It's no secret. Earlier this week, the Federal Reserve announced that it had to review what went wrong at Silicon Valley Bank (SIVB) and Signature Bank (SBNY) , and in this work, would likely have to reconsider current capital requirements for banks operating with between $100M and $250M in assets.
The Fed will have to reassess the annual stress tests in the process, that supposedly do the job of evaluating US banks and their ability to function throughout a number of highly adverse economic scenarios. The central bank is not the only regulatory agency facing the music this week after having missed signals at SVB in particular that some felt were becoming obvious.
There is no intent to be political here. This does not excuse the current administration for there was ample time available to correct issues if they had been seen as problems prior to becoming problems. That said, in 2018, the Legislative Branch of the US government eased portions of the Dodd-Frank Act that were considered too restrictive.
This exempted certain banks with assets of less than $250M from the central bank's strictest level of supervisory measures. The next year, the Federal Reserve itself approved a less strenuous set of regulations for smaller banks. As luck or perhaps a lack of the strictest levels of supervision would have it (Not throwing stones, I was in favor of a lesser version of Dodd-Frank at the time.), Silicon Valley Bank had seen assets in house drop to $212M by year's end, 2022.
As the Wall Street Journal and now many others have already reported, Federal Reserve Bank Vice Chair for Regulation -- which is a different position at the Board of Governors than the position recently vacated by Lael Brainard -- Michael Barr will head the central bank's review. This review will be completed and the results published by May 1st. On the matter, Barr said "We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience."
Obviously, it's not too difficult to see this review result in a rewind of the 2018 and 2019 unwinds. At a minimum.
Rally Caps
US equity markets were in "rally mode" on Tuesday. A number of what might be seen as negative market impacts had to be overcome and some of them did force the rally to stutter a bit, but that rally into the day's end was something fierce. As if forced by something unnatural. Short covering maybe? Gamma squeeze?
Either way, the S&P 500 had rallied hard into mid-morning, then sold off over a four hour period, only to make up most of that lost ground over the final 45 minutes or so of the regular trading session. That rally towards day's end did not have the feel of sustainability. Check out the minute by minute action...
For the day, there was something of a rotation away from what we had seen late last week and earlier this week. Most mid-major to major equity indexes with the exception of the Dow Transports, scored gains of at least a full percentage point.
Across the 11 S&P sector SPDR ETFs, a clear preference was shown for "growth" as Communications Services (XLC) led the way higher, up 2.83%. Within that sector, the Dow Jones US Internet Index showed a gain of 3.91% for Tuesday, led higher by Meta Platforms (META) which was up 7.25% on news of an aggressive plan to continue cutting costs through payroll control. Technology (XLK) posted a second place finish among S&P sector SPDRs, up 2.31% as the semiconductor and software industries both performed well on the same day.
Defensive sectors that had been shown favor of late, closed higher as all 11 doctors shaded green for the session, but the REITs (XLRE) , Staples (XLP) , and Health Care (XLV) all closed near the bottom of Tuesday's performance standings.
As far as breath is concerned, the sun did shine. Winners beast losers by a rough 3 to 1 at the NYSE and by more like 7 to 4 at the Nasdaq. Advancing volume took impressive shares of 69.6% of composite NYSE-listed trade and 60.1% of trade across Nasdaq listings. Perhaps even more impressive than the day's breadth was the fact that the Nasdaq Composite took back both its 50 day SMA and 200 day SMA on the day as a probable "golden cross" beckons...
Can the Nasdaq build on Tuesday's price discovery? Hmmm.... The S&P 500, readers will see with some disappointment, a failure to retake its 200 day SMA upon a retest from below of that level that had been lost this past Thursday...
The importance to portfolio managers for the market's broadest large cap index to either retake this line, or fail to do so, can not be overstated. Readers will also notice the significant drop-off in trading volume on a day over day basis, which is never a good sign on the first "up" day after a series of "down" days. This was quite the volatile up day at that.
Trading sessions bearing more than one sharp reversal usually drive much higher trading volume than seen on Tuesday. The implication here would be that a number of portfolio managers that probably reduced long side exposure remain less than convinced that the water is safe for re-entry. That is suboptimal.
Why The Volatility?
1) February CPI...
Consumer prices did little to surprise in February. On a year over year basis, headline inflation printed at 6%, which was the expectation, down from January's growth of 6.4%. Month over month headline inflation also printed at consensus, up 0.4%. At the core, while the year over year print of 5.5% also hit on expectations and was down small from 5.6% growth in January, the month over month print actually slightly exceeded expectations with growth at a 0.5% pace.
Though inflation continues to slow, this print seems a little too hot for the Fed to just walk away from their fight with consumer level inflation as they also deal with the current regional banking crisis, despite the fact that this crisis obviously eases when rates (and yields) head lower. This Wednesday morning, Fed Funds Futures trading in Chicago are now showing an 81% probability for a 25 basis rate hike next week and a 61% probability for another 25 basis point rate hike on May 3rd.
So, why did stocks rally through this report that appears to strengthen the case for continued tightening of monetary policy? Perhaps it was in what the Fed calls sticky inflation, which is CPI less Food, Energy and Shelter or simply Core less Shelter. According to the St. Louis Fed's website, this number printed at year over year growth of 5.11% for February, which was down from 5.27% in January and 5.62% in December. Clearly, this metric might matter more than traditional headline or core CPI and maybe even more than headline or core PCE... and this metric clearly shows a disinflationary (not deflationary) pattern.
2) Watching You...
Kiss 1974? No. Moody's. Citing concerns over an over reliance upon uninsured deposit funding as well as unrealized losses in their asset portfolios, Moody's Investor Services placed a number of US banks on review for downgrade. San Francisco based First Republic Bank (FRC) was probably the headliner, but other banks on the list included Western Alliance Bancorp (WAL) , Intrust Financial Corp., UMB Financial Corp. (UMBF) , Zions Bancorp (ZION) , and Comerica (CMA) .
Interestingly, UBS initiated coverage of WAL with a "buy" rating and an $85 target price, and I see the stock trading with a $30 handle (+1%) overnight after running 14% on Tuesday.
3) Trouble Over The Black Sea
Financial markets certainly did wobble a little in response to news that two Soviet era Russian Su-27 fourth generation fighter jets (akin in the US to the now obsolete F-14 Tomcat and F-15 Eagle) had forced an "incident" in the interception of a US MQ-9 unmanned Reaper drone over international waters. The Reaper, manufactured by General Atomics (which is private), can be used in both a reconnaissance role as well as in "hunter-killer" operations.
The two Su-27's apparently harassed the drone, dumping fuel upon the vehicle and then one fighter actually made contact with the Reaper which damaged the propeller. The propeller on an MQ-9 is in the rear of the aircraft, so one can see how this could happen either accidentally if one were getting a little too cute, or intentionally. This either forced the vehicle to crash into the sea, or forced the ground based operators to ditch the vehicle into the sea in order to prevent capture.
SentinelOne Reports
Cyber security provider SentinelOne (S) , which is a Sarge name, reported on Tuesday evening. The firm posted Q4 results that beat on both the top and bottom (adjusted) lines. Sales growth came to 92% year over year as annualized recurring revenue increased 88% y/y. Just be careful with this one in a down tape.
While the growth is spectacular, the guidance was a little on the weak side. Revenues for the current quarter are seen at $137M, which is just about on consensus, while full year revenue guidance came in at $631M to $640M, with Wall Street looking for about $648M.
The stock is up about 2.2% on the news. My thinking this morning is a pre-opening reduction on the pop and a repurchase later at a lower price to re-establish position size should the markets grant me that lower price later.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.79%.
07:00 - MBA Mortgage Applications (Weekly): Last 7.4% y/y.
08:30 - Retail Sales (February): Expecting -0.3% m/m, Last 3.0% m/m.
08:30 - Core Retail Sales (February): Expecting 0.1% m/m, Last 2.3% m/m.
08:30 - PPI (February): Expecting 5.4% y/y, Last 6.0% y/y.
08:30 - Core PCPI (February): Expecting 5.2% y/y, Last 5.4% y/y.
08:30 - Empire State Manufacturing Index (March): Expecting -7.8, Last -5.8.
10:00 - NAHB Housing Market Index (March): Expecting 41. Last 42.
10:00 - Business Inventories (Jan): Expecting 0.0% m/m, Last 0.3% m/m.
10:30 - Oil Inventories (Weekly): Last -1.694M.
10:30 - Gasoline Stocks (Weekly): Last -1.134M.
16:00 - Net Long-Term TIC Flows (Weekly): Last $1.528B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (ADBE) (3.68), (FIVE) (3.07), (PATH) (.07), (ZTO) (2.59)
