In many ways, yesterday’s session seemed anticlimactic. So, what was all the fuss about - the S&P 500 finished unchanged, with seven out of eleven sectors higher and lots of green on the screen.

Fine Mess for Financials

Banks got rocked again, down almost 12% on the session. The SPDR S&P Regional Banking Index ETF (KRE) crashed from 65 on February 3^rd to 42 now. Keep an eye on the First Republic Bank (FRC) for a hint at some kind bottom.

Where’s the Fear (below the surface)?

While major indices didn’t reflect the same level of fear as the media, market breadth was overwhelmingly bearish.

Market Breadth	NYSE	NASDAQ
Advancers	839	1,733
Decliners	2,237	2,830
New Highs	14	31
New Lows	345	624
Up Volume	1.79 billion	2.97 billion
Down Volume	4.75 billion	3.22 billion

 

The Volatility (Fear) Index spiked above 30 before settling at 26.52.

Wreckage

Only 15% of the S&P 500 is changing hands above their respective 5-day moving average.

Sending Out an S.O.S.

The three-day swoon in the 2-year government bond yield is the steepest three-day move since October 22, 1987. This was the same day John Adam’s first opera, “Nixon in China,” debuted at the Houston Grand Opera. And the number one song was “Bad” by Michael Jackson (these are not coincidences).  

It was also three days after Black Monday, the worst single-day in the history of the stock market.

All the Brouhaha

A major problem for Silicon Valley Bank (SVB) and many others is the unrealized losses on the books, mostly from bonds that have been hammered. The Fed has decided to extend one-year loans on those underwater assets at par (value upon maturity), up to a 30% discount. So, a bank can use a bond in its portfolio that is worth $1000 in twenty years but is currently marked to market at $700 and get the full $1,000 now.  It seems simple enough, but this opens another can of worms; more risk-taking and even fewer loans.

Last year, Americans yanked hundreds of billions from banks, especially small banks. They can find yields elsewhere because of higher interest rates. The biggest threat is Jay Powell and the Fed.

Dig Those Crazy Moves

On Friday, it was universally accepted that the Fed would do another 100-basis point (bps) in rate hikes. Now, the CME FedWatch Tool is modeling for two 25-bps hikes, followed by a series of rate cuts beginning in early summer.

Yesterday, NY Fed inflation expectations declined to 4.2% from 5.0% and are now at the lowest point since May 2021.

This morning, all eyes will be on the Consumer Price Index (CPI) report. Interestingly, the Cleveland Fed is looking for a huge increases this month in the Core Consumer Price Index (CPI) on a month-over-month and year-over-year basis.

Let’s see how February shakes out first.

Portfolio Approach

We are unsuspending our Current Buy list and adding a new position in Industrial in our Hotline Model Portfolio this morning.

Today’s Session

The Street Breathes Easy - For Now

We got the CPI report this morning, which came in an expected +6.0% from a year ago.  There was a sigh of relief from Wall Street, where many were bracing for a negative surprise.

For Main Street, they are still getting hammered on electricity, autos and dairy products. 

The market opened higher.  There is still a touch and go element to all of this, but we remain focused on opportunities, even though assessing near term risk is harder than normal (it’s never easy).

Comments

Charles, If you have not seen and read Lyn Alden's primer on the Fed, Regulatory Agencies, Banks and Yields, you should recommend it to your followers. It is seriously deep and insightful. As always, it is clear headed and informative. Truly, required reading. Wayne F Carr on 3/14/2023 10:03:01 AM

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