Is something amiss?
Maybe the only thing amiss is my judgement.
Risk-on speculation is certainly in, and already has been back in vogue for weeks. Uneducated risk-on speculation? Sure, it's easy to throw stones when one has been rather cautious. Benefiting more as a short-term trader responding to and anticipating price in the immediate. Benefiting far less as a (hopefully) thoughtful investor reliant upon existing and projected fundamentals.
Even as one who had moved significant portions of cash into T-Bills, the sight of U.S. six-month paper yielding 5% startles. Complaint? No. We adapt to any environment. That's who we are by definition.
Last night was an example. Roku ( ROKU) reported sizable losses that slightly beat estimates on revenue that barely grew year over year. Average revenue per user was up a whopping 2%. Gross profit in fact, was negative relative to the year-ago comp. The outlook for the current quarter is for revenue just above consensus, but still for a deeply negative adjusted EBITDA.
The market jumped on that fat pitch like an 85 MPH fast ball with nothing on it. The stock is trading more than 10% higher on nothing that would provoke an entry point (in my opinion) other than a precipitous (92%) drop in the stock's last sale that bottomed in December after a year and a half of beat-downs.
Roku will still have to compete with the likes of Amazon ( AMZN) , Apple ( AAPL) and others to provide to consumers with what they offer. Roku is singled out here, but the list of money losing "growth" names that have become less "growthy" still seeing a boost in stock price of late is long. Just look at Bitcoin.
Risk-on, baby.
Scratching The Surface
So, it is that January CPI printed on the hot side. So, it is that January Retail Sales scorched the tape as they were published. What gives there?
January Industrial Production was still lousy. Retail Sales, however, were up an incredible 3% over December, and still up 2.3% ex-autos. Department store sales ran 17.5% on a month-over-month basis. Really? Is that even possible? As grocery store sales just barely grew (+0.1% m/m). Gasoline was not even a contributor in January.
The Atlanta Fed revised their GDPNow model for the first quarter, up to 2.4% from 2.2% (q/q SAAR) on Wednesday, as the input for real personal consumption expenditures had to be tweaked to the upside, even as the input for real gross private domestic investment was reduced.
Is the economy simply much stronger than we thought only a short while ago? Is there not still a lag in between adjustments made to monetary policy and its impact upon Main Street, USA?
The Chicago Fed provided a weekly update known as the National Financial Conditions Index. This index reflects a comprehensive update on U.S. financial conditions across the realms of money markets, debt markets, equity markets, traditional banking and according to the Chicago Fed, shadow banking.
Source: St. Louis Fed
Readers will see here that, according to the Chicago Fed, financial conditions overall, are as loose now as they were a year ago and have been getting looser quickly since late December. Readers will also see here that the closest financial conditions ever came to being actually restrictive since the height of the pandemic in the first half of 2020 came this past October at the head of a rather typical head-and-shoulders pattern. That apex, by the way, I repeat... never entered into restrictive territory.
Is it possible that even as the FOMC has driven the Fed Funds Rate from 0% to 0.25% up to 4.5% to 4.75% in about a year's time, and allowed approximately $530B to roll off of the back end of the Fed's balance sheet that financial conditions simply stopped tightening and apexed when equity markets bottomed this past October?
Let's Get This Straight
So, what we are seeing on a daily basis is very likely a pricing in of financial conditions that remain too loose as the FOMC has slowed the trajectory of its upward-moving interest-rate setting policy as the Fed's balance sheet/monetary base/M2 money supply all remain gargantuan relative to pre-pandemic times.
Source: Federal Reserve Bank website
This is a four-year chart of the Fed's balance sheet. This shows clearly just how far the central bank is going to have to take its quantitative tightening program just to get demand/supply equilibriums across the entire U.S. economy back to 2019 levels.
Now, factor in what other central banks have done and that, ultimately, we live in a global economy and we may have to live in an abnormal environment for longer than anyone wants to or that there would be the public stomach/political will to pursue.
Conclusions
So, when "they" ask you today, "Who's right... the equity market or the bond market?" You know the answer. Markets are responding to financial conditions that are still too loose. I know that I have been more of a dove than a hawk for a number of months as I thought we could see a U.S. recession in the not too distant future.
Though that recession may have been delayed (maybe not), and may be at first thought of as shallow when it does arrive, you can bet that our interpretation of that contraction in economic activity will be skewed by a general perception that conditions have started to normalize.
There is a chance that unless that head-and-shoulders pattern above reverses sometime soon, that the FOMC will have to revise its intentions in terms of how far the Fed Funds Rate should go as consumer-level inflation persists. Either that or start selling balance sheet assets outright in addition to the roll-off. Maybe Mester was right.
In the meantime, I still believe that short-maturation U.S. sovereign debt provides an excellent alternative to what would otherwise be inert cash positions and that 5% yields are going to beat the heck out of enough equities in order to provide a less risky alternative.
Oh, and if you haven't noticed, the CME Fed watch tool has started to price in a puncher's chance for a 50 basis point rate hike on March 22.
New Positions
I initiated two new positions on Wednesday. Both are old friends that have performed well for me in the past.
Both are out of favor. In for an eighth of my intended long on both of these.
I initiated Ford Motor ( F) as the stock tested its 21-day exponential moving average (EMA).
Pivot: $13.80
Price Target: $16.
Panic point: $11.80.
I initiated Freeport-McMoRan ( FCX) as those shares tested their 50-day simple moving average (SMA).
Pivot: $47
Price Target: $54.
Panic point: $39.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 200K, Last 196K.
08:30 - Continuing Claims (Weekly): Last 1.688M.
08:30 - Philadelphia Fed Manufacturing Index (Feb): Expecting -7.5, Last -8.9.
08:30 - Housing Starts (Jan): Expecting 1.364M, Last 1.382M SAAR.
08:30 - Building Permits (Jan): Expecting 1.351M, Last 1.337M SAAR.
08:30 - PPI (Jan): Expecting 5.4% y/y, Last 6.2% y/y.
08:30 - Core PPI (Jan): Expecting 4.9% y/y, Last 5.5% y/y.
10:30 - Natural Gas Inventories (Weekly): Last -217B cf.
The Fed (All Times Eastern)
08:45 - Speaker: Cleveland Fed Pres. Loretta Mester.
13:30 - Speaker: St. Louis Fed Pres. James Bullard.
16:00 - Speaker: Reserve Board Gov. Lisa Cook.
18:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: ( AMAT) (1.92), DKNG (-0.58)
