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Markets Could Be A Trap Ahead Of Today’s Fed Decision

Markets Could Be A Trap Ahead Of Today’s Fed Decision

Submitted by QTR’s Fringe Finance

Make no doubt about it, all eyes are going to be…



Markets Could Be A Trap Ahead Of Today's Fed Decision

Submitted by QTR's Fringe Finance

Make no doubt about it, all eyes are going to be on the Federal Reserve’s decision about interest rates later today - and most strategists feel as though they have the market action pinned down. If, of course, by pinned down, you mean “could land anywhere within a 10% range”.

For example, J.P. Morgan recently offered up a ludicrously detailed and nuanced take on what the day’s action could hold, broken down into 6 different situational scenarios of different rate hikes and commentary choices, all of which basically boiled down to the grand conclusion that “markets could crash lower or rip higher 10% depending on what the Fed does.”

To quote Snatch, “You could land a jumbo f*cking jet” in that range.

My analysis looks past that brilliant work of sell-side art and makes the case for how, in my opinion, the Fed has already “booby trapped” markets ahead of their decision today. Let’s discuss what I think.

The nice thing about today’s decision is, in my opinion, it doesn’t matter.

I mean, sure, the Fed’s decision obviously will dictate trading for the day - maybe even for the rest of the week, maybe even for the month of November.

But I still continue to believe that a trapdoor could fall out from under this market at some point regardless of what the Fed says or does today.

My readers know that for the last few months, I have been making the argument that the 325 basis points already baked into the economic cake have still not been digested, and subsequently puked up, by the market yet.

Fed Officials Look at Higher Peak for Rates as Inflation Endures - Bloomberg

And the consumer is just now starting to run out of firepower. Have a look at an extremely frightening chart: personal savings rate overlapped with consumer loans.

As Americans are now tapped out on their savings, they are borrowing. When less borrowing becomes available and rates rise, it then becomes a story of delinquencies, charge off, bankruptcies and forced selling. When forced selling happens, prices are driven lower, making the cycle even worse for remaining participants. Thus begins a financial royal fuck deluxe that ends in capitulation and panic - the first semblance of true free market buy signals the market will have given off in years.

If I had to guess, we’re at the “Return to ‘Normal’” phase of things. After all, Goldman put out a note last week suggesting a soft landing could be incoming and people think they’re “buying the dip” with valuations nearly double the median S&P 500 bear market P/E ratio right now.

We blew past “Delusion” during Covid, when we didn’t even have an economy and were relying totally on the Fed’s money printer (which we are now paying for with 8% inflation) and we reached “New Paradigm” once Cathie Wood and Ross Gerber were being hailed as generational investing visionaries.

We spent the summer in “Denial”, as markets tried to recover, and now that things have settled down slightly, some people think we are back to normal. We’re not.

You can call me a pessimist if you’d like, but it is still extremely difficult for me to make the case that the market has bottomed – even if the Fed pivots today – with Market Cap/GDP about 40% above historical means and a Shiller PE in the mid 20’s.

Make no mistake about it, now matter how many times your portfolio has caused you to wet yourself over the last 9 months, this has been an orderly selloff: we have not seen panic yet, these are not trying times, there is no blood in the street and there definitely isn’t a buffet of value across markets yet.

That’s not to say that those moments won’t be forthcoming, but the road to get there, in my opinion, remains a rocky one. We’re going to need to see significant panic, fear, and capitulation before “old-school” value investors like myself see a reason to get screamingly bullish on equities.

This time and place varies significantly from the last time I was overall bullish on equities, which was in March 2020. Back then, I knew stocks were still expensive even thought they had crashed as a result of Covid. But I also thought that Covid fears in general were overblown (especially regarding financial stocks) and that QE infinity would eventually lead to market euphoria when coupled with the rosier reality of the coming pandemic.

This go-round, it’s a little different. Rising rates are a far more concrete and finite problem. In essence, no matter what the Fed does now, 325 bps are already making their way through the plumbing of the market - a time bomb just waiting for the right reason to explode, in my opinion.

This perspective is extremely important: these rates are going to rise again today no matter what. The only thing “analysts” are considering is whether it’ll be 50 bps or 75 bps - to which I say: who cares? The 325 bps time bomb is still making its way through market plumbing regardless of whether or not the Fed doesn’t even hike at all today.

When it blows, we’ll realize we’re not on a path that the Fed set with today’s rate hike decision, but rather that all along we have been on a path they started us on 9 months ago when stimulus checks stopped, inflation became real, and the fallacy of 0% rates forever ended violently. We just closed our eyes and continued on the ride, never once pulling up the window shade to catch a glimpse of the Fed napalming the economy in the background. As long as the plane has stayed somewhat level, with tolerable amounts of turbulence, we have just assumed that everything is going according to plan. My guess is when the market pulls the window shade up for us, we’re not going to like what we see.


Tyler Durden Wed, 11/02/2022 - 12:09

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Stay Ahead of GDP: 3 Charts to Become a Smarter Trader

When concerns of a recession are front and center, investors tend to pay more attention to the Gross Domestic Product (GDP) report. The Q4 2022 GDP report…



When concerns of a recession are front and center, investors tend to pay more attention to the Gross Domestic Product (GDP) report. The Q4 2022 GDP report showed the U.S. economy grew by 2.9% in the quarter, and Wall Street wasn't disappointed. The day the report was released, the market closed higher, with the Dow Jones Industrial Average ($DJIA) up 0.61%, the S&P 500 index ($SPX) up 1.1%, and the Nasdaq Composite ($COMPQ) up 1.76%. Consumer Discretionary, Technology, and Energy were the top-performing S&P sectors.

Add to the GDP report strong earnings from Tesla, Inc. (TSLA) and a mega announcement from Chevron Corp. (CVX)—raising dividends and a $75 billion buyback round—and you get a strong day in the stock markets.

Why is the GDP Report Important?

If a country's GDP is growing faster than expected, it could be a positive indication of economic strength. It means that consumer spending, business investment, and exports, among other factors, are going strong. But the GDP is just one indicator, and one indicator doesn't necessarily tell the whole story. It's a good idea to look at other indicators, such as the unemployment rate, inflation, and consumer sentiment, before making a conclusion.

Inflation appears to be cooling, but the labor market continues to be strong. The Fed has stated in many of its previous meetings that it'll be closely watching the labor market. So that'll be a sticky point as we get close to the next Fed meeting. Consumer spending is also strong, according to the GDP report. But that could have been because of increased auto sales and spending on services such as health care, personal care, and utilities. Retail sales released earlier in January indicated that holiday sales were lower.

There's a chance we could see retail sales slowing in Q1 2023 as some households run out of savings that were accumulated during the pandemic. This is something to keep an eye on going forward, as a slowdown in retail sales could mean increases in inventories. And this is something that could decrease economic activity.

Overall, the recent GDP report indicates the U.S. economy is strong, although some economists feel we'll probably see some downside in 2023, though not a recession. But the one drawback of the GDP report is that it's lagging. It comes out after the fact. Wouldn't it be great if you had known this ahead of time so you could position your trades to take advantage of the rally? While there's no way to know with 100% accuracy, there are ways to identify probable events.

3 Ways To Stay Ahead of the Curve

Instead of waiting for three months to get next quarter's GDP report, you can gauge the potential strength or weakness of the overall U.S. economy. Steven Sears, in his book The Indomitable Investor, suggested looking at these charts:

  • Copper prices
  • High-yield corporate bonds
  • Small-cap stocks

Copper: An Economic Indicator

You may not hear much about copper, but it's used in the manufacture of several goods and in construction. Given that manufacturing and construction make up a big chunk of economic activity, the red metal is more important than you may have thought. If you look at the chart of copper futures ($COPPER) you'll see that, in October 2022, the price of copper was trading sideways, but, in November, its price rose and trended quite a bit higher. This would have been an indication of a strengthening economy.

CHART 1: COPPER CONTINUOUS FUTURES CONTRACTS. Copper prices have been rising since November 2022. Chart source: For illustrative purposes only.

High-Yield Bonds: Risk On Indicator

The higher the risk, the higher the yield. That's the premise behind high-yield bonds. In short, companies that are leveraged, smaller, or just starting to grow may not have the solid balance sheets that more established companies are likely to have. If the economy slows down, investors are likely to sell the high-yield bonds and pick up the safer U.S. Treasury bonds.

Why the flight to safety? It's because when the economy is sluggish, the companies that issue the high-yield bonds tend to find it difficult to service their debts. When the economy is expanding, the opposite happens—they tend to perform better.

The chart below of the Dow Jones Corporate Bond Index ($DJCB) shows that, since the end of October 2022, the index trended higher. Similar to copper prices, high-yield corporate bond activity was also indicating economic expansion. You'll see similar action in charts of high-yield bond exchange-traded funds (ETFs) such as iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Barclays High Yield Bond ETF (JNK).

CHART 2: HIGH-YIELD BONDS TRENDING HIGHER. The Dow Jones Corporate Bond Index ($DJCB) has been trending higher since end of October 2022.Chart source: For illustrative purposes only.

Small-Cap Stocks: They're Sensitive

Pull up a chart of the iShares Russell 2000 ETF (IWM) and you'll see similar price action (see chart 3). Since mid-October, small-cap stocks (the Russell 2000 index is made up of 2000 small companies) have been moving higher.

CHART 3: SMALL-CAP STOCKS TRENDING HIGHER. When the economy is expanding, small-cap stocks trend higher.Chart source: For illustrative purposes only.

Three's Company

If all three of these indicators are showing strength, you can expect the GDP number to be strong. There are times when the GDP number may not impact the markets, but, when inflation is a problem and the Fed is trying to curb it by raising interest rates, the GDP number tends to impact the markets.

This scenario is likely to play out in 2023, so it would be worth your while to set up a GDP Tracker ChartList. Want a live link to the charts used in this article? They're all right here.

Jayanthi Gopalakrishnan

Director, Site Content


Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

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Hotels: Occupancy Rate Down 6.2% Compared to Same Week in 2019

From CoStar: STR: MLK Day Leads to Slightly Lower US Weekly Hotel PerformanceWith the Martin Luther King Jr. holiday, U.S. hotel performance came in slightly lower than the previous week, according to STR‘s latest data through Jan. 21.Jan. 15-21, 2023 …



With the Martin Luther King Jr. holiday, U.S. hotel performance came in slightly lower than the previous week, according to STR‘s latest data through Jan. 21.

Jan. 15-21, 2023 (percentage change from comparable week in 2019*):

Occupancy: 54.2% (-6.2%)
• Average daily rate (ADR): $140.16 (+11.3%)
• evenue per available room (RevPAR): $75.97 (+4.4%)

*Due to the pandemic impact, STR is measuring recovery against comparable time periods from 2019. Year-over-year comparisons will once again become standard after Q1.
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four-week average.

Click on graph for larger image.

The red line is for 2023, black is 2020, blue is the median, and dashed light blue is for 2022.  Dashed purple is 2019 (STR is comparing to a strong year for hotels).

The 4-week average of the occupancy rate is below the median rate for the previous 20 years (Blue), but this is the slow season - and some of the early year weakness might be related to the timing of the report.

Note: Y-axis doesn't start at zero to better show the seasonal change.

The 4-week average of the occupancy rate will increase seasonally over the next few months.

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American Express Numbers Show What Still Gets People to Spend Money

American Express stock jumped nearly 12% since earnings dropped.



American Express stock jumped nearly 12% since earnings dropped.

Even though American Express  (AXP) - Get Free Report earnings announced Friday afternoon fell somewhat short of expectations for the quarter, shares still soared to highs unseen for many months due to a number of strong metrics -- quarterly revenue growth of 17%, plans to raise its dividend by 15% from 52 to 60 cents and an annual revenue that surpassed $50 billion for the first time ever.

At $52.9 billion, the latter is driven primarily by an increase in quarterly member spending. Last year, that number was at $42.4 billion. 

According to American Express Chairman and CEO Stephen J. Squeri, the increase can be attributed to higher numbers of millennials gaining in earning power and using their AmEx above other cards to tap into rewards as many approach milestones like marriage, career advancement, and homeownership.

"Millennial and Gen Z customers continue to be the largest drivers of our growth, representing over 60% of proprietary consumer card acquisitions in the quarter and for the full year," Squeri said in an earnings call discussing the results.

People Are Using Their AmEx Cards a Lot

The $52.9 billion number is up 25% from what was seen last quarter and reflects a number of different factors also having to do with post-pandemic spending.

"We ended 2022 with record revenues, which grew 25% from a year earlier, and earnings per share of $9.85, both well above the guidance that we provided when we introduced our long-term growth plan at the start of last year, despite a mixed economic environment," Squeri said.

AmEx further reported that 12.5 million new members signed up for cards in 2022 while existing members used their cards frequently. Fourth-quarter sales at AmEx's U.S. consumer services and commercial segments rose by a respective 23% and 15%.

But higher expenses also led to falling below analyst expectations. The fourth-quarter income of $1.57 billion, or $2.07 a share, is down from $1.72 billion ($2.18 a share) in the fourth quarter of 2021. FactSet analysts had predicted $2.23 a share.

"I'm not sure what that's really a function of right now -- whether it's a function of the economy or of confusion on where to advertise right now," Squeri told Yahoo Finance in reference to lower spending on the part of small business and digital advertisers. "We're going to watch that, but the consumer is really strong, travel bookings are up over 50% vs pre-pandemic."


It's a Good Time to Be Tracking Credit Card Companies

Immediately after the earnings dropped, AmEx stock started soaring and was up nearly 12% at $175.24 on Friday afternoon. This is a high unseen in months -- the last peak occurred when, on September 12, shares were at $162.45. 

Whether due to or despite analyst threats of a looming recession, people have been using their credit cards very actively throughout the end of 2022.

When it posted its earnings earlier this week, Mastercard  (MA) - Get Free Report surpassed Wall Street expectations of $5.8 billion and $2.65 per share in fourth-quarter earnings. Visa  (V) - Get Free Report also saw revenue rise 11.8% to $7.94 billion in the same quarter. The numbers also reflect higher numbers of people traveling and using their credit cards in different countries.

"Visa's performance in the first quarter of 2023 reflects stable domestic volumes and transactions and a continued recovery of cross-border travel," outgoing CEO Al Kelly said of the results during a call with financial analysts.

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