Thursday, January 26, 2023

Morning Note: Key Highlights

Here are some key highlights from our latest messaging:

Yesterday: we keep saying with regard to corporate earnings: 

"On balance, the LEI and other recession indicators are likely to continue sending a recessionary signal in the coming months. Meanwhile, aggregate earnings forecasts remain too optimistic and have room to be revised lower."

Hence, the chart we featured in yesterday's note (LEI/CEI ratio in white, SP500 earnings in orange):


So, if there's one graph (other than the one for our own index) that illustrates what has us not yet believing this year's rally in equities, it's this one (the Leading Economic Indicator/Coincident Economic Indicator Ratio):


...cyclical sectors are outperforming defensives as if we're bolting out of a recession (that never was) -- (that's healthcare, staples and utilities below the red zero line on the next graph):

Well.... hmm... Either it's indeed blue skies dead ahead, or equity market actors are getting a tad bit complacent (if not overconfident) amid what remains a pretty precarious setup... For the moment, we'll presume the latter, but we'll remain open to all possibilities.

Last Thursday:

Yesterday's action very much jibed with our near-term thesis for the equity market... I.e., data releases (save for mortgage apps) were resoundingly weak (recessionary even), while Fed speakers -- even the doves -- reiterated that the tightening cycle still has a ways to run:    emphasis mine...

Harker (dove): "...reiterating comments he made last week, said increases of 25 basis points would be appropriate going forward. “I think we get north of 5 - again we can argue whether it’s 5.25% or 5.5% - but we sit there for a while,”"

Logan (dove): "“A slower pace is just a way to ensure we make the best possible decisions,” Logan told an event at the University of Texas at Austin’s McCombs School of Business. “We can and, if necessary, should adjust our overall policy strategy to keep financial conditions restrictive even as the pace slows.”"

Bullard (hawk): "“We’re almost into a zone that we could call restrictive - we’re not quite there yet,” Bullard said in an online Wall Street Journal interview, explaining that price pressures remain too high and officials must not “waver” on bringing them steadily down to the Fed’s 2% target.

Policy has to stay on the tighter side during 2023” as the
disinflationary process unfolds, he added, saying that he
penciled in a forecast for a rate range of 5.25% to 5.5% by the end of this year in the Fed’s December dot plot of projections."

Mester (hawk): "“We’re beginning to see the kind of actions that we need to see,” Mester said in an interview with The Associated Press published Wednesday. “Good signs that things are moving in the right direction.”

Mester didn’t disclose how big a rate increase she favored
when officials next meet, but stressed that she wants rates to keep moving higher."

Yeah, no love right here for stocks from the Fed. 

Asian stocks leaned green overnight, with China shuttered this week for the lunar holiday... 8 of the 13 open markets we track closed higher.

Europe's mostly green as well so far this morning, with 13 of the 19 bourses we follow trading up as I type.

While, the S&P and Nasdaq are up to start the session, sector breadth is suffering notably (financials, utilities, industrials, staples and materials are all trading lower): Dow down 57 points (0.17%), SP500 up 0.17%, SP500 Equal Weight down 0.04%, Nasdaq 100 up 0.85%, Nasdaq Comp up 0.77%, Russell 2000 down 0.08%.

The VIX sits at 19.18, up 0.52%.

Oil futures are up 1.83%, gold's down 0.63%, silver's down 0.14%, copper futures are up 0.02% and the ag complex (DBA) is up 1.155%.

The 10-year treasury is down (yield up) and the dollar is up 0.25%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 14 -- led by Albemarle, Nokia, Dutch Bros, ag futures and Amazon -- are in the green so far this morning. The losers being led lower by metals miners, AT&T, oil services stocks, MP Materials and Brazil equities.

"Of course, nearly everything changes over time. This includes your emotional state, how much money you make, or the political climate. Paradigms shift, challenges change, market conditions evolve, and technology provides additional solutions as well as creating new problems. When you look forward from the present, status quo bias distorts your view."

--Duke, Annie. How to Decide

Have a great day!


  1. Thanks for all the updates Marty! The market amazes me everyday. Mix earnings with great economic growth in the 4th quarter of 2022 give investors optimistic hope that better day is ahead of them. The market keeps going higher and higher at or above the resistance line. PCE tomorrow and fed meeting next week will be very interesting to see the market reactions.

    1. You bet Sam... And, definitely, the near-term equity market is in the hands of the fed...

      With regard to Q4 GDP, under the surface revealed a less than rosy picture, stripping out what are maybe the less telling data (govt spending, inventory and exports), we end up with essentially flat results (0.6%)... It was very telling, when you focus on housing, durable goods and business equipment spending, according to researcher Erik Basmajian, we actual contracted -3.2% in Q4... Narrow it down to just housing and durable goods, and we're looking at a serious recession (-5.5%).

      Peter Boockvar also does a good job breaking down the data:

      "Digging into GDP ex government spending and gross investment saw final sales to private domestic purchases grow just .2% in Q4, the slowest since it went negative in the first half of 2020 and December 2009 before that. Negative prints likely follow from here. Real final sales which takes out the influence of inventories grew by 1.4%.

      Bottom line, Q4 GDP 2022 rose 1% (rounded from .96) from Q4 GDP 2021 on a real basis. I expect negative GDP prints from here in Q1 and Q2."

      All of this is consistent with the signal from our own general conditions index... I.e., recession risk is high in 2023...

      But, you're right, the market action suggests soft landing...

      Lastly, the intraday action is quite interesting... apparently there has been a massive amount of speculation using 0DTE (zero day to expiration) call buying at daily bottoms leading to these huge intraday ramps -- day-trading the dips so to speak... let's call that a shaky setup that could open the market to some not-small downside if/when it dries up...

      Bottom line, it's just a messy setup right here... Could indeed continue to melt higher, but I'd be very careful...

    2. Thank you for the detailed response!