I now have a 3% position in technology after having virtually zero through the first eight months of 2022.

(TLT) rallies $1.40/share from the lows (back to the day's high - there must be a technical term for that!) - a recent buy.

Nice recovery from some of the large money-center bank stocks from the lows: JPMorgan (JPM) is up $2 and and PNC Financial Services Group Inc.  (PNC)  is up $3 off of the morning bottoms.

I added to new positions, (DAL) and (UAL) , on the whoosh lower this morning.

With rates higher for longer and the economy stronger than expected,  I remain of the view that bank stocks offer among the best values in the market today.

I am a buyer on all dips.

Coming out of this cycle I expect a valuation reset higher.

I will be out of the office (on business) over the following dates:

* Leaving about 2 p.m. today

* Out tomorrow.

* Out Wednesday-Friday of next week

(God awful) breadth, biggest movers and heat map at 10:15 a.m.:

Breadth

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Market Movers

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Heat Map

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* (DIS) at $97.45.

* (JPM) at $104.95

- (WINT) +31% (reports positive istaroxime Phase 2 study in early cardiogenic shock published in the European Journal of Heart Failure)
- (AXLA) +15% (releases positive interim data from Phase 2b EMMPACT study of AXA1125 in nonalcoholic steatohepatitis)
- (AA) +8.1% (LME said to discuss possibility of ban on new deliveries of Russian metals such as aluminum, nickel and copper)
- (JAGX) +5.9% (subsidiary Napo Pharmaceuticals announces activation by FDA of Investigational New Drug Application for NP-30)
- (IDRA) +5.3% (acquires privately held biotechnology company Aceragen in stock-for-stock deal)
- (SDPI) +5.2% (awarded $750,000 grant to expand manufacturing operations)
- (SIGA) +5.1% (new contract awarded by US Department of Defense for procurement of up to $10.7 million of oral TPOXX)
- (GNLN) +4.9% (sells Boca Raton, Florida, headquarters building for $10 million)
- (LIFE) +4.7% (announces Notice of Allowance for U.S. patent for Anti-Neuropilin-2 Monoclonal Antibodies)
- (MTN) +4.1% (earnings, guidance)
- (AXSM) +1.8% (plans to resubmit AXS-07 NDA for acute treatment of migraine in the third quarter of 2023 based on successful FDA Type A meeting)Downside:
- (SUNL) -29% (withdraws outlook; to take $30 million to $33 millioon impairment related to wind down by largest solar installer)
- (VEEE) -27% (2.5 million share secondary priced at $2.75)
- (AMPS) -19% (prices 7 million share stock offering at $11.50/share)
- (KMX) -17% (earnings, guidance)
- (RAD) -13% (earnings, guidance)
- (ISR) -11% (earnings)
- (VJET) -10% (prices 1.28 million share registered offering at $3.44/share)
- (CGNT) -5.5% (Stifel Nicolaus Cuts CGNT to Hold from Buy, price target: $6) (IVR) -5.2% (provides update on portfolio, liquidity and book value)
- (WOR) -3.9% (earnings; plans to separate steel processing business, expects to complete the separation by early 2024)
- (OLPX) -3.5% (Piper/Sandler Cuts OLPX to (NAPA) from Overweight, price target: $12)
- (ADC) -3.4% (prices previously announced 5.0 million shares offer at $66.85/share)
- (BBBY)  -3.1% (earnings, guidance)
- (BBBY) -2.8% (earnings, guidance)
- (BBBY) -2.3% (Tier1 firm Cuts AAPL to Neutral from Buy, price target: $160 from $185)
- (NAPA) -2.1% (earnings, guidance)

* The investment mosaic has grown increasingly complex

* It is growing more difficult to attack inflation at a time in which financial markets are increasingly unstable, less liquid and experiencing unprecedented volatility

* It is worrisome how interconnected our financial system has become and that we cannot readily absorb minor shocks...

* Will what happened in the UK bond market come to the U.S.?

* Will the Fed lose control of the long end of the curve?

* Given the recent turmoil in the global bond and currency markets, is "risk free" still risk free?

After Wednesday's robust market rally I issued a warning:

Sep 28, 2022 ' 04:39 PM EDT DOUG KASS

Minding Mr. Market: A Warning to Come

As I mentioned to an investor last night, I feel that I am getting the ability of buying great companies at good prices.

Stock prices are not low enough for me to say that I am getting the ability of buying great companies at great prices -- at least not yet!

But I have been buying equities into the weakness of the last two months, and I will start tomorrow morning's diary with a warning.

As promised, here are my warnings:

On the one hand, I am not surprised the stock market reacted positively to the news of the Bank of England intervention of the gilts market (to buy gilt bonds with maturities over 20 years), although it is a bid odd even given pension leverage/derivative risks because things really started to crack the day before and the market barely sold off, probably because this sort of intervention was expected.

The policy move resulted in a seven standard deviation move in the gilts market.

An even bigger picture issue is that it already has come to this again.

It seems we have a system that can no longer tolerate what should be minor shocks.

In the eyes of the Fed, the "neutral rate" is a 0.5% to 1.0% real rate. Depending upon which gauge you use (Consumer Price Index/Personal Consumption Expenditure Price Index), inflation remains elevated and problematic in that, on an absolute basis, rates in the US are still not close to a neutral rate yet. It's not much different in the UK, with a bank rate of 2.25% and inflation at 10%.

Bottom line is it did not take much to require central bank intervention in the UK.

Should we be celebrating, as the markets did on Wednesday, the fact that the system has become this fragile? And what does it all mean going forward?

With respect to earnings, FedEx (FDX) was the big canary in the coal mine.

As it turned out, the earnings estimates people had for FedEx were not close to reality.

In normal times, EPS estimates are close to reality.

During inflection points, they never seem to turn out right, to the positive or the negative. Not even close. That is because analysts are incremental, as are companies. In downside inflections especially, companies don't want to let all the hot air out of the balloon at once. Especially at companies full of equity comp where insiders sell like crazy. Analysts just follow company guidance. They never cut enough.

Any valuation case for the market is predicated on two things -- earnings and the multiple those earnings will get.

The problem is the earnings estimate is never right. It seems like you need a year or two of cutting or raising before you get estimates to the point where the ballpark they end up in is close to right.

My guess is market EPS estimates will turn out being as close to reality as the FedEx earnings estimates were.

Other questions I have that are concerning (especially with regard to valuations, which are derived by the assumption of a discount rate) this morning:

* Will what happened in the UK bond market come to the U.S.?

* Will the Fed lose control of the long end of the curve?

And most importantly, in a regime of heightened global currency exchange and bond volatility, is "risk free" still risk free?

Over the last 24 years, I have maintained that the investing mosaic is always complex.

It should be clear over the last two weeks that the complexity of investing is growing more so.

It is for this reason that, for now, eyeing a chart or being a monkey looking at moving averages or even looking at projected funnymentals (and next year's S&P EPS projections) do not provide a complete picture of what the appropriate market strategy might be in these uncertain, volatile and illiquid times.

Keep your seat belts on and watch your portfolio's valuation at risk (VAR).

You can't half ass it or it won't work, opines my friend Peter Boockvar, chief investment officer with Bleakley Advisory Group: 

A big problem with intervention, whether in FX or in the bond market, is you can't half ass it or the markets will fight right back. While many want to blame the Truss UK budget for the craziness in the UK bond market, the Bank of England is very much to blame too. Both because of their modest interest rate hikes to date in the face of raging inflation at the same time they were on the cusp of outright selling gilts in their attempt at QT rather than just led them mature on their own. So, by now intervening and BUYING gilts, they've put themselves in an even more precarious situation because the markets know temporary QE is just that, temporary. And they tell us yesterday that next month they'll start selling gilts?

Bonds are giving back some of what they gained yesterday and the same can be said for just about everything, FX, stocks, and commodities (ex oil because of possible further OPEC production cuts).

The PBOC might be the next central bank to intervene, this time in their FX market and you can see the intraday chart in the onshore yuan. Reuters reported this morning, "China's central bank has asked major state owned banks to be prepared to sell dollars for the local unit in offshore markets as it steps up efforts to stem the yuan's descent, four sources with knowledge of the matter said."

CNY Intraday

In terms of market sentiment, as of last Friday Investors Intelligence yesterday said Bulls fell to 25.4 and that is below the June low of 26.5. Bears rose almost 3 pts to 34.3 but it was above 40 in June. The AAII today said Bulls rose 2.3 pts to 20 off last week's lowest level since late April. Bears were little changed at 60.9, off .1 pt from last week's highest level since late February 2009. Even with yesterday's rally, the CNN Fear/Greed index closed at 18 in the 'Extreme Fear' category and that was down 1 pt from Tuesday. Bottom line, the contrarian sentiment set up was there for yesterday's rally and likely has some more room before the next test for markets, corporate earnings.

Vietnam, an economy growing in importance in its manufacturing presence, said its September exports rose 10.3% y/o/y but that was well below the estimate of up 18%. Imports grew by 6.4%, about half the forecast. Their economy as a whole rose by 13.7% y/o/y in Q3, just under the estimate of 14.4% and helped by manufacturing which was up 13% y/o/y. Their statistics office said "Production and business activities grew strongly. Many industries have recovered strongly and achieved higher growth even compared to the time before the Covid-19 pandemic."

Ahead of Germany's September CPI print at 8am est, Spain said its headline CPI rose 9.3% y/o/y but that was below the estimate of 10% and down from 10.5% in August. The core rate too moderated to 6.2% y/o/y from 6.4% last month and 4 tenths below the estimate.

Also out of Europe was the September EC Economic Confidence index which fell to 93.7 from 97.3 and that was below the estimate of 95. Manufacturing fell below zero and there was further softening in services, consumer, retail and construction confidence. It's safe to say, although not officially, that Europe is in a recession but that's almost stating the obvious at this point. Euro is down .2% after yesterday's 1.5% rally.

Economic Confidence in the Eurozone

Another one from Liz Ann (on a subject that Johnny The Greek and I were discussing Wednesday in our Comments Section):

Bank of America cuts Apple (AAPL) :

From Bramo:

From my pal Lance:

Interesting contrary thoughts from my friends at Miller Tabak:

Wednesday, September 28, 2022

The Naysayers Are Wrong, Recession Risk Is Falling

Both the bulk of analysts, and the Fed itself, were slow to recognize the reality of an eventual Federal Funds rate near 5% because they focused on too short of a time horizon, the 10-15 years before the pandemic when a 3% Fed Funds rate seemed very high. During this period, inflation was never a serious challenge, and this time frame thus has few lessons for a high inflation setting. A longer view would have shown that a much higher Federal Funds rate is needed to get inflation back to 2%.

Markets are poised to make a similar mistake by not looking far enough back to judge how the economy will handle higher interest rates. This is causing them to overestimate recession risk. Mark Haefelle, of UBS, writes "our view is that a fed-funds rate of 4% is about the highest that the economy would be able to withstand, and the Fed is clearly threatening to raise rates above that level." [1] We disagree. History suggests that the economy is well positioned to survive a 5% Fed Funds rate with slow, but positive, GDP growth.

Figure 1: 5-Year Real rates Remain Low by Historical Standards

Figure 1 shows two measures of real five-year rates. TIPS (red) are our preferred measure while 5-year nominal yields less the Cleveland Fed's estimate of inflation expectations (blue) offer an older, but noisier measure. Since last week's Fed guidance, TIPS have risen to 1.58%. Until this week, when they briefly rose above 1.9%, they have not been this high since 2008. The good news is that with the Fed's forecast finally realistic, real rates should be close to their peak. We still forecast a terminal Fed Funds rate of 475-500 bps. Relatedly, we expect about 25-50 bps of additional increases (more on this later) to the 5-year real rate to bring it to around 2%. As shown in Figure 1, even a 2% real rate is unremarkable by historical standards. Furthermore, the economy's fundamentals should make it more resilient to higher rates than usual. These include low household debt (debt service is just 9.6% of disposable income compared to 13% prior to the Great Recession) and the record 5.6 million gap between job vacancies and the unemployed. Higher rates will slow growth and a recession is possible, but unlikely. We put the odds of recession through 2023 at 35% (down from 40% last week). Furthermore, the chances of a deep recession (e.g. unemployment above 6.5%) are just 10%.

This chart is a good resource for short-term traders (as an example, the strength in biotech stocks on Tuesday in a dispiriting tape, foreshadowed the great Biogen (BIIB) aided upside on Wednesday):

View Chart »View in New Window »

This was mentioned in my Overnight Futures column earlier:

Some technical optimism from JPMorgan:

Technical : Market Breadth and Momentum Signals

Breadth is defined as percentage of SPX constituents trading above 200D Moving Average.

Momentum is defined here as the percentage of SPX constituents trading above 70 RSI vs percentage trading below 30 RSI.

· Often, the signal for the market approaching a near-term bottom is when Breadth is below 20 and Momentum is below -20%.

· After the signal period, a recovery occurs in both Breadth and Momentum, which further enhances the recovery in the short term.

· In the short term, the market often bottoms out during the active signal period.

· While the signal usually lasts for less than 10 days, it lasted for longer during periods of more extreme scenarios.

o Examples: 2002 Tech Bubble, 2008 Lehman Bankruptcy, and 2020 COVID Pandemic.

We saw this signal starting into Friday's close, 9/23/2022.

More intervention (this time from China)?

* Shocks abound (and so do financial stability risks), led by yesterday's seven standard deviation move in gilt bonds.

* Over the last six hours the stock futures have had more moves than a short stop batting .110!

* While over the last 24 hours global bond and equity prices have also had more moves than a short stop batting .110!

* Six consecutive losing sessions were broken on Wednesday, S&P futures fell back overnight as risk appetite continues to be low and unstable.

* The unprecedented instability of currencies and interest rates resurfaced last evening and continue to underscore the likely end of the salad days of easy financial conditions and hold the key to the prospective course of global equity markets during the near term.

* Overnight, weakness in non-U.S. currencies (especially the Eurodollar) and a resumption of rising worldwide bond yields -- the byproduct of ill-timed (2021-22) and now hawkish monetary policy (and what appear to be related reverse currency wars) -- continue to weigh on worldwide stocks this morning.

* Importantly, yesterday morning's questionable intervention by the Bank of England has quickly waned.

* And so did a hot inflation print in Germany provide some market concerns.

* Investor sentiment remains sour. Previous bullish strategists (Goldman and others) are now confidently bearish, bulls are now talking about limited downside (and not so much about the upside), put buying set a record on Friday and AAII Bears are at March 2009 levels. Last night the S&P oscillator stabilized (in response to the rally) -- still oversold but at -10.89% compared to -12.64% and -13.81% over the last two days and about -2.50% for most of the previous week. This is still a deep oversold reading -- but sentiment is not a good timing tool.

* Goodbye TINA, hello TATA ("Treasuries Are The Alternative"): I believe the bond rout continues to create an opportunity in both fixed income and, in the fullness of times, in equities. Depending on one's risk profile, short-dated Treasuries are a reasonable place to be.

* Rates turned back up over night. The yield on the U.S. 2-Year Note is back higher by +10 basis points after having advanced for 14 out of the last 15 sessions. The yield on the 10-Year is +12.7 bps -- the yield is now at 3.835%.

* While market inflation data has noticeably moderated (softening labor and commodities) in recent months. This morning, soft commodities and energy product prices are mixed to lower -- but, for now the market is not focused on these factors.

"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"

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.

Brent oil is unchanged at $89.16.

S&P futures were stable early in the evening session but a combination of a strengthening U.S. dollar, rising global interest rates and a hot German inflation print began to reverse futures (lower) about at the time that the New York Yankee's Aaron Judge hit #61 in Toronto.

Going forward, during these volatile markets, I will now keep a bead on volatility (as well as currency rates). This morning VIX is +1.26 to $31.44.

Gold, which collapsed last week and early this week, rallied (weakly) Monday/Tuesday but is down again, -$13.90. I still can't work it up to buy precious metals.

Bond yields continue to represent the greatest risk to equities, and with rates recently 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. U.S. rates are broadly higher this morning.

The S&P oscillator improved after yesterday's rally but is still oversold at -10.89%. 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 am executing slowly given the unprecedented currency and rate movement - and the heightened regime of volatility.

Cryptocurrencies continue to be in the background and not gaining investor enthusiasm. Flat overnight.

S&P futures peaked at +5 and bottomed at -54. At 5:53 a.m. ET futures were -28 handles.

Nasdaq futures peaked at +14 and bottomed at -189. At 5:55 a.m. ET futures were -90 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:

Minding Mr. Market: A Warning to Come

Powell and Yellen Should Be Fired

Anyone Can Find Out How Hard It Is To Get An Apple Phone

Repeating for Emphasis 

A Ludacris Forecast

From a Source 

Here were Wednesday's trades:

* Sep 28, 2022 ' 09:52 AM EDT DOUG KASS

Upping My 'Bank Deposits'

I took my bank stock positions close to the highest weighting of the year on this morning's whoosh lower.

* Sep 28, 2022 ' 10:34 AM EDT DOUG KASS

Added to SPY

I added to (SPY) at $363.40.

* Out of SPY (short) calls and puts.