The highlight of the week, the all-important latest Consumer Price Index (CPI) measure of retail inflation numbers, came out before the market opened on Thursday and was right in line with forecasts, showing a continued cooling of inflation in the US.
Headline CPI fell 0.1% between November and December, following a 0.1% increase the previous month. Over the past twelve months, the index is up 6.5%, falling from a 7.1% rate a month earlier.
Core CPI, which excludes food and fuel costs, rose by 0.3% month-to-month and 5.7% year-on-year, the smallest twelve month gain since late 2021. The previous month, those numbers had been up 0.2% and up 6.0%, respectively. This all appears to imply that inflation may indeed be falling at a faster rate than growth is and that’s exactly what markets want to see.
While stocks broadly reacted quite positively to the data in Thursday’s session, the bond market had more trouble making up its mind. The benchmark 10-Year Treasury interest rate initially traded lower to around 3.47%, a sign that the bond market was happy, but then it moved back up again to around 3.56%, only to reverse course in the late morning and move back down again to close at the low of the day (3.45%).
The strong general market consensus in the immediate aftermath of the CPI report was that the Fed will raise the Fed Funds rate by another 0.25% when it meets on January 31st and February 1st to consider its next interest rate move, with the outcome of the meeting after that on March 15th and 16th still up for debate.
Stocks continued to perform solidly but not spectacularly on Friday going into a three-day weekend, almost as if traders were nervous of being over-optimistic after what had been a broadly positive few days.
Markets had started the week floating slowly higher on not much news in advance of the CPI report. This is a welcome change from most of last year when a lack of news or any other catalyst usually resulted in the default scenario of a steady drift lower.
Those analysts who dragged themselves out of bed early on Tuesday looking for further clues in Fed Chair Jerome Powell’s speech to the Swedish Central Bank in Stockholm were probably left disappointed, although he did reiterate how inflation is the devil, saying that price stability was the “bedrock” of a healthy economy, and how it provides the public with “immeasurable benefits over time”.
The heads of three Federal Reserve banks tried to throw cold water on the idea that recent indications that inflation may be easing will lead policymakers to pull back on raising interest rates and magically pivot to lower rates any time soon.
Atlanta Federal Reserve Bank President Raphael Bostic said he expects interest rates to be above 5% by early in the second quarter and remain there for a “long time”. He said, “We are just going to have to hold our resolve.”
San Francisco Federal Reserve Bank President Mary Daly also indicated rates need to go above 5%. She said that the Fed has to continue boosting rates and keep them high “until the job is well and truly done.”
Uber-hawk James Bullard of the St. Louis Fed said that rates should be swiftly moved up to above 5% (at least 0.75% higher than where we are now) and that the Fed should then play game of wait-and-see-what-happens before deciding on the next move.
The market took all these comments in its stride however. As I mentioned last week, many large investors are starting to believe that the Fed’s bark is worse than its bite and are becoming less and less intimidated by what Jerome Powell and his lieutenants are coming out and saying in press conferences and in highly-scripted TV and radio interviews. They are convinced that the Fed will be forced to act based on the data rather than on its own rhetoric.
They also see a (growing?) chance that that data might indicate that inflation is becoming close to under control and that the elusive so-called “soft landing” (inflation conquered without the economy tipping into a damaging recession) can be achieved.
In fact, if you take the last three month’s worth of CPI (admittedly a small, cherry-picked sample, but stay with me here) and annualize it, that implies an annual inflation rate of just 1.6%!
Attention swiftly turned to earnings on Friday as the Q4 2022 season got underway and the initial results were decent enough. Wells Fargo, JP Morgan, Bank of America and Citigroup all gained around 2-3% on Friday after releasing earnings data that can be described as somewhere between adequate and quite good. The generally positive vibes were also bolstered by a report showing a jump in consumer sentiment.
So far, 29 S&P 500 companies have reported Q4 2022 results with 23 of them coming in better than expected. While only a tiny sample size at a very early stage, it is already starting to raise hopes that corporate earnings may not be in quite as much trouble as had been feared. The recent renewed weakness in the US Dollar is helping a lot in regard to forward guidance for many companies.
For the week, the S&P 500 gained a solid 2.7%, and the NASDAQ ran up 4.8%.
OTHER NEWS (Crypto Contagion Edition)
Prosecutors have now said that the extent of the fraud committed by FTX and Sam Bankman-Fried and his henchmen could be so vast and sprawling that the Southern District of New York may not even have enough resources to properly investigate such a massive caseload of theft, bribery, illegal campaign contributions, market manipulation and outright fraud. Another problem is the huge amount of contagion spreading rapidly to other crypto players.
SBF doled out many millions in donations to political parties, academia, selected charities and non-profits at the same time as thieving customer money to illegally pour billions into his hedge fund so that he could invest in often hare-brained, perilous wagers that imploded. He also used these stolen client funds to pay personal expenses associated with a lavish lifestyle for him, his sometimes-girlfriend (who he put in charge of the hedge fund) and a bunch of his crypto-bro buddies in a drug-soaked frat-house in the Caribbean, according to federal prosecutors and regulators.
Now, according to the Wall Street Journal, the new FTX management is asking for these political and corporate donations back in an attempt to recoup money for FTX’s nine million customers who collectively lost billions of dollars when the exchange collapsed. Some recipients of this dirty money have voluntarily returned it, but the others reportedly face legal action if they do not immediately do the same.
The closest thing the crypto market has to a central bank is Silvergate Capital which is the biggest provider of banking and lending services to firms in the space. It has not had a good start to 2023. As the unregulated crypto ecosystem has collapsed under the weight of rampant fraud on the part of many of the sector’s incompetent participants, Silvergate was forced to lay off 40% of its staff as depositors pulled out over $8 billion from Silvergate accounts (about 70% of its total deposits).
Even the madly wild risk-takers at ARK Invest disclosed that they had sold over $5 million-worth of Silvergate Capital stock (SI). Congressional investigations into the firm’s culture and practices are ongoing as part of the whole FTX case.
Additionally, Silvergate reportedly incurred a $718 million loss while being forced to sell $5.2 billion worth of reserves (bonds) to satisfy some of those withdrawal requests. The firm was worth over $6 billion as recently as late 2021, but is now worth less than $370 million after its stock price fell 95%. These are absolutely mind-bending losses for any company, but especially for one that was supposed to be crypto’s grown-up in the room. Last week, JP Morgan down-graded the outlook for the stock and more than halved its price target.
Coinbase said that it would eliminate around 20% of its staff and is being forced into a broad cost-cutting exercise. CEO Brian Armstrong specifically blamed SBF for the difficulties at his own firm, saying it was primarily due to “unscrupulous actors" and spoke of “further contagion” in the crypto marketplace. The battered publicly-traded stock (COIN) recovered somewhat following the announcement.
There also continues to be an avalanche of alarming revelations about what is going on at crypto lender Genesis, which is under federal investigation and is holding hostage almost a billion dollars of trapped client funds that the company refuses to release to account holders who are trying to withdraw their money and it announced that it was firing over a third of its staff.
Chapter 11 bankruptcy (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) could well be in Genesis’ near future, according to many analysts and that could mean potential financial catastrophe for those account holders.
UNDER THE HOOD:
We are now in an eerily similar technical set-up to where we were back in August last year, when the S&P 500 had gained back half of its then-bear market losses, which some hailed as a “guaranteed bet” on a new uptrend beginning. In addition, the index was in the midst of a strong upward trajectory and was a single trading day away from crossing back above its critical 200-day moving average. On that occasion, everything quickly fell apart and by October we were at new lows again for the year. That is not a prediction of what will happen this time but a cautionary tale about what might.
Consequently, we need to look very carefully at what the technicals are telling us. Buying Power and Selling Pressure Indexes are among the indicators that have begun to demonstrate more promising movements. Selling Pressure has dropped sharply to levels not seen since those heady days of last August. This illustrates a lack of desire on the part of investors to sell. Check. At the same time, Buying Power has ticked higher to test its mid-November multi-month high, illustrating that Demand has seemingly outpaced the gains of the major price indexes. Check.
This is rather healthy price action, although we would like to see more wild, frenzied and indiscriminate buying than is currently being observed.
Although the short-term rally appears intact for now, it is approaching potentially significant levels of overhead Supply and stocks may be short term overbought. And we still need to remember that this rally is happening in the context of a still-dominant cyclical overall downtrend which could soon spoil the bulls’ fun.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Stock and bond markets will be closed on Monday for Martin Luther King Day.
It will be a busy rest of the week with a bunch of Q4 2022 earnings reports, including those from Netflix, Goldman Sachs, Procter & Gamble, Morgan Stanley, United Airlines, Charles Schwab, Prologis and Schlumberger.
The main event on the economic data calendar will be on Wednesday when the overall inflation picture will become a little clearer after the release of the latest Producer Price Index (PPI) reading of wholesale inflation experienced by manufacturers for their raw materials. Expectations for the headline index are for a 6.8% rise from a year earlier and for Core PPI (ex-food and energy costs) to have increased 5.4%.
We will also get Retail Sales data this week.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 24% (20% the previous week)
→Neutral: 36% (38% the previous week)
↓Bearish: 40% (42% the previous week)
Net Bull-Bear spread .. ↓Bearish by 16 (Bearish by 22 the previous week)
Source: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5th 2009, right near the end of the Great Financial Crisis. The lowest percentage of AAII bears was recorded at 6% on August 21st 1987, not long before the stock market crash of October 1987.
Weekly sentiment survey participants are usually polled on Tuesdays and/or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com:
- Last week’s best performing US sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - up 5.8% for the week
- Last week’s worst performing US sector: Consumer Defensive (two biggest holdings: Proctor & Gamble, Pepsico) - down 1.5% for the week
- The NASDAQ-100 outperformed the S&P 500
- Foreign Developed Markets finished ahead of both US and Emerging Markets
- Small Cap did better than Mid or Large Cap
- Growth stocks did better than Value stocks
- The proprietary Lowry's measure for US Market Buying Power is currently at 184 and rose by 19 points last week and that of US Market Selling Pressure is now at 121 and fell by 21 points over the course of the week.
- SPY, the S&P 500 ETF, is now above its 50-day and 90-day moving averages and also slightly above its long term trend line. SPY ended the week 14.3% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is now above its 50-day moving average but still below its 90-day and its long term trend line. QQQ ended the week 26.0% below its all-time high (11/19/2021).
The Lowry’s Percent of Stocks Above Their 30-Day Moving Average reading rose steeply from 43% to 82%.This important 0-100% reading measures overall positive stock participation. Higher readings indicate increasing positive market momentum, lower readings indicate increasing downside momentum. Extreme readings below 20% and above 80% could potentially point to imminent short term trend reversals.
- VIX, the commonly-accepted measure of anticipated stock market risk and volatility (often referred to as the “fear index”), implied by S&P 500 index option trading, ended the week much lower at 18.4. It is well below its 50-day and 90-day moving averages and also far below its long term trend line.
ARTICLE OF THE WEEK: This article describes some of the ways that some of the provisions of the recent SECURE Act 2.0 may have tipped the balance in favor of Roth IRAs and Roth 401(k)s over Traditional ones.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor’s business affairs, debts, and assets, and for that reason is known as "reorganization" bankruptcy.
Named after the U.S. bankruptcy code 11, corporations generally file Chapter 11 if they require time to restructure their debts. This version of bankruptcy gives the debtor a fresh start. However, the terms are subject to the debtor’s fulfillment of its obligations under the plan of reorganization.
Chapter 11 bankruptcy is the most complex of all bankruptcy cases. It is also usually the most expensive form of a bankruptcy proceeding. For these reasons, a company must consider Chapter 11 reorganization only after careful analysis and exploration of all other possible alternatives.
During a Chapter 11 proceeding, the court will help a business restructure its debts and obligations. In most cases, the firm remains open and operating. Many large U.S. companies file for Chapter 11 bankruptcy and stay afloat. Such businesses include automobile giant General Motors, the airline United Airlines, retail outlet K-mart, and thousands of other corporations of all sizes.
Corporations, partnerships, and limited liability companies (LLCs) usually file Chapter 11, but in rare cases, individuals with a lot of debt who do not qualify for Chapter 7 or 13 may be eligible for Chapter 11. However, the process is not a speedy one.
A business in the midst of filing Chapter 11 may continue to operate. In most cases the debtor, called a “debtor in possession,” runs the business as usual. However, in cases involving fraud, dishonesty, or gross incompetence, a court-appointed trustee steps in to run the company throughout the entire bankruptcy proceedings.
The business is not able to make some decisions without the permission of the courts. These include the sale of assets, other than inventory, starting or terminating a rental agreement, and stopping or expanding business operations. The court also has control over decisions related to retaining and paying attorneys and entering contracts with vendors and unions. Finally, the debtor cannot arrange a loan that will commence after the bankruptcy is complete.
In Chapter 11, the individual or business filing bankruptcy has the first chance to propose a reorganization plan. These plans may include downsizing business operations to reduce expenses, as well as renegotiating debts. In some cases, plans involve liquidating all assets to repay creditors. If the chosen path is feasible and fair, the courts accept it, and the process moves forward.
The Small Business Reorganization Act of 2019, which went into effect on Feb. 19, 2020, added a new subchapter V to Chapter 11 designed to make bankruptcy easier for small businesses, which are “defined as entities with less than about $2.7 million in debts that also meet other criteria,” according to the U.S. Department of Justice.
The act “imposes shorter deadlines for completing the bankruptcy process, allows for greater flexibility in negotiating restructuring plans with creditors, and provides for a private trustee who will work with the small business debtor and its creditors to facilitate the development of a consensual plan of reorganization.”
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