It's hard not to notice... Broader equity markets had been trading in the green almost all day on Thursday. Late in the afternoon, after there had been some persistent price erosion evident for hours, the major indexes went red. They were down for the session.
The S&P 500 in particular, pierced its 200 day SMA (simple moving average) twice. Yet, this most important of technical levels, the one that provokes increased risk-on and risk-off behavior up and down Wall Street as risk managers pressure portfolio managers to "do something", held firm. Some will credit the chart-monkeys, and they would not be wrong.
The algorithms that have made technical analysis far more accurate in recent years than it had ever been a couple of decades ago, see these same lines on the charts that we do, as they are written by people who either read the same charts we do or hire professionals to read these charts for them. Hence, enough of us (algorithms and humans alike) see most of the same patterns, often in similar ways.
Round and Round
Round and round
What comes around goes around
I'll tell you why
- De Martini, Pearcy, Crosby (Ratt), 1984
Madam Secretary
There was however, more than one reason for that intraday double-bottom on Thursday that ultimately produced another nice rally in tech stocks and at least a mediocre recovery elsewhere from that afternoon selloff on Thursday. On Wednesday, Treasury Secretary Janet Yellen had caused a widespread market rout when she had appeared before a Senate Banking Committee sub-committee and seemed to contradict not only what she had said a day earlier, but what Fed Chair Jerome Powell was almost simultaneously messaging at his post-statement FOMC press conference.
When asked on Wednesday about the US insuring bank deposits greater than the FDIC's current limit per account of $250K, Yellen incredibly said, "I have not considered or discussed anything to do with blanket insurance or guarantees of deposits."
Not incredible that these deposits might not be guaranteed, but incredible that someone in Yellen's position would not have even thought about such an idea or discussed the concept with anyone. The quote was ridiculous, out of sync with what the Fed Chair and the Secretary of the Treasury herself had previously messaged and markets sold off hard that afternoon.
On Thursday afternoon, one day after her gaffe, Yellen got another chance to step up to the plate. She would appear before a sub-committee of the House Appropriations Committee. Yellen read prepared remarks that were nearly identical to the statement she had made on Wednesday. There was one key exception. Yellen added, "Certainly, we would be prepared to take additional actions if warranted." One day after contradicting herself, Madam Secretary Yellen re-contradicted, or un-contradicted herself (not sure which term is correct), and markets rallied accordingly.
Not All Markets
While financial markets played a child's game of "Chutes and Ladders" on Thursday, some things seemed to stay the same. Capital still flowed into Treasury securities, and still flowed into Tech stocks as cyclicals and even defensive sectors struggled. Anyone take a look at the bottom 10 performers among the S&P 500 on Thursday? The banks were well represented. Zions Bancorp (ZION) , Comerica (CMA) , KeyCorp (KEY) , First Republic Bank (FRC) , and Charles Schwab (SCHW) make up the bottom five, all sporting daily losses of more than 6%. M&T Bancorp (MTB) also managed a bottom 10 finish.
The fact is that many bank stocks closed on Thursday at their lowest levels since this crisis began two weeks ago. Though broader markets had been more or less stabilized by the common belief on Wall Street that the FOMC is likely done for this tightening cycle, it remains quite apparent that the banks are far from finding their way out of the woods, and that is something that could still very negatively impact markets, not to mention the US economy itself quite broadly.
The Fed's Balance Sheet
This environment has made the Federal Reserve's weekly Thursday evening balance sheet announcement more of an event than Monday Night Football ever was. On the surface, the balance sheet itself showed an increase of $94.487B in total assets held. This took the size of the balance sheet up to $8,734T as it would appear that most of the progress made by the Fed's quantitative tightening program meant to decrease the size of this balance sheet, and the size of the monetary base has been retraced in just two weeks.
Banks tapped the Fed's primary lending window for another $110.3B during the week ending March 22nd on top of the $152.9B lent in this way the week prior. Banks have also now tapped the new BTFP (Bank Term Lending Program) for an aggregate $53.7B. This is a pop from the $11.9B lent through this program during the first week of its existence.
There is a great deal of difference between these two methods of borrowing, and many investors are making the mistake of seeing this rapid balance sheet expansion as a form of quantitative easing, which it is not. In fact, this is far from easing of any kind. First off, lending through the discount window, which is how most of this balance sheet increase has taken place, is currently offered at an interest rate of 5% and made against qualifying collateral. These loans are usually paid off rather quickly. There will or should not be any seepage of liquidity into public credit creation or the public economy from these transactions.
The other program, the BTFP, is a little different. Those loans are offered currently at a fixed rate of 4.7%, are also collateralized (albeit at par) and banks have a year to repay these loans. While it is possible that there could be some impact on the public economy from this space, one must think that banks going this route must really be more concerned with shoring up cash reserves in support of total deposits at this time. These programs (just this author's opinion) are far more likely to result in more cautious behavior at the banking level, thus actually resulting in tighter rather than looser monetary conditions on Main Street.
When the Fed is involved in what we refer to as "quantitative easing" the central bank creates fiat out of thin air, and purchases debt securities with these newly created funds, artificially suppressing interest rates, and bloating money supply. This is done with the intention of forcing credit creation at the national, regional, and local levels, while simultaneously forcing risk-on behavior. Again, in my opinion, this is a completely different ballgame. Should this result in tighter financial conditions, as I expect, raising rates this past Wednesday, was really just folly, and pointless at best. A mistake at worst. Inflation is awful. Inflation is also not even close to being the worst economic nightmare lurking in the shadows at this time.
Tale of Two Markets
Investors poured into Treasuries on Thursday. That trend has continued overnight. The US Ten Year paid 3.39% late Thursday. I see that paper paying as little as 3.31% this morning. These are year to date low yields for the Ten Year. The US Two Year Note went out at 3.8% on Thursday, which was down 19 bps from the day prior. I saw US Two Year paper paying just 3.63% this morning. This brings this particular yield spread to -32 bps after printing at -105 bps little more than two weeks ago. Remember, historically this spread tends to uninvert just prior to the onset of recession, so this price discovery makes sense in this environment.
Losers beat winners by a rough 7 to 4 at the NYSE, and a very close 10 to 9 at the Nasdaq (where the winners live these days). Advancing volume took a 37% share of composite NYSE-listed trade and a 52.8% share of that metric for names listed up in midtown. Composite NYSE-listed trading volume, where the losers are, experienced a 10% day over day increase, while aggregate Nasdaq-listed trading volume saw a small day over day decrease. If that's not some kind of continuance in microcosm of what we have seen throughout March, then nothing is.
Only two S&P sector SPDRs shaded green on Thursday. Not surprisingly, these two were Technology (XLK) and Communication Services (XLC) as these two funds sported one day gains of 1.63% and 1.62%, respectively. To reinforce this overt rotation, the Philadelphia Semiconductor Index gained 2.67% for the day, while the Dow Jones US Internet Index gained 2.01% and the Dow Jones US Software Index picked up 1.8%. The tech/internet space was led by Netflix (NFLX) , NetEase (NTES) and Accenture (ACN) . Energy (XLE) continued to show weakness as one might expect heading into recession.
My Thoughts
I remain very cash-heavy. That cash in percentage terms is more deployed in the form of US three and six month paper than it has ever been prior, at least since I have run my own dough.
My equity exposure is as narrow as I am comfortable with. Advanced Micro Devices (AMD) , Nvidia (NVDA) (both of whom I have covered recently for Real Money) and Microsoft (MSFT) remain my most heavily weighted names. I will likely give them all a haircut going into this weekend, even as they have not yet hit my most recent targets.
I still have those 50% stakes of Bank of America (BAC) and Wells Fargo (WFC) in inventory. Hanging onto half of those longs has turned out to be a mistake. At least we have traded the banks well this week. That helps. I remain long (as always) the defense contractors, and my cybersecurity names, but leave only Occidental Petroleum (OXY) on my energy book.
"Not With Your Money...
... Even if I Hated Your Guts"
That was what I told a family member who asked me if I was buying the dip on Thursday in Block (SQ) . I don't pick bottoms or even try to where publicly noisy short sellers and accusations lurk. "They" have far more at stake and far more information on the matter than I do.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (Feb): Expecting 1.4% m/m, Last -4.5% m/m.
08:30 - ex-Transportation (Feb): Expecting 0.3% m/m, Last 0.7% m/m.
08:30 - ex-Defense (Feb): Expecting 0.2% m/m, Last -5.1% m/m.
08:30 - Core Capital Goods (Feb): Expecting 0.3% m/m, Last 0.8% m/m.
09:45 - S&P Global Manufacturing PMI (Mar-Flash): Expecting 47.4, Last 47.3.
09:45 - S&P Global Services PMI (Mar-Flash): Expecting 50.5, Last 50.6.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 754.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 589.
The Fed (All Times Eastern)
09:30 - Speaker: St. Louis Fed Pres. James Bullard.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
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