Categories
Commentary

Daily Brief For May 15, 2023 + Key Update

LOAD LEVELS ON TRADINGVIEW BY CLICKING HERE.

A Key Administrative Update

Hello team. Hope your week is off to a good start.

Below is a straightforward letter. A link to a recent report we published is included, as well, since the context emboldens the case for strategies examined in that report.

Separately, after reflecting on the newsletter and noticing a slow decline in quality, we are pausing daily newsletters. During this break, we will evaluate the content direction and frequency of posts.

While the newsletters are paused, please stay in touch. If you want to connect, email renato@physikinvest.com. Also, check the website, physikinvest.com, for old letters, research, and the like. It is all free. Any input you may have is welcomed. Thank you. Onward and upward we go.

Regards,

Renato


Significant risks to markets heading into 2023 included the growing options complex and private market investors raising cash to meet capital calls that could prompt sales in public markets. The latter, in a way, is coming to fruition. Tiger Global is to offload private assets in the secondary market, Bloomberg says, noting the firm experienced a significant decline in the value of its venture investments, marking them down by approximately 33% last year.

The shift is driven by factors including the need to provide distributions to clients and invest in better-performing assets; cash, we maintain, is not appreciated, despite the potential for rates to decline and debt ceiling debates. Fed officials signaling they will leave interest rates unchanged at high levels for a period, and signs of weakening economic conditions across the globe, may help recent dollar strength last.

Graphic: Retrieved from Ryan Detrick of Carson Group. “Fed funds rate > CPI YoY … finally. Each of the previous 8 cycles could stop once this was in place.”

With short-term rates still inflated on debt ceiling uncertainties, traders may allocate to strategies detailed in Physik Invest’s “Investing In A High Rate World” report. The current landscape bolsters the case for such strategies.


About

Learn about our origin story here, and consider subscribing for updates on the critical contexts that could lend to future market movement.

Separately, all content is for informational purposes. Derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements.

Categories
Commentary

Daily Brief For May 12, 2023

LOAD LEVELS ON TRADINGVIEW BY CLICKING HERE.

Bloomberg reports that if the US defaults on its debt, which could happen as soon as June 1 if President Biden and House Speaker McCarthy fail to reach a deal on raising the ceiling, homebuyer borrowing costs may surge to 8.40%. As a consequence, the typical home’s monthly payment would increase by 22.00% and cool property sales; the monthly payment on a $500,000.00 mortgage may rise to $3,800.00, compared to about $3,095.00 at the current rate of 6.30%.

Image
Graphic: Retrieved from WSJ.

In prior letters, we concluded that past monetary action made stocks less sensitive to interest rates, quoting JPMorgan Chase & Co (NYSE: JPM) strategists that the market would likely continue to “artificially suppress perceptions of fundamental macro risks,” barring surprises like a debt limit breach.

US Tech Stocks Outperform | The Nasdaq 100 has soared amid expectations of easier Fed policy
Graphic: Retrieved from Bloomberg.

With a debt limit breach a potential reality, Moody’s Corporation (NYSE: MCO) says a breach may compound recessionary pressures; expect a drop in equities, a volatility spike, and a disruption of funding markets.

Graphic: Retrieved from Nasdaq Inc (NASDAQ: NDAQ).

“Data show that short-term bonds have the most predictable reaction – with interest rates and default insurance costs rising significantly – before quickly returning to normal after the uncertainty has passed,” Nasdaq’s Phil Mackintosh writes. “In reality, a crisis was averted in all [prior] cases, with the government able to increase or suspend the debt limit before the X Date.”

Graphic: Retrieved from Bloomberg.

Notwithstanding the short-term uncertainty regarding the debt limit, Bank of America Corporation (NYSE: BAC) is adamant there will be a recession that manifests cracks in “credit and tech,” similar to the situation in 2008. BAC sees the bubble in technology, media, and telecommunication stocks soon deflating as they face higher-for-longer interest rates and a tempered earnings outlook.

Graphic: Retrieved from Societe Generale SA (OTC: SCGLY) via The Market Ear. While investors poured $3.8 billion into technology stocks in the week through May 10, $2.1 billion was pulled from financial equities, the most significant redemption since May 2022.

Compounding the recessionary pressures BAC sees, EPB Research adds, are banks’ funding costs, which have increased too much relative to prevailing asset yields. If the spread drops too low, bank lending tightens, and a recession occurs. Also, other data suggests tightening is finally starting to have an impact. Bloomberg reports that initial claims for unemployment insurance are on the rise. There has been a drop in overall wage growth to 5.1% last month, too, the biggest fall in the rate of increase since the series began.

Graphic: Retrieved from Bloomberg.

Separately, breadth divergences are becoming more frequent, with the Daily Advance-Decline (A-D) Line for the NYSE showing lower highs while DJIA and S&P 500 show slightly higher highs, McClellan Financial Publications writes. The bond CEF A-D Line is also showing a bearish divergence, indicating a shift in liquidity that could weigh on other stocks, including the big-cap stocks holding up the SP500 and the Nasdaq 100.

bond cef a-d line
Graphic: Retrieved from McClellan Financial Publications.

McClellan adds that the A-D Line originated from data collected by Leonard Ayres and James Hughes in the 1920s. It was made famous in 1962.

nyse a-d line 1929
Graphic: Retrieved from McClellan Financial Publications.

That’s when Joe Granville and Richard Russell commented on it in their newsletters, noting how it had shown a big bearish divergence ahead of the 1962 bear market.

a-d line 1962
Graphic: Retrieved from McClellan Financial Publications.

To end, the economic calendar next week is focused on manufacturing and housing. The housing market is showing some downside risk for existing-home sales for April due to a weak reading on pending sales, MCO says, adding that housing permits and starts are expected to move sideways as builders remain cautious amid high-interest rates and economic uncertainty. Regional Fed surveys in New York and Philadelphia will provide the first read on factory activity for May, with little hope for a significant rebound in manufacturing. Jobless claims will be critical, as continuing the recent trend would likely signal a rapid deceleration in monthly job gains. Other critical data to be released include retail sales, industrial production, and business inventories.

Should readers wish to hedge the debt ceiling debacle, June call options on the Cboe Volatility Index appear attractive, some suggest. But, with RVOL as low as it is, owning optionality is not generally warranted. The risk is lower lows in volatility.

Image
Graphic: Retrieved from SpotGamma.

About

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Categories
Commentary

Daily Brief For May 11, 2023

LOAD LEVELS ON TRADINGVIEW BY CLICKING HERE.

US consumer prices rose by 4.9% in the 12 months to April, down from the previous month’s 5%. Wednesday’s figures suggest inflation is moderating and emboldens the case for a pause to interest rate increases.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.

“The Fed will want to see declines in these statistical measures for a few more months before it could feel comfortable about cutting rates,” John Authers writes.

Notwithstanding “sticky price inflation” falling (only “if shelter prices are excluded,” the most challenging “front in the battle on inflation”), applications to purchase and refinance homes rose with yields falling, and that’s exactly what the Fed doesn’t want.

Many maintain the Fed is looking to walk-up long-end yields, and that’s problematic for assets; higher interest rates portend lesser allocations toward risky assets.

Graphic: Retrieved from Bloomberg.

Pimco’s Erin Browne and Emmanuel Sharef add that “12-month returns following the final rate hike could be flat for 10-year U.S. Treasuries, while the S&P 500 could sell off sharply.” 

Graphic: Retrieved from Pimco.

Accordingly, bonds look attractive “for their diversification, capital preservation, and upside opportunities,” while “earnings expectations appear too high, and valuations too rich,” warranting “underweight” equities positioning

Graphic: Retrieved from Pimco.

Compounding the risks are flows “that eventually will constrain lending and nominal growth on a 6- to 12-month horizon,” writes Goldman Sachs Group Inc (NYSE: GS).

Graphic: Retrieved from Bloomberg via The Market Ear. “The bull in money market funds refuses to cool down.”

In other news was worry over a US debt default.

The US government has been using accounting measures to provide cash after reaching a borrowing limit. Treasury Secretary Janet Yellen informed Congress that these measures might be exhausted by June, resulting in payment disruptions; a default would cause an economic disaster and “global downturn,” threatening “US global economic leadership” and “national security,” Yellen says. A solution (e.g., to raise the debt ceiling) could manifest issuance of “a substantial amount of bills in 2H23 … that would drain liquidity,” Morgan Stanley (NYSE: MS) writes.

Despite the worry, markets are contained in part due to positioning contexts. Decline in realized volatility (RVOL), coupled with implied volatility (IVOL) premium, makes it difficult for the market to resolve directionally.

In fact, Nomura Holdings Inc (NYSE: NMR) said it sees “significant further potential for additional equities re-allocation buying from the vol control space over the next month if this ongoing rVol smash / tight daily ranges phenomenon holds—i.e., +$37.8B of US Equities to buy on theoretical 50bps daily SPX change).”

Graphic: Retrieved from Bloomberg.

Options are sold systematically as traders aim to extract the premium; the Ambrus Group’s Kris Sidial says there is a puking off options exposures and short-bias activity (i.e., selling options) used as yield enhancement as traders call bluff on authorities not being there to prevent crises. 

Graphic: Retrieved from Sergei Perfiliev. “This is a 1-month vol – it’s 30 calendar days for implied and I’m using 20 trading days for realized – both of which represent a month.” Note that “juicy VRP = big difference between options’ implied vol (what you pay) and realized vol (what you got). Options are cheap historically, but expensive relative to realized vol.”

Should readers wish to hedge the debt ceiling debacle, June call options on the Cboe Volatility Index appear attractive, some suggest. But, with RVOL as low as it is, owning optionality is not generally warranted. The risk is lower volatility, not higher.


About

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Categories
Commentary

Daily Brief For May 10, 2023

LOAD LEVELS ON TRADINGVIEW BY CLICKING HERE.

Our levels have been working. For instance, as shown below, yesterday’s Daily Brief levels were key response areas for the Micro E-mini S&P 500 Index (FUTURE: /MES).

Graphic: Retrieved from TradingView.

Some of the levels overlap centers of options activity; falling volatility coincides with increased sensitivity among those options, lending to reversion and responsiveness.

“This continues to suggest that our theoretical framework of ‘options dominance’ is indeed the driver. In 2017 when the XIV (inverted VIX ETF) was king of the hill, that 44bps high-low range would have been the 47%ile,” reports Tier1Alpha. “If you think these markets are boring, try 2017. Our suspicion is that similar forces are at work, just concentrated in 0dte options. The 2017 bear market in vol came to an end with Volmaggedon. The cycle will end this time as well, but the catalyst remains to be seen.”

Graphic: Retrieved from Michael Green of Simplify Asset Management.

Consequently, per SpotGamma, “there is little room for error.”

From an options positioning perspective, for volatility to reprice lower and boost the market, “we need a change in [the] volatility regime,” SpotGamma previously added. The likelihood of that happening is low since many expect the Federal Reserve (Fed) to stick to its message of higher rates for longer, notwithstanding the consumer price index rising by a below-forecast 4.9%, the first sub-5% reading in two years. Overall prices remain hot, and the job market remains robust. Policymakers need more than one month of data to be confident that prices are on a sustained downward path, Bloomberg reports.

Graphic: Retrieved from Bloomberg.

“Inflation is higher than the Fed’s mandate and not on a path to get to that mandate soon. The CPI report is one data point, and most measures show elevated inflation. Areas that had been disinflationary are reverting. And the stickiest parts of inflation remain elevated.”

Graphic: Retrieved from Bob Elliott of Unlimited Funds.

So, support for a pause or hold is the more likely scenario.

“When pauses have occurred against the backdrop of tight labor markets, the Fed has rarely eased in the subsequent six months — the most common outcome has been an on-hold Fed,” explained Praveen Korapaty of Goldman Sachs Group Inc (NYSE: GS). “In contrast, periods with material deterioration in the labor market have more reliably resulted in easing. At least during this period, the inflation backdrop at the time of the pause does not appear to have had a material influence on policy actions.”

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via Bloomberg. “As this chart from Goldman shows, when the employment is tight (which it plainly is at present), pauses tend to become extended. It’s only when employment is seriously deteriorating (on the right side of the chart) that the Fed pivots swiftly.”

Moreover, heading into price updates this morning, the expectation was for a smaller move in the S&P 500. However, with volatility very low, we’ve maintained that selling options blindly is dangerous. When you least expect significant movement, it often happens; just before the opening, the market has moved over 1.0%.

Graphic: Retrieved from Pat Hennessy of IPS Strategic Captial Management. “Welp, it was fun while it lasted. SPX straddle only pricing 83bps for tomorrow ahead of CPI, lowest on record since dailies were listed in May 2022.”

Check out our detailed trade structuring report for more on how to better manage a portfolio in this enviornment.

Graphic: Retrieved from Bloomberg. “The case for concerted easing rests fundamentally on the yield curve. Long-dated bonds have been paying a lower rate than shorter securities for the best part of a year, and this is a well-known recession indicator,” John Authers says. “It’s also a serious headache for banks, who traditionally borrow at low short rates (via deposits), lend at a higher rate, and make their profit from the difference. Banks, we know, are in trouble. If claims of a ‘crisis’ are a tad overblown, the deposit flight created for them by the inverted curve will contribute to the recessionary environment.” A way for the curve to return to its usual shape is for the Fed to cut rates, but the consensus among pros is that won’t happen for some more time.

About

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Categories
Commentary

Daily Brief For May 9, 2023

LOAD LEVELS ON TRADINGVIEW BY CLICKING HERE.

Sentiment calmer on the heels of some weaker-than-expected data from China. Generally speaking, markets are holding well, led by technology and innovation. 

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via The Market Ear.

Price doesn’t tell the whole story, however. Breadth is softening while market boosters are slowly being picked off. Tier1Alpha says that “1-month realized volatility rose nearly 13%, [and] … if volatility continues to rise, it will have an outsized effect on the 1-month vol, as the sample is now largely filled by the smaller returns we experienced in April.” Altogether, this “could result in larger [selling] flows being triggered from systematic strategies that use volatility scaling as a means for risk control.”

Graphic: Retrieved from Bespoke Investment Group via The Market Ear.

“With that vol premium getting squeezed out, there is little room for error,” SpotGamma adds; uncertainties that may manifest pressure and compound weaknesses under the hood include inflation reports and the debt ceiling issue.

“The next big moment comes Tuesday, when President Joe Biden is scheduled to meet House Speaker Kevin McCarthy and other congressional leaders,” Bloomberg explains. “The meeting is high stakes. Republican leaders want promises of future spending cuts before they approve a higher ceiling, while Biden is insisting on a ‘clean’ increase.”

Further, traders expect increased chances of rate cuts. This may not be outlandish; “Looking at the past 17 hiking episodes, the two-year, 10-year Treasury yield curve bottoms out 108 trading days before the first rate cut.”

Graphic: Retrieved from Bloomberg.

“Using that guide, the 2s10s curve reached negative 111 basis points on March 8 and has since steepened to about negative 41 basis points. Assuming that marked the trough, 108 trading days lands in mid-August — sandwiched between the Fed’s July 26 and September 20 rate decisions.”

Graphic: Retrieved from Bloomberg. “Look at the gap between the three-month and the 10-year yields, generally regarded as a surefire recession indicator. It’s also a great indicator of imminent rate cuts. An inversion is also a timing signal because it makes little or no sense unless you’re confident that rate cuts will be starting soon. And over the last 30 years, the curve has never been as inverted as it is now.”

For better hedging participation in market upside, check out Physik Invest’s recently published trade structuring report.

Graphic: Retrieved from BNP Paribas (OTC: BNPQY) via Bloomberg. JPMorgan Chase & Co (NYSE: JPM) strategistsay that “the first quarter will likely be the high point for stocks this year, … adding that equities won’t reach lows until the Fed has pivoted to rate cuts.”

About

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Categories
Commentary

Daily Brief For May 4, 2023

LOAD LEVELS ON TRADINGVIEW BY CLICKING HERE.

The Federal Reserve moved the fed funds target rate by 25 basis points to 5-5.25%. They also indicated a likely pause.

“Over the last 30+ years, every time fed funds were raised above the levels of core sticky inflation, policy turned out to be restrictive enough to cool inflationary pressures back to 2% or below,” explained Alfonso Peccatiello. “By summer, core sticky inflation should be trending in the 4% annualized area while fed funds will be sitting at 5% – and history suggests that means the Fed has tightened enough.”

Graphic: Retrieved from Bloomberg.

Following a wait-and-see period, which Peccatiello thinks may last about five months, Powell said rates might loosen; measures indicate that financial conditions are tight, leading to predictions of negative economic consequences and cuts.

Graphic: Retrieved from Bloomberg.

“Chairman Powell’s message remains sobering — the Fed’s policy rates will only come down with a greater economic slowdown or credit crunch from tightening bank lending standards,” said Yung-Yu Ma of BMO Wealth Management. “The equity market has faded in the wake of Chairman Powell’s press conference. The market may be realizing that there’s a fine line between getting the rate cuts it wants and maintaining an economic trajectory that doesn’t invoke buyer’s remorse. A classic case of be careful what you wish for.”

Graphic: Retrieved from Charles Schwab Inc-owned (NYSE: SCHW) thinkorswim platform. Three-Month SOFR Futures (FUTURE: /SR3). Implied interest rate = 100 – future price; the implied interest rate calculated using the 3-month SOFR future is an annualized rate. Based on the shape of the curve, /SR3 trader’s price an easing in the coming months.

Markets closed lower after the Fed’s decision, amid PacWest Bancorp’s (NASDAQ: PACW) examination of strategic options, including a possible sale, confirming that the problem of high bond yields is still around in the banking sector.

Graphic: Retrieved from Bloomberg.

“It looks like the markets are moving from one bank to the other, and vulnerable deer in the herd are being kicked off,” Dennis Lockhart, a former Atlanta Fed President, said. “But I would like to believe that Jay Powell has information that suggests that the situation is contained or containable.”

Graphic: Retrieved from Tier1Alpha. Measure suggests traders’ fears and demands to protect/speculate on movement are higher (but restrained) after rate hike, a pressure on underlying markets that could be a catalyst for upside, too, if volatility were to compress/fall again.

As explained in recent letters and our detailed trade structuring report, the markets may trade stronger for longer. However, the risks grow “as recessionary conditions proliferate.” Some, including Andy Constan of Damped Spring Advisors, think a hard landing is 100% a likely outcome over the long term, while, over the short term, our recent letters point to context that may keep markets contained.

As a reminder, there will be only updates to levels tomorrow and Monday. Stay well.

Image
Graphic: Retrieved from Sergei Perfiliev. A persistent spread in realized and implied volatility may contain markets.

About

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Categories
Commentary

Daily Brief For May 3, 2023

LOAD ALL LEVELS ON TRADINGVIEW BY CLICKING HERE.

The S&P 500 (INDEX: SPX) recovered after a violent sell-off led by products like the SPDR S&P Regional Banking ETF (NYSE: KRE). This is before updates on the Federal Reserve’s (Fed) monetary policy today.

Graphic: Retrieved from Danny Kirsch of Piper Sandler Companies (NYSE: PIPR).

The consensus is the Fed ratchets up the target rate to 5.00-5.25%. Following this, it is likely to keep rates at this higher level for longer than markets expect, letting the effects of the tightening work through the economy and tame the still-sticky inflation (e.g., lenders eating the cost of interest to sell more goods, job vacancies dropping, and payrolls surprising higher).

Graphic: Retrieved from Citigroup Inc (NYSE: C) via Bloomberg. “The Fed’s own projections from March suggest rates will be only just above 5% by year’s end — implying a protracted pause with no cuts, after the most aggressive hiking campaign in decades. It’s marked in red in the chart [above].”

Strategists at JPMorgan Chase & Co (NYSE: JPM) think a “hike and pause” scenario prompts a push higher in stocks.

“Here, the Fed would be relying on a tightening of lending standards stemming from the banking crisis to act as de facto rate hikes. Any language that the market interprets as the Fed being on pause should benefit stocks,” JPM wrote. “This outcome is not fully priced into equities.”

This idea was alluded to in yesterday’s letter; stocks likely do “ok” in a higher rates for longer environment. Beyond economic surprises and the debt ceiling issue, the Fed’s balance sheet (not likely to be addressed in this next announcement) strategists like Andy Constan of Damped Spring Advisors are most concerned about, since the size of quantitative easing or QE made stocks less sensitive to interest rates. Ratcheting quantitative tightening or QT, the flow of capital out of markets, would prompt some increased bearishness among those strategists.

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via Macro Ops.

JPM strategists add the market may continue “artificially suppress[ing] perceptions of fundamental macro risks,” prompting upside momentum.

“We expect these inflows to persist over the next two weeks, with several more large returns expected to drop from the trailing sample window,” Tier1Alpha explains. “Even if market volatility increases during this time, it would take exceptionally significant moves to trigger substantial selling. While these inflows are advantageous during market upswings, it’s essential to remember that they can be particularly brutal on the way back down once volatility inevitably returns.”

Eventually, “as recessionary conditions proliferate,” EPB’s Eric Basmajian says, asset prices will turn. Downside accelerants include the debt limit breach, which Nasdaq Inc (NASDAQ: NDAQ) and Moody’s Corporation (NYCE: MCO) think portends recession and volatility spike.

Trade ideas and more in our recently published report.

Graphic: Retrieved from Bloomberg.

About

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Categories
Commentary

Daily Brief For May 2, 2023

LOAD LEVELS ON TRADINGVIEW BY CLICKING HERE.

First Republic Bank (NYSE: FRC) is in the news for its failure. FRC was known for handing out mortgages at rock-bottom rates. When interest rates rose, the bank’s book of mortgages was hurt and left it with not enough to suffice withdrawals. 

“FRC believed its business model of extraordinary customer service and product pricing would result in superior customer loyalty through all cycles,” wrote Timothy Coffey of Janney Montgomery Scott. “Instead, too many FRC customers showed their true loyalties were to their own fears.”

This “marks the second-biggest bank failure in U.S. history, behind the 2008 collapse of Washington Mutual Inc.,” reports WSJ; after the instability in March, the bank finally succumbed to the Federal Reserve’s (Fed) rate increases and depositor worry.

JPMorgan Chase & Co (NYSE: JPM) acquired the bulk of FRC’s operations.

Graphic: Retrieved from JPM. See a nice summary by @brandonjcarl.

Further, research shows money is getting tighter, a headwind for the economy, while inflation is sticky and the Fed’s bond holdings are preventing tightening from being effective; WSJ reports the Fed’s balance sheet loaded with bonds may be insulating stocks from interest rate policies. 

“Quantitative easing locked the Fed into a position that is difficult to unwind,” said Stephen Miran of Amberwave Partners. Quantitative easing, or QE, made stocks less sensitive to interest rates. “It’s made tightening both slower and less effective than it should have been.”

Graphic: Retrieved from Bloomberg. The Fed’s favorite measure of inflation, the core PCE index, has been consistently stuck around 4-5% since 2022. The employment cost index, which shows wage growth at around 4-5%, is inconsistent with a 2% inflation target.

Not “adjusting balance-sheet policy,” but raising rates to 5.00-5.25% as expected, ‘is akin to “hitting the same nail with a hammer over and over again.’” Therefore, stocks, which are higher alongside surprising economic and earnings data, though risky, can do “ok” for longer, comments Andy Constan of Damped Spring Advisors.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.

The sale of volatility bolsters the stability and emboldens upside bettors, adds JPM’s Marko Kolanovic, who finds “selling of options forces intraday reversion, leaving the market price virtually unchanged many days.”

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

“This, in turn, drives buying of stocks by funds that mechanically increase exposure when volatility declines (e.g., volatility targeting and risk parity funds),” he elaborates. “This market dynamic artificially suppresses perceptions of fundamental macro risks. The low hurdle rate and robust fundamentals bode well for 1Q earnings results, but we advise using any market strength on reporting to reduce exposure.”

At this juncture, yes, stocks can move sideways or higher for a bit longer as a function of “momentum, not value,” Simplify Asset Management’s Michael Green concludes. Traders can position for this and various levels of potential upset later with structures included in a report we published last week.


About

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Categories
Commentary

Daily Brief For April 26, 2023

LOAD LEVELS ON TRADINGVIEW BY CLICKING HERE.

Morning, team. The detailed 11-page context and trade structuring report on better-protecting investments in 2023 and beyond was published. You can access it below:

If you do read it, please consider providing me with some feedback below:

https://forms.gle/82jBsN6H4qVoeU5m8

Separately, over the next few days, the Daily Brief newsletter will be ultra-brief, and only the levels will be updated.

Thanks for understanding, and I hope you got some value out of that report in the meantime! Stay well.


About

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Categories
Commentary

Report: Investing In A High Rate World

Context And Structuring

An optimal portfolio may have fewer stocks and more cash, bonds, commodities, and volatility. Given the uncertainty and high-interest rates, investors can protect their initial investment by allocating a substantial portion of their principal to lower-risk assets and a smaller amount to risky assets with leverage potential.