Private Wealth

Weekly Research Briefing: Don't You See It?

October 04, 2022

Maybe a melted candle of Santa Claus carrying a Christmas tree? Maybe something that you just found in the depths of your refrigerator? Or maybe a soon-to-be-sold six-figure photograph going into the fall auctions? Whatever it might be an image of, it is certainly clearer than everyone's outlook for the global financial markets. I am not sure that I have seen a more confused set of forecasts than right now. Bears remain bearish while bulls are now looking for caves to hibernate inside. Most all equity targets are being trimmed, cut or butchered while strategists and economists look for any hints that the labor markets and inflation is slowing.

The good news is that we made it to Q4. Will the seasonal strength of the equity markets kick in now? One would think that the news flow and market uncertainty couldn’t get any worse, but of course that is not true. An earnings recession followed by a banking/lending crisis would certainly make every risk asset cheaper. It could always get worse, and the markets could always go lower than you think. But the current setup looks interesting: Maximum bearishness into the end of the Q3 plus a most worried earnings reporting season leading into the seasonally strongest 3 months of the equity year. Also, the biggest buyers of stocks (corporations) are out of the market until their buyback window reopens after their reports. And count it as likely that the Fed and other central banks are watching the markets. Take global equities down another 15-20% and I bet the future pivots will start hitting the Q4 calendars.

This is a big week for labor data watchers with the ISM Employment, JOLTS, ADP and NFP all dropping. The markets obviously want weaker numbers, but not too weak. And as we get ready for the beginning of next week’s earnings season, we will be watching for a new episode of the U.K. government, OPECs potential production cuts, Ukraine’s tactical rebuilding of its eastern regions, the questionable rumors surrounding Credit Suisse and any big moves in the markets. Have a great week.

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Mortgage rates hit the highest level since 2008...

While new home purchases and housing starts would seem to be drying up at an alarming rate, I wonder if one-year ARMs will come back into play to target a future lower rate as inflation recedes. Either way, the Fed has done its job to the residential housing industry.


The Fed's favorite inflation measure came in hot last week driven by gains in services...

The markets did not like this number on Friday, so now we wait for the next CPI and any labor wage data.

The Daily Shot

Consumers, on the other hand, think that inflation will continue to retreat...

The Daily Shot

Europe is not yet seeing a peak in consumer prices...

The Daily Shot

Saw the same consumer economic strength in Denver over the weekend...

Major shopping mall completely packed on a late Saturday afternoon. While the Apple Store always has a shoulder-to-shoulder crowd, the registers at most other stores also had lines. It felt almost like a holiday shopping weekend. That said, we are the only U.S. state with two FBS colleges that haven't won a football game this year, so our Saturday sports won't happen until the Avs and Pioneers take the ice later this month.

In the event the retail industry did want to line up big holiday sales, it no longer costs a fortune to move goods across the Pacific...

The Daily Shot

Hawkish Fed speak did continue to send the markets lower last week, but did the tone soften a bit over the weekend?

(US) Fed's Mester (FOMC voter):

We have to get inflation down; I am probably a little above the 4.6% fed funds median path in latest SEP projections - CNBC

- My expectation is inflation will come down but rates need to rise to attain that

- Don't see market dysfunction in US right now, but we are always watching for it

- Not expecting big jump in labor force participation because we are back to trend

- Not at point we should think about stopping on rate hikes; We still are not in restrictive territory

- US dollar is one of financial conditions that has tightened

- Want to see long term inflation expectations down from where they are today while also seeing continued progress on realized inflation

- Market functioning is incredibly important, but that is different than volatility

- BOE is in a particularly challenging situation

(US) Fed's Daly (non-voter):

Additional rate hikes are necessary and appropriate; Need to remain attentive to data as costs of errors are high

- Doing too much could end in overtightening; Doing too little could mean harsher measures later

- Already seeing effects of higher rates; Full impact of policies will unfold over time

- A deep recession isn't warranted or necessary to meet Fed goals

- A myriad of risks narrows the path to smooth landing, but do not close it


Market now betting that interest rates will be staying below 4.5% through next year...

It was thinking over 4.5% after last month's hot inflation readings and the hawkish FOMC meeting. But with the fade in the markets to new lows last week combined with some less than hawkish comments from Fed members, the fixed income markets are suggesting a Fed pivot or at least cooling.

CME Group

The worst year-to-date sell-off in the AGG's history...


This sure looks like a near-term top in 10-year interest rates...

There is still hope for the soft landers...

While the 10s/2s Treasury yields have inverted, the more relevant 10s/3mo still has not. Maybe the Fed still does have a small strip to land this big jet airliner.

But while interest rates may have made a short-term peak, some are worried that the current pool of Treasury buyers is disappearing...

“We remain concerned about the (lack of) structural demand for Treasuries,” wrote JPMorgan analysts led by Jay Barry and Srini Ramaswamy.

In fact, they say, all of the three main buyers for US government debt — commercial banks, foreign governments and of course the Federal Reserve itself — appear to have stepped away from the market. While some of the retreat is to be expected as the US central bank tapers its balance sheet, the scale of the shift in appetite is still noteworthy, they write.

They estimate that the Fed’s Treasury holdings have dropped by $180 billion year to date as the central bank embarks on quantitative tightening. Meanwhile, commercial banks’ collective holdings of Treasuries have fallen by $60 billion this year, after growing more than $700 billion in 2020 through 2021. And foreign governments are also stepping back, with official holdings having dropped $50 billion over the past six months.

“The reversal in demand has been stunning as it has been rare for demand from each of these three investor types to all be negative at the same time,” the analysts say.


When one of the biggest fixed-income players in the world talks, we listen...






Morgan Stanley has been a correct bear all year. And still staying cautious as we go into earnings...

Michael J. Wilson, one of Wall Street’s biggest equity bears, says that while the Federal Reserve’s dovish pivot is becoming more likely amid falling money supply, this doesn’t remove the risk of a sharp contraction in earnings.

The tightening of liquidity in the global financial system is entering a “danger zone” where economic accidents tend to happen, increasing the chances of the Fed restarting quantitative easing, Morgan Stanley strategist wrote in a note on Sunday. This could lead to a recovery in stocks, he said, but this doesn’t change Morgan Stanley’s concern about the outlook for earnings.

“A Fed pivot, or the anticipation of one, can still lead to sharp rallies,” Wilson said. “Just keep in mind that the light at the end of the tunnel you might see if that happens is actually the freight train of the oncoming earnings recession that the Fed cannot stop.”...

The strategist said last week that US equities are in the “final stages” of a bear market and could stage a rally in the near term going into the earnings season before selling off again.

Wilson has said that he sees an eventual low for the S&P 500 coming later this year, or early next, at the 3,000 to 3,400 point level. That implies a drop of as much as 16% from Friday’s close.


BofA/Merrill Lynch has also been a correct bear for year...

J.P. Morgan is reeling in some of its risk appetite for equities...

This year we have been above consensus positive. Our positive outlook was based on an assumption that central banks will not make a grave policy error, that the war in Europe will de-escalate over the course of the fall/winter season, and that growth in Asia will accelerate significantly in H2. Importantly, we also observed near record low positioning. While we still think that Asian growth will be supportive of the global cycle and positioning provides a floor to market, we are increasingly worried about central banks making a policy error, and of new geopolitical tail risks. Given the recent escalation in hawkish rhetoric, the likelihood of central banks committing a policy mistake with negative global consequences has increased, and this started showing in various cracks in FX and rates markets. Even if a mistake is avoided, a delay will likely be introduced for the global market and economic recovery. On the war in Europe, the destruction of the Nordstream pipelines last week is an event that significantly increases tail risks and makes it very difficult to de-escalate near term. While we remain above-consensus positive, our targets may not be realized until 2023 or when the above risks ease.

J.P. Morgan

Credit Suisse and Citi also cutting targets...




The big equity giant doesn't like stocks...

BlackRock: “Many central banks aren’t acknowledging the extent of recession needed to rapidly reduce inflation. Markets haven’t priced that so we shun most stocks.”


Watch what they do, not what they say...


And on the last day of the Q3, the S&P 500 exits with a 25% drawdown...

J.P. Morgan

Here is what the numbers look like to recoup a 25% drawdown...

J.P. Morgan

Sure, the S&P 500 has been terrible. But a balanced stock and bond portfolio has been equally disastrous...

@RyanDetrick: 60/40 portfolio is down 20.6% YTD.

Only 2008 was a worse year for investors. That's the bad news.

The good news is there is still time and the best 3 months for stocks during a midterm year are coming up.

We don't know what exact date the bottom in equities will occur, but 25% drawdowns have provided some good launchpads...

@awealthofcs: This is the 9th time since 1950 that the S&P 500 is down 25% or worse

Past performance is no guarantee and such

It could always get worse before it gets better

But historical returns from down 25% are pretty good 1, 3, 5 & 10 years out

An October volte-face would be perfect since so few are expecting it...

When the equity market is drowning, it is often down in September followed by a rebound in October.


Small and Midcaps look to be providing the best investor hunting grounds right now...

Yardeni Research

All the charts look bad. But if I was forced to put a star on one of the major indexes this week, it would be this one...

The world is using GoFundMe and cupcake sales to raise money to buy tanks for Ukraine...

As most intelligent and able-bodied men leave Russia to avoid going to war, it can only be a matter of time before the women in the country take control of the government and make things right again.

Russia 2.0 will need to find a new way to participate in the global economy...

But here is what is totally predictable: A dynamic is now in place that will push Putin’s Russia even more toward the North Korea model. It starts with Putin’s decision to cut off most natural gas supplies to Western Europe.

There is only one cardinal sin in the energy business: Never, ever, ever make yourself an unreliable supplier. No one will ever trust you again. Putin has made himself an unreliable supplier to some of his oldest and best customers, starting with Germany and much of the European Union. They are all now looking for alternative, long-term supplies of natural gas and building more renewable power.

It will take two to three years for the new pipeline networks coming from the Eastern Mediterranean and liquefied natural gas coming from the United States and North Africa to begin to sustainably replace Russian gas at scale. But when that happens, and when world natural gas supplies increase generally to compensate for the loss of Russia’s gas — and as more renewables come online — Putin could face a real economic challenge. His old customers may still buy some energy from Russia, but they will never rely so totally on Russia again. And China will squeeze him for deep discounts.

In short, Putin is eroding the biggest source — maybe his only source — of sustainable long-term income. At the same time, his illegal annexation of regions of Ukraine guarantees that the Western sanctions on Russia will stay in place, or even accelerate, which will only accelerate Russia’s migration to failed-state status, as more and more Russians with globally marketable skills surely leave.

The New York Times

This chart is heartbreaking...

Most single mothers can’t afford to raise a child:

Single mothers in the U.S. have a median net worth of only $7,000. For single fathers, it’s significantly higher at $59,000.

Meanwhile, the average cost of childcare in the U.S. is about $10,000.

When we wonder why more women are choosing not to have kids – look at the cost. The price is way too high.

Scott Galloway

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