White Elephant Sale?
I guess we'll find out. The Monday trading session was dominated by crude oil and the energy sector in the wake of the not-so-surprising "surprise" move by Saudi Arabia and several OPEC+ nations to follow Russia's lead and cut production from next month on into year's end. The headline that broke late Monday afternoon, though unrelated, might be just as important to an economy struggling to maintain a trajectory of growth going forward as any fertile environment for a re-acceleration of headline level consumer inflation.
That headline would be the FDIC's announced plan to start marketing the $60B Signature Bank ( SBNY) loan portfolio still retained in the agency's receivership following New York Community Bank's ( NYCB) purchase of the loan and deposits it deemed worthy at a discount. This portfolio contains commercial real estate, commercial, and single-family residential loans. The commercial real estate loans portion of this portfolio is supposedly composed to some degree of a concentration of multi-family properties in New York City.
Is this event, the one that sheds some light on just how damaged markets for commercial real estate truly are? In New York City of course, but also regionally, and even nationally? Perhaps how this portfolio sells, meaning what percentage discount is demanded off face by prospective buyers will signal the coming of similar urban-to-suburban discounting elsewhere. We are not talking much office space here, but with remote work at least a significant part of the white-collar landscape, as firms downsize, just how valuable can office space be relative to pre-pandemic times?
We won't have to find out right away, but this white elephant is lurking. According to Reuters, FDIC will try to market this portfolio by late this summer. According to Bloomberg News, the FDIC plans to reach out to state and local government agencies and community-based organizations for input, and has retained Newmark & Company Real Estate as an adviser.
Marketplace
What a day! For the Dow Industrial Average. For everyone else, not so much.
The Dow 30 popped for 0.98% on the session, propped up by UnitedHealth Group ( UNH) and Chevron ( CVX) . Those two names were both up more than 4% following the OPEC+ decision for Chevron, but for UNH, following the decision made by the Centers for Medicare & Medicaid over the weekend to increase payment rates for Medicare Advantage plans by 3.3% in 2024, which is up significantly from the 1.1% increase that had been proposed less than two months ago.
Rising crude prices put the whammy on the airlines and truckers, which took the Dow Transports lower by 1.09%. In fact, as buyers moved into Treasuries, taking the entire yield curve moderately lower, large swaths of U.S. equity markets either slumped or remained in place. While the S&P 500 gained 0.37%, the Nasdaq Composite gave up 0.27%. Getting more granular, the three smaller-cap indexes all closed very close to "unchanged" while the KBW Bank Index surrendered 0.65% and the Philly Semiconductor Index lost 0.94%.
Seven of the 11 S&P SPDR ETFs gained ground on Monday led by Energy ( XLE) . That fund was up 4.53%. The other 10 funds ranged from +1.12% to -0.94%, with no real preference shown for cyclicals, defensives, or growth. The breadth was mediocre at best, as it has been for weeks now. Winners beat losers at the NYSE by just a smidge, as losers beat winners at the Nasdaq by slightly more than that. Advancing volume took a 52.9% share of composite NYSE-listed trade, but just a 36% share of that same metric for Nasdaq listings. Aggregate trading volume decreased on a day-over-day basis for names listed at both exchanges.
Does this mean that trade will be thin all week, with a market holiday this Friday? It certainly could mean that a lot of traders would like to be less active as both Passover and Holy Week progress. On this, we'll have to remain cautious.
The Future of Crude
I am sure many readers can see front-month WTI Crude futures trading just below $81 per barrel as we work our way through the zero-dark hours on Tuesday morning. That's up about half of one percent on top of Monday's almost 5% run. Readers may also have noticed that July WTI futures are trading a little lower than that, with August trading almost a dollar lower than front (May), September trading with a $79 handle, November with a $78 handle and December trading with a $76 handle.
Does this "backwardation" signal lower prices for crude going over the rest of the year? Despite the OPEC+ pledge to keep production cuts in place that long? Well, it does mean that futures traders don't exactly trust Monday's spike. These markets had already been in backwardation. Monday's spike both exacerbated and put a spotlight on the condition.
On the reduced global output, I would not count on U.S. drillers riding to any rescue. U.S. drillers have become very disciplined as domestic policies over the past three years forced managements to focus on prioritizing free cash flow and returns to shareholders over growth. Any change would require more than a potentially temporary shift in the balance between supply and demand.
U.S. producers would seek some reassurance in regards to the future of "green" and "not so green" policy in order to make such an investment. In short, U.S. producers can not risk trusting Washington as the politics of energy are likely to shift more quickly than can the investment in exploration, transportation, and production infrastructure.
Now about this "backwardation" in futures pricing. The more normal condition is known as "contango," where oil futures with distant expirations trade at a premium to the front-month. This implies higher crude prices in the future as backwardation would imply the opposite. However, this is not always the case.
In a paper published in 2017, which I read about at the Barron's website, PIMCO portfolio managers (Johnson & DeWitt) made public their findings that oil markets have tended to increase 2.9% in the three months following a move into a state of backwardation, while decreasing some 3.8% over the three months after moving into contango. Why is that? Perhaps lower futures prices out a few months, simply discourages production. Well, there you have it, don't you?
Manufacturing Wipeout
It's almost difficult to look at the ISM's March 2023 Manufacturing PMI without gasping. The headline print of 46.3 made March the fifth consecutive month of contraction for the series, and shows that this contraction is accelerating. The component print for New Orders, which is the most important part of any manufacturing survey, dropped to an eye-watering 44.3, while Employment, Supplier Deliveries, Backlogged Orders and Export Orders all moved more deeply into contractionary territory from February as Inventories and Prices moved into contraction after having expanded in February.
Just on the results of this one survey as well as the Census Bureau's print for February Construction Spending (-0.1% m/m), the Atlanta Fed was forced to take their GDPNow model estimate first quarter economic growth down to 1.7% (q/q, SAAR) all the way from 2.5%. The poor data released on Monday had Atlanta bring down their estimated inputs for private domestic investment, gross private domestic investment, and real government spending all at once.
Oh, Joy
Over the weekend, the World Bank warned of a "lost decade," publicly stating "Across the world, a structural growth slowdown is under way: At current trends, the global potential growth rate -- the maximum rate at which an economy can grow without igniting inflation -- is expected to fall to a three-decade low over the remainder of the 2020's."
The Washington D.C.-based international lender blames aging workforces, weakened investment, slowing productivity, the war in Ukraine, the pandemic and already elevated inflation. The bank also stated "It will take a herculean collective policy effort to restore growth in the next decade to the average of the previous one."
What, Me Worry?
St. Louis Fed President James Bullard appeared on Bloomberg TV on Monday morning with Mike McKee. On the OPEC+ production cuts, Bullard said "This was a surprise. Whether it will have a lasting impact I think is an open question."
Then, after acknowledging this surprise, Bullard added "I would have expected somewhat higher oil prices anyway with China coming back sooner than expected during the first half of 2023 and with Europe skirting recession, and strong (?) data in the U.S., all of those are pretty bullish factors for the oil market."
Readers may recall that Bullard just last month had forecast a Fed Funds Rate as high as 5.625% this year. In a quote that should probably scare the spit out of you, Bullard confidently said "You can walk and chew gum at the same time, you've got the macroprudential tools for financial stress and you've got monetary policy to fight inflation."
What, me worry?
Evolution
Notice the developing cup pattern on this chart of Eli Lilly ( LLY) that evolves out of a downturn that began late November/early December. The stock's relative strength and daily Moving Average Convergence Divergence (MACD) have both been improving steadily since early March as the stock approaches a $354 pivot.
This is the spot where LLY likely either breaks out or adds a handle to this cup. Should the breakout occur on this move, my price target would be close to $407. Should a handle develop, I see the $332/$335 area (50-day simple moving average, 200-day SMA) as a preferable spot to add.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 2.8% y/y.
10:00 - JOLTS Job Openings (Feb): Last 10.824M.
10:00 - JOLTS Job Quits (Feb): Last 3.884M.
10:00 - Factory Orders (Feb): Expecting -0.4% m/m, Last -1.6% m/m.
16:30 - API Oil Inventories (Weekly): Last -6.076M.
The Fed (All Times Eastern)
13:30 - Speaker: Reserve Board Gov. Lisa Cook.
