Trade The Journey

Trade The Journey

Top of the Morning! The market looked at this past week as a barometer of possible future rate decisions. Before the week started, the probability of a fifty-basis point rate hike had ventured above 70% but that changed when the latest reports on the job market showed some loosening. However, the collapse of Silicon Valley Bank (SVB) and to a lesser extent Silvergate rattled the market, causing volatility to rise sharply and the indices to fall through their moving averages. Depositors tried to withdraw close to $42 billion from Silicon Valley Bank (SVB).

SVB entered the week in sound financial condition before Thursday and by the end of Thursday, the bank was technically insolvent, marking the second-largest bank to fall in US history. On March 8th, Moody’s downgraded SVB, and then venture capital funds began to request their funds. Market participants piled into bonds as the attention shifted to the health of banks.

While I didn’t trade this past week, I crafted a practice trade that I felt would capitalize on the stock’s sideways trend. The trade would have worked if the fear of contagion in the banking sector as a result of SVBs’ collapse didn’t happen. The practice trade, ultimately a loser, showed me that preparing for the improbable should be worked into my trading plan. How can a trader plan for a market-moving event if it hasn’t happened?

If a market-moving event happens 20% of the time, the other 80% could serve as a profit-taking period with a solid risk management plan. If the risk management plan has stops set to limit losses on trades during the relatively quiet periods, they should hold during the unexpected. The only certainty you have as a trader is uncertainty. 

Economy

The first report released this past week was the factory orders report. Below is some helpful information to assist you in assessing the factory orders report from investopedia:

  • New orders, which indicate whether orders are growing or slowing
  • Unfilled orders, which indicate a backlog in production
  • Shipments, which indicate current sales
  • Inventories, which indicate the strength of current and future production

The factory orders report showed new orders for manufactured goods falling by 1.6% in January after rising in December. New Orders  have been volatile as of late, with transportation leading a decrease in new orders, falling 13.3%. New orders for durable goods fell 4.5% and new orders for nondurable goods rose 1.5%. Excluding transportation, new orders rose 1.2% after falling in the previous two months by the same percentage.

Notable sectors with new orders: Computers (11.2%), Construction Machinery (4.2%), Industrial Machinery (9.2%) and some of the primary metals.

Shipments rose this past month by 0.7%, with shipments of transportation equipment rising by 1.7%. Nondurable goods shipments rose 1.5% after falling last month, the increase was led by shipments of petroleum and coal products.

Notable sectors with shipments increase: Construction Machinery (5.8%), Computers (7.9%), Audio & Video equipment (11%), Electrical equipment, appliances, and components (3.3%), Paper products (1.1%), and Petroleum & Coal products (5.8%).

Unfilled orders were unchanged. Transportation equipment unfilled orders rose 0.7% after consecutive declines. Unfilled orders for durable goods were unchanged, however unfilled orders for computers rose by 1.7% and industrial machinery rose by 2%.  While unfilled orders for industrial machinery have been somewhat steady, computers unfilled orders turned up, after declining the past two months. Inventories were unchanged for all manufactured goods; however, inventories fell by 0.1% for durable goods and rose by 0.2% for non-durable goods. The inventory-to-shipments ratio was about the same as the previous levels.

Wholesalers who sell goods on their own account such as distributors, jobbers, drop shippers, import/export merchants, and Manufacturers’ sales branches and offices.

Monthly wholesale inventories fell 0.4%, and sales for merchant wholesalers rose 1% in January. Sales for durable goods rose by 0.7% and rose by 1.3%. Lumber sales fell this month after falling last month and are down over 10% from a year ago. Computer equipment sales were down after rising last month, however sales are down close to 10% from a year ago.

Machinery rose 1.2% and is up over 15% from a year ago. Inventories trended downward in furniture, lumber, and miscellaneous durables this past month. Merchant wholesalers’ inventories is still quite high in most industries from the previous year, falling only in computer equipment for durable goods and farm products for nondurable goods. Inventories/sales ratios for durable goods remained around the same level at 1.79 and nondurable goods at 0.95.

Moving on to the health and outlook for the consumer. The credit report for January showed that revolving credit rose by 11.1% and nonrevolving credit was virtually unchanged. Total outstanding credit for revolving and nonrevolving was also unchanged. The revolving credit is showing that consumers are using their credit cards possibly to cover expenses, as the savings accrued during the pandemic dwindles. The nonrevolving loans section does not include real estate loans.

A slew of job data was released this past week with the highly anticipated employment situations report released this past Friday. The first report was the ADP national employment report, which showed that private employers added 242,000 jobs in February. The goods-producing job sectors rose in the industries listed with the exception of construction which showed 16,000 jobs lost in February.

ADP stands for automatic data processing, which is a firm that processes payroll for a fifth of the US private firms.

The services-providing sector added the bulk of the February job additions in the private sector. Only one sector showed negative job growth, which was professional/business services. In regard to jobs added by company size, the small business establishment seems to be struggling, as the job growth was negative.

Perhaps a big reason is the lag small business have in pay growth compared to the larger companies. Job-stayers and job-changers both saw slight decreases in the growth of pay. The largest growth in pay for job-stayers was in leisure/hospitality (10.1%), Natural Resources/Mining (7.8%), Trade/transportation/utilities (7.4%), and financial activities (7.3%).

Job Openings fell a bit from the previous month but remain elevated. The largest decrease in job openings were in construction (240,000), accommodation and food services (204,000), and finance/insurance (100,000). Openings increased in nondurable goods manufacturing, and transportation/warehousing, and utilities. Hires and total separations were unchanged but quits decreased indicating people are remaining at their jobs.

This could be a sign that the labor market is loosening. Layoffs and discharges increased, led by professional and business services.

Initial claims came in above expectations, increasing by 21,000 to 211,000. Continuing jobless claims increased by 69,000 to 1.718 million. The four-week moving average showed the largest increase in the past month, which lends evidence to the fact that higher rates may be slowing the economy down albeit at a slower pace than the Fed would like.

The employment situation report showed that job additions moderated last month’s addition of over 500,000 to 311,000. Job gains were most notable in leisure & hospitality, retail trade, government and health care. The unemployment rate edged up to 3.6%. The labor force participation rate was unchanged as was the employment-population ratio.

Average hourly earnings moderated with an increase of 0.2% and for the private sectors earnings rose 0.5%. The average workweek edged down for nonfarm payrolls, manufacturing, and production & nonsupervisory employees.

Mortgage applications rose 7.4% this prior week.  The refinance index rose 9% and the purchase index rose 7%. The average rate for a 30-year fixed rate conforming loan increased by 0.08% to 6.59%. The average rate for a 30-year fixed rate jumbo loan rose 0.05% to 6.49%.

The Fed also released its beige book this past week which highlights economic activity in the six districts. Most of the districts reported that inflation and higher interest rates may be affecting consumers’ budgets, although spending activity held steady. Evidenced earlier by the rise in revolving credit, consumers are turning towards credit, as discretionary income fails to meet the level of expenses.  Loan demand declined, credit standards tightened and delinquency rates edged up on balance according to the report.  Economic conditions are not expected to improve in the coming months.

The labor market remained strong in most districts. However, employers are becoming less flexible and scaling back remote work options. Wage increases are expected to be moderate. Finding skilled workers is still a challenge and childcare was noted as a challenge for the districts affecting labor force participation.

Prices in most districts are moderating, although input costs rose for energy and raw materials. Rent remains high, and home prices were virtually unchanged or down slightly. Firms reported a challenge in passing further price increases to consumers.

The trade balance report showed that the trade deficit rose by 1.6% with exports rising by 3.4% and imports rising by 3% in January. Exports of goods rose $10.1 billion, and export services fell $1.6 billion led by travel. Imports of goods rose by $9.1 billion, and imports of services rose by $0.1 billion. Leading the increase for import of goods was automotive vehicles, parts, and engines which rose $3.1 billion. The real goods deficit with China fell $0.9 billion mostly due to China’s stagnation in recovery.

This past week’s cash flow report:

This past week didn’t go as planned, meaning I spent far more than I intended. I’m happy that although my cash flow was strained this past week, I didn’t have to withdraw from my savings account. Hopefully, this coming week I do a better job of denying myself a few of life’s pleasures.

Grade: D+

Reason: Lack of restraint

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