Bang
December 17, 2023 -Weekly Comment
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Just a smattering of disconnected thoughts this weekend. I skimmed the news Saturday morning and this headline from the FT struck me:
Bang & Olufsen says it will defy luxury slowdown as ‘rich will only become richer’
Makes some sense right? It’s an old saying: “the rich get richer”. We used that on the CME floor once in a while. As stocks surge to new highs it feels like the naysayers (yes, I am tentatively raising my hand as I gaze down at the floor to avert eye contact) are all wrong. On the other hand, the BANG headline contrasts with BBG’s: Underwater Car Loans Surge to the Highest Level Since 2020. This article goes on to highlight the resurgence of the REPO man.
This voice inside my head keeps whispering, “The soft-landing crowd are IDIOTS.” (I’m not saying it out loud though).
Out on the road today / I saw a Deadhead sticker on a Cadillac
A little voice inside my head said / “Don’t look back, you can never look back”
-Don Henley, Boys of Summer
I guess it’s the repo man in an Escalade with B&O speakers, deadhead logo on the rear bumper. Business is good.
In what is perhaps a desperate attempt to cling to the idea that Federal Gov’t spending largesse is going to collapse under its own bloated weight of debt and take the economy and financial assets right along for the ride, I looked back.
I always remember riding the Metra commuter train into Chicago one morning in March and reading the WSJ article about Bear Stearns admitting that its two mortgage portfolios were nearly worthless. That was in 2007. I thought “this is it”. A stock market sell-off ensued. It lasted less than a month. Then SPX made a new high in July, followed by a sharp sell-off in the beginning of August. Here’s a snippet from cnn/money from August 16, 2007:
https://money.cnn.com/2007/08/16/markets/markets_1200/index.htm
(Aug 16, 2007) Credit worries took center stage again Thursday after Countrywide Financial, the largest U.S. mortgage lender, said it was forced to tap an $11.5 billion line of credit to offset its liquidity crunch.
Countrywide’s increasing troubles over the last few days have exacerbated fears about a global credit crisis.
After holding short-term interest rates steady at 5.25 percent for more than a year, many investors and other Wall Street pros are looking to the Federal Reserve to cut interest rates at the central bank’s upcoming policy meeting Sept. 18.
“What everyone’s waiting for now is to see what the Fed will do at the next meeting,” Yared said. “Whether they drop 25 basis points or even 50 to really soothe the markets.”
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It’s all so familiar it almost sounds a bit tedious. Except that the $11.5 billion credit line sounds like pocket change in today’s world. And, in fact, the Fed DID “save the day” (S-T-D) on Sept 18, 2007, cutting the funds rate in Sept ‘07 from 5.25% to 4.75%. Here’s a clip:
NEW YORK (CNNMoney.com) — The Federal Reserve cut the target on a key short-term interest rate by half of a percentage point Tuesday to 4.75% in a bold acknowledgement that the central bank is concerned the mortgage meltdown plaguing Wall Street and Main Street could hurt the economy.
Here’s a follow-up on October 1, 2007:
Dow hits all-time high
Big blue-chip barometer hits intraday record of 14,111 as Wall Street resumes the recent advance: Citigroup warning, drop in ISM index fuels hope of Fed rate cut.
October 1, 2007 –Stocks surged Monday afternoon, with the Dow touching an all-time high above 14.110 as investors shrugged off a profit warning from Citigroup and instead focused on the possibility of more Fed rate cuts.
The broader S&P 500 index and the tech-fueled Nasdaq composite both gained 1.3 pct. The Russell 2000 small-cap index jumped more than 2 percent. [Russell surged 5% pre-FOMC to Thursday’s high last week]
“You’re seeing a continuation of the recent momentum,” said Chris Johnson, CEO of Johnson Research Group. “There was unfavorable news in the financial arena, but the market is still rallying, which tells you that investors are afraid of getting left behind.”
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Now of course, there are NO PROBLEMS with Citi and the banking system this time around. Indeed, C surged from 38 to 50 in the past month and a half! And…they’re paying bonuses to encourage staff departures. Don’t miss out! Everything is wonderful now. However, as an aside I am kind of wondering why CME stock is down nearly 6% from the Dec 4 close of 219.78 and down 2.3% last week, to 206.73. Obviously there’s a large seller taking advantage of a strong market to unload. Does someone know something? [DISCLAIMER: I am long some CME puts. And I don’t know anything except for price action] I would also note that ICE was up 8.6% last week. ZH rhetorically asks, given Powell’s green-lighting of rate cut expectations: “Is that why the Fed needed to bring rates down massively and fast, to reduce the bond losses on banks’ books?”
https://www.zerohedge.com/markets/bank-loan-volumes-shrink-deposits-rise-trouble-brewing
The below chart is an overlay of 2007 SPX against current price action. 2007 is in purple and today’s is in high/low/close format in blue. These charts almost never work. (*still gazing toward the floor). And of course, today we don’t have a mortgage crisis. What we have is a federal gov’t that has eroded personal responsibility and economic stewardship by blowing out the budget, surreptitiously transferring private household debts and obligations to the gov’t ledger and trying to represent it all as an economy that’s firing on all cylinders.
In any case. here’s the current, relatively muted characterization of things, by Investor’s Business Daily:
Stock Market Rally The Dow Jones set a record high, while other indexes set 2023 highs. Megacap techs were relative laggards, but are mostly in or near buy points. Small caps led a powerful, broad advance as the Federal Reserve signaled it will shift to rate cuts next year. Treasury yields extended big losses.
It’s possible to compare this past week’s FOMC press conference with the S-T-D rate cut in 2007. Within the space of a couple of weeks Powell shifted from “not thinking about rate cuts” to “we’re thinking about rate cuts.” It might all work out. It’s just worth a little reminder that about a month after the Sept 2007 rate cut, SPX made its high in October. Then it started to shed weight like a singing fat lady on Ozempic, and was down 46% over the next twelve months.
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Last week I wrote this:
My personal bias is to be long SFRZ4. …I would like to buy as closely as possible to the upward sloping trendline which comes in around 9567.0. Stop out 9550, target 9612 to 9625. In options, buy 0QZ3 9575/9600cs for 6 or lower on a dip. I know that I would advise Powell and the Fed to lean hawkish and that being long Z4 might not be appropriate in that case. However, Powell was balanced during Dec 1 comments, and economic data has generally softened. The market is likely to look through restrictive comments, if they occur.
SFRZ4 high last week was 9632, low was 9571. 0QZ 9575/9600cs expired at full value of 25.
My bias now is to set a short in USH4 anywhere between 124 and 125, (settled 123-27). The long end was incredibly well bid last week despite an easing schedule that was clearly brought forward. It should have been an engraved invitation to buy the steepener. However, on the week, twos fell just over 27 bps to 4.451%, fives down nearly 33 to 3.926% and thirties down an astonishing 30 bps to 402.5%. Actually, post-settlement the cash yield ticked just below 4%. My stop-out area is 127, and my target is 117-16 to 118-16.
| 12/8/2023 | 12/15/2023 | chg | ||
| UST 2Y | 472.5 | 445.1 | -27.4 | |
| UST 5Y | 425.3 | 392.6 | -32.7 | |
| UST 10Y | 424.3 | 392.6 | -31.7 | |
| UST 30Y | 432.7 | 402.5 | -30.2 | |
| GERM 2Y | 269.3 | 250.4 | -18.9 | |
| GERM 10Y | 227.6 | 201.6 | -26.0 | |
| JPN 20Y | 153.5 | 142.1 | -11.4 | |
| CHINA 10Y | 268.5 | 263.6 | -4.9 | |
| SOFR H4/H5 | -125.0 | -148.0 | -23.0 | |
| SOFR H5/H6 | -40.0 | -32.5 | 7.5 | |
| SOFR H6/H7 | 4.0 | 5.0 | 1.0 | |
| EUR | 107.63 | 108.97 | 1.34 | |
| CRUDE (CLG4) | 71.44 | 71.78 | 0.34 | |
| SPX | 4604.37 | 4719.19 | 114.82 | 2.5% |
| VIX | 12.35 | 12.28 | -0.07 | |
