November 16, 2024
What You Need to Know Today:
Consumer sentiment points to healthy spending; lower inflation fears
U.S. consumer sentiment rose to a four-month high in early September. The sentiment index from the University of Michigan increased to 69 from August’s 67.9, preliminary figures showed Friday. The median estimate in Bloomberg’s survey of economists called for a reading of 68.5. The biggest contributors to the improved sentiment reading were the tamest short-term inflation expectations since the end of 2020 and anticipation of a drop in borrowing costs as the Federal Reserve begins to cut interest rates.
Saturday Night Quarterback says (on a Sunday), For the week ahead expect…
I expect surface quiet but important movement in the lower depths of the financial markets. The week ahead lacks in obvious market-moving events and reports. There’s a smattering of earnings with Disney (DIS) on May 7 and Toyota Motor (TM) on May 8. But nothing from the likes of Apple (AAPL) or Microsoft (MSFT). A few speeches from Federal Reserve officials–Fed governors Lisa Cook on May 8 and Michelle Bowman on May 10. But no Fed meeting. No testimony from Fed chair Jerome Powell. But deep in the workings of the bond market, this will be a big week. The Treasury will auction $112 billion in Treasury paper.
The jobs data doesn’t tell us what the Fed is thinking about rates and inflation–so the market guesses
The U.S. economy added 175,000 jobs in April, the Bureau of Labor Statistics announced on Friday. That was the smallest number monthly new jobs in six months. The unemployment rate ticked up to 3.9%. And traders tried once again, to get ahead of the data. Concluding that slower job growth, meant the Federal Reserve would be more likely to cut interest rates sooner–in September, say, rather than November or December–bonds rallied and yields fell. The yield on the 10-year Treasury dropped 7 basis points to 4.5%. The yield on the 2-yer Treasury, which had been flirting with 5% earlier in the week, fell to 4.82%. Stocks climbed with the Standard & Poor’s 500 up 1.26% and the NASDAQ Composite gaining 1.99%. Trouble is that these moves were the exact opposite of gains and losses earlier in the week.
Please Watch My New YouTube Video: Go Away in May?
Today’s video is Go Away in May? Historically, the months between November and May were much more profitable than the months from May to November. The saying “Go away in May” came from that distribution of returns, suggesting investors should get out of the market during the less profitiable May to November period. This advice holds particularly true for tech stocks, which have very clear seasonal revenue patterns. For example, in March of 2023, Apple (AAPL) earned $1.52 per share, in June earnings per share went down to $1.26, in September they went back up to $1.46 and then the company blew it out in December to $2.18. While this isn’t indicative of the entire tech sector, it’s a good example of this seasonal pattern, especially for technology stocks with big consumer businesses. So what about this May? I’d say, you can probably “go away”–but maybe a little late than usual. NVIDIA’s (NVDA) earnings come out on the 22nd of May and will likely be giant. Current Wall Street estimates have earnngs per share at $5.14, up from $.88 a year ago. After that,the technology sector is relatively quiet. The next big tech event to look out for is Apple’s Worldwide Developers Conference in June, which could result in “buzzy” tech announcements about AI. After that, I don’t see a lot of reason to be overweight technology and I’ll look to take some profits. I think this amounts to a modest Go Away in May call.
Brookfield Renewable pops on Microsoft supply deal
Microsoft will buy more than 10.5 GW of clean energy from Brookfield Asset Management and its Brookfield Renewable affiliate (BEPC), the companies announced on Wednesday, May 1. Shares of Brookfield Renewable were up 5.13% today, May 2, on the news. I added Brookfield Renewable to my Dividend Portfolio on March 26, 2024. The shares are up 10.82% since then as of the close on May 2. They pay a dividend of 5.52%.
The Fed walks a very, very fine line on inflation and interest rate cuts
On Wednesday, May 1, the Federal Reserve decided NOT to cut interest rates at its May 1 meeting. That was the decision expected by the financial markets. And Federal Reserve chair Jerome Powell tried his best to keep traders from speculating that the Fed would actually raise interest rates, rather than cut them, in the remainder of 2024.
Step #7 in my Special Report: Sell GM and Ford sometime between now and December
I added Step #7 to my Special report: 8 Steps to Protect Your Portfolio from the Global Debt Bomb today. And my advice is to sell Ford and General Motors sometime between now and before the December 13 meeting of the Federal Reserve. Here’s what I wrote in that Special Report.
Live Market Report (20 minute delay)
Housing contracts rose in February; market says “maybe” a housing bottom
Contracts to buy U.S. previously owned homes increased for a third straight month in February. On Wednesday, the National Association of Realtors said its Pending Home Sales Index, which measures signed contracts, rose 0.8% last month to the highest level since August. Economists polled by Reuters had forecast contracts, which become sales after a month or two, would fall 2.3%.
Buying Schwab Put Options on outlook for a very rocky April 17 earnings report
This is shaping up as a very tough earnings season for all financial stocks. But no stock looks more exposed to a short-term hit than Charles Schwab (SCHW.) Which is why I’m adding the May 19 Put Options with a strike of $52.50 to my Volatility Portfolio tomorrow, March 29.
More economists worry about Friday’s PCE inflation report
Now it’s not just the Cleveland Fed’s NowCast that’s pointing at problems in Friday’s PCE (Personal Consumption Expenditures) index inflation report. Economists surveyed by Bloomberg project that the core PCE index–that is excluding food and fuel prices–climbed 0.4% in March from February. Year over year, the core PCE index is projected to be up 4.7% with the all-items rate up 5.1%.
Oil rallies, finally
Oil rallied today, Monday, March 27, for the first time in, well, quite a while. Oil is likely to finish with a loss in March, for a fifth monthly drop. So today’s move, which saw West Texas Intermediate jump by almost 55, marked quite a shift in direction.
Please Watch My New YouTube Video: Trend of the Week Is a Minsky Moment Ahead?
This week’s Trend of the Week is Minsky Moment Ahead? Hyman Minsky was an economist who studied credit cycles. Minsky died in 1995, but in 1998, during the Russian Ruble and Asian Currency Crises, economist Paul McCulley recognized the situation was one described by Hyman Minsky, and dubbed it a “Minsky Moment.” A credit cycle starts when credit is abundant and banks are lending generously and gradually taking bigger and bigger risks. Eventually, an event like the Silicon Valley Bank failure hammers the banks, causing them to pull back and tighten their lending to a greater degree than at the start of the cycle. It’s a classic case of locking the barn door after the horses have escaped. Once the crisis is in place banks tighten their lending standards and this causes a constriction of credit when the economy really needs credit–a Minsky Moment. Right now, there are a lot of contractionary forces at work in the economy, including the Fed’s raising of interest rates while selling off some of its balance sheet. The two areas that will likely be hit hardest by these contractions and the Minsky cycle are emerging markets, which are having trouble repaying debt from lenders such as China that are not willing to renegotiate, and the start-up market, where private companies are finding it harder to raise enough capital to keep their companies going. If you’re holding emerging markets stocks or new tech stocks with an eye to the future, make sure you’re comfortable with where they are presently, and watch that they’ve been able to secure the funding they need. Be careful out there.
The Search for the Next Shoe to Drop in the Bank Crisis Goes On: What About Commercial Real Estate?
Officials from the White House, the Treasury Department, and the Federal Reserve, are huddling over risks to the banking systems from the $20 trillion market for commercial real estate. Analysts told the Washington Post that this market could be heading for a crash over the next two years thanks to higher interest rates and continued softness in demand after Covid shutdowns. One reason that this market is getting extra attention is that regional banks, already under pressure from problems at Signature and First Republic banks, play a big role in this market for loans to commercial real estate.
Venture capital financing dries up
It’s not like it was easy to find venture capital financing before the collapse of Silicon Valley Bank. It’s just that now finding money to fund a startup or raising a round of follow-on financing has gone from difficult to almost impossible. In the last three months of 2022 venture capital funding fell by 61%, according to Pitchbook. Now many more venture capital investors are sitting on the sidelines.
Saturday Night Quarterback says, For the week ahead expect…
Look for another inflation report this week. This time–on March 31–it’s the Federal Reserve’s favorite inflation model, the Personal Consumption Expenditure (PCE) index. And, there’s potential trouble in this report–if projections from the Cleveland Federal Reserve Bank’s Inflation NowCast are accurate.
Goldilocks fails to capture the Federal Reserve (sort of)
Goldilocks is just about the only thing keeping the current stock market afloat in the face of a storm of worry from a banking crisis, to stubbornly high inflation, and signs of a cooling economy. The Goldilocks story says, Don’t worry about all that. The Federal Reserve is about to pivot on interest rates. At its May 3 meeting, the Federal Reserve Open Market Committee might raise interest rates by 25 basis points but that will be the last interest rate increase. And then the Fed will move to start cutting interest rates in the second half of the year with financial markets pricing in as much as 200 basis points of cuts by the end of 2024. And all this will happen, too, without a recession, as the Fed engineers a successful soft landing of the economy and a significant slowdown in inflation.
If you believe that, you should be buying stocks. I don’t believe it. And more importantly, the bond market doesn’t believe it.
Move #3 in my Special Report: 5 Moves for the Next 5 Months
Here’s Step #3 in my 5 Steps for the Next 5 Months Special Report
So what was today all about?
I argued in my YouTube video on Tuesday that this was a market without a trend. So far that seems about right.
Please Watch My New YouTube Video: Quick Pick KBE Bank Stocks ETF
Today’s Quick Pick is SPDR S&P Bank ETF (NYSEARCA: KBE). I’m not suggesting buying this now: I’m suggesting you watch this and buy Put Options on this ETF when the time is right. The SPDR S&P ETF is approximately 80% regional banks. As you can imagine, it took a huge hit during the recent banking scare and would have been a great Put Option last week during the plunge in the sector. Options are a way to leverage the volatility of this market. The recent exit of my VIX Call Option resulted in a 100% gain in about a week. For KBE, I’d look at Put Options that climb in value as the price of the ETF sinks. At the time of recording, KBE was selling at about 37. I’m looking at the June 16 Put at a strike price o 38. At the moment, the Put is deeply underwater but I’ll continue to watch this rally to see when it’s worth it to jump in. At the moment, I suggest you watch this one: Don’t buy just yet but wait for the next shoe to fall in the banking crisis.
Please Watch My YouTube Video: Where is the Contagion?
Today’s topic is Where is the Contagion? I’m not talking about viral diseases, I’m talking about financial market contagion. After the collapse of Silicon Valley Bank and the subsequent shutdowns of Signature and Credit Suisse, investors are naturally asking, who’s next? What happens if this pops up in places we aren’t expecting? The problem is in the financial world, many financial companies and systems are connected. They can act as guarantors for one another, or have obligations to each other that see risk passing from one bank to another. All this creates opportunities for contagion to spread. One of these “contagions” to look at is AT1 bonds, otherwise known as CoCos. At1 bond issued by Credit Suisse become worthless when that bank was taken over by UBS. There are about $280 billion worth of AT1 bonds in the world at the moment. The question is, who owns them? Bloomberg discovered both PIMCO and Invesco hold these CoCos, though not at a level that would cause their collapse. If you’re invested in a bond fund, it’s important to know which kinds are in their portfolios. that’s especially true in the case of bond funds that have looked to beat the yield of treasuries by buying riskier classes of bonds.
Fed raises interest rate by 25 basis points as expected
Not a whole lot of news out of today’s breathlessly awaited meeting of the Federal Reserve’s Open Market Committee. The committee raised its short-term benchmark rate by 25 basis points to a range of 4.75% to 5%. That move had about 80% odds in its favor going into the meeting. The Dot Plot projections kept the interest rate forecast at 5.1% for the end of 2023. That was unchanged from the December Dot Pot projections.
FOMA lives! At least with Big Money
Want to know why stock prices have been so resilient in the face of a global banking crisis and the prospect of higher interest rates from the Federal Reserve? FOMA. Fear of missing out. Especially among some of the world’s largest money managers. Some of the world’s biggest investors are looking beyond interest-rate hikes, bank failures, and the threat of recession to one of the greatest fears of all money managers—-missing out on the next big rally, Bloomberg reports.
Ahead of the Fed’s decision on interest rates, the signs are that banks are pulling back on lending because of the banking crisis
Ahead of the Federal Reserve’s decision on interest rates today, banks look like they’ve cut back on lending as a result of the Silicon Valley Bank/Signature Bank/ etc. crisis. And economists are reminding us all, that a reduction in bank lending because of fear of a banking crisis is just as much a tightening of the money supply as higher interest rates from the Fed.
It’s my VIX Call Options trade all over again–almost
On March 6, I bought the May 17 Call Options with a strike of 23 on the CBOE S&P 500 Volatility Index (the VIX) when the index traded at 18.61. I figured that the “Fear Index” was so low that it wouldn’t take much to push it and these options higher. A week later the options were up 116% after the VIX climbed to 26.52. Historically, that isn’t a very high reading for the VIX, which can easily hit 35 to 45 when fear engulfs the market. I’m still holding my June 21 Call Options with a strike of $23. But I’ve been looking for a chance to replay that earlier trade. Somehow (LOL) I don’t think this market is done with volatility.
Please Watch My YouTube video: Trend of the Week There is No Trend
This week’s Trend of the Week: There is no Trend. When I was filming this video on Tuesday the 14th, the S&P was up almost 2%, the DOW was up almost 1.5%, the NASDAQ was up 2.23% and the VIX, which had been climbing higher with the Silicon Valley Bank collapse, was down almost 15%. Since filming, the markets dipped sharply with the threat of Credit Suisse going under, and have trended slightly upward since. If you’re going to trade in this market, you have to do one of two things. One thing is to be very fast, and trade on the bounces as they show up. The other tactic is planning ahead. Long-term in this market is about a week. A week prior to filming (3/6) I bought Call Options on the VIX (the volatility index) and I sold them on March 13 with a 108% return. On March 14, however, those VIX Call options were down 27%. Talk about volatility! The trend is, there is no trend. Subscribe to my JubakPicks.com to get timely posts on how to keep up with the chaos. For more options and other volatility plays, subscribe to JubakAM.com.
Market consensus converges on 25 basis point interest rate increase from the Federal Reserve tomorrow
The CME FedWatch Tool, which calculates the odds of a Fed move on interest rates by looking at prices in the Fed Funds Futures market, puts the odds of a 25 basis point interest rate increase from the U.S. central bank tomorrow at 86.4%. That’s up from 73.8% on March 20.
That’s stability? First Republic shares drop another 47% today
Shares of “troubled” (is that fair? just “troubled?”) First Republic Bank (FRC) fell another 47.11% by the close today, March 20, after credit rating company S&P Global lowered the bank’s credit rating for the second time in a week.
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