03/03/2024 NewsLetter

Newsletter - 03/03/2024

UPCOMING WEEK:

VIP MEMBERS (all times MST):

THURS @ 6PM

Topic: Verticals, Calendars & Diagonals

FREE MEMBERS (all times MST):

Free Session THURS @ 10AM

Topic: Finding Trade Candidates

So close. The weight of the incoming macro news is building - but we are not . . . quite . . . there. Be assured, IF there is a sudden drop in the market, a painful drop, it will NOT mean that we have "missed" anything. There is always a retrace of the initial move and that retrace takes weeks, not days. But we are so close. More below.

Week in Review

From TRowePrice:

"Most of the major benchmarks ended the week higher, with the Nasdaq Composite joining the S&P 500 Index in record territory for the first time in over two years. The month also closed a strong February, with the S&P 500 marking its strongest beginning two months of the year since 2019, according to The Wall Street Journal. The week’s gains were also broad-based, with an equal-weighted version of the S&P 500 Index modestly outperforming its more familiar market capitalization version. For the year-to-date period, however, the capitalization-weighted version of the index remained ahead by 409 basis points (4.09 percentage points), reflecting the outperformance of large, technology-oriented growth stocks.

The defining event of the week in terms of market sentiment appeared to be Thursday’s release of the Commerce Department’s core (less food and energy) personal consumption expenditures (PCE) price index. The index rose 2.8% for the 12 months ended in January, in line with expectations, but the report appeared to calm concerns over the Labor Department’s earlier release of its consumer price index, which showed core prices rising by 3.9%, above expectations of around 3.7%. The core PCE price index is generally considered the Federal Reserve’s preferred gauge of overall inflation pressures.

While stocks jumped on the inflation news, it appeared to have a limited impact on the tone of Fed communications. T. Rowe Price traders noted that 12 Fed policymakers were scheduled to deliver speeches over the week, and all seemed to echo the recent narrative that they were in no rush to cut interest rates. Indeed, according to the CME FedWatch Tool, futures markets ended the week pricing in only a slightly higher chance of a rate cut over the next two policy meetings—24.6% versus 23.4% the week before."

SECTOR BREAKDOWNS:

SPX and NDX

This is what I said in last week's newsletter:

"I am fully aware that the market is in buy mode and will both manage my short positions and seek new longs accordingly."

I am starting to see less fundamentally strong companies beginning moves to the upside. This does not mean it's the top - it merely means that money is seeking areas that still have room to move topside - and the areas that remain are of lower quality across many fundamental metrics.

There is no argument, SPX broke out on the daily and weekly to new highs so I am not fighting the trend.

NDX:

Weekly and daily prices have broken to new highs as have the number of "experts" top-calling. Do I think prices are overextended? Sure. Have I added short positions? Yup. But I have also been adding more longs because you do not fight the trend.

This is when people start losing money. They refuse to accept what price is doing, get VERY short, and once price has moved high enough, they will capitulate - AND THEN the market will fall. This is all but guaranteed.

MACDHisto flipped to green on the Daily and improved on the weekly. The market is TELLING US what the path of least resistance is: UP. How far? No one knows.

So, what do I look for? DIVERGENCES. One possible divergence is the fact that the $RUT (small caps) have not broken to new levels. And that green box shows just how "choppy" this area has been before.

With the $SPX and the $NDX making new highs though, it is more likely the $RUT will follow not lead.

WEEKLY FUND FLOWS:

Bonds continued to attract capital but Money Markets showed a jump in inflows. This should not be construed as a signal of impending weakness in equities. YET. The volume of the MM flows is not large enough to be "out of the ordinary" and this, I am treating it as a non-actionable data point.

Sectorwise, Financials show negative flow for the 4th week with total flows slightly increasing. This probably was driven by the $NYCB debacle this week. Information Tech (Mag 7 et al) saw large inflows again as investors chased strength. The only other notable data point was that Utilities saw moderate outflows, which makes sense as rates drifted higher.

Bitcoin & Miners

BTC has not only broken out strongly on the daily, weekly and monthly. AND IT'S JUST GETTING STARTED. This has everything to do with the extremely bullish structural setup: BTC ETFs are attracting massive inflows while at the same time, more firms have decided to allow their clients to buy them. Short BTC and get killed..

Along with all miners, $IREN was smashed this week. Why? BC money is flowing out of miners and into BTC ETFs. This will remain a structural headwind for miners but there is a small positve: as can be seen by the dotted yellow line, price has found moderate support. Next week price will either bounce or fill that gap.

$CIFR is the same story as $IREN - BUT - price is at the POC (bright green line) which is significant support. Price could fall further to the $2.25ish level before bouncing but the hammer on Friday is a strong reversal signal. Now it needs to be confirmed, within 3 trading days.

$BITF printed a hammer also on Friday and at moderate support. It is often useful to zoom out to see what price is actually trending. As can be seen from the weekly, price is at a very important support level, going back to July 2021. Failure to hold this level will result in price going to $2.

I repeat what I said last week: "The thesis has not changed for the BTC miners I own nor has the catalyst event happened." Is it painful to watch price go down? Only if you have not scaled or are over position sized. For reference, the miners remain my largest allocation at 18%. Yes I could lose 100% of my investment and still be profitable but I am not going to allow that nor would I be happy with seeing and 18% drop in my overall portfolio.

Don't worry - price has found support and it might drop lower - but the fact remains that the miners continue to print money, or rather Bitcoin.

My expirations are out from May to August. I will not look to roll the May contracts until the end of March, if it is needed. I do not think it will be.

DOOM List Update

DOOM 1:

With the $NYCB debacle this week, the volume has been turned up to "5" on the CRE tune: "It's all going to burn." But I am going to cover at length this trade at length below.

DOOM 2:

The YEN traded sideways this week at it's already weakened level. Whether this is a consolidation before reversing or before breaking to new 52-week lows remains to be seen. But with the Japanese stock market rocketing higher, the JCB is sort of stuck: they own 50% of Japanese large capital stocks so if they want to defend the YEN, they can either pull money out of the Nikkei or they can sell "foreign bonds" or some of both. Currently they have been issuing a LOT of 10 year debt but what happens to those bonds if the JCB hikes in April? They are going to go down.

Also, if other Central Banks plan on cutting this year, that will remove the rate differential with Japan thereby reducing pressure on the YEN. I think that they stated this week what their intent is when the JCB stated that they could "sell foreign bonds" to help support the YEN. Which foreign bonds do you think they are talking about?

DOOM 5:

Sadly, it appears that NATO and the US are obsessed with going to war with Russia. First, Germany revealed this week that British troops are already on the ground in Ukraine. Second, Germany also said that if they send long range missles to Ukraine that it "would require German troops" t be deployed into the war zone. Finally, the USSECDEF (who is a complete moron) continues to state what his vision is: direct conflict with Russia. This is not the DOOM I want to be correct about but sadly, that is where this is trending.

And in an even more terrifying development., just this morning we now have proof that GERMANY BLEW UP A BRIDGE IN CRIMEA. So there you have it, a NATO member directly attacking Russia. I cannot believe we are depending on Russia to exercise restraint!

Doom Trades

$KRE

From the newsletter Three weeks ago:

"Any bounce will be temporary and should be contained to below $50."

The break level is $45.66 - and it must do so on the weekly.

$VNQ

$VNQ is in a weekly buy and it bounced off the Weekly POC. There is no rush here and I get a sense that I will be buying 2025s.

$BAC:

Weekly remains in a buy and appears to forming a Bull Flag. Until price breaks $31.29 to the downside or it makes a new 52 week high, there is nothing to do but wait.

$TQQQ:

$TQQQ remains in a weekly buy and a weekly uptrend. Price has broken the resistance level i talked about last week and I will be looking to add a LONG trade this week. I am waiting for a proper setup to add to my short CORE position.

$TLT:

I said that last week was a critical week and it proved correct. Weekly posted a LCD BUT with the threat of the Fed lowering rates it is unwise to establish a large position. In order to be more certain I will not enter a full CORE size AND I will wait for a close below the $92.00 on the monthly.

Current Open Positions

$ABR:

$ABR printed a daily reversal due to the dividend payout so this is very easy: a close above Friday's high gets me out of this trade BUT my intent is to roll my April puts to October puts, for no cost. $ABR's recent earnings release probably violated disclosure regs and this company's holdings are a dumpster fire.

$BOWL:

$BOWL triggered a LCD on the daily which is what got me in (Green box). Price needs to break $13.61.

$BUD:

I entered the $BUD short due to the gap down after earnings. The next day price retraced and while it might consolidate here for a day or so, I do expect it to break through Thursday's low of $59.77.

$CPRT:

$CPRT continues to print higher highs and lows on the daily, as well as buying tails and new 52 week highs, everyday since I entered. The trade is currently up 25% and the trend is in our favor.

$DBX:

$DBX went from up 50% to down 21% - why did I hold it? BC I f'd up due to how busy I have been - sorry excuse but its the truth. A Bear flag has formed BUT price must not CLOSE above the $24.46 or a stop will be triggered.

$ENVX:

$ENVX was entered due to a LCD (Green Box). LCD's are strong setups and all we need is some volume and this trade should be good. Moreso, I have a tight stop on this so not much is risked.

$UCO:

With the murder of over 100 Palestinian civilians by the IDF this week at what was supposed to be a refugee food distribution and Iran giving the Hezbollah the green light to attack Israel, oil moved up strongly on Friday finally BUT it did not close above the $80 level, which is what I believe is the line in the sand. Price is in an uptrend and MACDHisto is turning back upward. Now we will see if my patience will be paid off.

$UPWK:

$13.71 is the stop level on this short position. I think it has become my second choice to $ANF as an annoying trade. If price reverses back lower, there is a LOT of room for it to fall.

DOOM TRADE: $KRE

I thought it would be a good time to review the Commercial Real Estate (CRE) and Regional Banking (KRE) DOOM Trade as it's my opinion that momentum is building toward the inevitable "tipping point."

THESIS:

Briefly, the entire premise of this trade is based upon the belief that as a result of massive liquidity injections by global Central Banks into the monetary system AND because US Regional Banks participated in aggressive lending to the CRE sector, across all asset classes, CRE and KRE are at risk of experiencing a severe pullback,. Furthermore, I believe that due to the perfect storm that is happening only another round of even more massive stimulus (bailout) will stop the bleeding. What follows are the Bear and Bull case for CRE and KRE. I do not think that by the end of this section that you will have any doubt what the higher probability trade is here.

BEAR CASE:

As the steady drumbeat of bad news flows out of the CRE space, we are starting to see KRE being forced to deal with some of the issues, albeit the effect thus far has been manageable. I believe that's changing and rapidly with $NYCB only one example and the tip of the iceberg. What follows is a top level discussion of my opinions that support the Bear case for CRE and KRE. Let's begin:

Office vacancies hit an all time high in the 4th quarter of 2023 according to Moody's.
- A cultural refusal to return to the office, high large city crime rates and general economic malaise are the driving factors.

According to Fitch, just 46% - 48% of loans up for renewal in 2024 will be able to refinance, compared with a rate of 73% for loans maturing in 2022 - 2023.

Delinquencies on CRE CMBS loans is rising sharply.

Compounding the CRE issue is the fact that a large number of banks have a total CRE loan to Risk Capital ratio at 100% or higher:

Regardless of what the Labor Department says, inflation is nowhere near their retarded 2% goal:

In addition to the stress that KRE is experiencing from CRE, other lines of their credit business are also experiencing rising delinquencies:

In addition to the above, US National Debt will continue to be a thorn in the "lower rates are coming" thesis. Higher supply = higher rates.

PUTTING ALL TOGETHER:

Here's the picture the above paints: At exactly the time that CRE and KRE would benefit from lower rates, inflation is preventing it from happening. At the same time, because vacancy rates are going up, realized rents are going down and therefore the ability to service debt is falling - which reduces overall cash flow. This then is causing a drop in property valuations which will put even more stress on the lender's balance sheet.

If it was only CRE debt that was causing issues for the KRE banks, then it might be more manageable. But we can also see that two of the other lines of business, consumer credit and auto loans, are experiencing sharp increases in delinquency rates.

Now, let's consider that the not only are there $1.2 TRILLION in CRE that will need to be refi'd in 2024-2025, but of that balance, only 46%-48% (probably also a bullshit estimate with the number probably in the high 20s to low 40s) of those loans will actually be able to refi.

RISING VACANCIES + RISING CMBS DELINQUENCIES + FALLING PROPERTY VALUES + RISING INTEREST RATES =

DOOM

BULL CASE:

There are only two scenarios where CRE and KRE do not experience a sharp drop in my opinion and neither of them "solve" the problem that was created by massive amounts of global stimulus. You cannot just take all that liquidity out of the system without at the same time, allowing the asset values to settle to non-stimulus levels - letting them "float" on their own.

Extend and Pretend in perpetuity:

KRE banks could continue what they are doing now which is to NOT report loans as delinquent and therefore NOT have to realize a drop in their cash flow by reworking loan terms to add the missed payments to the back end of the loan. This is a novel plan but there are two major issues with it:

This does not help the loans that MUST refi this year and next.
While the KRE banks do this, the asset values backing those loans are dropping.

This is creating a vicious spiral that cannot go on forever because at some point, many of these losing loans will have to be realized on the KRE banks' balance sheets and cash flow statements.

Even if rates somehow drop further and stay down (key part) it will not solve the drop in property values which can only be fixed with an increase in economic activity and a decrease in vacancies. While a permanent drop in rates would certainly benefit the stocks of the KRE banks, at some point investors will realize they are paying more for less assets and more risk.

Finally, it should also be noted that the vacancy issue is, in my opinion, is the result of some cities move to more lax crime prevention. This is not something that will change overnight and in fact, this could become the new normal.

New Bailout:

A bailout of KRE banks would "solve" the CRE issue because it would provide banks with cheap liquidity to loan to the CRE sector. However, doing so would only kick the can further down the road and significantly increase the core issue: too much cheap money in the system.

In order for their to be a bailout though, there has to be a problem and thus far, other than $NYCB, there have not been enough banks failing. So the Fed and Treasury are stuck: wait for some KRE banks to collapse and then bail them out or launch a backstop program when none is currently needed.

FINAL COMMENTS:

If interest rates fall further and if inflation drops and if the economy starts expanding and if the UST is able to sell their record level of debt without moving rates up and if no EU or Asian banks collapse and IF the global economy stops contracting, then yes, KRE and CRE might have a chance to make it without large asset value resets.

Ask yourself this: with the data provided above, do YOU think the Fed will be able to land a soft landing where interest rates and inflation are at perfectly aligned levels? Do you think the CRE space will "all of a sudden" become healthier? Do you think that KRE banks will all of sudden financially improve?

If you do, then do not short KRE, CRE or anything for that matter.

As for me, I play the odds and there has yet to be anyone that convince me that the odds favor anything but a growing issue with CRE and KRE.

THE PRIMARY CHALLENGE FOR THE SHORT CRE/KRE TRADE IS TIMING. The dominos have started to fall - how fast they fall is unknown. Therefore, LONGER DURATION as necessary in order to allow for the CRE/KRE mess to gain momentum.

I will leave you with this: just 3 days ago, the Fed's Bostic said this, which was also echoed by a random tweet by the White House:

For reference, here is what Hank Paulson was saying right before the 2008 crisis:

CLOSING COMMENTS:

This was my Closing Comment last week: "If the tech sector continues to move up I have no intention of merely observing." To that end, I did add some longs last week and am looking to add broad market ETF longs this week. But make no mistake, the market is very risky at the moment and choppy - so I will continue to do what I have been doing which is to size down on some trades. Remember that we Traders do not get paid for activity, we get paid to be patient and take only the highest probability trades. This is a "C" market to trade in so while we wait for a "B" or "A" market, do not succumb to FOMO - adhere to the first goal of trading: Protect Capital. The time will come when we are more active but activity for activity sakes just leads to losses and bad habits.

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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.