Wednesday, March 22, 2023

Morning Note: An Air of Desperation

Watching from a distance the past few days (on vacation), I found myself thinking how desperate "the market" (equity market actors) seems these days... And while indeed early-stage 2023 has seen its share of downs (recently wiping out all of January's impressive gains), it's, frankly, the ups that, for me anyway, have that air of desperation (fear of missing out) to them.

One might think that government stepping all-in to avert a banking crisis would signal to "the market" that all definitely ain't right in the world... And what do we get? A two-day rip your face off rally... I mean, you'd think that they just helicoptered in another trillion-dollar round of stimmy checks, or something!

Now, that said, who can blame the bulls? I mean, haven't we learned these past 15 years anyway that when the Fed (and the treasury) steps in, stocks go up? 

Well, yeah, but the question is, why are they stepping in right here, and what does it all mean, when it's all said and done?

As for the why, well, let's just say it's not because a pandemic has hit and folks are losing their jobs en masse... It is, however, an effort to contain a whole other kind of contagion; the kind caused by the Fed hiking interest rates at the fastest pace on record, following years of keeping them virtually pinned to the floor, and, thus, along the way, inspiring investors (read banks, in this case) to venture far out the yield curve to capture some return... I.e., when rates go up, the value of long-duration investments (in this case treasuries and mortgage backed securities) go down... And when you're a bank, and your depositors bail, and that "safe" stuff you own has to be sold to meet withdrawals, and the market value of that stuff doesn't foot the bill, well, hence the policymaker panic.

As for what's it all mean? Well, we can suffice to say that the struggles for the banking system (the economy's backbone) -- while vastly different, and vastly less dire than the '08 scenario -- land it in less than ideal shape right here... 

Here's BCA Chief US Equity Strategist Irene Tunkel's laundry list:

1. Tighter monetary policy leads to less demand for loans.

2. Larger banks have seen a serious slowdown in corporate activity (we flagged that in our last economic update).

3. Banks will have to increase deposit rates to avert further flight of capital (hitting net interest margins).

4. Banks will have to pay higher premiums for FDIC insurance going forward.

5. Regulatory headwinds will no doubt increase.

6. In a nutshell, banks will make fewer loans, and each will be less profitable.

Our base case remains that odds favor another leg lower for the current bear market, based on corporate earnings adjusting to what, at best, is a notable growth slowdown, if not all-out recession (our current view), over the coming months.

Now, the above said, as I continue to preach, we're not wedded to that thesis; indeed, the bulls may have it right, right here. 

It's just that the risk/reward setup right here in no way allows us to allocate like it's June 2009 all over again -- which, for example, saw our PWA Index emerging from the red (scored a +12.50 on 6/1/09) amid the Great Financial Crisis... Last week's score was -33.33.

We'll get there ("there" being when conditions favor a more aggressive stance), we're just not there yet, despite recent (albeit only a week or so) action.

The Fed wraps up its 2-day policy meeting today, and a setup that had odds favoring a 50 bp rate hike just a couple of weeks ago, now -- given the present mess in the banking system -- has them at 25... "The market" may buy that, in desperate fashion no less, if J. Powell signals that that'll pretty much do it on rate hikes going forward (as Fed funds futures presently imply).

Oh, and speaking of the banking system, here's how it works:

Stay tuned...

Asian stocks rallied overnight, with 14 of the 16 markets we track closing higher.

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

US equity averages are slightly off to start the session: Dow down 32 points (0.10%), SP500 down 0.11%, SP500 Equal Weight up 36%, Nasdaq 100 up 0.07%, Nasdaq Comp down 0.08%, Russell 2000 down 0.36%.

The VIX sits at 20.61 down 3.60%.

Oil futures are down 0.11%, gold's up 0.06%, silver's up 0.02%, copper futures are up 0.83% and the ag complex (DBA) is down 0.38%.

The 10-year treasury is up (yield down) and the dollar is down 0.06

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 15 -- led by AMD, URNM (uranium miners), VWO (emerging market equities), EWW (Mexico equities) and FEZ (Eurozone equities) -- are in the green so far this morning... The losers are being led lower by MP Materials, EWZ (Brazil equities), HACK (cyber security companies), Amazon and OIH (oil services companies).

And speaking of the fear of missing out:
"...once you worry you cling to anything out of desperation; and once you cling you are bound to get exhausted.”
--don Juan Matus


Have a great day!

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