DAILY DIARY
So Happy Together!
Me and you, and you and me
No matter how they toss the dice, it had to be
The only one for me is you, and you for me
So happy together
Thanks for reading my Diary today.
It's nice to be back.
Enjoy the evening.
Be safe.
I have two research calls, so I will see you bright and early tomorrow.
Forecasting Is Difficult...
I love this tweet from my old pal Dan:
Nvidia Move
I rarely do this but I shorted - trading rental at $373.40 - a small amount of Nvidia (NVDA) based on the extended overbought.
I would advise most not to follow this non rigorous trade.
'There Is No Later. This Is Later'
From my pal and fellow stooge, The Credit Strategist's Mike Lewitt:
The warning signs were hiding in plain sight that 2023 would be a tough year. It seems like many people expected the calendar to turn from 2022 and bring with it a newly positive investment environment. But that isn't how the world works. The IMF offered the following gloomy prognosis:
"The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next. The three largest economies, the United States, China and the Euro Area, will continue to stall. Overall, this year's shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession."
Indeed, for many it is already feeling like worse than a recession. The question is whether it will end up feeling like a depression. We are in a period where several negative cross-currents are creating enormous strains on the financial system.
First, the exogenous shocks and imbalances caused by the pandemic and the war in Ukraine disrupted global supply chains and unleashed massive government support. Supply chains are easing for the most part but government support is being withdrawn.
Second, companies are raising prices in response to labor and supply shortages, unleashing the highest inflation in forty years that is not receding as quickly as hoped. Further, this inflation is being further exacerbated by record government spending related not merely to the pandemic but to political demands to address climate change, wealth inequality and military threats from strategic adversaries.
Third, higher interest rates are causing artificially inflated asset values to unwind, causing stress for leveraged financial structures of all sorts around the world.
This is a culmination of the financialization of the global economy that began with the United States exiting the gold standard in 1971 and the post-1971 liberalization of exchange rates and deregulation of savings and then extended to the growth of shadow banking, derivatives, and foreign exchange trading and then the explosion of public and private debt throughout the world.
These developments led advanced economies to shift their focus from productive to speculative investments and from domestic manufacturing to cheaper offshore production while the explosion of leveraged credit allowed consumers to spend beyond their sluggish wage growth. Debt levels grew far beyond the productive capacity of the global economy to sustain them, forcing governments to intervene to support the system every time the system cracked and experienced a debt crisis (as just happened with the banking systems in the U.S. and Switzerland).
When debt levels became unsustainable in 2008, governments intervened to support the system. But that support came in the form of more and cheaper debt over the next 15 years that only worsened the problem. A debt crisis was solved with more debt which solved nothing in the long term. Further, that support was not accompanied by reforms to encourage productive investment or discourage speculation. Instead, governments adopted pro-debt policies such as ZIRP and QE that rendered debt even more attractive and resulted in an explosion of global leverage that can never possibly be repaid other than through default, inflation, or currency debauchment.
Even before the 2008 financial crisis, the global economy lacked the productive capacity to generate sufficient income to service or repay its current debt burdens (which are growing much faster than that productive capacity). Today the situation is far more dire. Developed country governments can try to inflate away the debts they incur while paying lip service to fighting inflation but their citizens' buying power is being obliterated. And even after nearly 500 basis points of rate hikes in a little more than a year, real interest rates are still in negative territory in the United States. The prospects that real rates will move into positive territory are questionable (especially if you look at real world rather than government inflation numbers).
But for the moment, the world is sleepwalking past these problems. But there are virtually no political constituencies willing to seriously address spending, taxation, entitlements, inflation, or any of the issues that must be addressed to prevent another crisis. As painful as it is, inflation is politically easier to bear than the spending cuts, interest rate hikes and other measures required to tame it. It is a silent destroyer. Complaining about it makes good press but suppressing it causes too much pain for politicians and voters to bear. It's easier for the government to intervene when something breaks and cover the costs than to lower the costs upfront.
My Bloomberg Interview
My Bloomberg interview with Matt and Bramo this morning!
My comments are at the 28 minute 22 seconds mark.
Programming Note
I have a business lunch between 12 - 2pm.
Radio silence.
My Short Exposure
I am expanding my short exposure from very small to small.
Among the reasons:
* S&P at the upper end of the projected trading range.
* Narrowness of markets advance.
* The S&P Oscillator has risen from -5.48% (oversold) last Wednesday to 2.94% at yesterday's close.
* The VIX is at 19.
* Weakness in financials.
* Valuations now stretched.
* Optimism about Fed cuts may be misplaced.
* Business media is giddy... once again.
Market Internals
At 10:45 am:
- NYSE volume 147M shares, 16% below its one-month average
- NASDAQ volume 1.36B shares, 0.5% above its one-month average
- VIX index +0.8% at 19.27
Breadth
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Biggest Movers
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Heat Map
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The Book of Boockvar
From Peter: Supply will be an ongoing problem/Gary Friedman day.We've been positive and long energy stocks since October 2020 and notwithstanding the recession worry fueled pullback recently, we remain so, especially after reading the Dallas Fed's Q1 Energy Survey out yesterday. Here are some notable quotes from a variety of energy industry participants that point to continued strains on supply for not just the short term but for years to come. "Oil price correction is adding pressure on the continuation of drilling and fracking activities. We expect the activity level to be flat to down in 2023 vs 2022's exit." "The dramatic increase in 2022 inflation has severely negatively impact project economics." "Uncertainty of the depth and duration of a bank crisis is causing us to be nervous about capital spending plans in 2023." "Regulatory uncertainty continues to be a headwind. Inflation pressures appear to be moderating slightly, but we still have a long way to go." "Permitting delays by the administration's policies have caused us not to drill two wells we had hoped to drill this year. The Bureau of Land Management is holding them hostage." "The current low oil prices, coupled with the banking scare, will be hard on smaller, undercapitalized companies to conduct business as usual. There will be tougher credit and lower reserve values because of new price decks." "An estimated 30-40% cost increase in field operations, increased interest charges on borrowed money, a drastic collapse in natural gas prices combined with lower crude oil prices produced a noticeable lower cash flow. Service company capacity is quite limited in select basins. Outside investors seem to be losing interest in hydrocarbons. The worldwide macroeconomic and political outlook is cloudy. The road ahead looks difficult but passable. We expect another 'muddle through' period in a cyclical business where more players will be winnowed out." "The uncertainty in oil and gas prices is making it difficult to plan for the future. Between government regulations and oil and gas prices, it is becoming more and more difficult to remain in the oil and gas business." "We expect oil and gas production to decline in 2023 due to higher drilling and completion costs. The significant factor is the lack of qualified employees. The second factor is the negative impact of environmental, social and governance initiatives." "The low oil and gas prices are impacting investment. Talk by government officials regarding the oil and gas industry makes one wonder why the industry should risk dollars." "The biggest threat to our business is the federal government. The public narrative, directed by Washington, that the world is moving away from oil and gas is a very big problem. It directly affects our ability to raise capital. This must stop. It's easier to finance a vape shop or a tattoo shop than it is to finance oil and gas. There is something seriously wrong here." If you want to read more, including quotes from service firms, see here.
By the way, on refilling the SPR, a few days ago Energy Secretary Jennifer Granholm said they won't start buying until the end of the fourth quarter. Complicating the decision is that two of the four SPR sites are down for maintenance. My money is on the refill taking place at much higher prices than currently seen. A good trade will be at risk of becoming not so much. Four of the more entertaining days of the year come when RH has its quarterly conference call and CEO Gary Friedman tells us what he thinks. Here are some things he said last night: "As noted in our previous shareholder letter, we expect business conditions to remain challenging for the next several quarters and possibly longer as a result of the accelerating weakness in the housing market, the uncertainty generated by the recent banking crisis and the cycling of record Covid driven sales and backlog reductions." "I think based on the times we're in and the uncertainty we're facing whether it's the continued rise of interest rates or the next bank or two. It's hard to be anything but conservative right now and I think it would be foolish to be not just from the perspective of disappointing investors but disappointing ourselves and possibly making decisions and investments before we can see around the next corner." "So we think there will be an inflection in the second half. What we don't know is what will be the economic environment in the second half. What would be the condition of the banking industry in the second half? Where will interest rates be in the second half? Where will inflation be in the second half?" "Look, do we think things are going to get significantly worse? I don't think so. I've never seen a luxury home market down 45% a quarter ever (which it was this past quarter), not even in 2008 and '09. So I think we're near the bottom but could get a little worse." When looking at the interest rate history of the 1970's and 1980's, "There's not many people on the planet in levels of authority and responsibility that were old enough to experience those times and I think that having a conservative view and being prepared, have a strong balance sheet and trying to see the whole board and all the moves." "We believe there are those with taste and no scale, and those with scale and no taste, and the idea of scaling taste is large and far reaching. Our goal to position RH as the arbiter of taste for the home has proven to be both disruptive and lucrative, as we continue our quest to build the most admired brand in the world." "Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermes, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top, nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim." We finally saw a high yield debt deal on Tuesday from Multi-Color Corp who raised $300mm but at a steep cost of 9.5% with a 5 yr maturity. That's almost 600 bps over the 5 yr Treasury yield. For the broader high yield universe, the spread to Treasuries as of yesterday was 480 bps vs over 500 bps last week. The one yr high was 584 bps last July. Access to credit and the cost of it will only get more expensive from here. Thanks for the heads up from Quill Intelligence, in the Conference Board's consumer confidence report from Tuesday, they had a special question and "asked about consumers' spending plans on services (not goods) over the next six months. "The results reveal that consumers plan to spend less on highly discretionary categories such as playing the lottery, visiting amusement parks, going to the movies, personal lodging, and dining. However, they say they will spend more on less discretionary categories such as health care, home or auto maintenance and repair, and economical entertainment options such as streaming. Spending on personal care, pet care, and financial services such as tax preparation is also likely to be maintained." Overseas, the March Eurozone Economic Confidence index fell to 99.3 from 99.6. The estimate was for a modest rise to 100. All five components fell m/o/m in manufacturing, services, consumer, retail and construction. This figure was 105 in February 2020. We know Europe has benefited from a mild winter and the China reopening in fits and starts but the flow of credit is now slowing while lending standards rise at the same time about 80% of the credit comes from banks. Spain saw an almost halving of its March inflation rate to 3.3% y/o/y from 6% but it was all energy. The core rate held little changed at a still very high pace of 7.5%. Spanish bond yields are down a touch but are also so for the whole region. Germany's headline CPI at 8am estimate is expected to rise by 7.5% y/o/y vs 9.3% in February. Energy too is the big influence as well as energy subsidies. The euro is quietly rising to near a 2 month high vs the US dollar. While the Fed is likely done hiking, the ECB has more catching up to do and ECB members seem to quite comfortable with the balance sheet condition of its banks. After all, they went thru NIRP and QE hell for almost 10 years.
Small Net Short
On the opening strength I moved back into a small net short exposure.
The Business Media Too Often Treats Wrong Footed Perma Bull Analysis as Royalty
* By ignoring their investment boners...
For some reasons Yardeni Research and other perma bullish strategists are treated deferentially and almost as royalty - with little recognition of their wrong footed forecasts.
From a year ago - a view that could not have been more incorrect:
At the same time, skeptics, who are often correct in view, are treated as "one offs."
Go figure.
Selected Premarket Movers
Upside
- (SCYX) +85% (announces exclusive agreement with GSK to commercialize and further develop Brexafemme (ibrexafungerp), a novel, first-in-class medicine to treat fungal infection)
- (CZOO) +22% (earnings, guidance)
- (CXM) +15% (earnings, guidance)
- (CING) +11% (withdraws intention to pursue the contemplated public offering of up to 8.6M shares)
- (APVO) +8.4% (raises $9.6M in non-dilutive funding)
- (ASPS) +7.8% (earnings)
- (EVGO) +7.8% (earnings, guidance)
- (FFIE) +7.7% (starts production of the FF 91 Futurist Alliance at its FF ieFactory California)
- (PHG) +7.3% (CEO expects to reach recall settlements this year related to respiratory devices)
- (TNXP) +7.3% (presents positive efficacy and safety data from Phase 3 RELIEF study of TNX-102 SL for the management of Fibromyalgia at the 5th International Congress on Controversies in Fibromyalgia)
- (DFFN) +6.5% (enters into merger agreement with EIP Pharma to create leading CNS-focused company treating neurodegenerative diseases)
- (TREE) +6.2% (announces workforce reduction of approximately 13% of current workforce)
- (NEOG) +5.6% (earnings)
- (AVXL) +4.9% (ANAVEX2-73 (Blarcamesine) shows clinical benefit in Long-Term 48-Week Phase 2 Extension Study in patients with Parkinson's disease dementia)
- (GLT) +4.8% (announces completion of debt refinancing; No debt maturities through Sep, 2026)
- (OSH) +4.8% (CVS expects to close the acquisition of Oak Street Health, Inc. in H1 2023)
- (PDSB) +4.3% (plans to initiate Phase 3 Study evaluating PDS0101 in combination with KEYTRUDA)
- (ROKU) +3.4% (Board approved restructuring plan; cutting 6% of workforce or ~200 positions)
- (LICY) +3.2% (earnings)
- (MPW) +2.3% (agrees to sell 11 private hospitals for A$1.2B to HealthCo Healthcare & Wellness REIT)
- (AGL) +2.0% (Holland PHO and agilon health form partnership to expand the delivery of value-based primary care in West Michigan)
Downside
- (SMTC) -17% (earnings, guidance)
- (ANGO) -14% (earnings, guidance)
- (RDHL) -11% (announces $6M registered direct offering)
- (TRMD) -9.7% (announces secondary public offering of its 5M Class A common shares by a Selling Shareholder)
- (RH) -6.3% (earnings, guidance)
- (CNXC) -6.0% (earnings, guidance; to combine with Webhelp, creating a diversified global CX leader, in a $4.8B transaction)
- (VRNT) -3.3% (earnings, guidance)
- (BTU) -2.7% (confirms incident at Shoal Creek Mine)
More Night Moves: A Detailed Look at Overnight Futures and Why/What Markets Are Moving
* When it's time to sell you won't want to - and when it's time to buy you won't want to, either!
* I have used this week's rally to move back to market neutral.
* (Unemotionally) as reward vs. risk deteriorates I will move to net short on any further strength
Imagine me and you, I do
I think about you day and night, it's only right
To think about the girl you love and hold her tight
So happy together
If I should call you up, invest a dime
And you say you belong to me, and ease my mind
Imagine how the world could be, so very fine
So happy together
- The Turtles, Happy Together
* 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. Thursday was no futures column - lyrics silent! Today, the swoon (and SIVB) took the markets by surprise - in this not so magic moment... To Tuesday's optimism, I saw the market's party lights. Wednesday, with Credit Suisse concerns (and a hat tip to Yogi Berra), it felt like deja vu all over again. On Monday we got Ludacris... time to make money, money maker?
Today, dealing with the extreme volatility I am reminded of that great song, "I Would Rather Have A Bottle In Front of Me Than A Frontal Lobotomy."
And, late last week, what a crazy freakin' market - great for opportunistic and unemotional traders - but not so great for the buy and hold crowd!
Today as echoes of a bull market are resumed, we are happy together? But wait, over on The Death Star (CNBC) consider how many times a bull market was mentioned after similar advances during the Dot.com bust of 2000-2002!
* Despite all the volatility and the recent upward bias, we remain in The Chop Bucket (300-4100). Adjusting for the rise in stock futures (at 6:35 a.m.), the S&P sits at 4050. According to my calculus, there is + 50 handles of upside and - 350 handles to the downside.
* In this market I am trading more actively these days. I have been emphasizing pairs trades, straddles and strangles. I will continue to do so.
* The intermediate term outlook for stocks remains difficult in light of the competition and a "sea change" and new regime of (still) higher interest rates. Just look at the six month Treasury bill yield of 4.92%! As noted the widening gap between the S&P dividend yield and Treasury bills is getting quite extended - this remains an important chart:
Mar 21, 2023 ' 02:45 PM EDT DOUG KASS
Another Way of Looking at the Market's Over Valuation
Today the S&P dividend yield is 1.68% compared to the yield on a six month Treasury bill at 4.93% and a one year Treasury bill of 4.63%:
S&P Dividend Yield
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The differential between the S&P dividend yield and short duration Treasuries is as wide as its been in several decades.
From an historical standpoint the lowest dividend yield was 1.11% (August, 2000) and the highest dividend yield was 13.84% (June, 1932).
The mean S&P dividend yield over the last century was 4.27%.
* In response to the rally, the S&P Oscillator grew more overbought on Wednesday - increasing from -5.48% (oversold) to 2.94% (overbought) at the close yesterday.
* The VIX is back to pre bank crisis levels. Another overbought indicator?
"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:
*Yesterday's close (S&P 4027) inched back towards the top end of The Chop Bucket of 3700-4100 for the S&P 500. S&P cash adjusted for the rise in futures is 4050, providing an overwhelmingly negative reward vs. risk ratio of 71.
* Stock futures rose throughout most of the night. S&P futures had peaked at +23 and bottomed at -5 . Nasdaq futures peaked at +68 and bottomed at -29. At 6:55 a.m. ET, S&P futures were +22 and Nasdaq futures were +62.
* The S&P Short-Range Oscillator has been a great trading gauge/resource. When it gets oversold, as it did late last week, I buy. When it moved to less oversold (over 0) and overbought, there is typically a market headwind. The Short-Range Oscillator closed Wednesday at 2.94% (overbought) vs. -5.48% (oversold) a week ago.
* I have also kept a bead on volatility. In recent days, reflecting the bank crisis, the VIX has climbed from the high teens to the mid twenties. Over the last week, VIX has moved back to pre crisis levels - to 18.90 (-0.22). As volatility declined recently, I took off a lot of my straddles and strangles for a profit. As VIX spurted higher, I put them back on. They will be taken off today with the much lower volume backdrop:
* The U.S. dollar is again weaker (risk on) against the yen, euro and sterling:
* I have been continually writing that bonds should be at center stage to equity weightings - it's all about the rates. In the midst of the banking crisis I sold a lot of my Treasuries in light of the downward move in rates. I have bought back them back on the runup in rates in the last few days.
* The Two-Year Treasury yield is +1 bp at 4.09% and the 10-Year is -1 bp to 3.568%. Over there, the yield on the 10-Year U.K. Gilt bond is flat. Equities are ignoring the rate rise, I am not!
* The 10s/2s Treasuries curve has been making dramatic daily moves - back and forth. The curve is now at -53 bps.
* Commodities - where there are no zero days to expiration options! - are mixed to lower. Brent oil is +$0.70 to $78.98... For months I have been avoiding energy stocks, but I am now getting interested for the first time in a while on price. The notion, expressed in business media, that energy stocks are well positioned even with lower oil prices was fanciful as I have been writing in my Diary. My first oil purchase occurred yesterday, (OXY) :
* Gold has continued its big run. Up +$2 today:
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:
I have been out of the office over the last several days.
And here are Wednesday's trades:
Mar 30, 2023 ' 05:55 AM EDT DOUG KASS
My Comment of the Day (Yesterday Evening)
Most importantly to "Meet" Bret Jensen and Chris "Not the Designer" Versace - you are both great.
Your contributions were thoughtful and value added - better than I could have done and from a different perspective and style (which is important).
After being net long for a bit, I ended the day in a market neutral position.
Added to QQQ short after close at $312.65 and reduced SPY $401.30.
Added to JOE $39.41, initiated OXY $61.93 and added to PARA $21.21.
Shorted more SPY calls (September) and added to HRMY short at $33.61.
After being long for a bit - I ended Wednesday in a market neutral exposure.
See you in the early morning.
Dougie
P.S. - In the wee early hours Thursday morning (4:30 a.m.) I added to my (QQQ) short at $313.66 and I sold some more (SPY) at $402.97. At "market neutral" but, in the upper end of my trading range, I will be moving net short "shortly."
From The Street of Dreams (Part Deux)
Morgan Stanley downgrades Schwab (SCHW) to equal weight (price target goes to $68 from $99) based on "limited visibility on multiple variables."
P.S.: The shares currently trade at $54, so a reduced price target of $68 provides a lot of upside -- not sure if I understand the downgrade and not sure I want to listen to an analyst that previously had a $99 price target on the name!
Tweet of the Day (Part Trois)
I am in agreement:
Themes and Sectors
This table is a good resource for short-term traders:
View Chart »View in New Window »
From The Street of Dreams
Buy high, sell low?
From JP Morgan:
EQUITY AND MACRO NARRATIVE: Yesterday's price action has seemingly changed the narrative/sentiment as the NDX entered a bull market and bank fears have seemingly subsided. It feels a bit early to make those pronouncements, given the Fed remains active and there is a heightened risk of something else breaking in the economy. It is beginning to feel as though the risk/reward of a tactical bounce higher is increasing. While positioning alone is not a reason to be bullish, it does remain light with room to chase should the market push investors to do so. Aggregate sentiment remains depressed and market breadth muted.
That said, there remain numerous downside risks and two to monitor are (i) Japan rate normalization which could repatriate money to Japan and raise global bond yields and (ii) US Consumer fiscal cliffs which include weaker tax refunds, the end of the student loan moratorium, and the loss/reduction of COVID benefits such as SNAP (food stamps) payments. We explored the bull, bear, and base case in the March 28 Morning Briefing, which has additional color.
Markets Are the Weakest When They Narrow to a Handful of Blue Chip Names
"The breadth of the market is important. Broad-based rallies have the potential to continue, while narrowing rallies are prone to failure."
-- Bob Farrell
When observing the narrowness of the recent rally please remember one of Bob Farrell's Lessons:
Lesson #7 Markets are strongest when they are broad - and weakest when they narrow to a handful of blue chip names.
Bloomberg Interview
I will be on Bloomberg radio with Sir Thomas Keene this morning at 9:30 a.m.
Tweet of the Day (Part Deux)
Ch-ch-ch-ch-changes:
Miller Tabak on Rate Cuts
An important message from my friends at Miller Tabak:
Wednesday, March 29, 2023
2023 Rate Cuts are Delusional
Throughout the Fed's ongoing tightening cycle, markets have struggled to accept both the severity and duration of rate hikes. Early on, the Fed itself provided unrealistic interest rate forecasts (we were making this point in 2021), but markets have also chronically doubted the Fed's own guidance since it became more realistic. Recent banking turmoil is very likely to be the next example. Markets have become delusional about coming rate cuts and will be disappointed when rates stay near 5% for the rest of the year.
CME's Federal Funds rate futures now suggest a December 2023 rate of 425-450 bps, implying two or three 25 bps rate cuts this year. Furthermore, they put only a 9% chance of a year-end rate of 475-500 bps and just a 1% chance of 500-525 bps, the Fed's forecast from last week when Powell stated that FOMC "participants don't see rate cuts this year." Markets are blundering by again doubting the Fed. The chances that the December 2023 Fed Funds rate is 475 bps or higher are around 80%.
Banking problems are yet to have major macroeconomic impacts mostly because borrowing costs are yet to rise. If this continues, rate cuts are impossible. Figure 1 shows two key measures, the average yield on 10-year Baa corporate debt (red) and the rate on 30-year jumbo, fixed-rate mortgages (blue), which are ineligible for governmental repurchase. These rates have been flat because the rise in credit spreads has been roughly offset by lower risk-free rates. For now, the rise in credit spreads is equivalent to 75-100 bps in Fed rate hikes, although this is likely to decline in the coming weeks as the banking situation settles down. Likewise, risk free rates are likely to rise when markets realize that the banking turmoil is likely reduce to FOMC tightening by only 25-50 bps.
Figure 1: Lending Rates Remain Surprisingly Flat
Banking trouble will most likely (75%) lead to moderately higher credit spreads. Along with taking some of the Fed's attention away from the tight labor market, this will probably cause the Fed to pause at 500-525 bps after its May meeting for the rest of the year. As we wrote last week, there is a chance that banking problems percolate for much longer (15%) or escalate (10%). This final outcome, however, is the only way that current expectations for interest rates will be proven correct. Markets are poised to again get burned for not believing the Fed. We reiterate that sustained rate cuts are highly unlikely until at least mid-2024.
Chart of the Day
Tweet of the Day
Higher stock prices and lower volume is not a forceful or bullish cocktail:
My Comment of the Day (Yesterday Evening)
My Comment of the Day (Yesterday Evening)
dougie kass11 hours ago edited
Most importantly to "Meet" Bret Jensen and Chris "Not the Designer" Versace - you are both great.
Your contributions were thoughtful and value added - better than I could have done and from a different perspective and style (which is important).
After being net long for a bit, I ended the day in a market neutral position.
Added to QQQ short after close at $312.65 and reduced SPY $401.30.
Added to JOE $39.41, initiated OXY $61.93 and added to PARA $21.21.
Shorted more SPY calls (September) and added to HRMY short at $33.61.
After being long for a bit - I ended Wednesday in a market neutral exposure.
See you in the early morning.
Dougie
P.S.: In the wee early hours Thursday morning (4:30 a.m.) I added to my (QQQ) short at $313.66 and I sold some more (SPY) at $402.97. At "market neutral" but, in the upper end of my trading range, I will be moving net short "shortly."