Newsletter - 01/28/2024
UPCOMING WEEK:
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Topic: Trading Basics
It's a take of two data sets:
first is the never-ending up move of the markets. Second is the continually deteriorating macro conditions. Over time, macro conditions always dictate the longer term direction of the market.
Shorter term, the markets need to get this final push upward done and then the down move can begin. Remember, it won't be straight down and timing is always a challenge. But I believe that we are in the last stages of the up move in the market. I provide some possible scenarios below.
Week in Review
From TRowePrice:
Stocks recorded another week of gains, bringing the Dow Jones Industrial Average and the S&P 500 Index to new all-time highs and marking the 12th weekly advance out of the last 13 for the latter. The gains were relatively broad, although the small-cap Russell 2000 Index remained nearly 20% below its all-time intraday high.
Fixed income traders reported that an upside surprise in weekly jobless claims on Thursday helped balance out some of the strong economic readings, leaving the benchmark 10-year U.S. Treasury note yield little changed for the week.
Macro
The market continues to believe that the most likely outcome is a "Soft Landing" or as I call it the "Goldilocks Scenario." Remember, never once in its history has the Fed successfully engineered a "soft landing" where economic growth slows down organically to exactly the "right" inflation level of 2%. They will fail again this time.
The markets remain extremely biased: any news that supports the Goldilocks scenario is focused on and any news that does not, is largely ignored. This is typical of late stage bull markets.
Fourth-quarter GDP came in at 3.3% which is well above the expectations of 2% growth. Many participants see this as a sign of the overall strength of the economy. But they are wrong.
The US economy is consumer based: as long as people spend, the economy does well. If the consumer stops buying, then it is a chain reaction of negativity.
I believe that the fourth-quarter GDP number is masking overall weakness in the economy, especially the consumer. The strength of 2023's last quarter was because additional credit was made available to consumers through the broader adoption of "Buy Now Pay Later" credit programs. These programs do exactly as titled but with a couple of characteristics that lead me to believe we are nearing the end of economic strength due to the consumer:
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BNPL programs do not report to major credit reporting agencies AND they do very limited underwriting. This enables poorer risk consumers to use BNPL if their credit score is low. This is a very bad idea.
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BNPL charge higher interest rates than credit card which means that BNPL debt will take longer to pay off and will cost more for the average consumer.
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Consumers are using BNPL for living expenses such as food and groceries. This is a very bad signal.
In all credit structures, there is a ranking from least risky credit to most risky credit. BNPL would qualify as "most risky" and the fact that BNPL is being pushed as a valid way to "pay" for spending tells me that the credit issuers are running out of ways to keep their loan books growing. Think of BNPL as the subprime of consumer credit. It is the bottom of the barrel in terms of credit risk, payment schedule and average transaction size.
BNPL allows companies that produce the products to realize the sale and receive the funds despite the fact that consumers will have 12-18 months to pay off that product. It is just another financial engineering product to keep consumers spending because that keeps the economy from crashing.
Looking at US credit card lending, consumers are carrying record levels of debt:
The current situation is this: credit card debt is rising, delinquencies are rising, and credit issuers have made it EASIER for consumers to add more debt to their credit via BNPL. How do you think that's going to turn out?
SPX and NDX Charts and Outlook
The SPX continued to make ATHs this week driven largely by large cap technology shares.
I expect that since fourth-quarter earnings expectations were largely revised downward the bar to beat is already low and therefore, the setup for stocks to move higher after "beating" earnings is already in place.
I cannot look to get meaningfully short the market until I see a reversal on the weekly chart.
NDX:
While the NDX also made new ATHs this week, interestingly, it also printed a reversal on the daily chart. While it is too early to place a short position, it does indicate to me that perhaps underneath the surface of the tech sector, there already is some price weakness developing.
On the NDX weekly, if this week closes lower than the low of last week, the NDX will be in a weekly sell which would be bearish and would force me to add to my $TQQQ shorts.
SECTOR BREAKDOWNS:
IWM Underperformance:
One of the reasons I am not especially bullish technically is that the IWM is not participating in the rally and is 20% off its highs.
In order for the market to truly be in a "Bull" phase, all sectors would need to participate. I don't think that's going to happen.
Why Interest Rates Will Stay Down
As you know, I always examine the counterpoints to any argument I make. I have been very consistent in saying that I believe by the end of 2025, rates will be going back up. I believe that the primary driver for rates to go up is the fact that two of the major historical foreign buyers of US debt have domestic issues that may preclude them from participating in future US debt auctions: China and Japan. Also, I believe that inflation is rising, again, and that will also put upward pressure on rates. However, let's take a look at the counterpoint.
The Counterpoint:
Rates will continue to trend down because that's what Yellen and the Treasury need them to do. Also, its an election year and Yellen doesn't want to be blamed for Biden not getting reelected.
Support:
When Yellen announced in the summer that Treasury would be focusing on the short end of the yield curve I shook my head in disbelief. By doing this, Yellen opened Treasury up to:
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having to refi that debt at a much shorter duration thereby adding interest rate risk.
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the risk that US macro will worsen and make current "high" longer term rates not so high resulting in Treasury wishing they had chosen to refi current due debt at current longer term rates.
Since announcing her intent, short term rates have RISEN by 1 - 1.5% thereby costing the US $30b more in interest expenses. By these metrics, it appears that Yellen bet on the wrong direction. Or did she?
I believe that Yellen THINKS that long term rates MUST come down because if they do not, the interest expense on the debt will be so large that it will literally cause a meltdown in the US economy. That is the only reason that she just threw away $30b in interest savings in six months - because she believes Treasury will more than make it up on the back end when rates go down and stay down.
Among many issues there is one glaring issue: what mechanism does the Treasury have to drive down long term rates for an extended period of time? The answer is NONE. While the Fed and Treasury can most certainly affect rates over a shorter period of time, it is the international debt market, demand and supply, risk, macro, that ultimately drives longer term international debt markets. And because of that alone, I say that Yellen will be proven wrong and that her gamble will go down as being one of the dumber ones and at a great expense to the US taxpayer, as usual.
This also happens to be the soft landing scenario that the market is currently buying into. They of course are wrong also.
Even when the US goes into a broader recession rates will not come down because inflation will continue to rise and the perceived credit quality of the US will continue to fall.
DOOM List Update
DOOM 1: CRE IMPLODES:
Since there was a lot of discussion about the BTFP being ended on March 11 and whether or not that would be a negative for banks, I want to look at what will replace the BTFP and offer proof that the Fed and Treasury are preparing for a banking crisis.
The BTFP:
The Bank Term Funding Program, established as a result of the failure of SVB in March of 2023, provided loans of up to 1 year loans collateralized by US Treasuries, agency debt and MBS. IF it is shut down March 11, 2024, either "they" are no longer concerned that they need such a program or they have another one to replace it.
The Discount Window:
The Discount Window has historically been for those banks that have an emergency and as such, use of the Window carries a lot of stigmatism, something publicly traded banks want to avoid. The beauty of the Window lies in its collateral requirements: it can include loans and those loans are VALUED AT PAR VALUE!! (side not, here's another example of YOU getting screwed - since they are not valued at MARKET value there is shortfall between the actual value and what the bank just loaned against and YOU are on the hook for that, via future bailouts etc.) The Window is viewed as the Lender of Last Resort.
The Repo Market:
The Repo Market is the market for short term loans but the participants are the banks themselves, on both sides. THIS is actually the lender of last resort because if you cannot get a loan at the Window, then you must be in pretty bad financial shape.
Ok, so now we know the players. Here's the current situation: the BTFP is scheduled to be closed March 11, 2024. After it shuts down, banks that need temporary short term funding can go to the Discount Window, and see their stock price get smashed, or go to the Repo market, in general anonymity, at least for a short time.
Why does it matter? Because the Window has been where a bank could take the kitchen sink and get value against it. For $KRE, it makes it EASIER for a bank to access emergency funding AND ITS QUICKER. Therefore, it would appear that IF the Fed and Treasury can get banks to overcome the stigma of the Window then $KRE banks just got an easier, faster, larger way to access emergency capital.
Isn't this BEARISH FOR $KRE? It would be if property values weren't sinking:
And if vacancies weren't at record levels (courtesy of the Wall Street Journal):
And if credit conditions weren't so tight.
And if a record amount of CRE debt wasn't going to need to be refi'd in 2024.
And if the economy was growing, not shrinking.
So, you can bet on Yellen and the Fed and their history of incompetence or you can bet on the facts: the CRE market is melting down and no amount of emergency assistance available to banks will prevent some from failing.
DOOM 6: TERRORIST ATTACK ON US SOIL:
THIS guy could be in the US now thanks to the porous southern border (I cannot find if it has been verified):
Doom Trades
$KRE
Well so much for my "seeing the highs!" Weekly is now in buy. I am doing nothing. Zero. I am not concerned. One bit. In fact, I would like price to go to $61ish so I can add my final 5%.
Last week I said "I now have to wait into next week to see if the LCD Daily reversal gets stronger." Well, it did so I continue to wait. Weekly is also in a buy.
$TQQQ:
A Doji on the weekly is the first step. Now we need the second step.
$TLT:
Bear Flag forming on the daily. 200dma above as resistance. Waiting for break of $93.11. Letting my runner run. Remember: this was a counter every expert trade.
The Week Ahead
Big (?) week with FOMC. I honestly don't have an opinion on what Powell is going to say. As for the markets, the trend is your friend. Trade with the trend. Unless the weekly says the trend has changed.
Some areas or stocks that I watching this week:
If we get a pullback with oil, I will enter a long oil trade. Don't forget that seasonality is in my favor for the next five months. Risk is peace in the Middle East. "Curve Steepener" is if US attacks Iran.
$MARA Still getting in.
Bitcoin
Last week I said "I still expect price to fall to close the 11/27 gap at 39640."
Done
Upside target is 50,000.
January 29th BTC ETFs may advertise on Google. And be found first on searches.
The Weekly chart printed a hammer. Now we will get to see if this bullish formation is validated.
NEW FREE TRADE IDEA
$MARA - but it jumped before I could get in. Will try again this week.
CLOSING COMMENTS:
FINALLY I got all of my calendars to work. FINALLY! I am a creature of schedules so not having a working calendar really screwed me up. It certainly affected my scalping last week which resulted in a net positive week but more stressful than I like. Having specific mornings I scalp (see Calendar below) will help me immensely.
The market is rocketing higher and unless the FOMC Meeting brings a surprise, I don't expect the trend to change. We are in the blow off top phase. And yes, I find it a bit odd that small caps are not participating. So far.
BLOG POSTS:
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I posted a new video this week:
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Thankyou Family!
theBoss
Nothing above is investment advice nor should it be construed as investment advice. It is offerred for entertainment purposes only. Always consult your advisors before investing any money. Do not "follow" or "mirror" any trade ideas provided. Mr.NotAdvice is not a licensed or registered investment advisor. Do your own research.