Newsletter - 02/4/2024
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Topic: TBD
Here's is where we are at the moment:
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Stocks are trading as if the Fed has cut rates by at least 50bps.
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Bonds are trading like rate cuts are NOT happening.
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Oil is trading as if we are in a recession.
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VIX is trading as if last week was a flat week.
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10 year yield up 170bps in ONE SESSION as if something has broken in the bank sector.
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Gold is trading as if we are headed for a "Soft Landing".
ALL CANNOT BE CORRECT!
Week in Review
From TRowePrice:
The major indexes ended the week mixed amid a slew of significant earnings reports and economic data. The S&P 500 Index and Dow Jones Industrial Average moved to intraday highs, but the small-cap indexes recorded losses. The advance was also narrow, with an equally weighted version of the S&P 500 Index recording a modest loss. The week closed out the month of January with the S&P 500 advancing 1.6% over the month, while the equal-weight S&P 500 fell 0.90%, and the small-cap Russell 2000 Index declined nearly 4.0%.
Macro
Lots of confusing data this week. First we had FOMC and once again, Jay Powell waited until the presser to drop the hammer so to speak when he stated that he didn't think it likely that the Fed will cut rates in March. Among other things, Powell stressed that the Fed is concerned about inflation (imagine that) and that inflation will not only have to "touch" 2% but also stay at 2% or below "for a period of time." This triggered a sell-off in the markets but as has been the standard for the last 12 months, the markets only had to wait until Friday for the US Government to share (obviously bullshit) payroll numbers and the market was saved, yet again!
There's just one problem. Since the NFP number was a lie, let's examine "why" it was a lie. The NFP number is seasonally adjusted and makes NO designation for those jobs held by THE SAME PERSON - which has the effect of inflating the number.
Here's what the real number looks like when we back out jobs that are held by the same person:
Taking an even closer look Full Time Employment contracted (blue) for the second straight month while part time employment (orange) increased again.
Two points I am making: first, do not trust any economic numbers from the Federal Government. They have been lying for well over a year. Second, in lieu of "official" government numbers, just watch and see if the trend is job growth or job losses. It's pretty clear that over 2023, not all "jobs" that have been created have been equal.
If you add up the second column, it equals 4,048,000 - the amount of new jobs that the government said were created in 2023. However, if you add up the first column, which are the figures that the government "revised to" after the fact, it equals 3,836,000. That's a difference of over 200k new jobs. The government announces jobs data, pretty much any data lately, that supports their thesis, no matter how ridiculous that thesis is, and then they revise the numbers at a later date when the market has moved on to something else. But it is that revised data, the true data, that is telling quite a different story than what the bureaucrats are saying.
What's very interesting to me is the highlighted third column. Notice how the revisions got smaller and smaller until ending in December with a positive revision. My takeaway is the BLS is trying to paint the picture that jobs growth picked up in the last 5 months of the year. But as we saw from the preceding graphics, a great deal of the growth was due to those getting a second or third job so not net job growth.
The "jobs are growing" mantra is bullshit. Companies are laying off not hiring. Hiring is heavy on the lower end of the pay scale as well as less then fulltime. What's also concerning is "who" is being hired.
Since 2019, the number of Foreign-Born Workers entering the workforce has been 3,041,000. The number of Native-Born Workers has actually SHRUNK by over 1.3 million.
My point is this: if you want to really understand what the economy is doing, do not listen to the government, especially in an election year. Take the time to drill deeper and discover what the real answers are. Be better than the 95% of retail out there. Do the work and stand alone against the crowd.
SPX and NDX Charts and Outlook
The SPX continues to power higher led by tech, of course. While the SPX printed a HCD on Wednesday, it was invalidated the very next day.
I said this last week: "I expect that since fourth-quarter earnings expectations were largely revised downward the bar to beat is already low and therefore, the setup for stocks to move higher after "beating" earnings is already in place."
That's pretty much what happened.
NDX:
The NDX rose to ATHs on the back of "strong" earnings reports from a couple of the Mag7.
Otherwise, the "blow off top" scenario appears to be playing out. How long will it last? I don't think very long, like weeks.
By some of the most trusted metrics (P/FCF, PE, etc.) the tech sector is very overvalued. This is also typical of the end of cycles as market participants try to keep the party going on for as long as they can, irregardless if its warranted or not.
MARKET BREADTH:
As an example of one of the numerous divergences occurring in the market, Market Breadth is going DOWN while the market is going UP.
In fact, on Friday, for every stock that went up, two went down. This is further evidence that the support for the market is growing thinner and thinner.
SECTOR BREAKDOWNS:
Three Outcomes
Looking forward, I see only three broad possible themes to the market: it either drops under the weight of all the "bad" out there or it moons because of additional monetary stimulus or it all comes crashing down due to derivatives. These are the extreme scenarios meaning that any combination or intensity may happen but these three themes are the starting points of future paths in my opinion. I do not see any evidence that the economy is growing organically and therefore, I do not see the markets advancing much further without the government helping, and they are already doing everything they can to prop the markets up.
I really like how the above gentleman encapsulated the current conditions and what is being unwound. ZIRP, QE, QT, Covid - all of these where atypical boosts to the consumer and the economy. They also were done, in one form or another, globally.
Wrap your head around the sheer number and amount of fiscal intervention that the world's governments engaged in. It is quite simple really: the world CB's printed TRILLIONS of dollars/yen/euro to prevent BANKS from imploding. In doing so, all that FREE MONEY had to find a place to go and it went right into risk assets, not into growing the economy.
Next time you hear someone yammer about "soft landing" just think of the number of pos economic "balls" the Fed is juggling and the fact that they've never once been able to stick a soft landing. This time will be no different.
But this time ultimately could prove to be more painful than 1929. I think there are two broad ways this all plays out. The following are what I think are probable paths for the economy and the markets, absent a grey or black swan of course.
SCENARIO 1 - the "KRE" Collapse Scenario:
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Market makes new ATHs, albeit with narrow breadth - ONGOING
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Financial institution(s) or regional bank(s) fails; market down 20% - LATE 2ND QUARTER 2024
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Tech and rest of market follows banks and financials - 3RD QUARTER 2024
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Financial crisis moves globally - 4th QUARTER 2024
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Trump reelected
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Markets drop lower an additional 20% to 40% - 2025
SCENARIO 2 - the "Kick the Can Further" Scenario:
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Market makes new ATHs, albeit with narrow breadth - ONGOING
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Financial institution(s) or regional bank(s) fails; market down 20% - LATE 2ND QUARTER 2024
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Fed and Treasury launch the Mother of all Stimuli - 3RD QUARTER 2024
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SPX goes to 6500 - 4TH QUARTER 2024
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SPX goes to 10,000 - 2025
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SPX goes to 100,000 - 2026; it's called HYPER INFLATION. Enjoy your $50 per gallon gas
SCENARIO 3 - the "Death by Derivatives" Scenario:
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Market makes new ATHs, albeit with narrow breadth - ONGOING
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Financial institution(s) or regional bank(s) fails; market down 20% - LATE 2ND QUARTER 2024
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Regional Bank issue expand beyond loans and move into the CDO and CDS markets - LATE 3RD QUARTER 2024
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TBTF Bank fails, and causes a sudden unwind and pricing of ALL derivative contracts - LATE 3RD QUARTER 2024
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End of the world as we know it. All countries move to Socialism. Bankers are hunted and killed. Same for government officials.
IMPORTANT: You will note that I do not have a scenario where the markets go up without stimulus. I am sorry to be a downer. Also, the list of possible "outliers" is very large and complicated and therefore very difficult to try and estimate the probability one occurs.
DOOM List Update
DOOM 1: CRE IMPLODES:
$NYCB got it started this week when they were forced to report a 10x increase to their reserves AND reported a $260m loss for the 4th quarter, driving their stock down 40% at the open with heavy volume. In addition, they cut their dividend substantially. Now, to be fair, some of the increase in reserve was due to the bank becoming a +$100b bank along with the regulatory requirements. But that affected their cash position. The loss, however, was due to a large CRE loss on a SINGLE PROPERTY. It appears from this transcript that their largest holder, JPM, was not pleased, and did not hide it:
And reports like the following are starting to become more frequent. The meltdown is just getting started and ONLY a bailout is going to save $KRE. They know this also and that's why they are trying to play "kick the can" ad infinitum. They will be close, but they will fail. These things start to get their own momentum. One more bank makes headlines due to CRE and that should do it.
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I am NOT checking it off the list until we get at least another couple of banks' stock prices getting decimated. Then I can say it the implosion is in full swing.
DOOM 5: NATO AND RUSSIA ENGAGE DIRECTLY:
Nothing really new to report, except this:
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Doom Trades
$KRE
What a difference a week can make! Just think - ONE bank did this to #KRE this week. ONE BANK. Need to break $48.29 and that will get me $40.
$BAC
Weekly is still in a buy but what an UGLY candle this past week. Will watch for a confirmed reversal this week before I add.
$TQQQ:
Big move on the $NDX setting new ATHs. How much more and how fast this goes no one knows - but my guess it will be only the Mag5 really leading.
$TLT:
Out on my Short Runner for +30% and now, WEEKLY IS IN BUY with a break and retest of support. Stop is indicated.
This Week's Screw Job
My gosh I just "love" Nancy Pelosi. If it isnt't her amazing stock picking prowess its her snappy "Covid rules don't apply to me" attitude when she went for a haircut during the lockdown. Just when I thought I couldn't dislike the actions of this woman anymore, this happens:
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I really wish this was the only example of how we all get screwed but I wanted to share another with you. But this one will probably really piss you off. Because there is absolutely nothing the SEC will do even though fraud regs have been broken for at least a decade. Let's take a look at Fail To Deliver, but this time the EuroAsiaMiddleEast Flavor.
FAIL TO DELIVER:
Everyone knows the story of $AMC. Of how there are more shares short than exist. How Blackrock and Citadel are blatantly selling share short and then never delivering them. Yup. How are they doing this? Well, until now I thought it was via derivatives but now I know its via a much simpler method - the just lie.
While the SEC will aggressively pursue parties who are selling fake shares short if there is enough public shaming to do so, they won't do squat if the parties live outside of the US. Let me put this into terms even I can grasp: you can sell shares short as a foreign participant in US markets and NEVER DELIVER THE SHARES. And you can do it over and over and over again. Because the SEC will do nothing. Until last week.
Last week the SEC announced that settlement would go to 24 hours or T+1. That means short sellers must deliver the shares to the buyer in 24 hours. Which means that the SEC has just made it EASIER to track who the fraudsters are. And this time, I actually think they mean to do something (see, I am not all doom and gloom). I agree I am reading between the lines but
here's what I think is going on. I believe this week's announcement that May 28th will commence T+1 was a warning to the EuroAsiaMiddleEast regulators that the SEC is going to expect them to enforce. Also, I think it was a warning to the fraudsters that they better cover. Which leads me to who the fraudsters probably are, since the SEC is giving them a heads up: Citadel, Blackrock, JPM, Schwab et al.
Sorry, no happy ending.
The Week Ahead
I will be monitoring my $UVIX trade this week as well as my oil trade. The VIPs and I have opened a number of trades recently that are profitable so I will be managing those also.
I am in a "wait and see" mode until another bank makes headlines or the VIX jumps. I have no intention of getting long up here so I might be in for a couple of more weeks of no trading.
Some areas or stocks that I watching this week:
I will looking to enter a $TLT trade as well as monitoring any earnings breakouts that can be gap filled. I am monitoring the 10 year and the 20 as well as the Shanghai Exchange. Finally, since I am underwater with my 2x oil, I will have to do something with that this week so I will be watching oil closely.
Bitcoin
Price is consolidating and until it breaks $44k'ish, it's headed sideways.
The Weekly chart has now confirmed a strong reversal with this week's close above last week's high. Bullish.
FREE TRADES
I shared two new trade ideas this week, one Earnings Play and one Lotto. So that means position size should be no larger than 2% of total. One contract of each is a great start.
$IP Feb16 $37.50C for $1.15 was a total loss but $UVIX Apr $12C for $2.86 was up as much as 45% on Friday before closing the day at +15%
I will see Monday or Tuesday whether the $UVIX trade stops me out or starts to run again.
UPDATE: $KWEB May17 $12P for $0.94 is doing fine. Price is nearing a major support level.
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theBoss
Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.