Let's start with "The Good." Equity markets had started to price in the end of the Fed's monetary policy tightening cycle and according to futures markets trading in Chicago, a series of rapid decreases made to the target for the Fed Funds Rate over the next 18 months or so.
The Bad
The reason that expectations for a quick turnaround are because of what looks to be a rapidly decelerating economy where a real-life banking crisis exists, and it does not take much imagination to forecast a collapse in commercial real estate markets.
The Ugly
Where does one start? The US Treasury Department is run by a Secretary that reverses her messaging on how to support the US banking system on a daily basis. Astute folks will remember this particular cabinet member as also having told us that there would never be another financial crisis in our lifetimes, and while acting as Fed Chair, bluntly admitting to not understanding why the Phillips Curve was not correct and why high employment was not creating what was then a higher level of inflation.
Another European bank has set global equity markets ablaze while sending shares of banks that had closed at their lowest levels since this crisis started two weeks ago, to even lower levels. This time Deutsche Bank (DB) is the one trading lower. The ADRs in the US were trading 7% lower early on Friday morning after closing 6% lower on Friday. The firm's five year credit default swaps have jumped in terms of basis points over the past 36 hours or so as the firm's AT1 bonds (the CoCo bonds that were wiped out in the (UBS) / (CS) deal) are trading at around 77 cents on the dollar. These are nowhere near the levels hit by similar Credit Suisse related products ahead of that bailout, but these moves are enough to rattle some cages. US stocks were all lower this morning.
Oh, and the ongoing saga of awful looking macroeconomic results continues in the US. On Friday morning, the Census Bureau released February Durable Goods Orders. New Orders printed -1.0% m/m from a January print that was revised (lower) to -5.0%. Core Capital Goods Orders, which is considered to be the most important number here, because it omitted both defense and transportation spending and thus presents as a proxy for business investment, managed growth of 0.2% m/m, which was a deceleration from January's revised growth of 0.3% (down from 0.8%).
So... What Now?
The banks are weak. Fed Funds futures are now pricing in a 98% probability that the FOMC is done with rate hikes. The yield spread between the US Ten Year Note and US Two Year Note has "improved" to -32 basis points from a peak of 110 basis points two and a half weeks ago. For those who don't "get'' that, this spread typically uninverts just prior to the Fed realizing that recession is imminent as markets price in lower short-term interest rates.
What to Do?
Cash is a necessary part of every portfolio. If one thinks that they will not need the liquidity for three to six months, I know it's part of the problem for the banks, but T-Bills are smarter for now than savings accounts. One can go into Money Market Mutual funds in order to walk a fine line between both and still produce some interest income.
Gold belongs in every portfolio as well. That's just an opinion. I like to have 5% of my investable assets in physical gold and between 0% of 5% investable assets in paper gold (ETFs, futures) as a means of adjusting that allocation on the fly. Bonds are tough. Who wants to hold long-term paper in this environment? I do hold corporate paper, but only as a means of diversification. I manage the overview, but I hire someone else to run that book for me. The cash, gold, Treasuries and equities I run myself.
Equities
Ahh, equities. What to do here? With what appears at least to me to be a potentially serious contraction in economic activity staring us in the face. It is very difficult to not feel bearish at this time. hence, the cash. I have more capital in cash, or cash equivalents, than in equities right now. Ever hear of a Wall Street guy saying that before?
Certain techs such as the semis remain overvalued. I still like the elite end of that business. Advanced Micro Devices (AMD) and Nvidia (NVDA) have pretty much saved my portfolio over these past two months. I have had to raise target prices in each. That said, I am going to shave those positions today. I am no fool, or at least I pretend not to be. Microsoft (MSFT) has also acted as something of a safe haven, which kind of scares me. I did add Meta Platforms (META) as it took and held pivot as I had written that I would. I am long that one at $198.
What I will not cut is where I am invested for the long-term. How can I get out of the defense stocks in this world? There is a shortage of military hardware everywhere one looks. There's also a shortage of national fiscal flexibility everywhere. Both Northrop Grumman (NOC) and General Dynamics (GD) are trading at lower levels. Both Lockheed Martin (LMT) and Raytheon Technologies (RTX) have stalled at elevated levels. I have no plans to reduce any of them.
Same for cybersecurity. That said, both Palo Alto Networks (PANW) and CrowdStrike (CRWD) have been strong. SentinelOne (S) has not been. These are my three names in the space, and I do not ever see in my lifetime, a reduction in demand for protection from high-tech crime.
Energy has been tough. I sold my Chevron (CVX) much lower than I had wanted to. It went lower still. That's why I have target prices and panic points for every position and move those panic points higher as the stock moves higher. While this method prevents me from ever taking a loss of more than 8% on any position (unless it happens while I sleep), it preserved what was a small profit on Chevron. A small profit that had been a large one.
This is probably the first time I can remember not being long either Exxon Mobil (XOM) or Chevron. I am still long Occidental Petroleum (OXY) , me and my pal, Warren. Right now, this is my last long position in the energy space and that was my key space for quite some time.
I will have to trade both Wells Fargo (WFC) and Bank of America (BAC) today. The remaining long positions in those names will both be down more than 8% from my net basis upon the open. That's not exactly accurate, because readers will recall that I sold 50% of each position a couple of weeks ago, while they were both profitable trades, so in aggregate neither is yet down 8% but they do seem to be working on it.
Going Into the Weekend...
One has to ask. Who will be rescued this Sunday evening (or won't be) in a race against the Australian and Asian Monday morning openings? There is potential for a risk-off event going into this weekend, and a risk-on event should one regional bank or another in the US find a white knight... or if one European bank or another is able to find increased liquidity either with the help of central bankers or not. Yes, there is risk. I am treating the good days as short-term trading events and the bad days as part of a trend at this point.
Fact is that half of our problems have been caused by our legislators who will not take any blame and are likely to exacerbate the danger. The other half of our problems have been caused by the great enabler, our central bankers, who also take no blame and are as likely to exacerbate any negatives as to "fix" them. Recessions are ugly. To varying degrees, but they are all ugly.
In short... narrow books, flexible positions in liquid assets, target prices, panic points. and cash. Growth is nice. Free cash flow is nicer, Bitcoin? I didn't say that. Bitcoin has been strong because demand increases when folks lose faith in their fiat, and Bitcoin is global. I wouldn't trust it, but I get why it has been strong.
(MSFT, LMT, and BAC are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
