I am calling it a day as I have to prepare for some research meetings over the next two days. 

Thanks for reading my Diary. 

Enjoy the evening. 

Be safe.

From Peter Boockvar:
As the Beige Book has so much anecdotal information and I don't want to inundate you with too much, I'm going to hone in on the comments on the very interest rate sensitive commercial real estate sector as that is not just really important for the landlords but also for the banks that lend money to them.
We know of course that those with floating rate debt and/or have loans coming due are the most exposed to the new rate regime we're in. Also, depending on what area of real estate one is in matters for sure with office weak, industrial good and multi family mixed, among others.Boston:
"The industrial market continued to see low vacancy rates and high leasing demand, but nonetheless rents have levelled off recently. Though the office market remained weak-a Hartford contact described the market as "abysmal"-another contact noted a slight increase in leasing interest for larger spaces in downtown Boston, and leasing was stable in Providence. In the retail market, food and beverage establishments experienced relatively strong leasing demand, while vacancies continued to pile up for department stores and big-box retail."
"The only significant construction activity pertained to industrial properties. Most contacts expected commercial real estate activity to weaken moving forward, with the industrial market outperforming other sectors. The office class was predicted to weaken further, mainly as the result of pending lease maturations and the likelihood of high-profile loan defaults, and downward pressure on rents was expected."New York:
"Commercial real estate markets were little changed in early 2023. Office vacancy and availability rates edged up in New York City and northern New Jersey and were steady across upstate New York. Office rents were flat across the District. Retail vacancy and availability rates held steady, though retail rents fell slightly. Vacancy and availability rates edged up from low levels in the industrial market and rents trended up modestly."
"Construction contacts reported some stabilization in business conditions but remained pessimistic about the near-term outlook. New office construction starts remained at low levels in most of the District, though there was some pickup in northern New Jersey. New industrial construction starts were up in and around New York City but were little changed elsewhere. Multi-family residential starts remained weak across the District." Philadelphia:
"Market participants in commercial real estate continued to report steady current construction activity but noted additional softening of the pipeline as more projects are delayed, canceled, or redesigned. Leasing activity continued to slow modestly. While demand for warehousing and life sciences space remained strong, concerns about other commercial real estate prompted at least one large law firm to gear up for handling distressed properties."Cleveland:
"Nonresidential construction contacts reported that demand softened further because of high interest rates for commercial projects. One general contractor noted that the projects that are moving forward have often been self-funded. Real estate developers also cited weaker demand as customers have become increasingly concerned about high interest rates and general economic uncertainty. Contacts said that these same factors would lead to further softening in demand in coming months." Richmond:
"Commercial real estate activity remained unchanged since the last period. However, rent costs were moderating in certain sectors. Leasing rates for multifamily were starting to decrease, particularly for mid-priced units; high end apartment rents were unchanged. Retail leasing was strong this period especially for service and food businesses. New retail centers continued to be built and most were pre-leased, leading to lower vacancy rates. The industrial market continued to be strong with higher rental rates and good absorption levels. The supply of Class A space tightened, particularly in suburban markets. Commercial contractors noted that a general shortage of key components, including labor, remained a significant factor. Overall, commercial buyers remained hesitant to commit due to market uncertainty."Atlanta:
"Commercial real estate (CRE) contacts reported slowing market conditions in lower-tier office, multifamily, and certain segments of retail. The downward trend in the office sector eased further as more employers required staff to return to the office; however, heightened levels of sublease space remained an impediment to market recovery. Concerns regarding declining CRE values accelerated. Contacts reported increases in operating expenses and slowing or negative net operating income and rent growth. Additionally, firms continued to report instances of declining asset prices and buyers seeking greater concessions."Chicago:
"Nonresidential construction was unchanged over the reporting period, with contacts noting solid demand from health care and the public sector but weaker demand for distribution center construction. High interest rates and input costs continued to hold back activity, while lead times remained long for critical products such as HVAC and power generation equipment. Commercial real estate activity was little changed over the reporting period. Demand for high quality space remained solid, with one contact highlighting strong interest in retail space previously occupied by big box tenants. Overall, prices and rents decreased modestly, while vacancies and the availability of sublease space were up moderately."St. Louis:
"The commercial real estate sector has been mixed. Office demand remains low, but industrial demand remains high despite increased rents. Retail real estate has improved since the previous report, and one contact reported retail projects are back in demand for the first time since before the pandemic. Construction demand has slowed, with contacts reporting that many projects are on hold as investors wait out market uncertainty about rate hikes."Minneapolis:
"A Montana architecture firm said that large corporate clients have delayed project starts. Other contacts reported a smaller pipeline of future projects. A contractor in Minneapolis-St. Paul said, 'Interest rate hikes have put a considerable damper on new construction projects....Projects aren't penciling out.'"
"Commercial real estate was flat since the last report. Office space continued to struggle overall despite a slow but ongoing return of workers to downtown offices. But overall vacancy rates grew as some large tenants downsized and space available for sublease increased. Industrial property remained strong, though higher financing costs reportedly had some developers reevaluating speculative projects." Kansas City:
"Developers of multifamily housing indicated further deterioration of conditions from already depressed levels. Rising interest rates continue to be a challenge to financing multifamily housing projects, but contacts also highlighted recent volatility in rental rates as an additional headwind. Uncertainty about projected rent growth is reportedly very high, further hindering financing activities for new projects."Dallas:
"Demand for office space remained lackluster. Activity in the industrial market continued to be solid, but contacts were concerned about the elevated construction pipeline. The higher cost of capital, tighter lending standards, and economic uncertainty has made it difficult to price deals, diminishing investment sales activity."San Francisco:
"Multifamily housing demand remained steady, though contacts reported that asking rents or the rate of rent increases declined. One contact in Oregon noted strong demand for larger rental units as renters shared spaces to keep shelter costs down."
"Activity in the commercial real estate market was little changed on net. Demand for office space showed continued weakness with low rents and high vacancies. A contact in Oregon reported slowing demand for warehouse and industrial space, though other contacts reported continued strength in these sectors. One contact in Nevada observed that businesses expressed interest in purchasing commercial spaces, rather than renting them."

(GS) , (MS) , (HON) , (GE) , (SBUX) .

* Here is a yield update

The yield on the six month bill is +2 basis points to 5.31% and the one year bill yield is +4 basis points to 5.25%. 

These equity-like returns are with no risk and limited volatility. 

Given the weakening profits cycle, a more Hawkish Fed and still sticky inflation, Treasuries are the alternative.

At 2:22 pm:Breadth

View Chart »View in New Window »

Biggest Movers

View Chart »View in New Window »

Heat Map

View Chart »View in New Window »

From my buddy The Credit Strategist's Mike Lewitt:

Markets are having trouble digesting Jay Powell's sobering message that more work needs to be done to tame inflation. Talk of a 50-basis point hike in March is now back on the table (i.e., getting priced into derivatives markets) after markets convinced themselves that 2023 would only see a handful of 25 basis point hikes and then clear sailing after that. But the data isn't cooperating, leading Mr. Powell to warn that "We're looking at a reversal, really, of what we thought we were seeing to some extent...nothing about the data suggests to me that we've tightened too much."

Rate hikes have yet to fully impact the economy as seen in January's 0.6% rise in PCE inflation (the highest since last June and up from 0.2% in November and December), and January's 3.4% unemployment rate (though January's jobs increase of 517,000 was a statistical fabrication). It simply takes time for the economy to feel the effects of higher interest rates because the contracts that set interest rates on all types of financial obligations establish different timetables to adjust those rates. Some of those timetables are very short (i.e., floating rate debt contracts) and some are much longer and may require the debt instrument to mature and be refinanced at a higher rate (i.e., fixed rate debt contracts).

Accordingly, interest rate hikes take time to tame inflation which contributes to the complexity of policymaking. Concerns that the Fed will "overshoot" derive from the lagged effect of interest rates. "Overshooting" occurs when the Fed sets a terminal rate that constrains economic growth too much because it didn't give the economy sufficient time to react to higher rates. The result is a sharp economic slowdown.

If that occurs, the Fed then has to lower rates which the economy still has to take time to process, suffering the effects of a slowdown or recession until the economy starts growing again. Politicians are particularly averse to recessions and therefore very vocal about the risks of "overshooting." Needless to say, after economists, politicians are the last people who to listen to about economic policy (or any policy for that matter).

Mr. Powell's appearance before Congress yesterday was his first since last June when the Federal Funds rate was only 1.5-1.75%, pointing to the fact that rates haven't been at elevated levels for very long. We don't appear to be at the point of "overshooting" yet, but as we approach 6% it is an increasingly legitimate concern in view of the heavily leveraged nature of the American economy. For the moment, however, higher rates are not having the slowdown effect the Fed desired and the Fed believes more hikes are needed. Markets may disagree but markets have to abide by what the Fed does. And playing chicken with the Fed is a good way to get plucked.

A 50-basis point hike significantly increases the odds that the projected terminal rate, which closed at 5.65% yesterday, will hit 6%. Just as Walter Bagehot famously said that "John Bull can't stand two percent," the American economy can't stand six percent. Six percent will place serious pressure on the grossly overindebted public and private sectors, yet that appears to be where we are headed while our political leaders diddle around.

President Biden is talking about a politically unrealistic tax hike to sustain Medicare without providing any responsible proposals to reform that broken and corrupt system. Congress is a total write-off when it comes to fiscal discipline, fighting over how much more money it can use to bribe voters into helping them lead the nation to financial suicide. There is no question in my mind that only another crisis on the order of 2008-9 will lead to any chance of fiscal reform.

From where I sit, the Fed doesn't appear to be fooling around. Jay Powell may not be Paul Volcker, but he is being very clear about his intention to raise interest rates higher than anybody imagined a year ago. So somebody in DC better wake up pretty quickly and realize we are rushing headlong into a serious fiscal crisis. The markets are still hoping and praying that the Fed will back off but that is increasingly looking like a very bad bet.

The bond market is paying attention to these issues while the stock market continues to behave like dumb money. There is no reason why the S&P 500 should be trading anywhere near 4,000 in view of what the Fed is telling us it plans to do, what corporate profits are likely to do (even the phony corporate profits companies report), and what is happening geopolitically and politically. Investors don't have zero rates anymore to bail them out from their own stupidity and obliquity.

But rather than rant, let me look at some data. There is interesting data showing corporations are starting to cut back spending (the government is not cutting back anything which is a major contributor to sustained inflationary pressures). In his latest note, Societe Generale's brilliant strategist Albert Edwards points out that a subset of durable goods orders (non-defense capital goods orders ex-aircraft) is a good proxy for business investment spending and showed 16% nominal growth but much lower real growth over the last two years and flattened out over the last six months.

He attributes this to the fact that corporate profits are falling year-over-year, causing corporations to cut their capital spending as they normally do as the business cycle turns down. He also expects business inventories to turn down with the declining profits cycle. He cites an article in the Financial Time's Unhedged column by Ethan Wu that points to slumping US corporate margins from their pandemic peak as another warning sign. Margins have fallen back to trend from very elevated pandemic levels which suggests that companies have yet to feel compelled to cut investment and jobs aggressively (with the notable exception of the technology sector). But we are seeing increasing signs beyond technology (i.e., Wall Street, Hollywood) that cuts are coming.

As we move forward in time, the weight of higher interest rates will increase on the corporate sector which should lead to further investment and jobs cuts. This is taking time to work its way into the system for the two reasons noted above: (1) many companies refinanced their debts when rates were below 2% and are still living off low interest rates, and (2) rates have not been at current elevated levels for that long even with the Fed's aggressive tightening program.

With respect to the first reason, there is a great deal of floating rate debt outstanding whose cost is rising (3-month Libor is over 5% - no need for Libor floors anymore...) and pressuring many leveraged borrowers (Speaking of which, I note that WE - the barely breathing WeDontWork - is about to restructure $3 billion of debt, which just goes to prove that in order to kill some zombies you have to literally chop their bodies into little pieces and then set them on fire. I also note that the cost of Twitter's acquisition debt is likely higher than forecast when the deal was done while what is happening on Twitter seems to be much less worth paying for by advertisers).

Just because it takes time doesn't mean that higher interest rates won't do what they are supposed to do. Investors were hoping the Fed would lower them again quickly before they did their work but they forget that a similar lag effect works when that happens as when they raise rates. There are no free lunches in a world without ZIRP/QE. In a perverse way, everything that is happening today is leading to the type of crisis that may be precisely what returns us to a world of such destructive policies.

After recently calling for a near term rally, Morgan Stanley's Mike Wilson retreats and turns near- and intermediate- term bearish.

With the low VIX I have taken off all of my straddles for a profit.

(XLF) breaks $35.

No Bueno.

I am back down to small net short. 

Trading.

Also, I am increasingly concerned about the absence of any lift in the financials.

With S&P cash +12 handles and well off the lows, I have moved back to market neutral with the selling of this morning's Index buys -- (SPY) $399.48 and (QQQ) $298.22.

Stocks waffle a bit nervously as Powell's day two testimony begins.

The ADP based on recent readings of its modified model might suggest a slightly higher than expected payroll number on Friday. The JOLTS data seems to indicate the fact that the slowdown in real estate is starting to show up in weakening construction opening (hat tip Peter Boockvar).

If the market decides to get back to business and do some testing, we want to watch the 3970 area in the S&P. If they touch below that, we will see if there is any follow-through. It is not a big technical level on the cocktail napkins, but on the lower low kind of premise, it might bring in some reaction. So, we watch that carefully.

Aside from Powell, we will now go to watching the ten-year and in front of the auction. The ten-year is showing a decent bid this morning and it may be based on people adjusting positions in front of that auction. Also, the Fed Tan Book at 2:00 pm, presumably after Powell is finished, will be looked at to see what kind of regional Fed input we are going to be looking at when they start to decide on rates.

So, the coin is in the air. They will probably be concentrating on Powell for the next hour or so and then if it doesn't look like the questioning is going to bring anything meaningful, they go back to check their own technicals.

The bulls also want to get back above 4000 in the S&P. The bears want to see if they can break that 3970 level.

Stay tuned to Powell and try to stay safe.

Arthur

I will be out of the office Thursday at an offsite Board meeting between 10 am-3 pm. I will be monitoring the market during that period but my posts will be very short and infrequent.

On Friday I will be out at a conference and two spinout research meetings between 9 am-1:30 pm.

A heads up.

From Peter:

Job openings in January totaled 10.82mm, almost 300k above the estimate but down from 11.23mm in December. Hiring's rose by 121k from December and the hiring rate was 4.1% vs 4% in December and 4.1% in November. The number of quits fell and the quit rate fell to 2.5% which is the lowest since February 2021.

Well, at least in the most interest rate sensitive part of the economy, real estate, the Fed's hikes are working to kill job openings. The number of job openings in the construction sector plunged by a sharp 240k jobs to 248k and that is the least since October 2020. Job openings for 'real estate/rental/leasing' fell to the lowest since October 2021.

Reflecting the slowdown in manufacturing, the number of job openings in durable goods manufacturing fell to match the lowest since April 2021. Job openings rose for 'professional/business services' but gave back the rise in December for leisure/hospitality. The demand for education/health was steady as it always is. Job openings fell for retail but rose in transportation.

Bottom line, the quit rate fall (in response to hiring moderation) and the real estate sector shrinkage in job openings are the early signs of the rate tightening impact. And again, if there is any mean reversion and correlation left between ADP and BLS, Friday's number is going to disappoint.

View Chart »View in New Window »

View Chart »View in New Window »

View Chart »View in New Window »

View Chart »View in New Window »

* Since 1 pm yesterday

Friend: "Dougie, I don't understand why the market hasn't collapsed."

All the same. 

All the same.

From Peter Boockvar:
ADP said 242k private sector jobs were added in February following 119k in January. While that was above the estimate of 200k, the January figure was of course quite different than what the BLS told us. Of note, small businesses shed jobs, totaling 61k but was offset by the rise in hiring by medium and large companies.
For a local restaurant or small business to compete for labor with Chipotle paying $20 an hour or Amazon doing the same, is really tough. Manufacturing added 43k jobs but construction fired a net 16k. With services, leisure/hospitality again was the biggest hirer, adding 83k while people in 'professional/business services' lost jobs.
Income growth is still really good but is moderating. For 'job stayers', pay rose 7.2% y/o/y, though the smallest gain in a year. A 10.1% rise for leisure and hospitality workers led the way. For 'job changers', wages rose by 14.3% but a comedown from the 14.9% seen in the month before.
Bottom line, while ADP's chief economist referred to this job figure as "robust", the pace of hiring is slowing as the 3 month average of job growth is 200k vs 202k over the past 6 months and which compares with the 12 month average of 274k. For perspective, ADP averaged 256k in 2018 and 206k in 2019.
With respect to Friday's BLS report, because of the huge upside seen in January, I would not be surprised to see a negative number for the sole reason of mean reversion. So, ADP said the 6 month number of private sector job gains are about 1.2mm (200k x 6 months). Over the past 5 months (so awaiting Friday's tally), the BLS private sector job gain is already at 1.58mm. Over time these two data points should converge.

* (DIS) $98.93

* (AMZN) $93.41

* (GOOGL) $93.87

I added to (SPY) and (QQQ) (at $397.89, $296.06) on the whoosh lower due to the JOLTS report.

I have been short Essential Utilities (WTRG) . 

Here is a writeup that was delivered by Spruce Point Capital this morning. 

With today's story of the fleas and the dogs, I am reminded that the late great Ronald Reagan often said that the most dangerous phrase in the world was - - "I'm from the government and I'm here to help."

Traders might have empathized with that a little bit as the Fed Chair went up to the Hill and seemed to surprise the market a bit and that, in itself, should have been a surprise because, as I have written about and repeated that shortly after 9:00 in the morning on CNBC's Squawk on the Street, the odds very heavily favored the fact that he would take a somewhat hawkish position to reinforce the pattern of where the Fed's policy had been.

Regular readers will also recall that last week as the "Salesforce" conspired reversal rally broke out, I noted that I believed the rally might continue until Tuesday of this week and, at which point, it would sell off. We are back to the blind squirrel and the acorns again. Anyway, I also noted on TV that Powell's greatest opportunity to send a message would be in his written or prepared statement over which he had complete control. He could not control the questions the Senators asked him so; he can set the tone by writing whatever he wanted to dwell on and that is exactly what he did. We covered some of that in this late morning update:

Late Morning Update 03.07.23 - As we suggested in the pre-opening Comments, Powell's prepared statement, in which he had the flexibility to deliver the message he wanted, stunned the markets a bit. Actually, at first, the equity guys looked a bit bewildered for a minute or two, but then they noticed that the yield on the two-year shot up to a 15 or 16 year high. That gave them the message loud and clear. For now, they are circling the wagons with the Dow down about 200.

We will wait to see if there are any surprises in the Q&A, but the fact that he pretty much said we will stay the course and we are here to get inflation back down to 2%, gave all the hopes of pause or whatever a little bit of a poke in the nose. We will continue along with the rest of you in monitoring the Q&A. We will again look to see if further weakness develops. Does the S&P break below 4000, which would provide some negative technical signals? For now, it is all up to Powell at the microphone and the Senate Committee and the Senate is deemed to have the most knowledgeable questions. So, we will see if they are sharp and try to pin him down in any way.

For now, the bears have the initiative. As I say, the bulls are trying to circle the wagons at about -200 and we will wait to see what happens further. Stay safe.
__________

As we noted in the update, it was interesting to see the bond market reaction. While the stock oriented TV pundits kept talking about the ten-year, which has certainly been an item that we have remarked and followed, more importantly, as we noted in the update, it was the two-year and shorter rates that skyrocketed, indicating that they believed Powell might, in fact, be hiking rates in the very, very near term and, they went to 16 year highs and yield inversions went to 40 year extremes.

It was a little surprising that it went to work on the stock market. Their attempt to circle the wagons, however, got runover rather readily and continued through the day as we made note of in this midafternoon update: Mid-Afternoon Recap 03.07.23 The Bears remain in control as we move through the afternoon. The early attempt to circle the wagons at minus 200 got rolled over, as did a series of other attempts at lower and lower price levels. The S&P then took leadership and they had the battle of 4000. Ultimately, they got overrun at that point, although they're still trying to hold together.

The key here will probably be - do they close below 4000? If they close below 4000, that heightens the likelihood that we may retest the 200-day moving average and all those other cluster points between 3925 and 3940. Cross your fingers and hope the Bulls can mount some kind of defense. Stay safe.
__________

We watched them struggle again and again. First to hold the 4000 level and then struggled to try to re-attain it as we moved to the close, but it was to no avail and despite hearing from guys who are pretty good on the technical side, my cocktail napkins tells me that we have, in fact, raised the possibility that we may have a retest of the critical support area between 3925 and 3940, which contains an absolute cluster of important metrics, including the 200-day moving average.

The 50-percent retracement level and a variety of other technicals. So, should we test it, it will be critical as what to we do and should we break it, I think that will raise the possibility that we will go back and retest the October lows down around 3500/3600 level, but first let's talk about Chairman Powell's second day. Now, as much as we cared about his written presentation, for today it will be meaningless since it must be word for word - comma by comma - punctuation by punctuation the exact same as the presentation he gave the Senate on Tuesday morning. So, we know there will be absolutely no surprises. The only surprises then can come from the questions raised by our elected officials and, if the Senate questioning is any example, they will be trying to use Powell to make political points for their party or their view - - wouldn't you agree Mr. Chairman that blank, blank, blank, blank.

There are no easy or ready surprises seen therein. So, a lot of it will be some of the technicals again. Can we get back above 4000? Can they hold above it if they get there and what will some of the other potential technicals bring? In the meantime, according to standard procedure, we have to take a moment to look and see what our foreign cousins did following their assessment of what they saw here in the U.S. and what they heard at home overnight.

Overnight, global equity markets are a touch mixed, but with a predominate lean to the downside. In Asia, Japan and India are modestly higher. Mainland China is fractionally lower, but Hong Kong is down the equivalent of about 700 Dow points. In Europe, however, there is general agreement, and they are all moderately lower with slightly lighter than normal trading.

The U.S. economic calendar will be dominated by Powell's second appearance, but we still have other items early on. It being Wednesday, we are going to get the mortgage data and then ADP Payroll estimates, which will happen before the market opens and can influence people about any shading it may give the Powell testimony. About the same time Powell gives his testimony, we will get the JOLTS data, which will also be important, particularly if it corroborates whatever message we got from the ADP Payroll estimates. Again, it being Wednesday, we are going to get oil inventories.

At 1:00 p.m., there is a pretty big ten-year auction and at 2:00 pm, we get the Fed's Tan Book. So, we have Powell and shading around what he is saying, and the Tan Book will be look to for corroboration again and ADP and JOLTS also will be an influence. Away from that, you know the drill.

Stay close to the newsticker. Keep your seatbelt fastened. Stay nimble and alert and keep your eye on the yields - not just the ten-year with that auction but see if the two-year in short paper also moves up, but at any rate, stay safe. 

At 8:20 am:

View Chart »View in New Window »

Upside

-FRTX +80% (announces positive topline results from single and multiple ascending dose parts of Phase 1 study of oral DYRK1A Inhibitor FRTX-02; Evaluating strategic options to further develop FRTX-02 and maximize shareholder value)
- (KBAL) +72% (to be acquired by HNI Corporation for ~$12.90/shr [$9.00/shr in cash and 0.1301 shares of HNI common stock] in $485M deal)
- (DSEY) +38% (to be acquired by Solenis for $8.40/shr in cash valued at $4.6B)
- (RIGL) +31% (earnings)
- (HNI) +21% (acquiring KBAL for ~$12.90/shr [$9.00/shr in cash and 0.1301 shares of HNI common stock] in $485M deal)
- (MESO) +15% (US FDA accepts BLA resubmission for Remestemcel-L)
- (MAXN) +14% (earnings, guidance)
- (OPK) +14% (OPKO Health's ModeX Therapeutics enters into exclusive worldwide license and collaboration agreement with Merck to develop Epstein-Barr virus vaccine candidate)
- (VERX) +9.7% (earnings, guidance)
- (WE) +7.0% (said to be in further restructuring talks with debt holders)
- (CRWD) +5.7% (earnings, guidance)
- (LTH) +4.3% (earnings, guidance)
- (OXY) +3.0% (Berkshire Hathaway purchases an additional 5.8M shares, raises stake to ~200.2M shares)

Downside

-INBS -46% (files to sell shares of indeterminate amount)
- (MIRO) -32% (prices 6.25M shares at $1.60/share)
- (SOUN) -11% (earnings, guidance)
- (SFIX) -8.7% (earnings, guidance; CFO to step down)
- (BBIO) -3.0% (prices 8.8M shares at $17.00/shr for $150 in proceeds)
- (USFD) -2.9% (hearing share block being shopped via Morgan Stanley)
- (EW) -2.0% (downgraded at Wells Fargo)

From Peter: Powell and rates, overseas dissent/Some data points/Mexico
While Jay Powell continues to feed the rates market more gummies, not appreciating the time delay feature, nor the shock of a vertical rise in rates in just one year and that positive real rates for a while will itself be a continued form of monetary tightening, the Bank of Canada is expected to sit on its hands today, keeping its overnight rate at 4.5%.
Swait Dhingra is a new member of the Bank of England and she today is expressing her interest in going slow from here. "Overtightening poses a more material risk at this point, through potential negative impacts from increased borrowing costs and reduced supply capacity going forward. It risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed through energy and housing costs."
Now this opinion is in stark contrast to fellow colleague Catherine Mann who wants to keep on hiking but there is at least some dissent at the BoE.
There is also growing dissent within the ECB. It was Governing Council member Robert Holzmann a few days ago that said he wants to hike 50 bps in the next four meetings. He was slapped today by Ignazio Visco from Italy who said "Uncertainty is so high that the Governing Council of the ECB has agreed to decide meeting by meeting, without forward guidance. I therefore don't appreciate statements by my colleagues about future and prolonged interest rate hikes."
By days end yesterday, the fed funds futures pushed the March meeting rate hike odds of 50 bps to 64% vs 48% after he was done talking. I still think they go 25 bps as he's already made the downshift calibration that I don't think he will reverse. I appreciate Powell's fight and the need to further temper inflationary pressures but this process takes time and now that we are on the cusp of no longer having negative real rates, has to be treated more delicately in balancing the impact on the economy.
You've heard me talk many times before about how the below trend sales of new cars over the past 3 years will limit used car supply for the coming 3 years. So we saw the February Manheim wholesale used car index yesterday that showed a 4.3% m/o/m price increase seasonally adjusted. This is the biggest one month increase in February since 2009 and thus is not 'typical' according to Manheim. The explanation is pretty easy I believe understanding that leasing since 2019 has made up between 20%-35% of annual car sales. In February 2020, the auto sales figure in SAAR terms was 16.8mm. In March 2020 it plunged to 11.4mm and to just 8.6mm in April 2020 and got back to 12.2mm in May 2020.
Thus, a dramatic decline in cars coming off lease right now and leading to the lift in used car prices. I also heard from an executive at Sonic Automotive last night on CNBC who told Mike Santoli that he saw many more fleet buyers entering the used car market in February which was also a factor in the firming of prices.
Fannie Mae released its February Home Purchase Sentiment Index yesterday and it fell 3.6 pts m/o/m and is back near the survey low seen in October 2022. Doug Duncan, their chief economist, said "The decline was partly driven by a substantial decrease in consumers' sense of home selling conditions, with most respondents who indicated it's a 'bad time to sell' citing unfavorable economic conditions and mortgage rates as the primary reasons for that belief." Nothing surprising here, especially with the reversal higher in rates since the January payroll report.
What was worth noticing in the Fannie Mae survey ahead of this week's jobs data were the answers to the labor market questions. "The percentage of respondents who say they are not concerned about losing their jobs in the next 12 months decreased from 82% to 73%, while the percentage who say they are concerned increased from 18% to 24%."
While the average 30 yr mortgage rate lifted another 8 bps to 6.79%, mortgage apps rebounded by 7.4% w/o/w. Purchases after 4 weeks of declines rose 6.6% w/o/w as the spring buying/selling season is upon us, though still down 42% y/o/y. Refi's were up by 9.4% but down 76% y/o/y. Assume at this level of mortgage rates that most are refinancing to take cash out of their home as opposed to trying to lower their mortgage rate. By the way, about 90% of outstanding mortgages are under 5% and 70% are below 4%.
Also out yesterday was the February Logistics Managers' Index which fell 2.9 pts to 54.7 from January. While still above 50 it follows two months of gains. Of note, the 'transportation costs' component is "now contracting at the fastest rate we have measured in the 6.5 yr history of the index." Part of this though is seasonal as February is sort of a hangover month after the holidays and the January gift card usage and returns influence.
LMI said "There is some optimism from some corners that traffic will pick back up sometime in Q2 as retailers begin to rebuild inventories ahead of back to school and holiday shopping, but as of this moment that has yet to materialize." LMI said there has been some loosening of warehouse capacity but storage prices are still accelerating, though should start to moderate.

View Chart »View in New Window »

If there is a beneficiary of the diversifying supply chains from China, it is Mexico. And while much of the focus of the direction of the US dollar is against the euro and the yen, have you seen what the Mexican peso has done? It's just off the best level vs the dollar since 2017. The Mexican stock market is up 9.5% year to date too.
Mexican Peso (the lower it is, the higher value vs the US dollar)

View Chart »View in New Window »

dougie kass

Added to SPY $397.89 and QQQ $296.06.
Dougie

It's the Jerk
He's doing the Fly
Don't play him cheap 'cause you know he ain't shy
He's doing the Monkey, the Mashed Potatoes
Jump back Jack, See you later alligator

Come here sister
Papa's in the swing
He ain't too hip now
But I can dig that new breed babe
He ain't no drag
He's got a brand new bag

- James Brown,Papas Got A Brand New Bag

With the possible exception of Little Richard, no one has ever made a rock or rhythm and blues record this extreme. And at a time when Motown had made comparatively ornate records seem the wave of the future. Brown posited the most radical alternative: a record so totally immersed in rhythm that you barely noticed ornamentation at all.

It is bone rattling and skirts the edges of intelligibility with his voice quavering and shaking like a man with cosmic palsy, Brown declared a new order of rhythm and himself its avatar.

No record before "Papa's Got A Brand New Bag" sounded anything like it. No record since - certainly no dance record - has been unmarked by it. James Brown is entitled to every bit of his vanity, because in 1965 he invented the rhythmic future in which we live today.

* From trouble ahead, trouble behind to a market that just won't like be much fun (since I quit drinkin') to You Can't Roller Skate With a Buffalo Herd (meaning it's a tough market to navigate these days). And soon thereafter the market was down 4%-6% from the early February highs - and The Law Won! Wednesday I moved to Long Island's Billy Joel so I can finally find what I am looking for.

Yesterday it was all about that (interest) rates. Friday was a market of Big Nothing, grinding sideways between levels of resistance and support? No, not really - it gapped higher to near the 2023 highs as tat expectation was shattered by the close of trading last week and, on Monday, many thought the worst is over now... Yesterday we moved to Dylan's "beware"... and today, after Powell's testimony we have a "brand new bag!"

* Bulls and "Moving Monkeys" were emboldened by Thursday and Friday's rally off and then above the 200-day moving average. I have cautioned about this in my Diary (and used the strength to sell/short). Late yesterday and early this morning we moved from small net short to small net long.

Looking back here is an example of the growing wrong headed consensus after Friday's wicked climb:

"Do not trade as if we're in a bear market, because we are not. The recent reset of Fed Funds expectations helped create the set-up for the bounce from Thursday's intraday S&P low of 3928. We believe the bounce has room" - Wells Fargo's Chris Harvey

* Regardless of the new regime of volatility, there is no change in my base expectation that we may have seen the top in the S&P 500 Index for all of 2023. Despite Friday's ramp and Tuesday's drop, and the business media's breathless hyperbole, I feel we will remain range bound.

* Adjusting for the small rise in stock futures (at 6:57 a.m.), the S&P sits at 3990, well below Monday's close. According to my "fair market value" and trading range calculus, there is +100 handles to the upside and -300 handles to the downside. That is a negative 3-1 ratio - but we are only about 100 S&P handles away from intrinsic value and a balanced upside/downside ratio.

* In this trading market I am trading more actively these days. Emphasizing pairs trades, straddles and strangles.

* The intermediate term outlook for stocks, remains difficult in light of the competition and a "sea change" and new regime of higher interest rates:

* The S&P Oscillator fell a bit further yesterday to -1.19%, a bit less oversold from day earlier.

"You are never as smart as u think you are when you are making money or as dumb as u think when losing."

-- Unknown

"The stock market will do whatever it has to do to embarrass the greatest people to the greatest extent possible."

-- Wally Deemer

"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"

This daily Futures feature is like inside baseball. I try to show you and write about what I believe thoughtful hedge fund managers are looking at when they awake -- let's call it our normal routine -- setting the stage for their strategy for the day. The market is a complicated mosaic and the more info you have, the better trader and investor you will be!

The market (and money) never sleeps -- and neither do I, it appears! I have previously 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 are often exaggerated outside the regular trading session. I frequently try to capture those efficiencies by trading actively both in the pre- and after-market sessions.

Here are some brief observations I wanted to highlight and a summary of overnight price movements in various asset classes:

* Tuesday's close (S&P 3985) is above (+85) "fair value" of 3900 and compares to The Chop Bucket of 3700-4100 for the S&P 500. S&P cash adjusted for the modest climb in futures is now a bit over 3990. Ergo, today there is about a 3x risk versus reward.

* Stock futures were quiet most of the evening - and in a narrow range for the third night in a row - as all the action has shifted to the regular trading session! S&P futures had peaked at +11 and bottomed at -6. Nasdaq futures peaked at +48 and bottomed at -35. At 7:20 a.m. ET, S&P futures were +4 and Nasdaq futures were +20:

* The S&P Short-Range Oscillator has been a great trading gauge. When it gets oversold, as it did last Thursday (at over -4%), the market robustly rallied. When it moved to less oversold (-1%) we got yesterday's schmeissing. The Short-Range Oscillator closed Tuesday at -1.19% compared to Monday at -1.72%, Friday at -1.53%, Thursday at -4.40% and Wednesday at -4.21%. For perspective, when the rally started on Dec. 28, 2022, the Oscillator was deeply negative (oversold).

* I have also kept a bead on volatility. In recent days the VIX has exhibited interesting - some might say flawed - behavior, falling in both up and down days. This morning, the VIX was at 19.81 (+0.22). As volatility declined recently, I took off a lot of my straddles and strangles for a profit. Over the last week I have repositioned and put back on some of my straddles.

* For the third day in a row, the U.S. dollar is stronger against the yen and euro. Little change against sterling. The consensus seems to be that the US dollar has peaked, but this chart suggests it is only consolidating its recent gains:

View Chart »View in New Window »

* I have been continually writing that bonds should be at center stage to equity weightings - it's all about the rates.

* The Two-Year Treasury yield is +3 basis points at 5.043% and the 10-Year is flat to 3.97%. Over there, the yield on the 10-Year U.K. Gilt bond is -3 bps. See my Barron'sinterview two weekends ago that describes rising rates as the single most important headwind against further stock gains.

As I have written, above any other independent variables the absolute level of rates keeps me from expanding my net long exposure to much higher levels as there is an alternative. And that alternative - intermediate bonds - provides generous and equity-like returns. This helps to explain my recent Treasury note buys over the last month. 

US Treasury Yields: End of 2021 -> Today

1-Mo: 0.06% -> 4.80% 3-Mo: 0.06% -> 5.04% 6-Mo: 0.19% -> 5.32% 1-Yr: 0.39% -> 5.22% 2-Yr: 0.73% -> 5.00% 3-Yr: 0.97% -> 4.66% 5-Yr: 1.26% -> 4.31% 7-Yr: 1.44% -> 4.17% 10-Yr: 1.52% -> 3.97% 30-Yr: 1.90% -> 3.88%

* The 10s/2s Treasuries curve moves to another record wide of -107 basis points.

* Commodities (where there are no zero days to expiration options!) are broadly lower again this morning. Brent crude is lower for the third consecutive day this week to $83.13 (-$0.12).

* Gold is flat.

Here is a synopsis of some of my columns I believe were important, or in the event you were out for the day and did not read my Diary. The principal intent is to review the logic of my market moves and other factors:

The Great Earnings Reset May Lie Ahead

A CRE Crisis?

Powell, Inflation, Treasuries and Markets

This is How I Evaluate The Market's Risk and Reward

And here are Tuesday's trades:

* Mar 07, 2023 ' 10:45 AM EST DOUG KASS

SPY, QQQ Moves

Selling (SPY) $403.05 and (QQQ) $299.70 on the rally off of the lows.

* Mar 07, 2023 ' 11:20 AM EST DOUG KASS

Shorts as Trades

I covered my (IWM) short at $187.42 for a nice profit over a very short period of time.

Position: None 

This table is good fodder for short term traders:

View Chart »View in New Window »

Late last week we essentially sold out of our long bank holdings - based on our growing concerns regarding the commercial real estate space and other credit fears, rising deposit (funding) betas and the likely economic consequences of the Fed's problems associated with taming inflation. 

JP Morgan today comments negatively on the sector: 

BEARISH MESSAGE FROM FINANCIALS INDUSTRY CONFERENCE (James Goulbourne)

• Banks providing a bearish message this morning from the ongoing industry conference, with the funding landscape turning more challenging faster than previously assumed; pressure likely to continue over the next few quarters as banks compete increasingly aggressively for deposits.
• We continue to see sector risk as asymmetric to the downside, driven by either: 1) the economy taking longer to move into a recession, with banks seeing continued negative EPS revisions as deposit costs ramp higher as the Fed adopts a higher terminal rate (see Powell's comments today for reference) or 2) a recession manifesting itself, with credit fears moving to top of mind and the sector pricing in a higher cost of equity.
• In the short term we think deposit dynamics will dominate.

Wolf Street on the ECB balance sheet.

From Liz Ann:

Dollar strength (best since November):

View Chart »View in New Window »

I have reestablished my longs in Alphabet (GOOGL) and Amazon (AMZN) after the close of trading yesterday and this morning in the premarket.

Yesterday's sizeable market decline (-65 handles) took the S&P Index to within 2% of my calculation of "intrinsic value" (3900 on the S&P). 

Remember in a "fairly valued market" there are always attractive individual equities to purchase - and attractive shorts! 

After the close of the market I moved from small net short to small net long - added Indexes.