Thursday, December 15, 2022

Morning Note: Key Highlights

So, the Fed delivered the expected .50% rate hike, but, on balance, didn't deliver the bulls the assurance that they're near-done with their quest to put the screws to what, in key areas, remains stubborn, or sticky, inflationary pressures... Hence, stocks finished the day moderately lower.

We can get into the weeds of options positioning and how, when concentrated at certain levels, like, say, 4,000 SP500, it can act like a magnet pulling to that level, and what to anticipate post the largest options expiration date of the year (tomorrow)... Or we can talk seasonality ("Santa Clause Rally"???), or we can talk data, or we can take a look at some key highlights from the messaging herein over the past few days.

Let's go with the latter.


"Yesterday morning's softer than expected CPI report initially got traders thinking that Powell will play the dove tomorrow, until, that is, they, perhaps, realized that the stuff Powell says the Fed's focused on remained elevated in price, and that a rallying market defies the Fed’s desire to keep financial conditions tight, and that last week's PCE read (which came in hotter than expectations) is the Fed's preferred measure, yada yada.

I.e., while stocks did close higher on the day, they settled at a level notably below the session's high.

So, in a nutshell, financial markets are at the mercy of the Fed... Powell knows full well precisely what to say, or to imply, to solicit whatever directional response he'd prefer, assuming he has a preference (for the market) right here... Traders are simply speculating on which direction he'll lean... Frankly, folks, that's it!"

"The Leading Economic Indicators and the inverted yield curve clearly signal a recession ahead. The labor market is slowing but hasn’t crashed. Sometimes recessions appear quickly, triggered by major events like a financial market collapse (2008) or a government shutdown (Covid). But more typically, the economy eases into recession. Responding to the Fed’s interest rate policy does not happen quickly and the Fed does not reach its terminal policy rate level (about 5% expected) overnight. NFIB’s leading economic indicator has never missed in 50 years, and it predicts a slowdown."


"...cooling inflation absolutely jibes with a weakening economy, which is what's on our macro radar heading into next year, which of course isn't great news for corporate earnings going forward.

Not to pour cold water on this rally, believe me, I'm not complaining, but let's not get ahead of ourselves just yet... Like I said, the economy has issues (our PWA Index's latest score has odds favoring recession next year), and recall -- if you fear the Fed -- that the PCE inflation measure (supposedly the Fed's favored measure) for November actually came in hotter than expected last week, sending the SP500 down by 3.37%.

Speaking of the Fed, tomorrow's rate announcement will bring a .50% increase in the benchmark rate, and Powell's commentary will either bring more sunshine for the bulls, or bring the bears roaring back..."


"The human propensity to choose short-term enjoyment over long-term well-being naturally exaggerates the highs and lows of the cycle because it pulls the good times forward at the expense of the future."

Dalio, Ray. Principles for Dealing with the Changing World Order

Last Friday:

"As for next week’s Fed meeting, I see it — in terms of market impact — as a virtual tossup at this point… Powell surprised me at his recent Brookings appearance – he softened his tone markedly and stocks loved it… He may very well feel inclined to bring back a little tightness by emphasizing that, while they indeed slowed the pace (they’re definitely going .50%, vs the .75% that was all priced in a few weeks ago), persistent inflationary pressures (in the wage numbers in particular) will likely have them holding rates at a relatively high level for notably longer than fed funds futures – and stocks – are presently pricing in.

So, if indeed Powell comes in tight during his post-meeting presser, stocks will take a hit, especially if softish inflation data has them ramping higher into the meeting…"

Asian got hammered overnight, with 14 of the 16 markets we track closing lower.

Europe's following suit so far this morning, with all 19 bourses we follow trading notably down as I type.

US stocks are red to start the session: Dow down 373 points (1.10%), SP500 down 1.38%, SP500 Equal Weight down 1.33%, Nasdaq 100 down 1.70%, Nasdaq Comp down 1.70%, Russell 2000 down -1.50%.

The VIX sits at 21.37, up 2.51%.

Oil futures are down 0.57%, gold's down 1.33%, silver's down 2.42%, copper futures are down 1.16% and the ag complex (DBA) is up 0.28.

The 10-year treasury is up (yield down) and the dollar is up 0.05%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 4 -- Brazil equities, long-term treasuries, ag futures and intermediate-term treasuries -- are in the green so far this morning. The losers are being led lower by Dutch Bros, Amazon, MP Materials, Sweden equities and base metals miners.

"If I turn out to be particularly clear, you've probably misunderstood what I've said."

--Alan Greenspan

Have a great day!

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