Thanks for reading my Diary today.

I am still on a research call and I have another one coming up at 5:15 p.m.

Enjoy the evening.

Be safe.

Thanks for reading my Diary today.

I am still on a research call and I have another one coming up at 5:15 p.m.

Enjoy the evening.

Be safe.

Thanks for reading my Diary today.

I am still on a research call and I have another one coming up at 5:15 p.m.

Enjoy the evening.

Be safe.

I will be on a research call from 3:30-4:30 pm.

Radio silence.

From Peter Boockvar: 

BoE Governor Andrew Bailey at the IMF event in DC is telling pension funds that they have until Friday to get their financial homes in order as the BoE will no longer be intervening: "My message to the funds involved and all the firms is you've got three days left now. You've got to get this done."

Long end US Treasuries are selling off (stocks of course following) in sympathy and the pound reversed its daily gain. Hopefully the market can find its own price discovery from here.

Intraday 10 yr Yield move

Here is the reason for the mid-afternoon dive:  

BOE'S BAILEY SAYS INTERVENTION IN MARKETS WILL BE TEMPORARY

14:47:14 *BOE'S BAILEY SAYS `WE WILL BE OUT' BY THE END OF THE WEEK

14:47:26 *BOE'S BAILEY: MESSAGE TO FUNDS IS `YOU'VE GOT THREE DAYS LEFT'

I just purchased a wad of one year Treasury notes to yield over 4.25%.

* With apologies to Jimmy Breslin

* My radical view is that investment decisions should not be guided by hawkish Fed rhetoric as they will be folding like a cheap suit when it becomes clear that inflation has peaked

Here is my rebuttal to Mester's statement that inflation has not yet peaked (from last week's column): 

The near-universal tightening of monetary policy throughout the world is now contributing to a global economic slowdown, delivering a clear moderation in inflationary pressures/expectations and raising an increased possibility that yields may now be peaking:

1. Crude oil is down 40% from March 2022:



2. Soft commodities have moved broadly lower in recent months (lumber, wheat, soybeans, grain, etc.). As of last week, the S&P GSCI Commodity Index is down by about 30% from its March, 2022 peak:



3. Global freight rates are down 57% year to date:



4. Used car prices, which were a good tip-off to higher inflation in early 2021, are down 13% in 2022:



5. Home prices are down 6% from June 2022 and are now dropping more quickly in the face of a more than doubling in mortgage rates.

6. Rents in September 2022 exhibited the first decline of the year, and the year-over-year percentage increase is at the lowest level since May 2021).

As a former housing analyst I want to do a deeper dive on the housing market. Although the housing markets represent a small portion of GDP, the sector hits above the weight as it has a multiplier impact on consumer spending.

Two years ago a 30-year fixed-rate mortgage was 2.90% and the average new U.S. home price was $405,000. Today the same mortgage is 6.70%, the highest level since mid-2007 and the largest spike in rates over the last year since 1981, and the average home price is nearly $525,000. As a result, a $25,000 increase in the down payment (assuming 20% down) is required and monthly mortgage payments have doubled from $1,345 to $2,700.

Going forward the ability to access the housing market will clearly be more influenced and dictated by family income than Fed policy:



7. Finally, let's now look at the precipitous drop in ISM Manufacturing, Orders and Prices Paid:

ISM Manufacturing

New Orders

Prices Paid

Source of previous three charts: Peter Boockvar

The price declines listed above represent a potentially market-friendly development.

In further support of our claim that the back of inflation is being broken, we offer the following chart which shows that market-based inflation expectations hit an 18-month low last week (down from a peak of 3.02% in April 2022 to a current reading of 2.19%).

Bottom Line

I will repeat for emphasis that the Federal Reserve made the greatest mistake in monetary policy in history by not raising rates in 2021 and for misgauging the persistence and level of interest rates:

Last year the Fed adopted an ex-ante policy (of looking forward) based on deeply flawed forecasts that understated the stickiness of inflation. It was in our view the most significant mistake that has ever been made by the Fed. This year the Fed has compounded last year's mistake by front-ending or stacking aggressive interest rate moves/intentions on an ex-post basis (looking backward) based on lagging inflationary indicators.

My radical view is that no investor should listen to the Fed because they have been and are currently clueless and will fold like a cheap suit when, in the next few months, it is clear that inflation (and interest rates) have likely peaked.

As I wrote yesterday:

Oct 10, 2022 ' 02:58 PM EDT DOUG KASS

Overrated!

Like Fed Governor Loretta Meister, Lael Brainard is another academician that sits on the Federal Reserve Board of Governors.

Her somewhat dovish comments have helped to stabilize the markets.

I was going to start this post with a quote from the movie, Clueless - but that would be too mean.

I have sold my (TLT) .

I am using the proceeds to buy more equities.

* As I have repeatedly written!

In that regard, the equity rally from the lows has coincided with interest rate stability. 

The yield on the ten year US note, for example, is now flat after being up +9 bps earlier in the day.

I have added to (TRSSF) , (MSOS) , (GTBIF) , (TCNNF) and (DIS) .

My pal Rosie (Dave Rosenberg) responds to my opener: 

Dougie

Two more rate hikes is 125 bps, which in a more normal cycle would be five more rate hikes

And there are no fundamental bottoms in equities until we are 70% thru the easing cycle ... for all who eagerly await the pause and pivot ... Suckers that they are.

Added to (PNC) , (JPM) , (UAL) , DAL on whoosh lower.

Though the yield on the ten year is +3 bps (to 3.916%) it is down from the highs of +9 bps. 

Meanwhile, the two year US note yield is lower by -3 bps.

Adding to (PINS) at $22.92.

* Swift and sizeable moves in the global risk free rate of return have contributed to the tension of lower stock and bond prices and to fear - in a regime of heightened volatility

* All roads lead to interest rates - I remain of the view that both inflation and bond yields have or are close to peaking

* From my perch, the Fed is close to completing its tightening cycle - two more rate hikes - markets stop panicking when policy makers panic!

* The opportunity set and reward vs. risk have improved measurably with much lower asset prices and eroding investor sentiment

* For those, like myself, with an investing timeframe measured in months/years and not days/ weeks - both stocks and bonds appear attractive

* Today, with market momentum clearly to the downside, the hardest trade is to buy

* Going forward, bad news may be good news

* Accordingly, I have continued to add to my longs in this morning's weakness in premarket trading

"A strategic inflection point is a time in the life of business when its fundamentals are about to change, that change can mean an opportunity to rise to new heights."

- Andrew S. Grove, Only The Paranoid Survive: Lessons from The CEO of Intel Corporation

Early last week I delivered a more bullish message - and I have been methodically, but only on weakness, been adding to my net long exposure. In premarket trading I added to (SPY) ($357.39) and (QQQ) ($264.28). 

Since then, the markets rallied magnificently - a week ago - only to fall back to new 2022 lows by yesterday... more confirmation that this is the most difficult market to navigate in years. 

In both bonds and equities, 2022 has been one for the record books - an unmitigated disaster and one of the worst performance years in history. 

Not surprisingly, investor sentiment is at multi-decade lows. In the past I have highlighted record bears in the AAII survey, all time high in put buying, high mutual fund cash positions, deleveraging of hedge funds, etc. Here is another, more recent, indicator:

It is very difficult to invest in an environment where the global risk free rate is moving faster and more sizably than at any point in recent history.

But a disastrous - year to date performance in bonds/stocks - and an increasingly volatile backdrop may form the basis for opportunity as lower asset prices are the friend of the opportunistic and rationale buyer. 

Importantly, as discussed, below, though the jobs market remains strong, I see multiple signposts of deflation - in a slowdown in job openings, in home prices and second hand car prices (Manheim Index), in freight rates, lower energy prices, rising retail inventory levels, a decline in soft commodities, etc. 

I am of the view that bad news is now good news. 

Here is a summary of my observations in that column from last week: 

Oct 04, 2022 ' 09:16 AM EDT DOUG KASS

Why I Have Turned More Bullish

* I continue to (Aaron) Judge the future by looking at the past, as history is an instructive teacher.

* At times history is a vast warning system, and at other times (perhaps like today) it is a good forecasting tool for better times.

* History teaches us that investment opportunities emerge out of instability, bad news, excessively bearish investor sentiment and defensively positioned investors. (Fear, panic and lower stock prices are the allies of the rational and opportunistic investor.)

* While we fully recognize the policy mistakes that have been made and the economic and market challenges that lie ahead, we see economic buffers (moderating inflation, a strong jobs market, excess savings, a cushion of unrealized equity/home gains and high, inflation-aided nominal economic growth), a strong banking system and the absence of levered and debt-heavy sectors (e.g., in mortgage and finance) that were present in previous economic downturns.

* It is our central view that much has or is in the process of being discounted in sharply lower stock prices, so as students of history there are a number of reasons for optimism about the markets.

* All roads lead to bond yields.

* We are of the view that while inflation may remain "sticky," inflation has peaked as most inflationary forces are improving at the margin.

* Bond yields have also likely peaked for the cycle. (The yield on the 10-year US note is down by 44 basis points in less than a week.)

* Through the end of September 2022, the S&P has had the fourth worst start in history. Only during The Great Depression (1931), the bust of the Nifty Fifty (1974) and during the implosion of the dot-com era did stocks fall as much. Importantly, equities in the final quarter of the 15 worst nine months (save The Great Depression and The Financial Crisis) managed gains over the last quarter of the year.

* Equities now represent an attractive upside reward vs. downside risk proposition.

* We have been raising our net long exposure in the last several weeks as, for the first time in almost two years, we now perceive an opportunity to buy great companies for good prices.

"(To some) sanity is a madness, (I plan to) put my sanity (and analysis) to good uses."

- paraphrasing George Santayana

At the same time, I was not without concerns - especially on the global interest rate front:

Wrong-Footed Fed Policy Is at the Core of the Problem

I am not a Pollyanna without concerns. As noted above, last month's concerns regarding a rising US dollar and higher bond yields have proven correct as the Federal Reserve has outlined a more hawkish policy than many expected, hiking and emboldened to raise interest rates further and faster than at any time in decades:

In the past I have emphasized that we live in a world that is economically flat and interconnected. There is no better illustration of this thesis than looking at central bankers' policy initiatives in the last six months.

Last year the Fed adopted an ex-ante policy (of looking forward) based on deeply flawed forecasts that understated the stickiness of inflation. It was in our view the most significant mistake that has ever been made by the Fed. This year the Fed has compounded last year's mistake by front-ending or stacking aggressive interest rate moves/intentions on an ex-post basis (looking backward) based on lagging inflationary indicators.

This more hawkish Fed has placed pressure on non-US central bankers to tighten in support of their own currencies. Global equities have directly suffered under the Fed's jawboning and umbrella of tightening policy.

Of late, to reference the words of Warren Buffett, the speed and accelerated pace of Fed tightening have threatened global economies and made investors alert to possible systemic risks as the naked swimmers are exposed "when the tide goes out:"

While we believe in the final analysis those systemic risks -- such as the recent forced un-leveraging of gilt bonds by UK pension plans that led to a 92-basis-point rise in the 10-year gilt bond yield and a near 15% drop in the value of the pound sterling -- likely will be contained, we remain particularly concerned with the ramification of repeated and serial mistakes in monetary policy.

The Fed has clearly been offsides and, arguably, is making a second mistake this year in its hawkish action and tone.

These developments hurt confidence, raise volatility and increase the range of economic and market outcomes, most of which are market-unfriendly.

Here are some of the questions we ask ourselves and some observations we think about daily:

• The investment mosaic is growing ever more complex.

• It is growing more difficult to attack inflation at a time when 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?

On The Federal Reserve - "The Gang That Couldn't Shoot Straight"

For the last five years I have been openly critical of The Federal Reserve - which made the greatest mistake in monetary policy history by not tightening earlier in a backdrop of rapidly rising and "sticky" inflation. That single and fundamental concern formed the basis for my bearishness on equities as we entered 2022. 

To me, this is now "water under the bridge" - most investors now understand and agree with my concerns about Fed policy and stocks have arguably adjusted downwards and have discounted Powell's monetary boner. In other words, I am now "over it" and I am looking towards opportunity after the record market decline year to date. 

Central bankers are now getting what they want in what has been the largest and swiftest tightening in history - see chart above. 

Remember, in history, markets stop panicking when policy makers begin to panic!

With monetary policy working with a lag, the Fed - "the gang that couldn't shoot straight" - will get more of what they want in the months ahead. 

This means, to me, that Fed tightening will likely be done with after two more rate hikes: 

1. Led by housing, the global economy is slowing down post haste.
2. Asset prices are getting crushed - our markets have been a slow moving train wreck..
3. Since 1900, and through the end of 3Q, the 60/40 strategy is -21% year to date - the second worst year on record.
4. The S&P Index is -25% - the fourth worst year on record - only worse were 1931 (The Great Depression), 1974 (inflation and the end of The Nifty Fifty) and 2002 (the dot.com bust).
5. US Treasuries have returned -18% - the worst year ever. (1987 was the second worse when bonds only fell by -10%)
6. Investor sentiment is near record low levels and, arguably, retail and hedge fund investors have begun to capitulate. Nearly $70 billion went into money market funds last week out of the coffers of retail accounts. 

And Now The Good News

Besides those listed in my bullish column of last week, here are some additional and potential positive triggers to ponder: 

1. Mutual and hedge fund cash are at high levels. JPMorgan reported this morning:

Where did last week's volatility leave positioning? HF leverage was relatively unchanged, especially net leverage among Equity L/S funds which is still at the 1st %-tile since 2017. As we wrote about in our Prime Time note last week (Oct 6, "Déjà vu, Potential Energy Upside, & Positioning in UK"), aggregate positioning levels and changes in positioning have been similar to what we saw around mid-June. That is, they appear to be near 5+ year lows, but the shift lower in positioning recently has not been extreme, partly due to the fact that it's been low for a while.

1. Private equity cash hordes are at all-time high levels.
2. At some point the difference between spot and unrecognized potential will be unlocked. Goldman projects a market with $3.4 trillion of aggregate dry powder globally across growth, infra, m and a, buyout and real estate. When looking at previous uncertain moments the dry powder statistics were $800 billion in 2016, $700 billion in 2008 and $300 billion in 2001.
3. Vol control (quant, risk parity) funds equity allocation is in the 5th percentile.
4. CTA (who sell low and buy high) are full of cash and on the sidelines, too. According to Goldman Sachs, this could contribute to a large right tail asymmetry with their models projecting that CTAs would buy nearly $200 billion on a two standard deviation "up take" over the next four weeks.
5. Another right tail would be geopolitical risk premia normalization brought forth by a positive resolution to the war in Ukraine.
6. And, of course, any relief in terms of inflationary pressures, which I continue to expect, would produce a multi standard deviation rally in equities (see #4) 

Bottom Line

The hardest market to navigate in decades may now present one of the best opportunities in years for the dispassionate, opportunistic and rationale buyer who possess a timeframe measured in months/years and not days/weeks.

I entered this year with multiple concerns about the growing likelihood of negative geopolitical, economic, interest rate, inflation, corporate profit and market outcomes.

Accordingly, I have travelled through 2022 with a large cash position - materially insulating Seabreeze Partners, my hedge fund, from the dramatic declines in capital asset prices.

In the time ahead I plan to gradually utilize my cash in order to capitalize on an attractive and high risk free rate of return available in Treasuries and in the much lower prices of selected equities.

Yesterday Rev Shark wrote the following in "The Big Picture Isn't Pretty":

Doug Kass has an interesting column on his Real Money Pro Daily Diary Monday morning about the prospects for the cannabis sector. AdvisorShares Pure US Cannabis ETF (MSOS) exploded higher last week on news that President Biden was pardoning some drug offenses and was looking to change the way marijuana is treated under federal law.

Some sort of decriminalization has been anticipated for a very long time, and there was great celebration over this news. I used the spike in MSOS to pare back my position, as I believe it is going to take some time before the economic benefits of this new policy impact stocks. I'll be watching for some new support levels to form. I don't believe there is any rush to build up positions at this point.

RevShark responded to this lengthy post/analysis on cannabis that served as my opening missive yesterday.  

While I do trade and often trade around core positions, Rev and I deal in dramatically different timeframes and base our stock selection on different factors - he is principally a technician and I am a funnymentalist! 

Since Rev has not revealed the reasons behind his statement ("it is going to take some time before the economic benefits of this new policy impact stocks") nor do I have a sense of his upside price targets or industry analysis. I have made it clear that my holdings in the cannabis sector have a timeframe based on months/years and not days/weeks. 

I have chronicled why I think there is a possibility of a triple by 2025. 

If I am remotely close to this as a target I would not pare back after the one day surge - I would rather add on any weakness. 

My two bits. 

As we say in the harness racing business, horses for courses.

Upside

- (DICE) +92% (releases positive topline data from Phase I clinical trial of lead oral IL-17 antagonist, DC-806, for psoriasis)
- (ALBO) +20% (reports positive topline data from Phase 3 Trial of Bylvay (odevixibat) in Alagille syndrome)
- (JOBY) +16% (Delta to make upfront equity investment of $60M in Joby, with total investment of up to $200M possible)
- (SPNE) +15% (reports prelim Q3)
- (APRN) +10% (now offering meal kits without a subscription in the US Amazon store)
- (CDXC) +8.0% (ChromaDex and Nestlé Health Science announce new Niagen commercial supply agreement and $5M investment)
-ICL +5.4% (momentum)
- (COIN) +5.2% (Google said to have been picked Coinbase to take cloud payments with crypto; Coinbase said to move some of its applications to Google's cloud from Amazon Web Services)
- (WETG) +5.2% (to launch its self-developed global payment system WTPay on or about Oct 14th)
- (AAL) +5.1% (raises Q3 guidance)
- (GOEV) +5.1% (Zeeba to acquire up to 5,450 Canoo electric vehicles with 3,000 initially through 2024)
- (CABA) +4.9% (commences exclusive worldwide license agreement with IASO Biotherapeutics for clinically validated CD19 Binder)
- (ARAV) +4.6% (receives milestone payment of $6M from 3D Medicines)
- (DNA) +4.2% (announces collaboration with Merck to improve active pharmaceutical ingredient manufacturing)
- (AMGN) +2.9% (Morgan Stanley Raised AMGN to Overweight from Equal Weight, price target: $279)
- (CMPX) +2.1% (collaborates with Merck to evaluate CTX-471 in combination with KEYTRUDA)
- (LULU) +1.7% (Piper/Sandler Raised LULU to Overweight from Neutral, price target: $350)

Downside

- (RIGL) -11% (does not expect to file sNDA for warm autoimmune hemolytic anemia (wAIHA) program at this time and will explore options; to cut 16% of workforce and will recognize one-time cash severance-related charge of ~$1.5M in 4Q22)
- (LEG) -9.5% (cuts FY22 outlook due to lower volumes; saw home furniture demand softened significantly in the last few months)
- (OFIX) -9.3% (to merge with SeaSpine in all-stock deal; reports prelim Q3)
- (SPWR) -7.5% (Tier1 firm Cuts SPWR to Underperform from Neutral, price target: $18 from $22)
- (AZZ) -7.1% (earnings)
- (NOG) -5.2% (files to sell $350M convertible senior unsecured notes offering due 2029)
- (RBLX) -5.1% (Barclays Initiates RBLX with Underweight, price target: $20)
- (QRVO) -3.9% (Wells Fargo Cuts QRVO to Equal Weight from Overweight, price target: $85 from $130)
- (TSM) -3.4% (JPM cuts price target; KLAC said to stop some sales and services to China)
- (ZS) -3.1% (Pres Amit Sinha resigns to take new CEO position elsewhere, effective Oct 21st)
- (ZM) -2.9% (Morgan Stanley Cuts ZM to Equal Weight from Overweight, price target: $90)
- (PTON) -2.3% (Ex-CEO Foley reportedly has more flexibility to sell shares after leaving Board)
- (XOM) -2.3% (reportedly Exxon expressing prelim interest in Denbury, could be considering an offer for >$5B)
- (HAIN) -1.6% (Mizuho Securities Cuts HAIN to Neutral from Buy, price target: $16)

I have been adding to new positions in (UAL) and (DAL) in the last week. 

This morning, American Airlines (AAL) preannounced higher - with better revenues and operating margins. 

Should aid the group.

The Bank of England again is expressing this as today they are adding index linked gilts to their purchase operations in its attempt to calm down markets but instead is doing the exact opposite. This especially as all the purchases are supposed to end on Friday. I just don't see how they are then going to get away with outright selling gilts beginning month end as part of QT.

The Fed's QT right now is relatively easy as they have a lot of bonds coming due that will just mature naturally as opposed to the BoE that saddled themselves with a lot of longer term paper.

The BoE in today's statement said, "The purpose of these operations is to enable LDI funds to address risks to their resilience from volatility in the long-dated gilt market. LDI fund have made substantial progress in doing so over the past week. However, the beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing 'fire sale' dynamics pose a material risk to UK financial stability."

After yesterday's jump, gilt yields are lower while the pound is little changed. UK stocks are weaker along with everyone else.

While the JGB market is always key to watch and what the BoJ will do next with YCC, really the next one to have a gilt like event is in Italy. Today the Italian 10 yr yield is rising by 9 bps to 4.73% which is just a few bps from the highest level since 2013. This comes a day after German Chancellor Scholz expressed some openness to issuing joint EU debt which in turn the proceeds would be loaned to individual countries to help them deal with the current energy price challenges.

I'll say for the umpteenth time, we're witnessing continuing leakage from the great sovereign bond bubble and trying to figure out where US long rates are going to go by just looking at US inflation and growth stats just won't be enough in the analysis.

Italian 10 yr BTP Yield

Ahead of the inflation stats this week, Adobe Analytics yesterday released its holiday online sales forecasts. Their time frame is from November thru the last day of the year and the estimate is for 2.5% y/o/y growth in nominal terms. While below the rate of inflation, it also captures last year's boost which is around the time of Delta and we saw a jump in online purchases again.

Of particular note was what they said about the prices of goods. "Adobe expects that discounts will hit record highs (upwards of 32%) this holiday season, as retailers contend with oversupply and a softening consumer spending environment. Computers, electronics and toys will hit all time highs (for discounts)." They also said "The biggest discounts are expected to hit between Thanksgiving and Cyber Monday."

Again, we'll see this week to what extent the continued rise in services inflation offsets the likely continued deceleration in goods prices.

The September NFIB small business optimism index rose a touch to 92.1 from 91.8 in August, 89.9 in July, 89.5 in June and 93.1 in May. After being less negative over the past 2 months off a record low, those that Expect a Better Economy fell 2 pts to -44%. Those that Expect Higher Sales was less bad, rising by 9 pts to -10%. Those that said it was a Good Time to Expand was up 1 pt to 6%. There was a 2 pt drop in those that said current inventory stocks were too low. Plans to Hire did improve by 2 pts to the highest since May but job openings fell by 3 pts to the lowest since last spring.

The two compensation components moderated m/o/m. Capital spending plans fell 1 pt after rising by 3 pts last month. Those seeing Higher Selling Prices fell 2 pts to the lowest since September 2021. The earnings outlook rose 2 pts but after dropping by 7 pts in August which was the weakest since June 2020 and "Among owners reporting lower profits, 42% blamed the rise in the cost of materials, 21% blamed weaker sales, 12% cited labor costs, 8% cited lower prices, 6% cited the usual seasonal change, and 3% cited higher taxes or regulatory costs."

The NFIB said "Inflation and worker shortages continue to be the hardest challenges facing small business owners. Even with these challenges, owners are still seeking opportunities to grow their business in the current period."

NFIB

Shifting back to the UK, jobless claims in September rose 25.5k which is the highest since February 2021. For the 3 months ended August, the number of employed fell by 109k but that wasn't as weak as the drop of 160k that was expected. Also, the unemployment rate in August fell one tenth to 3.5% with wages ex bonuses rising by 5.4% y/o/y, the highest since last year. For perspective, in the 20 yrs leading into Covid, this figure averaged 2.8% but we know it is still about half the rate of inflation.

For perspective on last week's US average hourly number rising by 5% y/o/y, in the 20 yrs leading into Covid it averaged 2.5%.

From Danielle DiMartino Booth:

Some deride the the U.S. stock market as a close sibling to that village boy, a constant ringer of false alarms. Don't you know? "The S&P 500 has predicted nine of the last five recessions." For a varsity leading indicator of the business cycle quoted 24/7/365, significant realized volatility has fostered the notion of an equity market that can't stop crying wolf. Full dismissal of the signal would be rash. The stock market is still a reliable discounting mechanism, operating on the premise that it reflects all available present and future information. The key is rich contextualization.
To achieve this objective, we harken back to our Top 10 mile markers for gauging a turn in the labor cycle. They include worker-manager payroll spread, state jobless claims breadth, Challenger layoff announcement, BBB-A credit spread, U.S. Treasury yield curve, the unemployment rate, initial jobless claims, fewer jobs expectations, merger and acquisition activity and higher unemployment expectations. Combined, they span the financial markets as well as soft and hard economic data to then flag cycle inflection points.
You'd agree it's easier to focus through one lens rather than 10. To accomplish this, we created a one-stop shop - the Top 10 Labor Cycle Indicator, which averages z-scores (deviations from mean adjusted for volatility) to forge a composite metric (orange line). In the past, yellow flags for recession risk are flown when it falls to a level of -0.25 (yellow dashed line) and red flags are unfurled when it drops to -0.50 (red dashed line). Incorporating all data through September, including last Friday's 3.5% unemployment rate and the positive 20,000 worker-manager spread, the Labor Cycle Indicator came in at 0.11, two months removed from July's -0.02, the first negative print since the U.S. economy reopened in February 2021. This broad signal implies that recession risk is not imminent.
So what's got the stock market so hot and bothered? For starters, 20% annual declines in the month-end S&P 500 have signaled recessions four times: 1969-70, 1973-75, 2001 and 2007-09 (the last two are illustrated above). Granted, on this basis, there was only one false signal, in August 1988. Through last Friday's trading session, the S&P 500 was -21% year-over-year (YoY) versus the October 2021 month-end reference point (purple line). That implies high conviction for the onset of recession from equity land, even though the Labor Cycle Indicator is not flashing yellow or red.
The not good news is the Fed will shrug off equities' message and heed that of the labor market in the name of fighting the mighty beast of inflation. This week's main event, Thursday's release of the U.S. consumer price index (CPI), will further solidify market expectations for the November 2nd Federal Open Market Committee (FOMC) meeting. While the consensus is calling for a modest easing in the headline CPI (to 8.1% YoY in September from 8.3% in August) and a continued high level of core CPI inflation (at 6.5% YoY in September from 6.3% in August).
Two inflation drivers - one from the demand side and the other supply - say the Fed's mission is not accomplished. Demand is designated by money, or our new favorite Lacy Hunt gauge, ODL (other deposits liabilities at commercial banks). The trend continued to fall below normal through the end of September, grading the 1.6% YoY rate as a -1.34 z-score (blue line). The demand signal is moving in a desired direction for those who occupy the Eccles Building. It also fits with a late cycle setting for ODL, a money supply proxy that accounts for nearly 80% of M2. Anything south of a -1 z-score fits that bill (dashed blue line).
Designated by the average of inventory sentiment indices from the Institute for Supply Management (ISM) manufacturing and services Reports on Business, supply remains well below normal. To be sure, the 44.4 average (-1.62 z-score, green line) is well off the most undersupplied signal reached in November 2021. But the series normally stays between a +/-1 z-score, suggesting residual snarls must be resolved.
To that end, speculation in futures and overnight indexed swap (OIS) markets advertise a near certainty for a fourth "unusually large" 75-basis point rate hike come November (turquoise and magenta lines). Though hard to fathom coming out of the beak of an uber-dove, Chicago Fed President Charles Evans didn't sound like any boy who ever cried wolf yesterday: "If unemployment goes up, that's unfortunate. If it goes up a lot, that's really very difficult. But price stability makes the future better." Barring a systemic event, the stock market will remain in recession territory.

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

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I would continue to avoid most streaming companies ( (PARA) , (WBD) , etc.) -- "profitless prosperity" lies ahead.

From Goldman Sachs (lowers advertising sales estimates):

3Q22 Media Preview: Trimming advertising revenue estimates on tougher macro backdrop

11 October 2022 ' 12:07AM EDT

1) We trim advertising revenues estimates across our legacy media coverage by ~1% for C2022 and C2023 to reflect further macro headwinds. While we do not see these revisions as material, they nonetheless flow through to our EBITDA estimates and factor into our slightly lower price targets across most of our legacy media coverage.

2) We continue to expect cord-cutting to accelerate to a y/y pace of approximately -6.5% to -7% pay-TV sub declines through 2023 vs. approximately -5% to -5.5% in 2021. Our outlook reflects more households cutting-the-cord in favor of streaming services as well as fewer households signing up for pay-TV owing to fewer new customer connections at major cable companies.

3) We expect durable streaming net adds at the legacy media companies. At DIS, we expect core Disney+ net adds to improve q/q from 6.1mn in F3Q to 8.0mn in F4Q, driven by recent market launches and an expanded content line-up. At PARA, we expect Paramount+ net adds to downtick from 3.7mn in 2Q to 2.6mn in 3Q (owing to tough comps for international), but to ramp to >6mn in 4Q driven by further penetration of Walmart+ accounts and additional international launches.

More on absence of liquidity:

Wolf Street on liquidity in the fixed-income markets. There's Lots of "Liquidity" in the Treasury Market, but at Higher Yields, in this Raging Inflation ' Wolf Street

I warned about the Swiss National Bank's buying about six years ago.

* More follow thru on the downside in the overnight futures session despite additional intervention in the U.K. (in inflation-linked bonds). The expansion of BOE gilt bond buying has stabilized yields over there.

* The continuing streak of down S&P and Nasdaq days may continue on Tuesday.

* The unprecedented instability of currencies and interest rates continues 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, non-U.S. currencies (especially the Eurodollar) remain under pressure, placing upside on global yields -- the byproduct of ill-timed (2021-22) and now hawkish monetary policy, and what appear to be related reverse currency wars -- are moving multiple standard deviations from the mean.

* 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 two weeks ago Friday, AAII Bears are at March 2009 levels and the S&P oscillator remains in an oversold state... 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.

* The yield on the U.S. 2-Year Note is higher by two basis points overnight (highest level since 2007) after having advanced for most of the last month. The yield on the 10-Year is +6 bps... the yield is now at 3.949% (up by nearly 30 bps in the last week).

* Market inflation data has noticeably moderated, softening labor and commodities, in recent months. This morning soft commodities are lower (reversing yesterday's strength) and energy product prices have gapped lower -- Brent Oil is -$2.21/barrel -- based on continuing recession fears). But for now, the market is not focused on these factors and more focused on currencies and global bond yields. Energy stocks were lower yesterday and are trading down in premarket trading.

"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"

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

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 were broadly lower throughout the evening.

In recent weeks, during these volatile markets, I have kept a bead on volatility as well as currency rates. This morning VIX is +1.18 to 33.63.

Gold, which has collapsed in recent weeks, is -$5 this morning. I still can't work it up to buy precious metals.

Brent oil is -$2.05 to $94.12.

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 large portion of the market's drubbing recently. This morning yields are higher.

The S&P oscillator stands at -2.53%. The oscillator has been a good short-term trading tool over the last few months! While I am still at only 35% 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. This may change soon if the rate rise abates!

Cryptocurrencies are little changed at around $19k. I continue to have zero interest in the asset class.

S&P futures peaked at +9 and bottomed at -39. At 5:43 a.m. ET futures were -31 handles.

Nasdaq futures peaked at +46 and bottomed at -122. At 5:45 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:

The Biden Pivot - Cannabis Stocks May Triple

Overrated!

Brokedown Palace, Rising Global Interest Rates 

Recommended Viewing (Brady Cobb on Cannabis) 

The Problem With Tech Stocks

Here were Monday's trades:

* Added to Amazon (AMZN)

* Added to (SPY) , (QQQ)

* Sold (FGEN)