>>> Short Sellers Who Won in Third-Quarter Stock Swoon Start Pulling Bets
by Natalia Kniazhevich
(Bloomberg) -- Short sellers who made a fortune during the third-quarter stock-market dive are starting to close those bets against the market as the seasonally strong months for equities arrive.
Total short interest in US and Canadian stocks dropped by nearly $66 billion at the end of October to $871 billion, according to financial data and technology firm S3 Partners. Investors backed off bearish bets across sectors with consumer discretionary, financials, health care and information technology notching some of the biggest declines.
“Short sellers have got an early Christmas present in the third quarter” Ihor Dusaniwsky, head of predictive analytics at S3 Partners said in a phone interview. From here, traders are not building up new positions “as they don’t want to lose what they made already.”
The S&P 500 Index sank 3.7% in the third quarter, punctuated by a 4.9% drop in September, while the tech-heavy Nasdaq 100 lost 3.1% in the third quarter, led by a 5.1% slide in September.
Both indexes continued to fall in October, albeit at a slower pace, with declines of more than 2% each for the month. But November is traditionally the second-strongest month of the year for stocks, so traders need to be disciplined, said Steve Sosnick, chief strategist at Interactive Brokers.
“Taking profits is a key part of that discipline,” Sosnick said. “But unless we get a meaningful reversal in the bond market, it’s hard to expect a big rally in stocks.”
Per Timiraos --> no Fed hike next week -
>>< U.S. Inflation Accelerated in August
U.S. inflation accelerated in August due to a jump in gasoline costs, but underlying price pressures were likely mild enough to keep the Federal Reserve on track to hold interest rates steady next week.
Looks like a Fed pause in Sept might be in the cards, based on Nick Timiraos' recent WSJ article (link below). Rickards says that Timiraos has been anointed by the Fed as their unofficial mouthpiece for providing current Fed guidance to Wall St. He has always been accurate since the info comes directly from the Fed. Just reading his headlines is enough to get the gist of Fed policy -
>>> Cooler July Inflation Opens Door to Fed Pause on Rates <<<
>>> Hedge funds rush to unwind bearish stock positions
July 14, 2023
By Carolina Mandl and Nell Mackenzie
NEW YORK/LONDON (Reuters) - Global hedge funds rushed to unwind bets that U.S.-listed stocks will fall, as a persistent rally threatens their performance, JPMorgan Chase and Goldman Sachs told clients in reports.
"For hedge funds, shorts have been a challenge since early June especially," JPMorgan said, adding the unwinding of short positions got "extreme" in recent days.
Goldman Sachs said in a note on Friday short covering in the so-called U.S. macro products, which include equity index and exchanged-traded funds, reached the largest amount seen since November 2020.
A U.S. bull market has caught portfolio managers off guard, as they positioned earlier in the year for an economic downturn amid interest rates hikes, sticky inflation and geopolitical tension. Such short covering could, in turn, give fuel to the equity rally, further complicating the picture for remaining short-sellers.
The performance of the main U.S. indexes, however, has challenged their gloomy positions. The Nasdaq skyrocketed over 42% this year and the S&P 500 surged over 17%, while a basket of the most-shorted U.S. stocks is up 40% since early May, JPMorgan said.
The outcome for hedge funds has not been good. Overall, hedge funds went up 3.45% in the first half of the year, lagging the main stock indexes.
Amid the rally's persistence, investor sentiment has turned more positive, JPMorgan added in its note dated July 13.
Net buying, which excludes stocks sold, reached its largest level since October last year, according to Goldman Sachs. The move, however, was mainly driven by investors buying shares to cover their short positions.
Still, hedge funds also shorted more single stocks, mainly in sectors like staples, communication services and info tech, according to Goldman Sachs.
Goldman Sachs and JPMorgan run two of the world's biggest prime brokerages, a banking sector provides lending and trading services to investors and is able to see how large hedge funds and asset managers are moving.
>>> Powell Haunted by Repo Crisis as Fed Aims to Cut Balance Sheet
by Liz Capo McCormick, Alexandra Harris and Jonnelle Marte
July 9, 2023
(Bloomberg) -- Tucked away in hours of congressional testimony by Federal Reserve Chair Jerome Powell last month was an admission that the central bank was blindsided by the impact of shrinking its balance sheet four years ago.
While Powell assured lawmakers the Fed is committed to avoiding a repeat of 2019 — when the repo market, a key part of US financial plumbing, seized up — Wall Street economists and strategists caution that quantitative tightening remains complex and hard to predict. Known as QT, it involves letting Fed bond holdings mature without replacement, draining cash from the financial system.
In the coming months, the full brunt of the Fed’s current QT program is set to be felt. How it proceeds, and how the Fed handles the process, could shape its political latitude to keep using its balance sheet as a key tool in the future, amid Republican angst that was on display in Powell’s June 21-22 hearings.
“We didn’t see it coming,” Powell acknowledged at the House Financial Services Committee June 21 when referencing the sudden problems that emerged in 2019 and forced the central bank into steps it didn’t want. The advantage now is “we have experience,” he said.
The Fed is currently shedding its bond holdings at an annual pace of roughly $1 trillion, much faster than in 2019 but from a much bigger base. Powell told lawmakers he’s “very conscious” of the importance of not just inflating the balance sheet during each easing cycle and leaving it enlarged.
So far, Powell and market participants agree, things have been going smoothly. There are still more than $3.2 trillion of bank reserves parked at the Fed, and no indication that that gauge of liquidity has shrunk to a level that would cause problems in money markets as happened in 2019. Analysts estimate — with low conviction — the banking system needs at least $2.5 trillion to function smoothly.
“You don’t want to find yourself, as we did a few years back, suddenly finding that reserves were scarce,” Powell said last month. This time, the goal is to slow QT down at some point, ending the bond-portfolio runoff when reserves are still “abundant,” with an added buffer “so we don’t accidentally run into reserve scarcity.”
One reason things are going well so far is that there’s another big element of liquidity on the Fed’s balance sheet — the reverse repo facility. Known as RRP, money-market funds have used it to park cash. And that account stands at more than $1.8 trillion.
Another reason is that the overall Fed balance sheet has only shrunk by a fraction of the amount it surged during the pandemic. The Fed’s liquidity injections during the spring — to help address regional bank troubles — expanded the balance sheet. The Treasury was also limiting sales of bills — which remove liquidity — while it was constrained by the debt-limit standoff.
Those two dynamics have largely ended now, however.
“Things will start tightening on the liquidity side,” predicted Raghuram Rajan, the former International Monetary Fund chief economist and Indian central bank governor. “Then we will see the full consequences” of QT, the University of Chicago economist said last week on Bloomberg Television.
Even then, a number of observers see things going relatively smoothly. That’s because QT could end up mainly draining RRP. Indeed, it’s already receded to the lowest level since May 2022.
The RRP can shrink “dramatically” without “particularly important macroeconomic effects,” Powell explained last month. And he told a Senate panel that “that’s what we would have hoped to see, rather than taking reserves out of the system.”
With the Treasury in the middle of ramping up its own cash reserve by as much as $1 trillion, market participants will be closely monitoring what gets drained as that goes ahead.
Bank of America Corp. strategists, led by Mark Cabana, estimate that 90% of the Treasury’s issuance will be funded by the RRP, as money-market funds shift from that Fed facility to investing in higher-yielding T-bills.
Others aren’t so sure.
RBC Capital Markets analysis indicates that, so far, about 60% of the Treasury’s sales are coming from draining the RRP. Even that pace is faster than Blake Gwinn and Izaac Brook expected, and those strategists see the rate slipping to 45% to 50%. If households and companies keep pouring cash into money-market funds, they say, that could leave them still needing to park large amounts in the RRP, slowing its decline.
Gennadiy Goldberg, head of US rates strategy at TD Securities Inc., said it’s unclear how the Treasury’s bill sales will be funded. And that in turn leaves the impact of the Fed’s QT a question mark.
“Saying everything is OK is like calling the game after the first quarter,” he said. “Last time the Fed hit the wall at 60 miles an hour as they weren’t expecting reserve scarcity to be there — and the risk now again bears watching.”
There are other potential issues, to boot.
Dina Marchioni, director of money markets at the New York Fed, said at a symposium last month that staff are watching for the potential to money-market funds to start buying slightly longer-dated assets — something they might do to lock in yields for longer as the Fed approaches the end of interest-rate hikes.
That could put upward pressure on very short-term rates, sending them above the Fed’s target rate, Marchioni indicated.
The central bank does have policy tools it can use to address challenges, including a standing repo facility that offers cash overnight in exchange for securities, and the recently established Bank Term Funding Program.
“The risk scenario is that they do too much, too fast and then disrupt the flow of credit to the economy by so much that it tips things over to recession,” said Seth Carpenter, a former Treasury official who is now global chief economist at Morgan Stanley. But “that is not at all our base case,” he added, expecting QT to last well into next year.
Still, even Fed staff — as revealed in minutes of the most recent policy meeting — last month viewed with “uncertainty” their expectation for bank reserves to remain “abundant” by year-end.
“The biggest unknown at the moment is what is the lowest comfortable level of reserves in the financial system,” said TD’s Goldberg. “We just don’t know.”
>>> It’s Getting a Lot Harder to Chase the Stock Rally From Here On
by Jan-Patrick Barnert and Ksenia Galouchko
July 2, 2023
(Bloomberg) — Don’t get too greedy.
That’s the chorus from many investors who are entering the second half of the year with double-digit stock gains already under their belts.
Global equities have decoupled from a worsening economic backdrop after rising about 13% in 2023, prompting warnings from some of the world’s top money managers that chasing the rally from here on is a risky move. Growing corporate profit warnings are also driving home the message.
“Resilience now is sowing the seeds for fragility down the line,” said Andrew McCaffery, global chief investment officer at Fidelity International. “The ‘best-flagged recession in history’ still isn’t upon us. But that recession will come when the lagged effects of policies eventually take hold.”
Increasingly hawkish central-bank rhetoric and a slew of profit warnings are denting optimism of a soft economic landing, after an action-packed first half that included a US regional banking crisis and a $5 trillion tech bounce powered by the hype around artificial intelligence.
“There’s maybe a nasty surprise in store for stock markets and credit markets in the second half of the year,” Joseph Little, global chief strategist at HSBC Asset Management, said by phone. That could stem from a “combination of the weaker fundamentals set against what is currently expected by market participants, which looks like an incredibly soft landing,” he added.
FedEx Corp. to Siemens Energy AG and European chemical firms have cut or withdrawn outlooks, and there may be more woe in store as the earnings season kicks off in earnest in two weeks. Analysts are slashing profit forecasts globally, following a period of surprising resilience earlier this year.
“I think for many sectors and many industries, this might be the last good quarter,” Luke Newman, a fund manager at Janus Henderson Investors, said by phone, noting that companies may struggle more to pass on cost increases to consumers now, compared with a year ago.
Rising interest rates are likely to remain a key theme for the rest of the year. Expectations of a Federal Reserve rate cut have now been pushed out to 2024, while European Central Bank officials have said the hiking cycle is unlikely to end anytime soon.
Almost 99% respondents in a Deutsche Bank AG survey of 400 market professionals said higher rates will likely lead to more global “accidents”, with most of them expecting the moves to bring fresh strain to financial markets.
That spells trouble for the rate-sensitive tech sector, in particular, where valuations look rich after an AI-fueled surge. Investors and strategists are also concerned the concentration of this year’s market rally in a handful of megacap tech stocks means that bad news for the group could exacerbate declines for equity gauges overall.
“There’s been an overreaction in the short run” in tech stocks on AI hype, Lode Devlaminck, managing director for global equities at Dupont Capital Management, said by phone. “I do think AI is a game changer for a lot of companies in terms of productivity gains. But looking forward, if we want the market to continue or to sustain the rally, it actually needs to broaden out because it’s too narrow right now.”
Still, worsening conditions don’t necessarily mean stocks will fully reverse their 2023 gains.
Historically, barring the Great Depression in 1929, the S&P 500 has had positive returns every single year when it has gained 10% or more in the first half. Thomas Schuessler, portfolio manager of DWS’s €21 billion dividend fund, sees no good reason to fully hold off from investing in stocks.
“However, I don’t think that we can project the gains of the first six months onto the second half of the year,” he adds.
One factor could exacerbate any moves to the downside in the second half of the year: low trading volume.
While US equities entered bull territory in June, the run came amid thin market participation. The S&P 500 Composite Turnover Index shows a drop in volume every month in 2023 on a year-on-year basis.
Along with the seasonal summer lull, that could accelerate a market correction if traders unwind bullish bets. Patrick Grewe, portfolio manager at Van Grunsteyn, expects a correction in overvalued stocks as rates rise.
“A rock-solid conservative stance should also be maintained in the second half of the year,” he said. “In particular, trying to catch up with the market involves immense risks.”
>>> PIMCO CIO says preparing for 'harder landing' for global economy, Financial Times reports
July 2, 2023
July 2 (Reuters) - Pacific Investment Management Co (PIMCO) is preparing for a "harder landing" while top central bank chiefs prepare to continue their campaign of interest rate rises, Daniel Ivascyn, chief investment officer at the U.S. bond giant, told the Financial Times in an interview published on Sunday.
"The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks," Ivascyn told the FT, noting that when rates have risen in the past, a lag of five or six quarters for the impact to be felt has been "the norm".
The market is "too confident in the quality of central bank decisions", he told the FT.
>>> Trading legend Art Cashin is skeptical of the sentiment-driven rally and warns a 'bump in the road could turn out to be a landmine'
by Filip De Mott
Fri, June 30, 2023
The current market upswing is largely sentiment driven, Wall Street trading legend Art Cashin said.
"Short of going absolutely parabolic, this has been some dramatic, pyrotechnic run on this rally."
But it will mean that small, future challenges could have outsized market reactions.
Legendary trader Art Cashin is skeptical of the stock market rally and said a hiccup could quickly unravel investors' optimism.
The warning comes as the market wraps up a strong second quarter that extended year-to-date gains. In the first haf of 2023, the Nasdaq is up 30%, and the S&P 500 is up 15.5%.
"I can't overstate how strongly sentiment has taken over," Cashin, UBS director of floor operations, told CNBC on Friday, pointing to fear of missing out. "I think, short of going absolutely parabolic, this has been some dramatic, pyrotechnic run on this rally."
Asked if there's an "unknown unknown" that could undo the rally in the second half of the year, he said that's possible.
Because the rally has relied so heavily on sentiment instead of fundamentals, he suggested that it's fragile.
"Sentiment is so great that a bump in the road could turn out to be a landmine," Cashin said, later adding, "so far the trend is going. Am I skeptical? Yes."
This year's stock surge has been led by the tech sector as hype around artificial intelligence has lifted names like AI chip leader Nvidia. Mainstays like Apple have also rallied, with the iPhone maker reaching a $3 trillion market capitalization on Friday.
Meanwhile, a slew of upbeat economic data has raised hopes that the US economy could avoid a recession. However, that could also force the Federal Reserve to stay hawkish, and officials have said more rate hikes are coming to get inflation back to their 2% target.
Though a rate hike was skipped in June, Chairman Jerome Powell predicted 2% inflation is unreachable until at least 2025.
Yet, higher rates are "not really in anybody's plan," Cashin warned. "If they're going to move significantly higher, everything could change. You could go to negative payrolls and whatever."
Still, he acknowledged, "But for now, the sun is shining, the Roman candles are bursting, and everybody's happy."
>>> US consumer confidence races to 17-month high; housing market regaining strength
By Lucia Mutikani
June 27, 2023
WASHINGTON (Reuters) - U.S. consumer confidence increased in June to the highest level in nearly 1-1/2 years amid renewed labor market optimism, while business spending appeared to hold up in May, indicating the economy remained on solid footing despite fears of a recession.
Hopes that the economy could avoid a downturn in the near-term were also bolstered by other reports on Tuesday signaling a housing market revival was likely underway, with new home sales racing to a 15-month high in May and monthly house prices rising again in April.
The upbeat data, however, suggested the Federal Reserve will likely have to continue raising interest rates to slow demand in the overall economy. The U.S. central bank, which has raised its policy rate by 500 basis points since March 2022, signaled this month that two additional rate hikes were warranted this year.
"The U.S. economy continues to steadily defy expectations and the fact that it is doing so without lots of hoopla is a good thing," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.
The Conference Board said its consumer confidence index rose to 109.7 this month, the highest reading since January 2022, from 102.5 in May. Economists polled by Reuters had expected the index to climb to 104.0.
Consumers under the age of 35, and those with an annual income of more than $35,000 were the main drivers of confidence this month. Consumers, however, continued to expect a recession at some point over the next six to 12 months.
But they grew more upbeat on the labor market, with the share viewing jobs as "plentiful" rising and the proportion of those saying jobs were "hard to get" falling.
The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, rose to 34.4 from 30.7 in May, a sign labor market conditions remain tight despite first-time applications for state unemployment benefits hovering at more than 1-1/2-year highs. This measure correlates to the unemployment rate in the Labor Department's closely followed employment report.
Though income expectations eased a bit, consumers were generally optimistic about family finances.
"This might reflect consumers' belief that labor market conditions will remain favorable and that there will be further declines in inflation ahead," said Dana Peterson, chief economist at The Conference Board in Washington.
Consumers' 12-month inflation expectations dipped to 6.0%, the lowest reading since December 2020, from 6.1% last month. The improvement in confidence mirrored the University of Michigan's sentiment survey.
But consumers' buying plans softened, with fewer households intending to purchase motor vehicles, major appliances and houses over the next six months. Vacation was also not on many consumers' minds. But economists cautioned there was no strong correlation between buying plans and consumer spending.
U.S. stocks were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury prices fell.
FLOOR FOR HOUSING
The run of positive economic news was extended by a separate report from the Commerce Department showing orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 0.7% in May. The rise in orders for these so-called core capital goods handily beat economists' expectations for them to be unchanged.
Though a downward revision to April's increase to 0.6% from 1.3% took some of the shine from the data, business spending was holding up despite the pain from higher borrowing costs. There were notable increases in orders for electrical equipment, appliances and components as well as machinery.
Shipments of core capital goods gained 0.2% in May after climbing 0.4% in April. Nondefense capital goods shipments including aircraft surged 3.4%. These feed into the calculation of equipment spending in the gross domestic product measurement.
Business spending on equipment has declined for two straight quarters, the first back-to-back decline since 2020.
"We may not be out of the woods yet, but back-to-back gains in core capital goods orders more broadly point to a potential bottoming out in spending and upside for second-quarter equipment spending," said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.
The housing market appears to have found a floor and could even be recovering. A third report from the Commerce Department showed new home sales jumped 12.2% to a seasonally adjusted annual rate of 763,000 units last month, the highest level since February 2022, benefiting from a dearth of previously owned homes available for sale.
Economists had forecast new home sales, which account for a small share of U.S. home sales, slipping to a rate of 675,000 units. Sales shot up 20.0% on a year-on-year basis in May. New home sales are counted at the signing of a contract, making them a leading indicator of the housing market.
While new home sales can be volatile on a month-to-month basis, they added to data last week showing homebuilder confidence positive in June for the first time in 11 months. Housing starts surged in May and home resales edged up.
A fourth report from the Federal Housing Finance Agency showed monthly house prices rising 0.7% in April after gaining 0.5% in March. Prices increased 3.1% in the 12 months through April after advancing 3.7% in March.
"Strength in housing suggests risks for the Fed's goal of a return to 2% inflation over the medium term," said Veronica Clark, an economist at Citigroup in New York. "Housing strength over the summer also supports our base case of further rate hikes sooner rather than later."
>>> A recession indicator that predicted every downturn since 1969 started flashing months ago—and a Wall Street veteran warns it always works on a delay
by Will Daniel
June 27, 2023
Wall Street analysts and investment strategists love to use “recession indicators.” These simple statistics that serve as evidence of (potential) impending economic disaster can be invaluable tools for managing risk. Just look at one of the most famous of them all: the yield curve. Since 1969, a yield curve inversion has preceded every U.S. recession.
The yield curve is a graphical representation of the relationship between the yields of related bonds—most commonly the U.S. 10-year Treasury and two-year Treasury. Typically, shorter-term bonds have lower yields than longer-term bonds because investors are taking more risk by locking up their money for longer. This relationship is represented by an upward sloping curve. But sometimes that yield curve can invert, meaning long-term bond yields drop below short-term bond yields.
Megan Horneman, chief investment officer at Verdence Capital Advisors, warned Monday that even after nearly a year, investors shouldn’t be “complacent” about this “historical recession indicator.”
“Historically, after the yield curve inverts, it takes ~15 months for the economy to officially enter a recession,” the Wall Street veteran explained in her Weekly Investment Insights research note on Monday. “Applying this same time frame to the current inversion (roughly one year ago), the economy could enter a recession in October of this year.”
Horneman, who spent more than a decade at Deutsche Bank before moving to Verdence, pointed to the yield curve inversion and “many other economic signals” as evidence that a recession in the second half of this year is now all but “unavoidable.”
The thing is, although every recession since 1969 has been preceded by a yield curve inversion, not every yield curve inversion has preceded a recession. The past six of them have all correctly predicted economic downturns, with a crucial exception: A brief inversion in March 2022 after Russia’s invasion of Ukraine spooked investors.
So what is the yield curve, why is it so scary, and what does Horneman see in the signals?
Reading the tea leaves
An inverted yield curve typically indicates that investors are moving money away from short-term bonds and into long-term bonds because they expect that a near-term decline in economic activity will force the Federal Reserve to cut interest rates. Essentially, it’s a sign that the market is becoming increasingly pessimistic about the economy’s prospects. And that’s exactly what happened on July 5, 2022, the Treasury yield curve (the difference between the yield of a 10-year Treasury and a two-year Treasury) inverted—and it’s remained that way ever since.
In addition to this signal of weak market confidence, Horneman noted that the Conference Board’s Leading Economic Index (LEI)—which uses data including building permits, average weekly hours worked, manufacturers’ new orders, and more to get a picture of the health of the economy—sank to its lowest level since July 2020 in May and has now fallen for 14 straight months.
On top of that, despite year-over-year inflation falling from its four-decade high of 9.1% in June 2022 to just 4% this May, Federal Reserve Chairman Jerome Powell delivered hawkish comments during his semiannual testimony on Capitol Hill last week, promising to continue his inflation fight. “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go,” he said, referencing the central bank’s 2% inflation target.
Horneman said the comments are evidence of two more rate hikes on the way this year, and argued “history is not on our side” when it comes to avoiding a recession during a period of rising interest rates. “History tells us that most Fed tightening cycles do not end in a soft landing. As can be seen in the table, over the past 11 tightening cycles, all but three resulted in an economic recession,” she explained in a June 20 note.
A warning sign for markets?
Recessions are never good news for stocks. They slow economic growth and increase unemployment, which hurts corporate earnings. And Horneman warned Monday that, on top of that, this year’s market rally was an anomaly compared with the historical trend, which could mean there’s “additional downside” ahead.
Historically, after the yield curve falls to its lowest level, the S&P 500 has posted an average gain of just 4.4% in the following 12 months. But the blue-chip index is already up nearly 9% in just the few months since the yield curve reached its lowest level (–108 basis points) on March 8.
“Equity valuations continue to rise on the optimism that the Fed may be near the end of their tightening cycle,” Horneman wrote. “However, it is also important to remember that equity markets historically do not bottom until we are within a recession.”
The CIO went on to argue that the first half stock market rally this year is not “sustainable” and said she expects to see a “10% to 15% decline when investors become realistic with the interest rate, economic and earnings environment.”
S+P 500 trading strategy -
Chart support levels -
1st Support - 4305 (Aug '22 high)
2nd Support - 4275 (early June trading range) (or 4250-4300 zone)
Key Support - 4200 (the rising 50 MA, and is also the top of the ascending triangle which formed over last 6 mos, from which the recent breakout started)
Strategy - I'm hoping for a re-test of the 50 MA in the weeks ahead. So a possible re-entry for the Flex portion of the stock allocation. Alternately, may use a gradual averaging in strategy once the S+P 500 drops into the 4200-4275 zone. In a few week the rising 50 MA should be in the 4250 area. The 50 MA is the key target to watch in the near/mid term.
All IMHO :o)