Apologies once again for last week’s report, or the lack of it. I am safely back in the US now and very much recovered. Thanks for all the good wishes that I received, they are very much appreciated.
Towering over last week’s market activity was the extraordinary and shocking fraudulent collapse of the FTX crypto exchange. For many, this was a watershed moment where the whole crypto eco-system was finally exposed as being polluted by criminality and fraud and is sorely in need of subjecting itself to very meaningful regulation very soon if it is to have any hope of remaining viable.
The rampant lawlessness in the current version of crypto-world will only make regulated government-sponsored programs like the Digital Dollar Pilot (see EXPLAINER: FINANCIAL TERM OF THE WEEK, below) either more attractive or less attractive, depending on how you look at it. Either you think that crypto cannot continue to exist in the hands of a few often criminally-inclined unrepentant crypto bros like Do Kwon, Sam Bankman-Fried and the rest and needs to be under government control or you think the whole thing is such a shit-show that the government shouldn’t even be touching it with a ten-foot pole.
The FTX bankruptcy overseer, John Ray, said “never in my [40 year] career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” And this is a guy who oversaw the bankruptcy of Enron!
Minneapolis Federal Reserve Bank President Neel Kashkari did not mince his words last week, calling out all cryptocurrencies as nonsense. He tweeted that the fall of FTX wasn’t just a case of one fraudulent player in a serious industry, but that the “entire notion of crypto is nonsense.” He added that crypto is not useful for payments, doesn’t provide an inflation hedge, has no scarcity value and no taxing authority. He described it as “just a tool of speculation and greater fools [a reference to the Greater Fool Theory]”
On the other hand, investors continue to see less and less risk in buying stocks. They want inflation to go down, so stocks can go up. But every time stocks go up, the Federal Reserve fears that inflation won't go down and Fed officials went out of their way last week to frantically emphasize that stock markets, giddy after the previous week’s furious rally, could be getting ahead of themselves.
San Francisco Fed Bank President Mary Daly said any discussion about pausing interest rate hikes “is off the table” although she did then go on to say that a range of 4.75% to 5.25% is a reasonable expectation for peak interest rates, implying the current cycle is close to done.
St. Louis Federal Reserve President James Bullard said interest rates "will need to be increased further" to become "sufficiently restrictive" in taming inflation.
Boston Federal Reserve President Susan Collins said on CNBC that yet another 0.75% interest rate hike in December was "still on the table" .
“It will probably be appropriate soon to move to a slower pace of increases,” Federal Reserve Vice Chair Lael Brainard told Bloomberg. “But I think what’s really important to emphasize: We’ve done a lot, but we have additional work to do.”
That's not exactly pivot-friendly language and reminds us that October’s inflation report was not a game changer, it was only a hopeful first step in the right direction.
On Tuesday, with the markets already jittery following reports that a Russian rocket had struck a Polish village, the Bureau of Labor Statistics released its measure of wholesale inflation, the Producer Price Index (PPI) for October, showing that raw material prices rose 0.2%, at the same pace as in September. The index was up 8.0% from a year ago, down from a rate of 8.4% the month before.
Retail sales jumped in October, up 1.3% after being unchanged the month before. That was the biggest advance since February. The annual gain was 8.3%. All these numbers exceeded forecasts, raising concerns of yet another green light to the Fed to keep up its aggressive monetary tightening to fight inflation.
Also unhelpful to market sentiment was the announcement that Target (TGT)‘s Q3 profits had plunged 50% and that the retailer was very concerned about sales during the key upcoming holiday season. The company blamed this on changes in consumer behavior, indicating that shoppers are increasingly being impacted by inflation, rising interest rates, and economic uncertainty.
Housing saw an eleventh straight monthly decline in builder sentiment and the ninth straight monthly fall in existing home sales as the real estate sector continues to reel from the Federal Reserve's aggressive rate hikes. Average rates on a 30-year fixed-rate mortgage have jumped from about 3% in January to over 7% currently.
So messages remain mixed, generally indicating a slowing economy but with consumers continuing to spend eagerly, only a light leveling-off in the rates of inflation and employment availability and the Fed still talking tough on interest rates. It’s difficult to see a sustainable turnaround from bear to bull while these contradictions continue to exist.
OTHER NEWS
Home prices rolling over? .. U.S. home prices could plunge as much as 20% due to a sharp rise in mortgage rates this year. Higher rates are dramatically increasing home ownership costs and “boost the odds of a severe house price correction,” according to a report from the Dallas Federal Reserve.
Dallas Fed economist Enrique Martinez-Garcia did admit that the potential for the nation’s homes to shed as much of a fifth of their value represents a “pessimistic scenario” but home prices could easily drop 15-20% under his scenario, driving down personal consumption by about 0.7%. “Such a negative wealth effect on aggregate demand would further restrain housing demand, deepening the [home] price correction and setting in motion a negative feedback loop,” Martinez-Garcia said in a release.
“Well, this is awkward …” .. In an abrupt about-face that all but blindsided official soccer World Cup sponsor Anheuser-Busch InBev, Qatari officials suddenly reversed course on agreed policy on Friday and banned beer sales in and around the Islamic country’s eight World Cup venues just two days before the world’s biggest sporting event kicks off.
Tournament organizer FIFA once again caved in to Qatari pressure, continuing the pattern of fawning incompetence, greed and corruption that goes back to when the tiny Gulf state (it’s smaller than Connecticut) was disastrously and fraudulently awarded the tournament in 2010 (I strongly recommend watching this documentary) as a nation with zero soccer heritage with brutal legislation that oppresses women and minorities, imported slave labor to build all the stadiums (with reported deaths of migrant workers involved with the project numbering over 6,500) and has a broad ban on alcohol consumption.
Anheuser-Busch are said to be furious at what they see as FIFA’s pathetic weakness, immediately tweeting “Well, this is awkward …” (later deleted). The company has handed over $75 million to FIFA to be a primary partner and exclusive beer distributor for World Cup 2022, along with the likes of other partners like Visa, Coca-Cola and McDonalds.
FIFA expects to generate about $6.5 billion from the tournament. You can be sure lawyers are being earnestly lined up on both sides as we speak.
On the brink? .. Twitter is teetering on the edge as Elon Musk appears to be breaking the company after buying it for $44 billion last month. The self-styled “champion of free speech for all” has pushed relentlessly to put his own personal imprint on the social media service, firing the board as well as anyone else who dissents with his views, slashing the rest of the workforce by 50% without consultation (and now getting roundly sued for it) and delivering a harsh message to any remaining employees that the company needs to shape up or else he will take it into bankruptcy.
Unsurprisingly, this has not gone down well at Twitter HQ and it was reported that 1,200 of the employees who survived the slaughter then went and quit on Thursday alone. This apparently leaves the company so short of engineering and software development expertise that Musk had to send out a mass email to staff on Friday morning saying; “Anyone who actually writes software, please report to the 10th floor at 2 p.m. today,” before then locking all employees out of Twitter’s offices until some time on Monday.
With the World Cup beginning on Sunday, global Twitter usage is likely to reach one of its highest-ever peaks and with all this chaos and lack of available trouble-shooting expertise, upcoming major platform crashes are considered to be likely. Watch this space.
UNDER THE HOOD:
Though short-term trends of Demand remain supportive, there is a growing body of evidence that suggests the recent rally may have become increasingly vulnerable and is likely to ultimately give way to the market’s dominant downtrend.
A few indexes, including the Dow Jones Industrial Average and the S&P 400 Mid-Cap Index have moved above their respective 200-day moving averages. The Mid-Cap Index itself has been outperforming the S&P 500 and broke out to a 16-month relative high in October. This demonstrates that while there are some pockets of strength to be found, improvements in the broader market have now stalled.
Remember, it is easy to be an investor in a bull market. Almost everything goes up with the trend, but it is not so easy when the primary trend is to the downside, as it still is. As in physics, trends in motion tend to stay in motion unless acted upon by an opposing force. In strictly market terms, that force must be strong enough to exhaust Supply and jump-start Demand, something that has not yet occurred.
The bottom line is that there is still not enough technical evidence to build a strong, compelling bullish case.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
It will be a short week of trading, with markets closed on Thursday for Thanksgiving and then closing early on Friday.
Earnings season is winding down but there will still be some notable reports next week, including Best Buy, Zoom, Dell, VMware, Hewlett Packard, Dick's Sporting Goods, Nordstrom and Deere.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 34% (up from 25% the previous week)
→Neutral: 26% (down from 28% the previous week)
↓Bearish: 40% (down from 47% the previous week)
Net Bull-Bear spread .. ↓Bearish by 8 (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 financial crisis bear market. 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 or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com:
- Last week’s best performing US sector: Consumer Defensive (two biggest holdings: Proctor and Gamble, Pepsico) - up 1.6%
- Last week’s worst performing US sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - down 2.8%
- The NASDAQ-100 underperformed the S&P 500
- Emerging Markets were broadly flat, while US Markets and International Developed Markets lost an equal amount of ground
- Small and Mid Caps did a little worse than Large Caps
- Growth underperformed Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 160 and fell by by 9 points last week and that of US Market Selling Pressure is now at 172 and rose by 11 points over the course of the week.
- SPY, the S&P 500 ETF, remains above its 50-day and 90-day moving averages and but below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 59**. SPY ended the week 17.1% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is now sitting right on its 50-day moving average but below its 90-day and long term trend line. The 14-day Relative Strength Index (RSI) reading is 56**. QQQ ended the week 29.5% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week higher at 23.1. It remains below its 50-day and 90-day moving averages. It also remains below its long term trend line.
ARTICLE OF THE WEEK: As crypto-world crumbles under the weight of greedy assholes and naked fraud, Nick Magiulli explores why the warning signs were there all the time and why so many people ignored them and powered ahead into financial oblivion.
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) .
Nine U.S. financial institutions, including Citibank, Wells Fargo, and Mastercard launched a pilot program working with the Federal Reserve Bank of New York to test the feasibility of a digital dollar based on distributed ledger technology.
Several U.S. financial institutions are collaborating to test the feasibility of a digital dollar based on distributed ledger technology.
The pilot will run for 12 weeks in a test environment and will involve central banks, commercial banks, and regulated non-banks.
The project is the most significant step to date in creating a digital dollar to improve financial settlements. The Biden administration has recommended the creation of a digital dollar and the U.S. has recently begun putting resources into the effort. Other countries are also exploring plans to create their own central bank digital currencies (CBDCs).
The proof-of-concept project is a 12-week effort that will test the feasibility of an interoperable digital money platform called the regulated liability network (RLN).3 It will use a distributed ledger—like the blockchain technology behind bitcoin. The goal is to improve financial settlements and will involve central banks, commercial banks, and regulated non-banks.
The U.S. dollar will be represented as tokens and settled through simulated central bank reserves on a shared multi-entity distributed ledger. The pilot will be conducted in a test environment and will use a technology provided by SETL and Digital Asset.
Global payments provider SWIFT is also participating in the effort. The New York Innovation Center, part of the New York Fed, is also involved.
WWW.ANGLIAADVISORS.COM | SIMON@ANGLIAADVISORS.COM | CALL OR TEXT: (929) 677 6774 | FOLLOW ANGLIA ADVISORS ON INSTAGRAM
This material represents an opinionated assessment of the financial market environment based on assumptions and prevailing data at a specific point in time and is always subject to change at any time. No warranty of its accuracy is given. It is not intended to act as a forecast of future events, nor does it constitute any kind of a guarantee of any future results, events or outcomes.
The material contained herein is at no time ever intended to constitute tax, legal or medical advice. It is also wholly insufficient to be exclusively relied upon as research or investment advice or as a sole basis for any investment decisions. The user assumes the entire risk of any actions taken based on the information provided in this or any other Anglia Advisors post.
Posts may contain links or references to third party websites for the convenience and interest of readers. While Anglia Advisors may have reason to believe in the quality of the content provided on these sites, the firm has no control over, and is not in any way responsible for, the accuracy of such content nor for the security or privacy protocols the sites may or may not employ. By making use of such links, the user assumes, in its entirety, any kind of risk associated with accessing them and making any use of the information provided therein.
Clients of Anglia Advisors may maintain positions in securities and asset classes mentioned in this post.
If you enjoyed this post, why not share it with someone or encourage them to subscribe themselves?
