Tuesday, September 20, 2022

Morning Note: "Fanciful"

Yes, tomorrow's Fed decision is a biggy for near-term market direction. But of course it's beyond the near-term that we're ultimately concerned with... As I hear myself repeating during virtually every client review meeting these days, we -- as we see the world at this juncture -- have high conviction with regard to our present strategy on a 5-year time horizon. It's the next 5 (or 15) weeks or months that remain notably precarious in our view.

While we do not foresee a 2008 (in terms of depth) scenario unfolding (although we remain open to all possibilities), our analysis nevertheless says recession (albeit relatively mild) looms.

Yesterday's release of the NAHB home builder sentiment survey supports our recession forecast.

The September NAHB home builder sentiment survey saw its index fall another 3 pts m/o/m to 46 after dropping by 6 pts in August, 12 in July and in the 6 months prior. It’s now declined each month this year, not surprisingly considering the steep rise in mortgage rates on top of the sharp home price increases. The estimate was 47. Present conditions fell 3 pts to 54 while the future outlook was down by 1. Of note too, Prospective Buyers Traffic dropped by 1 pt to just 31 with the reminder that 50 is the breakeven point between up and down.

Then, yesterday, Ford joined the likes of FedEx, GE and McDonald's, to name three, and issued an earnings warning having to do with the present state of general conditions. The automaker's shares got hammered as it guided future earnings well below last year's results.

So, for sure, the economy (the global economy) has its issues.

I'd, therefore, say that, speaking near-term again, the Fed has a green light to send stocks into the green come tomorrow, even with a .75% rate hike -- as long as Powell couches the latest data and earnings warnings as being developments in a disinflationary direction. The equity market should love such sentiment... 

Of course, he may very well repeat his Jackson Hole performance and -- despite recent data, etc. -- keep it short and not so sweet for markets, sending a message that essentially states that if the Fed's attack on inflation causes a recession, so bit it... 

Again, it's all about that post-meeting press conference.

Okay, so, if any recession right here is going to be mild, and if the Fed is indeed willing to soften its stance (we'll see), why are we still sounding a cautious tone on equities going forward?

Well, frankly, in our view the market is simply not discounting future earnings to nearly their proper degree, in even a mild recession scenario (hence Ford's drubbing yesterday on, yep, a disappointing earnings projection).

As Jesse Felder (The Felder Report, Felder Investment Research), quoting from a Bloomberg Opinion piece, points out:

'Since 1960, the average peak-to-trough earnings drop in a recession is about 31%. Yet sell-side equity analysts aren't even close to incorporating such a drop. In fact, estimates for both 2022 and 2023 still imply something close to a best case scenario.' 


Stay tuned...

Asian equities were mostly green overnight, with 13 of the 16 markets we track closing higher (although they're giving it back in futures action as I type).

Europe's red nearly across the board so far this morning, with 18 of the 19 bourses we follow trading down as I type.

US stocks aren't pretty to start the session: Dow down 277 points (0.89%), SP500 down 0.96%, SP500 Equal Weight down 1.08%, Nasdaq 100 down 0.89%, Nasdaq Comp down 0.86%, Russell 2000 down 1.36%.

The VIX sits at 26.90, up 4.43%.

Oil futures are down 1.41%, gold's down 0.91%, silver's down 2.44%, copper futures are down 0.50% and the ag complex (DBA) is up 0.68%.

The 10-year treasury is down (yield up) and the dollar is up 0.44%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), only 2 -- ag futures and base metals futures -- are in the green to start the session. The biggest losers are uranium miners, base metals miners, Albemarle, oil services stocks and Sweden equities.

"...to claim that Central Banks have reached the highest degree of policy precision, where, by tinkering with short-term policy rates, they can choose a desired inflation rate is surely fanciful."

Howell, Michael J.. Capital Wars

Have a great day!

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