Thursday, October 27, 2022

Morning Note: Key Highlights

Here are some key highlights from a week's worth of messaging herein:

While Apple's yet to report, Alphabet (Google), Texas Instruments and Microsoft did the dirty work after the close yesterday.

Here's Bloomberg:
The quarterly updates from Microsoft Corp., Alphabet Inc. and Texas Instruments Inc. underscored growing pressure on everything from corporate IT budgets to digital ad spending and chips for industrial machinery. Nasdaq 100 Index futures lost as much as 2.4%, reversing an earlier rally on Tuesday, as the results refocused investor attention on the damage to earnings and the economy from the Federal Reserve’s rapid interest-rate hikes.

While the US market -- in bullish fashion -- didn't flinch after China's Monday plunge, clearly, last night's earnings releases warrant, at a minimum, a pause in what we still view (for the moment anyway) as a potentially meaningful Q4 bear market rally.

Yesterday was an absolute blood bath for Chinese stocks. So much so that, frankly, it was amazing that US stocks were able to turn in a positive performance on the session.

The signal -- an albeit one-day signal -- was loud and clear; the world's second largest economy being held hostage by a communist party ideologue who just consolidated his power is a most bearish development.

Now, and nevertheless, keep in mind the point I made yesterday:
"... while the party in power's platform may on the surface appear to be everything investors would typically reject, make no mistake, at the end of the day, it will do what it can to keep its nation's markets afloat, and indeed competitive, on the global stage."
Ideological ramifications aside, I can assure you, Xi has no interest in crashing China's economy... The question at this juncture is simply one of pressing need, or priority.

The fact that US equities didn't flinch in the face of China's epic selloff yesterday suggests that the world agrees that Xi is not out to shoot off China's nose to spite the West's face, and it is simply uncertain about the when and the wherefore around zero-Covid, fiscal stimulus, etc. Or, for the moment, the short-term setup for US equities is simply too strong to ignore... Or maybe both??
Funny thing about the relationship (the connection) between politics and markets; while the party in power's platform may on the surface appear to be everything investors would typically reject, make no mistake, at the end of the day, it will do what it can to keep its nation's markets afloat, and indeed competitive, on the global stage.

Of course I'm referring to present-day China and I'm assuming that Xi's intent is to ultimately dispense with his draconian zero-covid policy (of course that one's a for-sure, it's just a matter of when), and intervene, either directly or via additional stimulus (or both) in a manner that assuages the fears of presently-hesitant global investors who'd otherwise (at this juncture) be, at a minimum, dipping their toes into the beaten-down stocks of the world's second largest economy -- trading at a mere 9 times earnings.

Now, as bullish as that may sound, I must warn you, when Xi ultimately pivots (and that, for the moment, rather than a pivot by the Fed, is the pivot to watch for), and we're then looking at China reengaging on the world stage, there are serious implications for commodity markets, energy in particular, that will have inflationistas rightfully screaming from the rooftops... And that's a problem for central banks that are beginning to, albeit subtly, express concern over the potentially systemic consequences of tightening monetary policy too far too fast... Not that global stocks won't, along with commodities, rally hard on that news (odds are they will), but when the dust settles, well... we'll cross that bridge when we get to it.
And last Friday:
Given the multiple headwinds markets face, the presently high level of jitteriness makes perfect sense… And while, indeed, it is incumbent upon us to continue to hedge our clients’ left tail risk with options, we have to remain open to the prospects for some serious right tale risk in equities when, say, the Russia/Ukraine war comes to an end, when China abandons “zero-covid” and injects yet more fiscal stimulus, when inflation, and, with it, interest rates and the dollar, begins to build a little downside momentum, if/when the treasury department begins the duration swap it appears to be contemplating, if the Fed were to concede to the mounting stress that’s showing up in global fixed income and currency markets (as the latest commentary from select members has subtly hinted to of late), and so on.

More importantly for our purposes, beyond the near-term event risk that could push equities markedly in either direction, when we consider the nature of what, among other things, is an early-stage shift to a global labor-friendly regime, we see a world rich in macro-based investment opportunities.

Asian equities were mostly green overnight, with 12 of the 16 markets we track closing higher.

Europe's mixed so far this morning as well, with half of the bourses we follow trading lower as I type.

US stocks are mixed: Dow up 409 points (1.28%), SP500 up 0.25%, SP500 Equal Weight up 0.84%, Nasdaq 100 down 0.46%, Nasdaq Comp down 0.18%, Russell 2000 up 1.31%.

The VIX sits at 27.26, down 0.07%.

Oil futures are up 1.80%, gold's down 0.20%, silver's up 0.31%, copper futures are up 0.06% and the ag complex (DBA) is up 0.15%.

The 10-year treasury is up (yield down) and the dollar is up only 0.46%

Among our 34 core positions (excluding options hedges, cash and short-term bond ETF), 21 -- led by AMD, oil services stocks, cyber security stocks, Dutch Bros and defense stocks -- are in the green so far this morning. The losers are being led lower by communications stocks, Albemarle, MP Materials, uranium and base metals miners.

"Information is like alcohol – you can either drink it quickly to get drunk and become foolish; or you can drink it slowly to enjoy yourself yet remain sober. In other words, you can either use information to further develop your biases; or you can use it to train your mind."

Andrei, Vizi. Economy of Truth 

Have a great day!


  1. Thanks for today's updates Marty!
    Fed Daly has concern with the State of the Economy and with the continuation of interest rate hikes. On Tuesday, the US Senate Banking Chair Sherrod Brown urged Fed Powell to be careful about tightening monetary policy so much that millions of Americans already suffering from high inflation would lose their jobs.
    Do you think we will have 50 basis point instead of 75 basis point on 11/02/22? How about December?

    1. Hey Sam, I agree that the Fed is softening their tone... It seemed to begin when UK bonds took their hit and the leveraged UK pension system was brought to the edge as a result... That's when J. Yellen started worrying about treasury liquidity and the "hawks" on the Fed started sounding a little bit dovish... The data lately has, on balance, been weaker which increases the odds of the Fed slowing down a bit... All that said, I still anticipate 75 bps next meeting, which is what futures are pricing in... If they soften up it'll be in the announcement's language, and in Powell's press conference... which would suggest 50 bps for December... which is also (right now) what's priced into fed funds futures currently.