +4% S&P inclusion
-Chegg (CHGG) +2% upgrade
-Atlas Corp. (ATCO) +6% Poseidon raised offer
-Planet Fitness (PLNT) +4% upgrade
-Generac Holdings (GNRC) +1% Hurricane Ian
-Las Vegas Sands (LVS) +6% Macau headlines
-Wynn Resorts (WYNN) +5% Macau headlines
-Lava Therapeutics (LVTX) +115% Seagen and LAVA Therapeutics announce exclusive worldwide license agreement
-Cohn Robbins (CRHC) +8% terminates merger agreement

Downside:
-Tronox Holdings (TROX) -4% pre-announcement
-AMC Entertainment (AMC) -3% entered into distribution agreement

September 23 put buying was the largest in history:

Source: Hedgeye

* Added very small to SPDR S&P 500 ETF (SPY) at $364.80.

* Added small to Invesco QQQ Trust (QQQ) .

The Bank of England and the Treasury are not denying there will be a statement on sterling later today.

26 September 2022

The 1970 Japanese World Exposition

The irony is Japan's exporters have long struggled to be competitive vis-à-vis their Chinese and South Korean counterparts given the yen's traditional safe-haven status and costlier electricity and labor. If only the appetite was there. Tellingly, the global recession is being led by weakness in China. Though we warned our clients with the benefit of counsel from our friends at the China Beige Book (CBB), the depth of 2022 weakness has taken too many by surprise. The CBB best sums up how the world perceived China a year ago: "Relying on little more than an outdated script, half-hearted government assurances, and wishful thinking, Street forecasts assumed a Party Congress year necessarily meant big stimulus, relaxation of policy crackdowns, a bull run in stocks, and sharply recovering economic growth. It's almost comical how far off they've been."

We concur on the "almost" part given the gravity of the implications for the global economy as flagged by the industrial sector. Per S&P Global, factories worldwide have seen export orders contract in the four months through September (purple line). The latest echo of the woes plaguing the world's factories arrived late last week in the Kansas City Fed's manufacturing survey which revealed a third consecutive month in the red in the industrial heartland (orange line).

Reassuringly, while down from a post-pandemic high of a net 43% planning to increase capital expenditures, September's 24% print was still well north of the long run average of 10% (light blue line). The capex outlook, however, is tumbling down -- a net 11% of manufacturers in the 10th District expected higher investment plans six months out, slightly below the long-run average of 13%.

At the opposite end of the capex spectrum is shuttering plant and equipment. In the last month, we've noted an increase in outright plant closures. To that end, last Tuesday, Pixelle Specialty Solutions announced it would close its Androscoggin Mill in Maine that produces specialty label and release papers. The mill also supplies the food service industry and eCommerce with industrial and packaging solutions. That same day, Dunn Paper said it would close its Port Huron, Michigan location November 18th due to "...ongoing challenges to generate positive cash flow in the face of adverse economic factors."

Reflecting the housing recession as reported by WHO13 in Des Moines, Iowa, "Less than two years after the Larson storm door company was sold, its new owners are shuttering an Iowa plant and two others, putting more than 300 people out of work. Fortune Brands announced on Tuesday that it will close the Larson manufacturing plant in Lake Mills, Iowa and layoff its 200 workers. The company is also closing factories in Grand Prairie, Texas and Senatobia, Mississippi."

The most telling closure of the week was not a factory but was the starkest reflection yet of the industrial recession. Eclipse Advantage, a Florida-based staffing firm that serves the supply chain and light industrial markets is shutting down a Northern Kentucky operation. Digital pink slips went out to 190 workers.

Backing out to the rest of the world, as QI's Dr. Gates points out, one distinction between ISM and S&P Global business surveys is the latter's Quantity of Purchases index. September's 46.8 fell to levels consistent with the Great Financial Crisis. Per Gates, "Because this volume guide for what procurement professionals are purchasing is in real terms, it guides global capex cycles, especially when things break down." We dare say, that's a fair characterization.

From JPMorgan's Dubravko:

The natural byproduct of slowing global economic growth and a strong U.S. dollar:

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From Liz Ann:

U.K. five-year gilt yields move exponentially as their central bank raises rates aggressively but their government lowers taxes (akin to pushing on the brake and the accelerator of a car!):

I would continue highlight the instability of currencies and interest rates.

The U.S. 2-Year Note has advanced for thirteen consecutive sessions.

The salad days of financial conditions are over and the abrupt tightening of financial conditions is weighing on global markets.

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

- Bob Seger, "Night Moves"

* Brent oil down by $0.77 to $85.35.

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

* The grind lower continues as S&P 500 futures dropped throughout most of the evening but when I awoke at 3:56 a.m. S&P futures were +4, now they are back to their lows of nearly -40 handles.

* We will now keep a bead on volatility (as well as currency rates). This morning VIX is +$2.74 to $32.66.

* Gold, which collapsed last week and early this week, continued to weaken again, Friday and is now -$4.80. I still can't work it up to buy precious metals.

* Non US currencies continue to get crushed. (In early 2022 I warned of this sort of escalation in currency "wars" -- I should have continued with the theme!)sterling, the euro and yen are all -20% this year against the U.S. dollar. This is destabilizing (particularly in a period of inflation and lower growth as well as questionable policy (UK) and may not be controlled with more drastic action. Remember a strong dollar is anti-U.S. corporate profits and growth -- with the S&P so dependent on non-U.S. growth and with the Fed feeling resolute that it is unwilling to alter its hawkish path.

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

*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 +7.4 basis points to 3.771%. I added to Treasuries on yield strength during the last few months and will get more aggressive this week.

* The S&P oscillator gapped higher (more negative) on Wednesday (finally breaking out of a range) and Friday's close moved to an even more oversold level -- at -10/66%. The oscillator has been a good short-term trading tool over the last few months! While I am still at only 28% net long, the oversold and other factors have me leaning to add -- but I was demonstrably slow in doing that over the last two days given the unprecedented currency and rate movement.

* One last note, which I will discuss further in my opener, the bullish strategists are now bearish. I mentioned on Friday that Goldman's David Kostin lowered his S&p year-end target to 3600. (He was at 5100 nine months ago). Res Ipsa Loquitor

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 at +7 and bottomed at -38. At 6:07 a.m. ET futures were -31 handles.

Nasdaq futures peaked at +41 and bottomed at -121. At 6:08 a.m. ET futures were -71 handles.

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

A Reverse Currency War

Will Alphabet Launch a Takeover of Pinterest

Risk Management (IMPORTANT!)

P.S. My awful stomach virus on Friday was (nothing more) an intolerance to dairy products (I had an ice cream sundae at dinner the night before before was the culprit!). All good now but limiting ice cream intake is no bueno!!

Here were Friday's trades:

* Added to Citigroup (C) , Bank of America (BAC) and Wells Fargo (WFC) .

* Day traded (OIH) for a push.