Trade The Journey

Trade The Journey

Market Turbulence Continues!

Top of the Morning! I hope everyone is enjoying their weekend. This week was marred with the concern of potential bank failures after the collapse of Silicon Valley Bank. Mid and small-size banks remained under pressure as the government assured the public that it would backstop the losses undertaken by depositors. Silicon Valley Bank didn’t do anything criminal or dishonest, in essence, the bonds held on their books loss value as rates rose and they were unable to accommodate their depositors’ funds and a bank run ensued. Its stock plunged.

First Republic is another bank in the throws of danger, in which several of the bigger banks agreed to lend $30 billion to help assist the bank. There was also a massive withdrawal of deposits underway as customers shifted their deposits to the bigger banks who have seen large cash inflows. Credit Suisse is another bank that is under pressure, however, credit Suisse has had a history of scandals and deteriorating losses that almost sank the beleaguered bank.

Its largest investor refused to contribute capital and the Swiss national bank agreed to contribute $50 billion in funds needed although it does still have cash reserves. Its operational cost has sharply increased. Recently UBS is in talks to merge with Credit Suisse. Signature bank also collapsed as depositors rushed to withdraw funds to the tune of $10 billion dollars. Its collapse shocked, as it was a major player in New York’s real estate scene.

With all of this transpiring in a matter of two weeks, the government rushed to provide support and assure the public that the financial system is not in danger of collapsing. This sequence of events puts pressure on the upcoming Federal Reserve rate decision, as rates have risen sharply within the last year. Although a similar problem emerged in Europe, the European Central Bank still proceeded to raise rates by fifty basis points amid the banking crisis citing prolonged inflation as a risk that can’t be ignored.

Sometimes these events may seem to emerge out of nowhere, but I can assure you signs of banking stress were elevated as evidenced by the Fed’s discount window lending activities. What is the discount window?

Here’s an excerpt from Bloomberg:

It’s the main direct lending facility provided by the Fed to support stability and provide liquidity to the US Banking System. It enables the central bank to lend banks money for up to 90 days. The banks get the cash in return for providing collateral- securities like government bonds – that the central bank can keep if the loan isn’t repaid.

Traditionally banks avoid borrowing from the discount window because of the stigma attached to it. However, banks have been borrowing from the discount window increasingly, topping the amount borrowed during the financial crisis. It is unclear how the Fed will interpret the recent turn of events as it prepares for its rate decision.

With inflation significantly elevated and above the Fed’s 2% target, can the Fed afford to pause its hikes in favor of a fragile financial system?

One thing is clear, volatility will remain high as we get closer to the rate announcement and market participants might remain on the sidelines until the announcement. With all the turbulence in the markets, I decided to place a trade last week that didn’t work out in my favor. I placed a call bull debit spread, expecting the price of bonds to rise if the CPI report showed inflation moderating. However, it was the wrong trade to place as market participants sold out of bonds in favor of equities and a risk-on environment. I closed the position and scoffed at my initial strategy.

The next day the Credit Suisse news came out and bonds rose, effectively turning my losing position into a winning position if I had kept the position open but as a trader the past must remain in the past in preparation for future trades.

Economy

The first report of the week released, was the NFIB small business optimism report for February improved a bit but is still below the 49-year average. In addition to inflation, filling available positions with skilled workers remains a concern for small business owners. Sixty percent of owners reported that are hiring, and of this percentage, ninety percent reported that qualified candidates were few or in some cases, none. The highest concentration of owners identifying challenging hiring conditions was in transportation, services, and construction.

Sixty percent of the small business owners reported capital outlays that included new equipment, acquired vehicles, and new fixtures & furniture.  Capital outlays listed by the largest to the smallest percentage of capital outlays. Eighteen percent reported improving or expanding facilities, six percent plan acquiring land for expansion or acquiring new buildings, and twenty-one percent report plans for capital outlays in the next six months.

A smaller percentage reported increasing average selling prices.  Higher prices were found in retail, finance, manufacturing, and wholesale. Forty-six percent of net owners reported raising compensation and twenty-three percent plan on raising compensation in the next three months. Inflation and labor quality remain a top concern for small business owners. I’d also imagine that rising rates will begin to affect capital outlays and capital markets for small business owners in the coming months.

Small business owners will continue to maintain their headcount by any means and mostly due to the inability of owners to find skilled labor.

Retail sales fell in February by 0.4% after rising in January. Retail sales totals fell excluding motor & vehicle & parts (0.1%) and gasoline stations (-0.4%). Retail sales fell for nearly every category except for Electronics & appliances stores (0.3%), food & beverage stores (0.5%), general merchandise stores (0.5%), health & personal care stores (0.9%), and nonstore retailers (1.6%).

 Food services & drinking places are up 15.3% and general merchandise stores are up 10.5% over the past year. Retail sales are not adjusted for inflation. Overall, sales are still up from a year ago, however, that could soon change.

Industrial production and capacity utilization were unchanged in February. Final products industrial production is unchanged for the last three months at 103.8. Consumer goods rose by 0.1%, business equipment production declined by 0.2%, materials increased by 0.1% and non-industrial supplies fell by 0.3%.

 Manufacturing production rose by 0.1%, while mining production fell by 0.7% and utilities rose by 0.5%. Durable manufacturing rose by 0.1% led by an increase in computer and electronic products. Nondurable manufacturing rose by 0.2%. Mining declined fell in all categories including oil and gas extraction. Utilities rise can be attributed to higher production of electric and natural gas.

Although capacity utilization was unchanged, manufacturing fell by 0.1%, mining fell by 0.6%, and utilities rose by 0.2%. The total index for industrial production has steadily declined, rising a bit this past month, but down from last September. Capacity utilization is below its average and is near the 1990-91 low.

The heavily awaited CPI report came in within expectations. The CPI for February rose 0.4% a bit below the 0.5% forecasted and the core CPI met the forecast at 0.5%, rising 0.1% from the previous month. The food at home index rose 0.4% and the food away from home index rose 0.6%. Nearly all the major grocery food group indexes rose. The largest food group to decrease was the eggs index, falling 6.7% after the dramatic spike these past couple of months.

The energy index fell by 0.6%, falling heavily for the natural gas index and fuel oil index but rising for the gasoline albeit a smaller increase from the previous month. Utility (piped) gas services fell 8%, after rising 3.5% in December and 6.7% in January. The shelter index led an increase in CPI, and rose for the owners’ equivalent rent, and lodging away index. Used cars and trucks fell 2.8%. Commodities less food and energy commodities were unchanged from the previous month. After falling for two consecutive months, airline fares rose 6.4%.

The PPI report surprised many by falling 0.1%, instead of rising the forecasted 0.4%. Core PPI also surprised participants by coming in unchanged. Final demand goods and final demand services fell in February by 0.1% and 0.2% respectively. A decline in the prices of chicken eggs was highlighted in the final demand goods decline for February. Final demand services were led by a fall in margins for machinery and vehicle wholesaling. Transportation and warehousing fell for a second consecutive month.

Intermediate demand fell in processed goods (0.4%), and unprocessed goods (3.8%). Intermediate services rose 0.3%. Intermediate processed goods decrease was led by a fall in diesel fuel. Unprocessed intermediate goods fall was led by energy materials (9.1%), specifically in natural gas which fell by 41.4%. Intermediate demand services increase was led by higher prices in loan services (8.3%), and related financial, trading, legal, warehousing, and staff services.  Gross rent for office buildings also rose. Each stage of intermediate demand declined in February except for stage 4 intermediate demand which was unchanged.

Helpful note: Each industry in the economy is assigned to one of the four stages of intermediate demand. Each stage of intermediate demand uses the input from the previous stage except for stage 1. You can use stages of intermediate demand to assess production flow and the price increases from stage to stage.

The good news is that inputs for producers are falling for both final demand and intermediate demand, signaling a further moderation in the CPI.

US Import prices have steadily declined since the high reached over a year ago at 13%. US import prices fell by 0.1% but rose for US export prices by 0.2% in February. Fuel imports fell by 4.9%, led by a large decrease in Natural gas import prices (55.6%) and a small rise in petroleum imports (1.5%). Fuel import prices have fallen for several months, with the last increase reported in June of last year. Nonfuel imports rose 0.4% and have been rising since December.

US export prices have steadily declined since the highs reached in March through June of over 18%. Agricultural export prices rose by 1% in February and also rose for nonagricultural exports by 0.1%. Import prices from China fell 0.5% and fell for Japan and Canada. Import prices are down year over year from China. Prices rose for imports from the European Union and Mexico. Commodities imports are down for the second consecutive month, while commodities exports rose for the second consecutive month.

Moving to housing, building permits rose 13.8% and housing starts rose 9.8% in February. Single-family authorizations rose 7.6% and starts for single-family homes rose 9.8%. Housing completions rose 12.8% in total, with single-family completions rising 1%. Permits, an indicator a future housing activity rose decisively in February after falling in January. Although the rise in permits and starts is good news for developers and potential homeowners, these levels are far below the numbers from a year ago.

Housing under construction fell 1.7% for single-family homes and rose 1% for 5 units or more. The Mortgage Bankers Association (MBA) showed that mortgage application volume rose 6.5% from the prior week. The refinance index rose 5% and the purchase index rose 8% from the prior week. Mortgage rates’ recent decrease was assisted by the fall in treasury yields. The average rate for a 30-year mortgage rate on a conforming loan fell 0.8% to 6.71%. The average rate for a 30-year mortgage rate on a jumbo loan fell 0.10% to 6.39%. The volume of applications remains far below the amount from a year ago.

The NAHB housing market index rose by two points in March to 44. Single-family sales presently rose by one point to 87, single-family sales in the next six months fell by one point to 47 and the traffic of prospective buyers rose by three points to 31. The numbers reported for this month are about half of what was reported just a year ago. However, each of the components has rebounded from their January levels.

Initial claims fell this past week and returned below the 200,000 level. Continuing jobless claims also fell this past week. As evidenced by the small business owners, filling positions remains a challenge for some industries while other industries like tech continue to trim their headcount.

The University of Michigan survey of consumers report showed that sentiment among consumers has fallen across the board. Current economic conditions and the index of consumer expectations also fell. Year-ahead of inflation expectations fell 0.3% to 4.1% in February.  Long-run inflation expectations also fell to 2.8% below the 2.9-3.1% range.  This report was conducted before the banking collapse and showed that consumers are feeling the effects of sustained higher prices.

The week ahead:

The upcoming week features the highly anticipated rate announcement and press conference on Wednesday. This can be a tough week to trade as market participants may remain on the sidelines until the rate is announced and Powell answers questions during the press conference. I traded during the last rate announcement and conference and lost big. The market responded to the initial rate announcement and statement positively, however, when Powell took the podium to speak on his outlook the market reversed its direction and I turned into a casualty. 

As you can see from the latest economic data reports the economy is on shaky grounds amidst a strong labor market and higher prices. The recent bank failures highlight the results of the rate hikes and if the FED hikes again, what could the markets be in store for?

This past week’s cash flow in review:

From week to week, the outcome of my well-intentioned spending plan is in limbo. Yes, I am able to save a portion of my paycheck, but I don’t feel that my available capital is large enough to overcome a catastrophic event. Sure, I am able to cover an emergency car expense or a surprise bill but if someone were to present an opportunity to invest in real estate, I’d have to liquidate my entire investment account.

This is not the life I envisioned, watching every cent that’s spent, hoping that an emergency won’t wipe out my savings account. This isn’t the situation I hoped for but currently, it’s my reality. At times, I feel tempted to remove the restraints and spend my money how I want but I know this wouldn’t end well for me. My hope is that by practicing money management now, I won’t have to learn it later when my income and trading profits catch up with my knowledge.

Grade: D+

Reason: Some improvement but not much

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