ANGLES.

A week following three major US bank failures that then saw two other banks sail very close to the wind ended with stock markets higher, the S&P 500 was up 1.4% for the week and the NASDAQ closed 4.4% higher. Anyone who claims they can correctly predict this stuff is such a liar.

Monday was the largest trading volume day so far this year on US exchanges (a record that lasted until Friday, when it was surpassed) and saw a bloodbath for shares of many regional banks on the back of the failures of Silvergate, Silicon Valley Bank and Signature Bank amid fears of financial contagion (see EXPLAINER: FINANCIAL TERM OF THE WEEK below).

These types of institutions are more reliant on net interest income (the difference between what they borrow and lend for) than larger Wall Street institutions which have additional diversified revenue sources including investment banking, trading, and wealth management.

None fared worse than First Republic Bank (FRC), whose stock plunged almost 70% on Monday before rallying back later in the week after it got assurances of some protection from the regulators and financial propping-up from its Wall Street banking pals like JP Morgan and Wells Fargo. It then slumped again on Friday after the bank announced that its dividends were a thing of the past.

For the third week running, there were extraordinary shifts in the market’s perception of what the Fed will do at this week’s March 22nd meeting, the idea being that in such a jumpy environment the Fed could not risk jacking rates up very far, if at all.

Indeed, there was a feeling that this turmoil could be the Fed's "get out of jail free" card, meaning that the banking crisis gives it the perfect cover to scale back or even pause its rate hikes, maintaining credibility in doing so by citing uncertainty in the banking sector as the “legitimate” reason.

This idea that the fallout from the crisis might help do the Fed’s job for it pushed non-financial stocks considerably higher for much of Monday’s trading session as, once again, the stock market priced in imminent Fed pivots and pauses having just got burned by doing exactly this literally only a month ago.

Interest rates on 2 year and 10 year Treasury bonds, which should be boring but have been acting like crazy biotech stocks lately, slumped hard, driving bond prices higher. The 2 year fell from above 5.0% to 4.0% in just three trading sessions. The technical term for this is; a friggin’ massive move - not seen since The Bangles were first advising us all to walk like an Egyptian in 1987.

As you will have seen in last week’s report, the futures market-based probability of a half percent hike by the Fed this Wednesday ended the previous week at 68%. By Monday evening, that probability was priced at .. zero, where it remained all week.

The likelihood of no change at all in rates being announced this week, priced at zero for months now, ended last week at 38% (Goldman Sachs analysts even came right out and said it - they think the Fed will leave rates unchanged as a result of what is happening in the financial sector). The remaining 62% probability said that a quarter of a point rise was on the cards.

The market has now priced in large interest rate cuts by year-end, with the probability of rates being lower than the current 4.625% now at 99%, and a two-in-three chance that rates will be below 4.00% on New Year’s Eve. This turnaround is quite astonishing when you look at the comparisons of where these probabilities were just a week ago and a month ago (see FEDWATCH TOOL below).

Before the market open last Tuesday morning we learned that, in the twelve months through February, the overall Consumer Price Index (CPI) measure of retail inflation rose 6.0%, compared to 6.4% the previous month. The January to February monthly rise was 0.4%. The year-on-year Core CPI rate, which excludes more volatile food and energy costs, was 5.5%, down a touch from the prior month. These readings were all broadly in line with expectations and supported a narrative that, while inflation is still a problem and the 2.0% Fed target remains pretty far away, the overall trajectory is still disinflationary - even if it is not as steep as the Fed would like.

This was broadly confirmed by the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers which came out the next day better than expected.

The market’s reaction to the CPI report dovetailed with the emerging lower or even no rate hike expectations as well as with an exhale when it came to assessing bank contagion risk and this all drove all stock prices nicely higher on Tuesday.

Fears that another shoe was dropping, however, emerged on Wednesday when shares of troubled Swiss bank Credit Suisse (CS) fell over 27% in pre-market trading amid reports that its Saudi sugar daddy had ruled out any further financial assistance. Now anyone even half-paying attention knows that Credit Suisse has been a dead bank walking for months now (it’s even been previously mentioned in this very publication).

Quite why everyone was acting so shocked on Wednesday that a crap $2 to $3 stock of an institution already shown to have been involved in facilitating international drug dealing, global espionage, malicious and deliberate data leaks of client information, government corruption in Africa, complicity with fraudulent billionaires and hedge funds and more, became even crappier is a bit of a mystery to me but regardless, the previous day’s stock market gains were swiftly vaporized.

The schizophrenic feel continued for the rest of the week. Thursday saw markets move solidly back higher again as Switzerland announced that it would essentially backstop Credit Suisse and the Zero/Small-Rate-Hike narrative re-emerged.

Friday was always going to be wild as it was one of the four“triple-witching days” that happen each year, when individual stock options, stock index options and stock index futures contracts all expire on the same day leading to significant position covering. Kerosene was thrown on the fire by something of a re-examination by investors of what had initially been thought to be the “good” First Republic and Credit Suisse news from the day before and another pretty substantial down day was the result.

All eyes now turn to Wednesday afternoon and the Fed’s interest rate decision and Jerome Powell’s associated press conference and, for the first time in a long time, it’s actually a little unclear which way they will go. I’m on Team Quarter-Of-A-Point-Rise right now, but we will have to get through the rest of this weekend plus two more days of banking sector news narratives before we learn the outcome.

It’ll be an interesting week. I suggest strapping in.

OTHER NEWS .. Banking Crisis Edition (kind of an Op-Ed, I’m afraid)

This is absolutely NOT 2008 .. There is far too much irritating, lazy media comparison between now and 2008 when it comes the events of the last week or two. While you expect this from clueless simpletons on FinTok and Instagram, I’ve also seen it on more respectable outlets that should know much better.

The biggest difference (of many!) between 2008 and now is that fifteen years ago, the assets held at the troubled banks (mortgages on homes) were hopelessly underwater. The home values were way below the value of the mortgages owned, which created massive losses and colossal solvency issues.

Today, the assets held at the troubled banks are US government Treasury bonds which are still worth exactly what banks paid for them (par value) as long as they don’t have to be sold in distress. This makes what we are seeing today a liquidity issue, not a solvency issue. In the grand scheme of things, liquidity issues can be overcome. Solvency issues cannot.

We know from the evidence placed before our eyes over recent months and years that the tech sector, and more especially the crypto-adjacent part, is systemically infused with greed and - in many cases - outright fraudulent and criminal…

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New features in the report (see below):

- Weekly updates on the latest official average 30 year fixed mortgage rate with comps going back one week, one month and one year

- FedWatch Tool information: What the latest important market expectations are on interest rates with comps going back one week and one month

Federal Reserve Chairman Jerome Powell basically killed risk appetite on Tuesday with a change of tone on inflation in remarks before the Senate Banking Committee. Not for the first time, he contradicted previous statements he has made recently, stating that the central bank may now have to both speed up the pace and increase the size of interest rate hikes in order to get inflation in check. Powell also told the panel the “ultimate level of interest rates is likely to be higher than previously anticipated”.

JP’s comments to Congress sent stock prices crashing and drove the interest rate yield on the two-year Treasury note up above 5% for the first time since Fergie took the rather debatable position that girls don’t cry in 2007 and the ten-year rate pushed right up against 4%. That differential between those two rates shifted to the steepest it has been in over 40 years.

On the other hand, did Powell really say anything so controversial or unexpected? I don’t think so. His tone change was entirely predictable given that recent economic data and earnings reports/guidance is completely inconsistent with inflation heading back to the Fed’s target of 2% anytime soon. He didn’t really say anything that should have come as a total shock to anyone, let alone market professionals; potential peak interest rates of now around 5.6% and now a very meaningful possibility of a half a point rate rise at the next Fed meeting (see below).

He even made a bit of a lukewarm attempt to partly take the edge off Tuesday’s comments by stating on Wednesday, in reference to the possibility of a 0.50% hike later this month instead of 0.25%, that “I stress that no decision has yet been made on this".

Once again, the constantly over-exuberant stock market was caught offside by such remarks. The sharply negative immediate stock and bond market reaction on Tuesday was really a result of the final evaporation of January’s excessive optimism that had been brought about by a now-discredited fantasy about pivots and pauses that the market had spun for itself.

When the Jobs Report finally came out pre-market on Friday morning, it showed the creation of an additional 311k jobs in February, vs the expected number of 215k. There was a downward revision of January’s shock blockbuster number of $517k as expected, but only by 13k, although December’s number was also revised down, from 260k to 239k. However, the unemployment rate unexpectedly bumped up to 3.6% from the half-century lows of 3.4%, as layoffs ticked up and more workers re-entered the workforce. Average hourly earnings only rise slightly and below expectations.

This was initially viewed as a “hot, but not too hot” report and the negative stock market reaction was relatively muted to yet another huge rise in jobs filled (but still about 180k less than the previous month), but a surprise increase in the unemployment rate. Both two and ten year Treasury interest rates actually eased lower from their highs earlier in the week after the report came out.

What pushed the market down hard on Friday afternoon was not really a reaction to the Jobs Report, which was quickly overshadowed by banking sector fears brought about by high profile bank failures, which I go into deeper below in OTHER NEWS .. Crypto and tech banking woes edition.

The market probability of the Fed raising interest rates by a half percent at its next meeting ending on March 22nd instead of the originally highly-expected quarter percent initially exploded right after Powell’s comments on Tuesday from 31% to 72% according to the CME FedWatch tool. It fell back a bit to close the week at 68% but a 0.50% rise in rates next time out is now very much a majority opinion and a huge rise in likelihood from a month ago when its probability reading was just 9%.

By the way, it is becoming increasingly clear that the CME FedWatch tool data (which I now include in this report every week, see below) is just about the most important source of information out there right now when it comes to trying to figure out crucial information about what financial markets are really thinking about interest rates and how traders are positioning themselves.

This year is going to be all about economic growth, and if that rolls over, so will the stock market. Stocks may have proven themselves resilient to more than previously-expected rate hikes, but I remain concerned they will not be immune to the eventual impact of these rate hikes. Put more plainly, stocks may have already discounted somewhat higher interest rates, but they have not fully discounted the effects of a recession that higher-for-longer interest rates might unleash upon the economy.

Beyond growth, the other massive red flag will be if the Fed indicates that it will raise rates substantially above the latest 5.6-ish% market estimate for peak (terminal) interest rates. For practical purposes, I now believe that means 6.0% or higher. If the Fed signals that’s where the Fed Funds rate is going, that will hit stocks, very possibly hard enough to test the October 2022 lows.

The market does not yet believe that we are even close to a world with a 6.0% Fed Funds rate in it (see FedWatch tool, below), but sentiment can change very fast as we have seen lately. Keep a close eye on that FedWatch tool.

OTHER NEWS .. Crypto and tech banking woes edition

The worlds of crypto, Silicon Valley tech and venture capital were all rocked last week when two of the biggest supporting pillars of their universes crumbled to dust.

First, as anticipated in last week’s Angles report, Silvergate Capital (SI), the San Diego-based crypto bank under investigation by regulators, shut itself down, sending even more tremors through an industry that’s been on edge since the collapse of FTX in November last year.

In an eye-rolling example of annoying corporate-speak, the biggest provider of banking, money transfer and exchange services to the entire crypto ecosystem, said in a statement; “In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of bank operations and a voluntary liquidation of the bank is the best path forward”.

Silvergate’s ties to disgraced Sam Bankman-Fried and his collapsed crypto exchange FTX and hedge fund Alameda Research may be one of the motivations behind the investigations. The firm also announced on its website that it would immediately discontinue its operation of the Silvergate Exchange Network.

Then on Thursday, SVB Financial Group (SIVB), the parent of Silicon Valley Bank, reported that colossal client outflows from the bank had resulted in forced asset sales at huge losses and the stock duly plunged over 60% in a matter of hours.

The so-called “backbone” of tech start-ups and venture capital firms everywhere, but particularly in the Bay Area of San Francisco, made its final journey to the scrap heap on Friday morning when the NASDAQ exchange confirmed the halting of trading in the stock and hours later California state regulators seized control of the wreckage, triggering FDIC insurance payouts to depositors (but limited to $250k each). This is the biggest bank failure since Washington Mutual back in 2008.

With Silvergate and Silicon Valley Bank the latest to fall into the black hole that has already sucked in so many crypto and crypto-adjacent players, fears about contagion within the banking sector rocketed - with early concerns focused on First Republic Bank (FRC), Signature Bank (SBNY), Fifth Third Bancorp (FITB), Truist Financial Corp (TFC) and KeyCorp (KEY), mostly bankers to the high net worth community (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) and with a track record of embracing th…

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February delivered a reality check to investors after a giddy January; the S&P 500 fell 2.6% for the month and the NASDAQ dropped 1.1%.

Stock and bond prices had risen impressively in January on the ideas that i) Inflation was declining, ie., disinflation, ii) the Fed was almost done with rate hikes and iii) there wasn’t going be a hard economic landing (ie., we were going to get inflation conquered without a recession). At least two of those three ideas are now pretty much considered off the table right now as a result of the data of the past three weeks. That’s why stocks gave back more than half of 2023’s gains.

Since the start of this interest rate hiking cycle a year ago, the market has proved to be consistently over-enthusiastic in pricing in an end to Fed rate rises, taking any hint of a drop in inflation or slowing growth and extrapolating it out to be some catalyst that will cause the Fed to back off.

That expectation has been proved wrong every single time so far and my default position is to remain rather skeptical of these rallies (even if the stock market isn’t) until we see more tangible progress on persistent disinflation, a gently cooling economy and - most importantly - a clear and believable expression from the Fed that an end to interest rate increases is imminent. We certainly aren’t there yet.

Analyst talk last week revolved around the often-dangerous idea of TTID (“This Time It’s Different”). The thinking goes that the consequences of the COVID pandemic permanently transformed the economic landscape and that the Fed may be applying olden timey rules to a new, altered economy by assuming that it could accomplish all it wants simply by raising interest rates to beat off inflation. This is what has caused the professional forecasting community to be almost continually wrong since the beginning of 2020 about the the path of the US economy, the level and duration of inflation and the direction of interest rate policy.

For example, the TTID narrative goes, the vast majority of existing homeowners aren’t going to change their spending (and therefore their contribution to the inflation rate) as the Fed raises interest rates, since they have a 30-year fixed mortgage, likely refinanced around 3% or less and don’t care what a new mortgage costs. Many households have been flush with COVID stimulus money and did not necessarily respond as the dusty old economic textbooks from the 1950s say they should have done to a rising rate environment.

If the TTID truthers are correct, it could be that in order to accomplish their stated goal of bringing inflation back down towards 2% again, recent economic strength and these new debt dynamics could mean the Fed has to work even harder, tightening policy even more harshly and for longer at a level that is absolutely not yet priced in to stocks with the S&P 500 around 4000.

Having said all that, markets ended last week higher as focus shifted temporarily at least from inflation and interest rate concerns to corporate news and earnings reports, which were mixed but generally on the positive side.

Target (TGT) reported better-than-expected earnings, but future guidance was set lower. The retail firm, considered a good proxy for the retail sector as a whole, provided a bright outlook for the overall industry as it said that inventory issues were improving, contracting 3% year-over-year in Q4 2022. However, it also reiterated that the environment remains challenging and that pre-pandemic operating margins are not likely to be recognized before fiscal year 2024 at the earliest.

Last week’s Fed-speak was a little confusing and contradictory. Federal Reserve Bank of Boston President Susan Collins said interest rates must move quickly higher and remain restrictive for some time to bring inflation growth back under control. But at the same time, Federal Reserve Bank of Atlanta President Raphael Bostic said he favors using smaller interest rate adjustments (read: 0.25% at a time) to fine-tune monetary policy and thinks rate hikes could well pause by mid-summer.

Nevertheless, the futures market is showing a quite extraordinary about-turn in professional sentiment about what is going to happen to interest rates (see FEDWATCH TOOL, below) and it doesn’t make pleasant reading for those who like to roll the dice on owning low/no-profit young tech or communications sector growth names for whom higher interest rates are kryptonite.

The odds of a half-percent hike instead of a quarter at the next Fed meeting later this month continue to rise, now reaching 31%, from literally 0% a month ago. Fedwatch also shows that there is basically no-one left who thinks interest rates will be below 5% at the end of the year compared to a 90% perceived chance of this just a month ago.

The probability of rates being at or above 5.25% on New Year’s Eve 2023 is now almost 70%. A month ago, that probability was priced at less than 1%.

OTHER NEWS ..

Closing the Silvergate? .. Incredible scenes last week at the top crypto bank Silvergate (SI), the biggest platform used by cryptocurrency holders to make transfers, which said it was “postponing” the release of its latest annual report and admitted that it was under multiple investigations by the Justice Department. As a result, key partners like Coinbase, Galaxy, Paxos and other crypto firms (hardly Hall of Famers themselves when it comes to good behavior, stability and transparency) decided to stop accepting or initiating Silvergate payments.

The share price plummeted 60% on Thursday alone to a record low of below $6.00 (that’s down over 97% from the high it made near the end of 2021) after the company essentially questioned its own viability, pretty much waving the white flag.

Silvergate reported a $1 billion loss for Q4 2022 and said it expects to record massive further losses related to its securities portfolio after selling additional debt to cover withdrawals. The bank still holds more than $11 billion of client money.

Short sellers and analysts have been banging on for ages about the enormous risks associated with almost all of Silvergate’s client base being unregulated entities, often incompetently run and exposed recently in many cases as being involved in fraud and criminal activity. The rest of the world seems to have finally caught up.

Analysts all over Wall Street slashed their ratings on Silvergate and Morgan Stanley, which had had a sell rating on the stock, even removed its price target entirely, citing the “high level of uncertainty” around the firm.

This looks like an old-fashioned “run on the bank” (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) and these always end in tears.

This was accompanied by worrying concerns about Tether expressed in a Wall Street Journal exposé last week and on the back of release of the fascinating investigative podcast, Real Money. Tether is the company behind the largest crypto “stablecoin” that claims (without a great deal of verifiable evidence, it would seem) to hold enough funds to be able to maintain a one-for-one peg to a proper currency such as the US Dollar or the Euro in order to facilitate the buying and selling of cryptocurrencies like Bitcoin, Ethereum and the rest.

The whole crypto eco-system feels distinctly unstable right now.

Still falling .. Home prices fell at the end of 2022 as high mortgage rates and concerns about the economy impacted the real estate market. The National Home Price Index showed home prices fell 0.3% in December after seasonal adjustment, and were up 5.8% from a year ago. It was the sixth consecutive month of declines, putting the index 4.4% below its June peak. Prices dropped in all of the 20 cities analyzed by S&P, falling by a median of 1.1%.  

On an annualized basis, the cities with the biggest price gains are Miami (+15.9%), Tampa (+13.9%), and Atlanta (+10.4%). Prices fell over the last twelve months in San Francisco (-4.2%) and Seattle (-1.8%). 

Mortgage rates rose for the fourth week in a row, dampening the…

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For all the different feel of this market in 2023, the price action is revealing that it is actually still broadly behaving much as it did in 2022. It’s still being driven by Fed expectations and those expectations are being determined by earnings and economic data.

In January, the data was mostly better-than-feared and the market developed the view that the Fed was close to ending rate hikes and that end-of-2023 interest rates would actually be lower than they were at the end of 2022. Stocks rallied hard and tech/growth names outperformed, including many of those that were slaughtered in 2022.

Then came that stunning Jobs Report on February 3rd, showing over half a million new jobs created in a month and everything began reversing.

Since then, additional data (notably retail and wholesale inflation and retail sales) has swung the narrative pendulum back the other way. Now the more accepted tale is that the Fed is in fact not close to done hiking and that rates will remain high for a good while even when they do finish raising them. Plus no rate cuts for you in 2023!

This new normal is reflected most obviously in the changing market expectations of interest rates (see FEDWATCH TOOL below to see exactly what I mean). For example, the market now prices interest rates ending the year above 5% as almost a total certainty, when just a month ago this likelihood was priced as a 50/50 toss-up.

Minutes from the Federal Reserve's February meeting released on Wednesday showed that the central bank is still taking things very cautiously with its rate policy, with several committee members pushing to raise interest rates by 0.50% at the meeting rather than the eventually decided-upon 0.25% raise. The Fed clearly continues to believe that inflationary risk outweighs the possibility of raising rates too far/too fast.

The minutes gave no direct indication of what the Fed might do at its next meeting in March but, according to the CME Group’s FedWatch Tool, while a quarter of a percentage point rise in interest rates is still favored as the most likely outcome next month, the futures market now prices the probability of a half a percentage point hike at 27% as compared to only 3% just a month ago.

At around the same time, Walmart (WMT) and Home Depot (HD) both highlighted the same phenomenon in their earnings guidance. Although supply chain problems are mostly abating, American consumers are now spending less on electronics, apparel and home improvements as inflation and evolving spending habits is now hitting demand for many of the more discretionary goods sold in large stores.

Unsurprisingly, the Consumer Cyclical sector, which is made up of the stocks of most of the companies who produce and sell more discretionary-type goods in stores and online, was the worst performing sector last week.

In its second estimate of Q4 2022 Gross Domestic Product (GDP), the Bureau of Economic Analysis reported that the US economy grew at an annual rate of 2.7% - down from the first estimate of 2.9%, compared to projections of 2.5% growth. In Q3 2022, the final estimate had been 3.2%.

The stock market initially seemed dazed and confused in response to all this, wandering around without much purpose, crossing from red to green and back again several times.

What finally seemed to nudge the market in one direction was the release of the Personal Consumption Expenditures (PCE) Price index. This is the Fed’s preferred gauge of inflation which it uses to guide its interest rate decisions more than any other indicator. That kind of makes it the most important single piece of economic data these days.

We learned that it rose 0.6% in January, more than the expected 0.4% rise and well up from December’s 0.3% increase. The index was up 5.4% from a year ago, accelerating a bit from December’s 5.3% but, more importantly, much higher than the 4.3% rate that had been expected. The Core PCE rate, which excludes more volatile food and energy prices, also climbed by more than estimates. This was a blow for those hoping for a swift pivot in the Fed’s higher interest rate policy.

It finally prompted the markets to make a directional decision and stocks started to accelerate sharply lower to end the holiday-shortened week down 2.7% in the case of the S&P 500 and 3.3% in the case of the NASDAQ.

There was a general sense, however, the market was actually showing a degree of resilience most of the time, with stock prices heading lower but in a somewhat orderly fashion (see UNDER THE HOOD, below, for more on this).

The feeling is that this resilience should stay in place as long as:

* 1) Economic growth doesn’t roll over hard, and

* 2) The Fed does not signal that peak interest rates will be substantially above its current 5.1% expectation. Any indication of an expectation of above, say, 5.4% will likely be met by a steeper fall in stock prices and an alarming jump in bond yields.

Interestingly, a number of analysts are starting to express a degree of skepticism around the validity of some of the recent economic data, which has included some remarkably quirky numbers indicating a very strong economy and a stubborn level of both inflation and job creation, owing to unusual seasonal adjustments that may be impacting the results.

If this is indeed the case and there’s something of a walk-back in the revised data which we’ll hear about in the coming weeks, we could see a sharp reversal in the broadly bearish (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) sentiment that first emerged from that “crazy” Jobs Report of February 3rd.

OTHER NEWS ..

Feeling better .. A survey of US consumer sentiment, which helps gauge how Americans feel about their own finances as well as the broader economy, rose in early February to a 13-month high of 67.0, suggesting a somewhat improved level of optimism about the economy. The final reading in February was up from 64.9 in January. This third straight gain pushed the index well above the record low of 50.0 set last summer.

Levels are still far below “normal”, however. The survey’s most recent peak was 88.3 in April 2021. Before the pandemic it topped out around 101.

Nevertheless, Americans think inflation, which is currently running at a twelve month rate of 6.4%, will persist for some time. They expect the inflation rate in the next year to average about 4.1% and 2.9% per year over the long run, still well above the Federal Reserve’s 2.0% target.

Taking off .. With borders now mostly open, some of the airline carriers that were burning through cash a year ago are posting big profits now. British Airways’ parent said last week it was in the black last year for the first time since the pandemic began. Singapore Airlines posted a record net profit for its latest nine month reporting period and Qantas of Australia showed a record pre-tax profit for its latest half-year.

It seems the results are being driven by a combination of pent-up demand and cost-cutting, with a big boost from government funds in some countries. With supplies of seats limited since carriers are still scrambling to hire staff and get planes back in the air, fares are high but passengers have been willing to pay.

Piling up .. Department of Justice attorneys last week added four additional counts to the eight previously made against Sam Bankman-Fried, the disgraced founder and former CEO of collapsed crypto exchange FTX. The new charges allege that SBF conspired to commit bank fraud and operate an unlicensed money-transmitting business. He also faces more securities and commodities fraud counts.

The newly-unsealed indictment provided a comprehensive account of his conduct, which prosecutors have stated led to a multibillion-dollar fraud. He is said to have stolen client funds to enrich himself and his fellow Bahamian frat house crypto bro pals and to help prop up FTX and its associated crypto investment firm, Alameda Research, run by his ex-girlfriend who has now agreed to testify against him.

The scheme was exposed when a r…

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Those of us hoping for a clearer picture to emerge from the release of the January’s Consumer Price Index (CPI) measure of retail inflation and other subsequent data were left sorely disappointed last week. If anything, things just became more confused.

Stocks drifted nicely higher on Monday as traders laid their bets ahead of the high-stakes inflation reports that would start arriving the following morning.

When CPI came out pre-market on Tuesday, it showed that consumer prices rose at a more rapid monthly pace in January, interrupting a months-long streak of cooler month-to-month readings. Prices rose 0.5% last month, as what we paid for shelter, food, energy and apparel in particular accelerated at a more rapid pace. In the twelve months through January 2023, inflation was 6.4%, compared to 6.5% in December and above the expectation of 6.2%. Core CPI, which excludes the food and fuel prices, rose by 0.4% in January, unchanged from December’s pace for a slightly lower annualized rate of 5.6%.

Then on Thursday, we learned that the Producer Price Index (PPI) measure of wholesale inflation felt by manufacturers for January rose 0.7%, more than the expected 0.4% and is up 6% year-over-year, down from the 6.5% rate in December. Excluding food, energy, and trade services, the year-on-year Core PPI was up 4.5%, easing slightly from the month before. 

On the surface, the reports looked to be saying that inflation was running mildly hotter. But looking deeper, you can see that a highly disproportionate portion of the retail price gains were attributable to housing. This was initially interpreted as a positive thing, since pricing there tends to react slower than other parts of the economy, meaning already-existing recent rate hikes may have yet to be felt and might not need to be added to. On the wholesale side, the Core PPI number still looks somewhat promising, although it wasn’t quite as warm and fuzzy as it was perhaps expected to be.

Simply put, these numbers tell us that inflation is still declining, but that the pace of that decline is slowing.

In a sign that US consumers are still willing to spend like crazy even as prices and interest rates rise, the Commerce Department's report showed that Retail Sales surprisingly surged 3.0% in January, way above the estimates of a 1.8% increase and almost 3x the rate of increase seen in the normally buoyant month of December.

Paired with the (also quite stunning) recent January jobs report from the Friday before, the retail sales number gave yet another indication that the US economy is proving to be massively more resilient to inflation and interest rate increases than anyone ever expected, which on one hand is great for stocks but on the other hand gives the Fed the green light to just keep on lifting and holding rates until it inflicts some real damage.

Federal Reserve Bank of Cleveland president Loretta Mester and St. Louis president Jim Bullard both raised eyebrows on Thursday, each separately expressing the opinion that there had been a strong case for a 0.50% hike at the last Fed meeting, rather than the 0.25% that the committee actually went for (neither Mester nor Bullard are voting members of the rate-setting committee any more) and introducing the possibility of a full 0.50% bump in the upcoming March meeting (see my new feature; FEDWATCH TOOL, below). They also both strongly pushed back on the idea of any interest rate cuts this year.

Creaking under the weight of all this mixed economic data and hawkish Fed-speak, the stock market took a day or so to digest it all and then finally decided that it didn’t really like what it saw and headed lower, led by the energy sector which had a bad week.

The interest rate market, however, was much quicker to sour on the data and futures market wagers on where interest rates will be at the end of the year are finally starting to mirror the Fed’s most recent forecasts of above 5%. Just a month ago, this probability was priced at just 2% by the futures market. By the end of last week, it was up to 69% and fast becoming consensus (see my new feature; FEDWATCH TOOL, below). The rebellious teenager from my report of a couple of weeks back is grudgingly starting to listen to the parent.

There was a clear narrative coming into 2023: The Federal Reserve had spent months pushing interest rates rapidly higher at a historic pace in a bid to tame inflation and those moves would slow growth and the labor market so much that the economy would be at risk of plunging into a nasty recession.

The worries about inflation aren't going away. But the growl of a recession is becoming increasingly distant, despite what is being loudly shouted by eight months now of an inverted yield curve, where short term interest rates are higher than long term ones, which is traditionally a strong sign of imminent recession.

Employers added more than half a million jobs in January, the housing market is starting to show some signs of stabilizing or even picking back up, Americans are still spending money like water and many Wall Street economists and analysts have marked down the odds of a harmful recession this year.

After months of asking whether or not the Fed could pull off a “soft landing” (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) in which the economy slows but does not plummet, the trendy new narrative is that there may not be any landing at all, soft or hard, for a few months — that growth will simply hold up until it finally decides to either accelerate or fall off a cliff.

Growth is the critical factor here that is currently propping up the stock market. It needs to stay strong because if stocks have to confront slowing growth alongside interest rates where they are, then risk asset prices will drop, likely very sharply.

OTHER NEWS ..

The strange math of stocks .. If you had bought shares of the troubled online used car retailer Carvana at the start of this year, you’d be up 170% by now. If you had bought them a year ago, even after that 2023 spike, you’d still be down by over 91%.

Trillions .. Americans assumed a record amount of debt at the end of 2022. The Federal Reserve Bank of New York’s quarterly report on household debt and credit found that in Q4 2022, overall household debt in the US rose by almost $400 billion or 2.4% to $17 trillion (that’s $17,000,000,000,000).

Credit card debt jumped over $60 billion to an all-time high of almost $1 trillion. Mortgage balances grew by a quarter of a trillion dollars to $12 trillion, up almost $1 trillion from 2021. Debt on auto and student loans also increased, lifting total non-housing balances by $126 billion. 

The bank noted that the share of current debt becoming delinquent rose again for almost all types of borrowing. That came after two years of historically low delinquencies.

The reason for these increased delinquencies is said to be inflation combined with the Fed’s effort to get it under control. While low unemployment has kept consumer finances generally strong, stubbornly high prices and climbing interest rates are now testing some borrowers’ ability to repay their debts. The Fed added that the data show particular signs of stress among younger borrowers who are starting to miss some credit card and auto loan payments at a much higher rate. 

Another bro icon charged with fraud .. Tearful crypto bros will have to take down yet another poster of one of their heroes from their bedroom walls. After having to terminate their man-crush on FTX’s disgraced Sam Bankman Fried, they now have to resign themselves to the realization of what everyone else kinda figured out last year, that Do Kwon was also a lying fraud. The founder of collapsed cryptocurrencies TerraUSD and Luna and his company bilked investors who purchased billions of dollars’ worth of the digital assets, the Securities and Exchange Commission (SEC) said.

The SEC filed a civil fraud lawsuit against Do Kwon and Singapore-based Terraform Labs in Manhattan federal court, accusing them of d…

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“This process is likely to take quite a bit of time, it’s not going to be smooth, it’s probably going to be bumpy”, Federal Reserve Chair Jerome Powell said on Tuesday in a speech in Washington DC, referring to getting inflation back to the Fed’s 2% target. But he could just as easily have been talking about the road to an eventual end of this bear market and a transition to a more sustainably bullish environment for stocks.

The conventional wisdom is that the current bottom recorded last October is probably “in” and, going forward, dips are going to be bought by short term investors and the larger the dip, the more aggressive the buying should be. Much as I would love for this to be the case, I do want to urge a degree of caution.

First, Powell, who has pushed back against the market narrative of peaking and then declining interest rates in 2023, has a long history of sounding one way in a speech - only to correct it at a later time. In fact, this has been a hallmark of Powell’s chairmanship. He will blow in the wind depending on the data that comes out in the coming days and weeks. Exhibit A will be the latest inflation data out this week (see THIS WEEK’S UPCOMING CALENDAR below).

Second, it’s not going to really matter to investors if we’ve reached peak hawkishness and peak interest rates if we’re heading for an economic hard landing (inflation conquered, but at the cost of a damaging recession), because stocks absolutely will drop from current levels in that instance.

While they might not take out that October low, we could easily be facing a 10%+ pullback on a hard landing, regardless of what the Fed does or doesn’t do. So, it’s essential that the evidence continues to point towards a soft landing, (inflation conquered, avoiding a damaging recession) so the data remains very important regardless of what Powell or his minions may say (see below).

Third, inflation absolutely must keep consistently falling from one print to the next, otherwise we risk a 1970’s style stop/start Fed rate hike campaign - and that uncertainty and apparent lack of control and competency on the part of the Fed would be the absolute worst-case scenario for both stocks and bonds.

Inflation is falling but it’s nowhere close to the Fed’s target yet. The labor market is making zero progress towards a better balance between available jobs and unemployment. For the sustainable, long-term economic growth which feeds ongoing higher stock prices, an economy must have highly visible and indisputable 1) low inflation and 2) healthy labor markets.

On that subject, Goldman Sachs last week reduced its likelihood of a recession this year from a 35% probability to 25%. That's good news for stocks. 

At the same time, Fed officials swarmed across the country, busily ratcheting up the rhetoric to try to create a narrative that we are absolutely not out of the woods yet.

* Federal Reserve Bank of New York president John Williams said the guidance for peak interest rates of 5.1% this year is still reasonable and that rates may need to be kept there for “a few years”.

* Federal Reserve Governor Christopher Waller noted the central bank’s interest rate hikes are starting to “pay off” but it will take “some time” for inflation to get back to the 2% target.

* Federal Reserve Governor Lisa Cook said the central bank is not yet done with interest rate increases but she still believes a soft economic landing is “possible”.

* Federal Reserve Bank of Minneapolis president Neel Kashkari said he anticipates that interest rates will go above 5% at some point this year and expects them to remain high for a while to cool inflation.

* Federal Reserve Bank of Atlanta president Raphael Bostic went much further, even referring at one point to the possibility of a 6.0% terminal rate.

In what is beginning to feel like a coordinated campaign to win the hearts and minds of the investing community, similar sentiments were also expressed last week by European Central Bank (ECB) officials, as well as JPMorgan Chase CEO Jamie Dimon who told Reuters that it's too early to declare victory over inflation.

This PR onslaught did seem somewhat successful in reining in some of the more wide-eyed optimism that we had seen the previous week and stocks spent most of the week stumbling along rather like a drunken sailor, continually taking one step forward and then two steps back to end up lower for the week. The exception was in the energy sector as Russia announced a cut in oil production, spiking oil prices and boosting the value of energy stocks.

With shorter-term interest rates moving higher at a faster pace than longer-term ones, the yield curve inversion between two year rates and ten year rates is at its widest level since the celebration time of Kool and the Gang in 1981. In olden timey days, an inverted yield curve and especially one inverting more and more steeply over a long period of time (we’ve been inverted since July 2022), was a nailed-on indicator of a recession right around the corner.

The inevitability of this effect is being challenged, however, as many observers are suggesting that if everybody suddenly knows about an assumed correlation, then maybe its efficacy is over and that a recession is far from unavoidable just because the yield curve inversion points that way.

We need to remain aware that, for stocks to remain buoyant in the face of still-rising rates, we need to see 1) inflation as shown by the Consumer Price Index (CPI) not to make any kind of comeback, starting this coming Tuesday, and 2) important economic readings show stability and ongoing unquestionable improvement. If we get the opposite, we may well need to prep for more painful volatility.

OTHER NEWS ..

What a difference a year makes .. This time last year, crypto exchanges and related products coughed up enormous amounts of money for plenty of high-profile Super Bowl advertising, many with celebrity endorsements. Today Fox Sports says there will be a grand total of none.

Back then, traditional financial institutions as well as highly-endorsed entertainers, influencers and sports stars were getting into crypto. Crypto evangelists puffed their chests out and bellowed that the El Salvador experiment and Russia’s subsequent invasion of Ukraine would soon help push crypto into the mainstream.

But just a few months of interest-rate hikes and risk-off sentiment in financial markets burst the bubble. The entire crypto ecosystem is now about a third of the size it was then. The complete collapse of Terra/Luna, Genesis, FTX and many others - often as a result of fraud, theft, incompetence or some combination of all three - has done untold damage to the industry’s reputation that was already fragile. Regulators can smell blood and are finally moving in.

Payward Inc.’s Kraken platform on Thursday said it had agreed to pay over $30m in fines to the Securities and Exchange Commission (SEC) over its staking practice, which essentially allows holders of some crypto coins to earn a yield from them, after regulators came down on the practice.

Regulatory sanctions on Kraken may just be the tip of the iceberg. The SEC has a problem with staking. It simply looks like exactly what it is, a financial service involving unregistered securities and you can be sure that the SEC is going to do something about that. That’s a big issue for those players still trying to make a living in the now-smaller crypto universe and always thought they could do so within the freedom of an unregulated environment. Good luck with that, bros.

Crashing shipping costs .. One of the main drivers of the recent significant drop in wholesale inflation affecting manufacturers is rapidly falling shipping costs. These costs climbed to historic highs in the second half of 2021 due to supply-chain stress and remained elevated through the first half of last year. Now it looks like they're coming back down to pre-pandemic levels.

The Freightos Baltic Index (FBX) is a widely recognized benchmark for global freight rates…

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The Federal Open Market Committee (FOMC, see EXPLAINER: FINANCIAL TERM OF THE WEEK) surprised absolutely no-one by raising interest rates on Wednesday by a quarter of a percent to a target range of 4.50% to 4.75%.

Fed Chair Jerome Powell dropped a few hawkish soundbites at his post-announcement press conference, all designed to be played out of context on CNBC, saying that monetary policy “does not yet look sufficiently restrictive” and that“ongoing increases in the target range will be appropriate”.

But he also said, “We can now say, I think for the first time, that the disinflationary process has started” . The overall picture he was desperately trying to paint was that of a Fed that's not done yet, but may possibly be acknowledging that we are at the beginning of the end of the tightening cycle.

Financial markets reacted by effectively calling the Fed’s bluff, viewing Powell’s performance as rather wishy-washy, where he seemed keen not to rule anything out and appeared to be almost defensively over-explaining his position as well as telling us what he thinks that things will look like in December while at the same time claiming to have no idea what things will look like in March.

The market, which is convinced that we are much closer to the end of the rate-hiking era than the Fed wants to let on and that interest rate cuts lie in our not-too-distant future, scoffed at the Chairman.

We believe you now even less than we did before, the market said and is starting to act like an emboldened rebellious teenager, no longer listening to what its parents are saying and going off to do its own thing, which in this case was to buy the crap out of everything - especially tech and communication services stocks, which soared in the Wednesday afternoon session.

It was a similar story overseas. The European Central Bank (ECB) lifted its key rate by half a percentage point to 2.5%, in line with expectations. It said that it plans to raise rates by the same amount in March but thereafter committed only to “evaluate the subsequent path of its monetary policy” - a big walk-back on it’s previously combative stance. The Bank of England also raised interest rates by half a percent, to 4.0%, but indicated that it will slow the pace of hikes to a quarter of a percent or maybe even pause at its next meeting in March.

The benchmark two-year Treasury interest rates fell hard, as did the futures market expectation of where rates will be at the end of the year, becoming even further disconnected from the much higher level that the Fed insists they will be at. The US Dollar responded by extending its recent decline, generally viewed as good thing for US businesses.

Part of the reason the stock market gets so excited about the fact we may be entering the zone of an end to rate hikes is that history tells us that this period has typically rewarded patient investors in the past. Returns for the S&P 500 Index in the year following the end of rate-hike cycles since 1980 have averaged 16% and if you zoom out to the two years following an end to the cycle, that return jumps to nearly 36%.

The problem is that there is another scenario for investors where the market’s current assumption that the era of rates hike is essentially done turns out to be incorrect as inflation rears its ugly head again in the not-too-distant future causing the Fed to have to revisit its role as party pooper by going back to raising interest rates again, financially assaulting those investors sucked in by the current euphoria with a destructive stock market decline that will inevitably follow that decision.

The day after the Fed announcement was marked by a big triple earnings miss; Apple, Amazon and Alphabet/Google all disappointed in their Q4 2022 reports and forward guidance. All three of these stocks, however, ended the week higher than where they were at the beginning.

While the Fed shenanigans were doubtless the biggest event of the week, the Jobs Report on Friday was definitely the most stunning.

Consensus expectations going in were for a 190k increase in jobs in January and for the unemployment rate to tick up to 3.6%. The number came in more than double that with an extraordinary 517k new jobs created and an unemployment rate that actually fell to 3.4%, the lowest since Neil Diamond first sung about a sweet girl named Caroline in 1969.

The final numbers are in for calendar year 2022 and the US economy added an astounding 4.5 million jobs in twelve months. Recession? Er, I don’t think so.

There were few signs of expanding wage inflation in the most recent report, however, which is the part that the Fed focuses most closely on. Average hourly earnings crept only slightly higher and, importantly, no more than expected.

Nonetheless, investors were shaken by the headline numbers of the report, having been expecting further signs of a slowing economy and instead seeing broad growth, particularly across leisure and hospitality, health care and professional services. Market interest rates exploded back upwards after the release of the data on the idea that maybe the Fed won’t be done raising rates quite as quickly as everybody was thinking just 24 hours earlier and stocks sank in response.

It was not enough, however to ruin what was still a winning five days for stock markets, with the S&P 500 up a little under 2% for the week and the NASDAQ-100 up over 3%.

OTHER NEWS ..

The biggest story of 2023? .. Less than two weeks ago, Gautam Adani was the fourth-richest person in the world. With a personal fortune estimated at $120 billion, the self-made Indian industrialist was wealthier than Gates or Buffet.

Then Hindenburg Research, an activist investigative financial reporting organization which shorts the stock of corporations that it then goes on to expose as corrupt, fraudulent or misleading investors, accused Adani and his companies of widespread fraud and “brazen stock manipulation” that it alleged has taken place over decades.

In a highly detailed report, Hindenburg pitched no less than 88 questions to Adani that cast severe doubts on his conglomerate’s financial health. Those ranged from requests for details on the group’s offshore entities to why it has “such a convoluted, interlinked corporate structure” leading to the astonishing claim that he had pulled off “the largest con in corporate history” . That’s a very high bar indeed (yes, I did recently finish watching the excellent Bernie Madoff docudrama on Netflix).

In a matter of days since the report was released, the value of Adani’s firms has fallen by a head-spinning $110 billion and his own personal wealth has been halved so that he is now down to his last $61 billion as investors flee in droves.

And we may only be witnessing the opening act of what could turn into a financial earthquake. Already burned by the fallout in the story’s first few days is the brother of the disgraced ex-UK Prime Minister Boris Johnson, who has been forced to resign as head of an implicated investment company as a direct result of the report’s findings. Stand by, this story could get very, very big and sting a lot more people and organizations before it’s done.

Why didn’t they just put Bruce Willis on it? .. A ridiculous spat over a Chinese balloon that US authorities admitted posed zero risk of physical harm and carried no intelligence-gathering capability that was lingering over The Middle of Nowhere, USA resulted in the mind-boggling decision to postpone US Secretary State Anthony Blinken’s important and already long overdue visit to China and caused an inevitable but completely unnecessary escalation of tension between the countries when the thing was eventually shot down.

It’s just the latest example of pointless, petty political b******t getting in the way of something as important as the national and global interest of helping to optimize the trading relationship between the world’s two largest economies.

Investors are still very cautious .. Nearly one-third of respondent…

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The already-wide gap between what the Fed says will happen and what the market thinks will happen just keeps on getting wider. Fed presidents are out there barking at us at every opportunity that the Fed Funds rate that it controls will be around 5.1% by year-end, or a full percentage point higher than where we are now. The stock market, by means of the Fed Funds futures prices set by large institutional traders, have this rate priced at south of 4.4%.

Such a divergence is extremely unusual and one of them will probably end up being right. If it’s the market (and historically speaking, it usually is), then the Fed will pivot to an end to the policy of raising rates (Q1?) and consider lowering them sooner rather than later (Q2? Q3?). If it’s the Fed, then such a pivot won’t come until much later in the year (Q4, if at all?) and stocks will have at least the next three quarters to potentially move steadily but solidly lower from here while we wait.

This will impact the “soft vs. hard landing” debate, in other words; will inflation be beaten by the interest rate hikes without a major, damaging recession (soft) or will the policy push the economy into a nasty recession that badly harms company earnings (hard).

This issue won’t be settled for weeks or months and until it is, the pendulum will probably continue to swing back and forth between hope and fear. But barring a major macroeconomic surprise or an utterly disastrous turn of events in the earnings arena, the S&P 500 is likely going to remain quite range-bound, although within rather elastic guard-rails. The fact is that, as things stand, we do not know whether this bear market is about to come to an end or is setting itself up to take another nasty leg lower. Neither case can be ruled out and near-term volatility will be the most plausible result.

At this point, it feels as though the market is beginning to think that Wednesdays’ expected 0.25% rate hike (see THE WEEK’S UPCOMING CALENDAR, below) could be the last in the cycle and the long-awaited pause will come at the next meeting in March. Some of the more wide-eyed optimists even believe that we may get a hint to this effect from Fed Chair Jerome Powell’s press conference on Wednesday afternoon. Personally, I think this is a bit fanciful - but we’ll see.

Last week, the market did not, as was the case for much of last year, interpret strong economic data as being bad news because it might mean that the Fed won’t pause.

It was announced that Q4 2022 Gross Domestic Product (GDP) rose at an annual rate of 2.9%, a little higher than expected, following a 3.2% increase for the third quarter. As always on Wall Street, there were two ways of looking at the numbers.

The “glass is half-empty” case is there was good growth but for the wrong reasons as imports fell and inventory numbers were building at a time when supply chain issues were getting resolved, implying an increasingly more depressed and lower-spending American consumer.

Investors chose, however, to go down the “glass is half-full” route that what the GDP numbers actually showed was the US economy’s fierce resilience in the face of the long campaign of aggressive Fed rate hikes, which ultimately bolsters the soft landing case.

We also got the Fed’s absolute fave data point and its chosen proxy for inflation, Personal Consumption Expenditures (PCE), which rose 0.1% in December and was up just 5.0% from a year ago, down half a percentage point from the year-on-year rate of the month before. This was all roughly in line with economist estimates and considered a definite positive in the battle against inflation in the eyes of the Fed. At the same time, we also learned that the University of Michigan’s Consumer Sentiment Index is on the rise, boosting optimism about the economy. 

Packaging all this data together, stocks had a generally strong week with just a few pockets of weakness (notably the Healthcare sector). Investors seemed very inclined last week to give most stocks the benefit of the doubt and see buying opportunities almost everywhere going into this week’s critical Fed meeting and interest rate announcement. But investors and their stocks can often be fickle friends, let’s see how things shake out on Wednesday.

OTHER NEWS ..

NYSE tech trouble .. The New York Stock Exchange (NYSE) suffered a severe technical glitch at the opening bell last Tuesday morning that caused wild unjustified price swings in the shares of more than 250 companies, leading to trading halts. The exchange added that some trades will be declared "null and void" as a result because they were erroneous under its rules. The NYSE said operations were said to be back to normal after about half an hour. 

My broad advice to clients has always been to place trades only between 10:30am and 3pm ET and only on days when the S&P 500 is up or down by less than 2% on the day at that point. Not that this will always save you from technology glitches, but outside of these hours there’s always a greater potential for factors that are idiosyncratic to stock exchange participants on that day to be the principal determinant of prices rather than just market forces.

U-Turn Larry .. Former US Treasury Secretary Larry Summers, traditionally a big fan of aggressive interest rate hikes, joined Team Pivot last week when he surprised many by warning the Fed against signaling any more rate hikes after this week's monetary policy announcement, which, he said, could hurt already fragile economic growth.

Early skirmishes .. On Thursday, we saw the first sign of financial market skittishness re: the likely upcoming debt ceiling s**t-show that I talked about in my report last week. Stocks dived briefly on news that Senate Majority Leader Chuck Schumer was discussing having to “protect the full faith and credit of the United States” in the face of rumblings from extremist senators that seem “disturbingly at ease with taking our economy hostage in exchange for gutting vital programs” like Social Security and Medicare.

Watch this space but, as I said last week, try your very best to ignore all this hysterical hot air when it comes to making changes to your portfolio.

UNDER THE HOOD ..

The S&P 500 and NASDAQ-100 are now both comfortably above their respective 200-day moving averages. That's a key level for market technicians that can now act as support for when things get softer in the future instead of a technical ceiling that the market kept hitting and backing away from, which is what it was before.

Markets deal in probabilities, not certainties and the technical probabilities favoring clearer skies ahead are no doubt increasing. For instance, the spread between Lowry’s Buying Power and Selling Pressure is at its most positive level in favor of the buyers in nearly two years. This tells us that the net effect on price of buyers is greater than the net effect from sellers.

However, one sign that is missing is a surge in volume as the rally begins. Pent up Demand should be wildly unleashed, yet net upside-volume has actually been falling since November. While volume around the holidays is always structurally lower, the trend has remained in place into January. This lack of power behind the gains could be indicative of just investor bottom-fishing rather than the rampant un-caging of the bulls.

Further evidence that bottom-fishing is what is going on rather than a full-on demand surge is the relative outperformance of the market’s most beaten down areas (stocks more than 30% below their one year highs). Real rallies are built on a base of the indiscriminate buying of anything that moves, not just the bargain basement stuff.

So the jury is still out and until that changes, we remain in a downward-trending environment from a technical perspective.

Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.

THIS WEEK’S UPCOMING CALENDAR ..

Huge. It’s the only word that can accurately describe this week’s upcoming financial calendar.

Abo…

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Financial markets and the Fed are playing a game of chicken. The Fed continues to wheel out its own people to double-down on their position that interest rates will be shortly be raised to above 5% and will stay there for ages until inflation is unquestionably showing signs of being 2% again, like it was in the good old days.

Financial markets, as shown by fed funds futures rates and trader sentiment, are calling BS on this. They insist that upcoming data will sway the Fed to stop raising interest rates soon and possibly even force them into a pivot back to lowering them before year-end due to having overshot with the hikes.

Until we learn for sure who the chicken is, market sentiment will continue to sit somewhere between hope and fear and last week was a classic example of this.

Stock indexes had broadly rallied to start 2023 and the biggest reason was that investors are interpreting further declines in inflation and slowing economic growth as increasing the chances for an economic “soft landing” . Nevertheless, for the second week running, the indexes were forced to stage a late-week rally, mostly led by beaten-down tech, to provide some window dressing for what was, on the face of it, a rather unimpressive weekly performance.

However, when you look more closely, it’s interesting to note that investors don’t appear to be fleeing stocks because they're were worried about a recession. If that were the case there’d be noticeable outperformance on the part of the more defensive stocks of companies that sell electricity, toilet paper or toothpaste over those of the more risky firms in tech and more discretionary areas. The opposite happened last week. That suggests that the market is just confused and churning without a real plan as to what it thinks or wants to do.

One obvious place it can look to for more directional clarity is earnings and Q4 2022 earnings season has started ramping up. There has been quite a lot of yucky news coming out of corporate America.

Just last week alone:

* Goldman Sachs (GS) reported a major earnings miss as a barren investment banking /mergers and acquisitions landscape and the apparent failure of its consumer banking venture damaged earnings and the tone of the forward guidance.

* Microsoft (MSFT) shares fell hard after the software giant announced it was cutting 10k jobs

* Alphabet/Google (GOOGL) announced will cut 12k jobs or about 6% of its workforce in the largest round of layoffs in the company’s history, although the stock actually rebounded on this news

* Bank of America (BAC) shares slid on a report it has frozen most hiring to save money

* While Morgan Stanley (MS)'s stock initially shot higher on its cheery asset management earnings, CIO Mike Wilson reaffirmed his pessimistic outlook for the US stock market, saying margins and earnings are likely going to disappoint and reset guidance lower

* Charles Schwab (SCHW) was massively downgraded by analysts with expectations of yield-seeking customers moving large amounts of cash out of Schwab’s highly profitable (to Schwab, that is, not to their account holders) Cash Sweep Account into money market, treasury bills and high yield savings accounts that these days finally pay close to 4% interest or sometimes even more

* Insurance company Travelers (TRV) said catastrophe losses from the big winter storm at the end of 2022 negatively impacted its bottom line and its share price promptly dived 5%

* Home Depot (HD) shares swiftly sank 4% after the Commerce Department reported housing starts and building permits fell more than anticipated last month (see OTHER NEWS, below)

Despite the fact that we did see pockets of good earnings news and guidance, Netflix (NFLX) for instance, we do seem to be experiencing an overall pattern of 2023 earnings estimates moving lower. But they are not yet collapsing and that alone could eventually end up being a positive for stocks.

The Producer Price Index (PPI) measure of wholesale inflation felt by manufacturers fell 0.5% in December, compared to expectations of a 0.1% decline after November's 0.2% gain. The index was up 6.2% year-over-year, down from 7.3% in November. More evidence that overall inflation may be falling nicely.

Americans cut back on spending at the height of the holiday season, particularly on vehicles and furniture and in popular gift categories. Retail Sales, the measure of purchases at stores, restaurants and online, declined 1.1% in December from the prior month. That was the biggest monthly decline of 2022 and marked the second consecutive monthly drop. In aggregate, however, 2022 saw the highest adjusted level of retail sales since 2004.

The beauty in this retail sales number was in the eye of the beholder and in this case the beholder was the stock market. The good news camp say it was further evidence of a slowing economy with lower consumer spending and therefore less pressure on the Fed to keep raising rates. So, thumbs up. But if it is interpreted as further evidence of a slowing economy with lower consumer spending and therefore lower sales and lower earnings for US companies, then that could be Bad News Bears for stocks.

Before heading off to frolic at the out-of-touch orgy of icky self-aggrandizement that is the World Economic Forum in Davos where billionaires tell multi-millionaires what they think would be best for the rest of us, US Treasury Secretary Janet Yellen informed us that the deadline for the US hitting its debt ceiling (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) passed last week.

In the short term, this just means that some reshuffling of government assets will take place but that Band-Aid can only realistically be expected to last until late spring/early summer, when a nasty and maybe protracted political fight is likely to break out about extending the limit.

Stand by for a lot of tiresome, grandstanding Congressional theater later this year, particularly from that subset of rabid ultras in the House and Senate who thrive on simply creating political chaos and division for the sake of it and you will hear some very apocalyptic sound bites from all sides. This toxic environment is going to be frenziedly amplified by America’s grotesquely-polarized media that prioritizes online clicks and scoring cheap political points over anything approaching intellectual rigor.

We went through all this crap in 2011 and the final outcome was that the financial markets’ fear of the apocalypse ended up creating a sensational buying opportunity for both stock and bond investors.

I know it’s early but I’m going to put this out there right now .. do not be afraid to ignore and completely tune out the deafening noise when it breaks and do not allow it to shake you out of your portfolio while this scary soundtrack blares in the background. Stay strong, this nonsense will eventually pass and you will be glad you disregarded it.

OTHER NEWS

From bad to worse to even worse .. As if FTX’s millions of customers had not had enough punches in the stomach lately, the bankrupt company finally came out and admitted last week that $415 million was stolen when it was hacked back in November, just two days after its bankruptcy filing. The hacker stole about $90 million from the US exchange (that was about half of all client assets stored there), around $323 million from FTX’s international platform and $2 million from Alameda Research, its affiliated hedge fund.

Also, in a candidate for the award for 2023’s most unsurprising piece of news so far, FTX at long last also admitted that a probe of its balance sheet showed the holdings of customer funds were lower than had been shown in the exchange’s internal accounts (shocker!), acknowledging for the first time that it knew that there was a shortfall of missing money at the crypto exchange, contrary to previous self-serving statements by the disgraced former CEO Sam Bankman-Fried, who is awaiting trial on massive fraud, corruption and theft charges.

Oh and by the way, as predicted by many, mammoth crypto…

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The highlight of the week, the all-important latest Consumer Price Index (CPI) measure of retail inflation numbers, came out before the market opened on Thursday and was right in line with forecasts, showing a continued cooling of inflation in the US.

Headline CPI fell 0.1% between November and December, following a 0.1% increase the previous month. Over the past twelve months, the index is up 6.5%, falling from a 7.1% rate a month earlier.

Core CPI, which excludes food and fuel costs, rose by 0.3% month-to-month and 5.7% year-on-year, the smallest twelve month gain since late 2021. The previous month, those numbers had been up 0.2% and up 6.0%, respectively. This all appears to imply that inflation may indeed be falling at a faster rate than growth is and that’s exactly what markets want to see.

While stocks broadly reacted quite positively to the data in Thursday’s session, the bond market had more trouble making up its mind. The benchmark 10-Year Treasury interest rate initially traded lower to around 3.47%, a sign that the bond market was happy, but then it moved back up again to around 3.56%, only to reverse course in the late morning and move back down again to close at the low of the day (3.45%).

The strong general market consensus in the immediate aftermath of the CPI report was that the Fed will raise the Fed Funds rate by another 0.25% when it meets on January 31st and February 1st to consider its next interest rate move, with the outcome of the meeting after that on March 15th and 16th still up for debate.

Stocks continued to perform solidly but not spectacularly on Friday going into a three-day weekend, almost as if traders were nervous of being over-optimistic after what had been a broadly positive few days.

Markets had started the week floating slowly higher on not much news in advance of the CPI report. This is a welcome change from most of last year when a lack of news or any other catalyst usually resulted in the default scenario of a steady drift lower.

Those analysts who dragged themselves out of bed early on Tuesday looking for further clues in Fed Chair Jerome Powell’s speech to the Swedish Central Bank in Stockholm were probably left disappointed, although he did reiterate how inflation is the devil, saying that price stability was the “bedrock” of a healthy economy, and how it provides the public with “immeasurable benefits over time”.

The heads of three Federal Reserve banks tried to throw cold water on the idea that recent indications that inflation may be easing will lead policymakers to pull back on raising interest rates and magically pivot to lower rates any time soon.

Atlanta Federal Reserve Bank President Raphael Bostic said he expects interest rates to be above 5% by early in the second quarter and remain there for a “long time”. He said, “We are just going to have to hold our resolve.”

San Francisco Federal Reserve Bank President Mary Daly also indicated rates need to go above 5%. She said that the Fed has to continue boosting rates and keep them high “until the job is well and truly done.”

Uber-hawk James Bullard of the St. Louis Fed said that rates should be swiftly moved up to above 5% (at least 0.75% higher than where we are now) and that the Fed should then play game of wait-and-see-what-happens before deciding on the next move.

The market took all these comments in its stride however. As I mentioned last week, many large investors are starting to believe that the Fed’s bark is worse than its bite and are becoming less and less intimidated by what Jerome Powell and his lieutenants are coming out and saying in press conferences and in highly-scripted TV and radio interviews. They are convinced that the Fed will be forced to act based on the data rather than on its own rhetoric.

They also see a (growing?) chance that that data might indicate that inflation is becoming close to under control and that the elusive so-called “soft landing” (inflation conquered without the economy tipping into a damaging recession) can be achieved.

In fact, if you take the last three month’s worth of CPI (admittedly a small, cherry-picked sample, but stay with me here) and annualize it, that implies an annual inflation rate of just 1.6%!

Attention swiftly turned to earnings on Friday as the Q4 2022 season got underway and the initial results were decent enough. Wells Fargo, JP Morgan, Bank of America and Citigroup all gained around 2-3% on Friday after releasing earnings data that can be described as somewhere between adequate and quite good. The generally positive vibes were also bolstered by a report showing a jump in consumer sentiment.

So far, 29 S&P 500 companies have reported Q4 2022 results with 23 of them coming in better than expected. While only a tiny sample size at a very early stage, it is already starting to raise hopes that corporate earnings may not be in quite as much trouble as had been feared. The recent renewed weakness in the US Dollar is helping a lot in regard to forward guidance for many companies.

For the week, the S&P 500 gained a solid 2.7%, and the NASDAQ ran up 4.8%.

OTHER NEWS (Crypto Contagion Edition)

Prosecutors have now said that the extent of the fraud committed by FTX and Sam Bankman-Fried and his henchmen could be so vast and sprawling that the Southern District of New York may not even have enough resources to properly investigate such a massive caseload of theft, bribery, illegal campaign contributions, market manipulation and outright fraud. Another problem is the huge amount of contagion spreading rapidly to other crypto players.

SBF doled out many millions in donations to political parties, academia, selected charities and non-profits at the same time as thieving customer money to illegally pour billions into his hedge fund so that he could invest in often hare-brained, perilous wagers that imploded. He also used these stolen client funds to pay personal expenses associated with a lavish lifestyle for him, his sometimes-girlfriend (who he put in charge of the hedge fund) and a bunch of his crypto-bro buddies in a drug-soaked frat-house in the Caribbean, according to federal prosecutors and regulators.

Now, according to the Wall Street Journal, the new FTX management is asking for these political and corporate donations back in an attempt to recoup money for FTX’s nine million customers who collectively lost billions of dollars when the exchange collapsed. Some recipients of this dirty money have voluntarily returned it, but the others reportedly face legal action if they do not immediately do the same.

The closest thing the crypto market has to a central bank is Silvergate Capital which is the biggest provider of banking and lending services to firms in the space. It has not had a good start to 2023. As the unregulated crypto ecosystem has collapsed under the weight of rampant fraud on the part of many of the sector’s incompetent participants, Silvergate was forced to lay off 40% of its staff as depositors pulled out over $8 billion from Silvergate accounts (about 70% of its total deposits).

Even the madly wild risk-takers at ARK Invest disclosed that they had sold over $5 million-worth of Silvergate Capital stock (SI). Congressional investigations into the firm’s culture and practices are ongoing as part of the whole FTX case.

Additionally, Silvergate reportedly incurred a $718 million loss while being forced to sell $5.2 billion worth of reserves (bonds) to satisfy some of those withdrawal requests. The firm was worth over $6 billion as recently as late 2021, but is now worth less than $370 million after its stock price fell 95%. These are absolutely mind-bending losses for any company, but especially for one that was supposed to be crypto’s grown-up in the room. Last week, JP Morgan down-graded the outlook for the stock and more than halved its price target.

Coinbase said that it would eliminate around 20% of its staff and is being forced into a broad cost-cutting exercise. CEO Brian Armstrong specifica…

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