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LONGWave - FEBRUARY 2024
Technical Analysis - 02/19/24
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UNDERSTANDING THE US CREDIT DEFAULT SWAP - US TREASURY CORRELATION
OBSERVATIONS: CLOSELY WATCHING THE FED'S DECISION ON QUANTITATIVE TIGHTENING (QT)
The Fed pays interest on Bank Reserves and on Reverse Repurchase Agreements to prevent interest rates from plunging. That’s how the Fed controls the Federal Funds Rate and maintains it at ~5.5% in its current fight against Inflation. The level of Liquidity in the financial markets is affected by changes in the amount of funds held in Bank Reserves, Reverse Repos and the Treasury General Account (TGA). Liquidity is created and destroyed through Quantitative Easing and Quantitative Tightening. It is Quantitative Tightening, not government borrowing, that is draining Liquidity out of the financial markets at the rate of $95 billion a month. Therefore, it is QT, not budget deficits, that TRADERS (versus Investors) need to currently worry about.
The last time the Fed carried out Quantitative Tightening (from October 2017 to September 2019), it went too far and destroyed too much Liquidity causing a crisis in the Repo market in September 2019, which forced the Fed to abruptly end QT. The Fed hopes to avoid making that mistake again this time. All three component parts of the Core Personal Consumption Price Index are slowing rapidly (with Core Goods Prices actually deflating). These trends suggest Inflation will soon fall back to the Fed’s 2% target and support the idea that interest rate cuts and a reduction in the pace of Quantitative Tightening are on the horizon.
Therefore, the Fed is very likely to end QT before the point where Liquidity becomes too tight. The Fed has already begun to publicly discuss plans to slow the pace of QT. We’ll hear more about that at the Fed’s next FOMC meeting in March. Stock prices are likely to react positively to any news suggesting that the pace of QT will be reduced, just as stock prices are likely to react positively every time the Fed reduces the Federal Funds Rate this year, (by paying lower interest on Bank Reserves and Reverse Repos).
With rate cuts and less Quantitative Tightening on the horizon, the outlook for the stock market appears promising during the months ahead. Of course, many things could go wrong. Anything that causes Inflation to reaccelerate would turn this rosy scenario on its head by forcing the Fed to tighten Monetary Policy instead of loosening it. For instance, unexpected rapid economic growth in the US could drive up Demand and push Inflation higher. Likewise, a new war or anything that causes new disruptions to global supply chains could reduce Supply and push Inflation higher. ===>>
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THIS WEEK WE SAW
Exp=Expectations, Rev=Revision, Prev=Previous
US
US Federal Budget (USD)(Jan) -22.0B vs. Exp. -21.0B (Prev. -129.0B)
US CPI MM (Jan) 0.3% vs. Exp. 0.2% (Prev. 0.3%, Rev. 0.2%)
US CPI YY (Jan) 3.1% vs. Exp. 2.9% (Prev. 3.4%)
US Core CPI YY (Jan) 3.9% vs. Exp. 3.7% (Prev. 3.9%)
US Core CPI 3-month annualized rate rose to 3.9% from 3.3%.
US Core CPI 6-month annualized rate rose to 3.5% from 3.2%.
US Cleveland Fed CPI (Jan) 0.5% (Prev. 0.4%, Rev. 0.3%)
EU
German ZEW Current Conditions (Feb) -81.7 vs. Exp. -79.0 (Prev. -77.3)
===>> FEELING LUCKY?
Investing is always a gamble. Based on what we know now, the odds appear favorable but they are continually changing. Investment strategies must take into consideration that unforeseen developments can turn a favorable environment into a very unfavorable one in an instant.
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WHAT YOU NEED TO KNOW!
WHERE 52.6% OF US JOB GROWTH IS OCCURRING
According to the US government's own data, over half the job growth in 2023 were government, the new social assistance category, and health care jobs. Cities across America are struggling to keep up with migrants as the associated overwhelming costs are soaring out of sight. Hospitals are being pushed to the breaking point (here, here) as they are forced to deliver services to those who can't or don't pay. Studies show that
minimally, well in excess of the documented $100B in non-budged cost have been forced onto state and local budgets (here). I personally don't recall voting for this while continuously being told the border was secure and then handed the bill. We had the same problem in 1773 when we had the Boston Tea Party over "Taxation Without Representation"!
RESEARCH
UNDERSTANDING THE US CREDIT DEFAULT SWAP - US TREASURY CORRELATION
- When assessing the amount of a government’s debt held by the public, it is customary to measure it relative to GDP. GDP serves as a rough proxy for the economy’s tax base—that is, its capacity to pay back the debt. ( i.e. default risk),
- With the US Debt of +$34T, it suggests we can expect the US debt growth in 2024 to be in excess of $2.55T, assuming the Deficit can be kept to -$1.7T. This is completely unsustainable!!
- We have been witnessing an unexpected collapse in government receipt, which according to the latest budget statement, are down a staggering 6.2% Y-o-Y.
PLUMMETTING 2024 TAX RECEIPTS
BEST CHANCE OF US DEBT CONTROL
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PRODUCTIVITY: New technological advances, such as artificial intelligence, could fuel a productivity-led boost to long-run economic growth.
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RE-ESTABLISH US AS AN "ASSET SAFE HAVEN": Events abroad could also increase the foreign demand for U.S. Treasury notes as a safe asset, helping to stave off projected increases in long-run U.S. interest rates.
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ENTITLEMENTS REVAMP: A complete re-evaluation of US entitlement programs - Social Security, Medicare, Disabilities and a multitude of other Social Programs
Q4 2023 EARNINGS SEASON:
- Earning projections reflect the increased optimistic outlook of the "Sell Side" analysts with their traditional year-end "Hockey Stick" for earnings.
- MATASII is not in that camp and believes earnings will turn out to be closer to being a much lower Q4.
- A Recession is ahead and it will be a "Hard Landing" with Increasing layoffs, loan default and bankruptcies increasing into the the US Presidential Election. It will likely only explode on the scene in 2025 when the Presidential year liquidity pumping finally ends!
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DEVELOPMENTS TO WATCH
OPERATIONAL EFFICIENCY = LAYOFFS + AI
- The annual US Budget Gap widened a further 16% in the first four months of the 2024 government's fiscal year as debt-servicing costs climbed further.
YET ANOTHER MASSIVE FEDERAL BUDGET OVER-RUN, WITH DEFICIT GROWTH
- Transcript mentions of “operational efficiency” are at highest ever in the US during this earnings season as companies focus on expense discipline, but also invest in technologies “that can drive future productivity like AI”.
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Most prevalent are: 1- Software, 2- Professional Services, 3- Health Care Services, and 4- Financial Services.
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GLOBAL ECONOMIC REPORTING
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JANUARY CPI: CPI is up 18% during the Biden Administration. The re-acceleration of inflation means wage growth is back in the red relative to prices.
- Overall, the inflation report for January was hotter than expected on all accounts and has pushed back money market pricing on rate cuts.
- The March rate cut probability has largely diminished while May is sub 50% with June fully priced for the first 25bp rate cut.
- The hot report, coupled with a strong January jobs report, shows the final stretch of the Fed's fight to return to the 2% inflation target will likely be bumpy and uneven, and arguably the hardest part of the fight.
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In this week's expanded "Current Market Perspectives", we focus on the "Irrational Exuberance" in the equity market and the similarity to March 1999.
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UNDERSTANDING THE US CREDIT DEFAULT SWAP - US TREASURY CORRELATION
To understand this correlation, first we need some perspective and background.
I have often said we are running a "War Time" Economy during Peace time, with the current Debt-to-GDP ratio currently close to its level at the end of WWII (chart right).
The decline in the debt ratio after WWII resulted from a combination of:
- Eliminating the Primary Deficit and
- Rapid economic growth
The United States was able to reduce its post-WWII debt ratio from a historic high of over 100% in 1946 to a historic low of roughly 25% in 1975 by a combination of a balanced primary budget and economic growth that surpassed the interest rate on debt. Could this happen again?
Based on CBO projections of:
- A persistent long-run Primary Deficit
- A relatively low rate of GDP growth
- High interest rates compared with GDP growth
Indications suggest that the US outlook points to a steady increase in the debt ratio. A high debt-to-GDP ratio increases government borrowing costs and can push up interest rates, which can reduce economic growth by increasing the cost of private investment.
Avoiding this outcome is likely to require some combination of:
- Major policy reforms—such as Tax Increases or slower growth in spending for programs like Medicare and Social Security
- Significantly higher Economic Growth and
- Steady or falling interest rates
When assessing the amount of a government’s debt held by the public, it is customary to measure it relative to GDP. GDP serves as a rough proxy for the economy’s tax base—that is, its capacity to pay back the debt ( i.e. default risk).
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WHY IS THE 30Y UST YIELD RISING AT THE SAME RATE AS US CDS'? (chart right)
The yearly change in the Debt-to-GDP ratio is the sum of two components:
- PRIMARY DEFICIT: The first is that year’s primary deficit—which is government spending (excluding interest payments), minus revenue—as a share of GDP.
- RATE DIFFERENTIALS: The second component is the initial level of the Debt-to-GDP ratio multiplied by the difference between the interest rate paid on debt and the rate of GDP growth. When the interest rate is higher than the rate of economic growth, it means interest payments—which is the interest rate multiplied by the level of debt—will push up the debt faster than economic growth pushes up GDP.
Year's Debt-to-GDP X (Interest Rate On the Debt - GDP Growth Rate)
Therefore when understanding debt growth and taking out GDP, by multiplying both the Numerator and Denominator:
Yearly Change is: Debt Level + (Debt Level X (Debt Interest - Growth Rate))
Therefore using current numbers -
(1.7T/ 27T) + (120 X (4.2% Interest Rates - 3.2% GDP Growth Rate) = New Debt level increases by 7.5%
With the US Debt of +$34T, it suggests we can expect the US debt growth in 2024 to be in access of $2.55T, assuming the Deficit can be kept to -$1.7T. This is completely unsustainable!!
Is it any wonder the 30 US Treasury Yield and US Credit Default Swaps costs are rising at the same rate?
.... but things are getting worse as 2024 Tax Revenues are falling.
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PLUMMETTING 2024 TAX RECEIPTS
We have been witnessing an unexpected collapse in government receipt, which according to the latest budget statement, are down a staggering 6.2% Y-o-Y.
A point of fact is that:
- Every time US tax receipts have declined, the US was in, or about to enter, a recession,
- The last three times tax receipts fell this low, was
- After the 2000 Dotcom Bubble
- After the 2008 Credit Bubble burst
- After Covid shut down the global economy for 3 months.
While the collapse in tax revenues should not come as a shock, the corollary to this should probably be less of a surprise. Although we doubt it will be: tax refunds - which are so critical to cover living expenses for the lower income classes - are down a recessionary 57% in the first two weeks of tax season. While this is terrible, it is an improvement from Week #1 when refund dollars were -72%; for Week #2, the drop was "only" -48%.
THE CURRENT LONG-RUN OUTLOOK
With current U.S. federal debt as a share of U.S. GDP nearing its historical peak from the end of World War II, understanding the drivers of the postwar economy may hold some valuable insights for the future path of the federal debt.
- Both the primary deficit and the interest rate on debt, compared with the economic growth rate, turned negative over the three decades after WWII, pushing down the debt ratio from over 100% to only about 25%.
- However, the prospects for these factors over the next three decades are less favorable.
- Without major reforms to mandatory spending programs such as Social Security and Medicare, or large tax increases, the primary deficit is expected to persist.
- This leaves the rate of economic growth relative to interest rates as the crucial factor determining the path of the debt-to-GDP ratio over the next few decades.
- Current projections of GDP growth are relatively low—lower than after WWII.
BEST CHANCE OF US DEBT CONTROL
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PRODUCTIVITY: New technological advances, such as artificial intelligence, could fuel a productivity-led boost to long-run economic growth.
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SAFE HAVEN ASSET: Events abroad could also increase the foreign demand for U.S. Treasury notes as a safe asset, helping to stave off projected increases in long-run U.S. interest rates.
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ENTITLEMENTS REVAMP: A complete re-evaluation of US entitlement programs - Social Security, Medicare, Disabilities and a multitude of other Social Programs.
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Q4 2023 EARNINGS:
KEY METRICS
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Earnings Scorecard: For Q4 2023 (with 79% of S&P 500 companies reporting actual results), 75% of S&P 500 companies have reported a positive EPS surprise and 65% of S&P 500 companies have reported a positive revenue surprise.
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Earnings Growth: For Q4 2023, the blended (year-over-year) earnings growth rate for the S&P 500 is 3.2%. If 3.2% is the actual growth rate for the quarter, it will mark the second-straight quarter that the index has reported earnings growth.
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Earnings Guidance: For Q1 2024, 59 S&P 500 companies have issued negative EPS guidance and 26 S&P 500 companies have issued positive EPS guidance.
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Valuation: The forward 12-month P/E ratio for the S&P 500 is 20.4. This P/E ratio is above the 5-year average (19.0) and above the 10-year average (17.7).
CHART ABOVE RIGHT: Earning projections reflect the increased optimistic outlook of the "Sell Side" analysts with their traditional year-end "Hockey Stick" for earnings. MATASII is not in that camp and believes earnings will turn out to be closer to the red line shown. A Recession is ahead and it will be a "Hard Landing" with increasing layoffs, loan default and bankruptcies increasing into the the US Presidential Election. It will likely only explode on the scene in 2025 when the Presidential year liquidity pumping finally ends!
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DEVELOPMENTS TO WATCH
OPERATIONAL EFFICIENCY = LAYOFFS + AI
Transcript mentions of “operational efficiency” are at highest ever in the US during this earnings season as companies focus on expense discipline, but also invest in technologies “that can drive future productivity like AI”.
Most prevalent are: 1- Software, 2- Professional Services, 3- Health Care Services, and 4- Financial Services.
TABLE BELOW: The "LAYOFF" element underway
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1. Twitch: 35% of workforce
2. Roomba: 31% of workforce
3. Hasbro: 20% of workforce
4. LA Times: 20% of workforce
5. Spotify: 17% of workforce
6. Levi's: 15% of workforce
7. Xerox: 15% of workforce
8. Qualtrics: 14% of workforce
9. Wayfair: 13% of workforce
10. Duolingo: 10% of workforce
11. Washington Post: 10% of workforce
12: Snap: 10% of workforce
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13. eBay: 9% of workforce
14. Business Insider: 8% of workforce
15. Paypal: 7% of workforce
16. Okta: 7% of workforce
17. Charles Schwab: 6% of workforce
18. Docusign: 6% of workforce
19. UPS: 2% of workforce
20. Blackrock: 3% of workforce
21. Citigroup: 20,000 employees
22. Pixar: 1,300 employees
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YET ANOTHER MASSIVE FEDERAL BUDGET OVER-RUN WITH DEFICIT GROWTH
The annual US Budget Gap widened a further 16% in the first four months of the 2024 government's fiscal year as debt-servicing costs climbed further.
The deficit for the first four months of the 2024 fiscal year reached $532 billion, or 16% more than recorded in the same period in the prior year, Treasury Department data released Monday 02/12/24 showed. Interest costs in the four months through January were $357 billion, a 37% jump from 2023.
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GLOBAL ECONOMIC INDICATORS: What This Week's Key Global Economic Releases Tell Us
Overall, the inflation report for January was hotter than expected on all accounts and has pushed back money market pricing on rate cuts. The March rate cut probability has largely diminished while May is sub 50% with June fully priced for the first 25bp rate cut. The hot report, coupled with a strong January jobs report, shows the final stretch of the Fed's fight to return to the 2% inflation target will likely be bumpy and uneven, and arguably the hardest part of the fight.
CONSUMER PRICE INDEX (CPI)
CPI is up 18% during the Biden Administration. The re-acceleration of inflation means wage growth is back in the red relative to prices (chart right).
HEADLINE NUMBER
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+3.1% Y-o-Y, Exp 2.9%, Prior 3.4%
- + 0.3% M-o-M, Exp 0.2%
- The 3-month annualized rate ticked up to 4% from 3.3%.
- The 6-month annualized rate was 3.7% (vs 3.2%).
CORE
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+3.86% Y-o-Y, Exp 3.7% (Below 4.00% Y-o-Y for the first time since May 2021)
- +0.4% M-o-M - (Biggest jump since April 2023).
- All items less food and energy rose 0.4 M-o-M in January.
- Shelter Inflation +6.04% Y-o-Y in Jan vs 6.15% in Dec.
- Shelter Index increased 0.6 M-o-M, (the largest factor in the monthly increase in the index for all items less food and energy).
- Owners’ Equivalent Rent rose +0.6 M-o-M,
- Rent inflation +6.09% Y-o-Y vs 6.47% in Dec: the Index for rent increased 0.4% M-o-M.
- Lodging away from Home Index increased 1.8%.
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SUPER CORE
- Core CPI Services Ex-Shelter index - soared 0.7% M-o-M (the biggest jump since Sept 2022).
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Core CPI Services (Ex-energy services)
Powell keeps talking about it. We have been concerned here for months about the refusal of core services inflation to ease off, and we’ve found the acceleration in the fall last year “very disconcerting.” But that’s how inflation is – it tends to serve up nasty surprises. And now it did.
Core CPI Services jumped by 0.66% in January from December, or by 8.2% annualized (blue). In this inflation cycle, only three months were worse (April, June, and September 2022). It includes housing, insurance, health care, subscriptions, etc., but not energy services. Core services is where consumers do the majority of their spending – and it’s re-heating from already hot levels.
The three-month moving average, which irons out the month-to-month squiggles, jumped by 0.50%, or by 6.2% annualized (red), the worst since March 2023. All this according to the CPI data released today by the Bureau of Labor Statistics.
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NOTE: In a closed door meeting, Fed Chair Powell told Congress after the CPI report that the inflation data was "consistent with what they had been anticipating".
- The Fed would look to the upcoming PCE report to give them more intel, according to Politico citing Representative Stephen Lynch.
- Meanwhile, Fed's Waller said that one lesson from 2020 is that forward guidance should be more flexible and forward guidance perhaps should also signal the possible path of the policy rate.
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PCE data due Feb. 29 will probably remain closer to 2% target with Portfolio management component being the big wild card.
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GLOBAL MACRO
WHAT DOES YOUR SCAN OF THE DATA BELOW TELL YOU? - THE MEDIA AVOIDS BAD NEWS!
We present the data in a way you can quickly see what is happening.
THIS WEEK WE SAW
Exp=Expectations, Rev=Revision, Prev=Previous
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UNITED STATES
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US Federal Budget (USD)(Jan) -22.0B vs. Exp. -21.0B (Prev. -129.0B)
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US CPI MM (Jan) 0.3% vs. Exp. 0.2% (Prev. 0.3%, Rev. 0.2%)
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US CPI YY (Jan) 3.1% vs. Exp. 2.9% (Prev. 3.4%)
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US Core CPI YY (Jan) 3.9% vs. Exp. 3.7% (Prev. 3.9%)
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US Core CPI 3-month annualized rate rose to 3.9% from 3.3%.
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US Core CPI 3-month annualized rate rose to 3.5% from 3.2%.
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US Cleveland Fed CPI (Jan) 0.5% (Prev. 0.4%, Rev. 0.3%)
- US December PPI was revised to -0.2% (prev. -0.1%)
- US December Core PPI was unrevised at -0.1%.
- US NY Fed Manufacturing (Feb) -2.4 vs. Exp. -15.0 (Prev. -43.7)
- US Philly Fed Business Index (Feb) 5.2 vs. Exp. -8.0 (Prev. -10.6)
- US Retail Sales MM (Jan) -0.8% vs. Exp. -0.1% (Prev. 0.6%, Rev. 0.4%)
- US Retail Sales Ex-Autos MM (Jan) -0.6% vs. Exp. 0.2% (Prev. 0.4%)
- US Retail Control (Jan) -0.4% vs. Exp. 0.3% (Prev. 0.8%, Rev. 0.6%)
- US Industrial Production MM (Jan) -0.1% vs. Exp. 0.3% (Prev. 0.1%)
- US Capacity Utilization (Jan) 78.5% vs. Exp. 78.8% (Prev. 78.6%, Rev. 78.7%)
- US Business Inventories MM (Dec) 0.4% vs. Exp. 0.4% (Prev. -0.1%)
- US Export Prices MM (Jan) 0.8% vs. Exp. -0.1% (Prev. -0.9%, Rev
- US Import Prices MM (Jan) 0.8% (Rev. -0.7%)
- US NAHB Housing Market Index (Feb) 48.0 vs. Exp. 46.0 (Prev. 44.0)
- US Initial Jobless Claims 212k vs. Exp. 220k (Prev. 218.0k, Rev. 220k)
- US Continued Jobless Claims 1.895M vs. Exp. 1.880M (Prev. 1.871M, Rev. 1.865M)
UK
- UK Employment Change (Dec) 72k (Prev. 73k)
- UK ILO Unemployment Rate (Dec) 3.8% vs. Exp. 4.0% (Prev. 3.9%)
- UK Average Weekly Earnings 3M YY (Dec) 5.8% vs. Exp. 5.6% (Prev. 6.5%, Rev. 6.7%)
- UK Average Earnings (Ex-Bonus)(Dec) 6.2% vs. Exp. 6.0% (Prev. 6.6%, Rev. 6.7%)
- EU ZEW Survey Expectations (Feb) 25.0 (Prev. 22.7)
- UK CPI YY (Jan) 4.0% vs. Exp. 4.2% (Prev. 4.0%)
- UK Core CPI YY (Jan) 5.1% vs. Exp. 5.2% (Prev. 5.1%)
- UK GDP Prelim QQ (Q4) -0.3% vs. Exp. -0.1% (Prev. -0.1%)
- UK GDP Estimate YY (Dec) 0.0% vs. Exp. 0.3% (Prev. 0.2%, Rev. -0.3%); GDP Estimate MM (Dec) -0.1% vs. Exp. -0.2% (Prev. 0.3%, Rev. 0.2%); GDP Prelim YY (Q4) -0.2% vs. Exp. 0.1% (Prev. 0.3%, Rev. 0.2%); GDP Est 3M/3M (Dec) -0.3% vs. Exp. -0.1% (Prev. -0.2%)
- UK Industrial Output YY (Dec) 0.6% vs. Exp. -0.4% (Prev. -0.1%, Rev. 0.1%); Industrial Output MM (Dec) 0.6% vs. Exp. -0.1% (Prev. 0.3%, Rev. 0.5%)
- UK Goods Trade Balance GBP (Dec) -13.989B GB vs. Exp. -14.9B GB (Prev. -14.189B GB, Rev. -15.125B GB); Goods Trade Bal. Non-EU (Dec) -3.319B GB (Prev. -2.838B GB, Rev. -3.747B GB)
- UK Manufacturing Output YY (Dec) 2.3% vs. Exp. 0.6% (Prev. 1.3%, Rev. 1.9%); Manufacturing Output MM(Dec) 0.8% (Prev. 0.4%, Rev. 0.8%)
- UK Construction O/P Vol MM (Dec) -0.5% vs. Exp. -0.2% (Prev. -0.2%, Rev. -0.7%); Construction O/P Vol YY (Dec) -3.2% vs. Exp. -1.4% (Prev. 0.9%, Rev. -0.7%)
- UK Business Invest QQ Prelim (Q4) 1.5% (Prev. -3.2%, Rev. -2.8%); Business Invest YY Prelim (Q4) 3.7% (Prev. 2.3%, Rev. 2.6%)
- UK Services YY (Dec) 0.1% vs. Exp. 0.5% (Prev. 0.1%, Rev. -0.3%); Services MM (Dec) -0.1% vs. Exp. -0.2% (Prev. 0.4%, Rev. 0.2%)
- UK GDP QQ (Q4 P) -0.3% vs. Exp. -0.1% (Prev. -0.1%)
- UK GDP YY (Q4 P) -0.2% vs. Exp. 0.1% (Prev. 0.3%, Rev. 0.2%)
- UK GDP Est. MM (Dec) -0.1% vs. Exp. -0.2% (Prev. 0.3%, Rev. 0.2%)
- UK GDP Est. YY (Dec) 0.0% vs. Exp. 0.3% (Prev. 0.2%, Rev. -0.3%)
- UK GDP Est. 3M/3M (Dec) -0.3% vs. Exp. -0.1% (Prev. -0.2%)
- UK Industrial Output MM (Dec) 0.6% vs. Exp. -0.1% (Prev. 0.3%, Rev. 0.5%)
- UK Industrial Output YY (Dec) 0.6% vs. Exp. -0.4% (Prev. -0.1%, Rev. 0.1%)
- UK Manufacturing Output MM (Dec) 0.8% vs. Exp. 0.0% (Prev. 0.4%, Rev. 0.8%)
- UK Manufacturing Output YY (Dec) 2.3% vs. Exp. 0.6% (Prev. 1.3%, Rev. 1.9%)
- UK Retail Sales MM (Jan) 3.4% vs. Exp. 1.5% (Prev. -3.2%, Rev. -3.3%);
- UK Retail Sales Ex-Fuel YY (Jan) 0.7% vs. Exp. -1.6% (Prev. -2.1%); Retail Sales YY (Jan) 0.7% vs. Exp. -1.4% (Prev. -2.4%); Retail Sales Ex-Fuel MM (Jan) 3.2% vs. Exp. 1.7% (Prev. -3.3%, Rev. -3.5%)
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EU
- EU ZEW Survey Expectations (Feb) 25.0 (Prev. 22.7)
- EU Employment Flash QQ (Q4) 0.3% vs. Exp. 0.2% (Prev. 0.2%)
- EU Employment Flash YY (Q4) 1.3% vs. Exp. 1.1% (Prev. 1.3%)
- EU GDP Flash Estimate QQ (Q4) 0.0% vs. Exp. 0.0% (Prev. 0.0%)
- EU GDP Flash Estimate YY (Q4) 0.1% vs. Exp. 0.1% (Prev. 0.1%)
- EU Industrial Production MM (Dec) 2.6% vs. Exp. -0.2% (Prev. -0.3%, Rev. 0.4%)
- EU Industrial Production YY (Dec) 1.2% vs. Exp. -4.1% (Prev. -6.8%, Rev. -5.4%)
GERMANY
- German ZEW Economic Sentiment (Feb) 19.9 vs. Exp. 17.5 (Prev. 15.2)
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German ZEW Current Conditions (Feb) -81.7 vs. Exp. -79.0 (Prev. -77.3)
- German ZEW Economic Sentiment (Feb) 19.9 vs. Exp. 17.5 (Prev. 15.2)
- German ZEW Current Conditions (Feb) -81.7 vs. Exp. -79.0 (Prev. -77.3)
- German government expects GDP to grow by 1% in 2025 (prev. forecast 1.5% in October) and sees inflation at 2.8% in 2024 and 1.9% in 2025, according to Reuters via government sources.
- German Wholesale Price Index YY (Jan) -2.7% (Prev. -2.6%); Wholesale Price Index MM (Jan) 0.1% (Prev. -0.6%)
FRANCE
- French CPI (EU Norm) Final YY (Jan) 3.4% vs. Exp. 3.4% (Prev. 3.4%); CPI (EU Norm) Final MM (Jan) -0.2% vs. Exp. -0.2% (Prev. -0.2%)
SPAIN
- Spanish CPI MM Final NSA (Jan) 0.1% vs. Exp. 0.1% (Prev. 0.1%); CPI YY Final NSA (Jan) 3.4% vs. Exp. 3.4% (Prev. 3.4%)
ITALY
- Italian Global Trade Balance (Dec) 5.614B EU (Prev. 3.889B EU); Trade Balance EU (Dec) -2.75B EU (Prev. -2.385B EU)
SWITZERLAND
- Swiss Producer/Import Price YY (Jan) -2.3% (Prev. -1.1%); Producer/Import Price MM (Jan) -0.5% (Prev. -0.6%)
SINGAPORE
- Singapore GDP QQ (Q4 F) 1.2% vs Exp. 1.4% (prev. 1.4%, Rev. 1.3%)
- Singapore GDP YY (Q4 F) 2.2% vs Exp. 2.5% (prev. 2.8%)
- Singapore Non-Oil Exports MM (Jan) 2.3% vs. Exp. 0.5% (Prev. -2.8%)
- Singapore Non-Oil Exports YY (Jan) 16.8% vs. Exp. 5.4% (Prev. -1.5%)
RUSSIA
- Russian Federation Central Bank Key Rate (Feb) 16.0% vs. Exp. 16.0% (Prev. 16.0%); sees its average key rate at 13.5-15.5% in 2024 (prev. forecast 12.5-14.5%;
SWEDEN
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Swedish Unemployment Rate SA (Jan) 8.2% vs. Exp. 8.2% (Prev. 8.2%);
- Unemployment Rate (Jan) 8.5% (Prev. 7.7%);
- Total Employment (Jan) 5.136M (Prev. 5.188M)
AUSTRALIA
- Australian Westpac Consumer Confidence Index (Feb) 86.0 (Prev. 81.0)
- Australian Westpac Consumer Sentiment MM (Feb) 6.2% (Prev. -1.3%)
- Australian NAB Business Confidence (Jan) 1.0 (Prev. -1.0)
- Australian NAB Business Conditions (Jan) 6.0 (Prev. 7.0)
- Australian Employment (Jan) 0.5k vs. Exp. 30.0k (Prev. -65.1k)
- Australian Unemployment Rate (Jan) 4.1% vs. Exp. 4.0% (Prev. 3.9%)
NEW ZEALND
- New Zealand 1-Year Inflation Forecast (Q1) 3.22% (Prev. 3.60%)
- New Zealand 2-Year Inflation Forecast (Q1) 2.50% (Prev. 2.76%)
- New Zealand Elec Card Retail Sale MM (Jan) 1.7% (Prev. -2.0%, Rev. -1.7%)
- New Zealand Elec Card Retail Sale YY (Jan) 1.6% (Prev. -0.6%)
- New Zealand Food Price Index (Jan) 0.9% (Prev. -0.1%)
JAPAN
- Japanese Corp Goods Price MM (Jan) 0.0% vs. Exp. 0.1% (Prev. 0.3%)
- Japanese Corp Goods Price YY (Jan) 0.2% vs. Exp. 0.1% (Prev. 0.0%, Rev. 0.2%)
- Japanese GDP QQ (Q4) -0.1% vs. Exp. 0.3% (Prev. -0.7%, Rev. -0.8%)
- Japanese GDP QQ Annualized (Q4) -0.4% vs. Exp. 1.4% (Prev. -2.9%, Rev. -3.3%)
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CURRENT MARKET PERSPECTIVE | |
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"IRRATIONAL EXUBERANCE"!
MIRRORING THE RUN-UP TO THE DOTCOM BUBBLE SPRING OF 1999
Click All Charts to Enlarge
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1 - SITUATIONAL ANALYSIS
The top 5 stocks account for 75% of all S&P YTD gains.
Just the top 3 tech stocks account for 90% of tech sector YTD gains.
US equity breadth is now the worst since March 2009, when the S&P troughed its post-Lehman crash around 666.
It's the Dotcom Bubble "Irrational Exuberance" all over again!
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With the second half of February being historically the worst month of the year for equities, markets extremely overbought, exuberance running at the "irrational" level, we should expect a corrective / consolidation.
After the consolidation we expect the markets to test previous highs or put in slightly higher highs.
"Tops are Processes, Bottoms are Events" and it will take more process to kill the momentum and decade long habits of buying the dips. It took until September 2000 for this to happen during the Dotcom Bubble, even though the highs were initially put in during March 2000. Markets don't repeat but they do Rhyme!
CHART BOTTOM RIGHT
As we have cautioned previously, the second half of February is historically the worst period for the US stock market.
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CHART BELOW
Inflows to Tech are on course for ~$85B in 2024!
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MEME STOCKS & SMCI
Remember Gamestock trading by the Meme and Gamma Traders? The exuberance is back and maybe worse! Two examples are SMCI and NVDA. Great stories and potential buy absurd & unrealistic trading - warnings signs of "Irrational Exuberance" last used to label the markets prior to the Dotcom Bubble implosion!
SMCI
Super Micro Computer (SMCI) is now the 161st largest public company in the United States.
- One year ago, SMCI, was worth less than $5 billion. Today, it is worth $55 billion and up over 1000% from its 2023 low.
- SMCI just experienced a 250% rally over the past 21 trading days.
- SMCI has been up 18 of those 21 days with the biggest daily decline being 0.6%.
- SMCI on Friday morning was up +71% in 10 days. The stock finished the day with an RSI of just under 97, the highest level since GameStop in early 2021, and look how well that turned out. SMCI was currently on a 9-day winning streak.
- At Friday PM close (options expiration) it plunged ...(see chart below).
"We launch coverage of Super Micro Computer, Inc. with a Buy rating and $1040 price objective. We think this provider of server and storage solutions will be a beneficiary of AI-driven demand growth. We believe the market for AI servers is much larger than is factored in Street models." (BofA initiates coverage.)
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NVDA
NVDA is showing the same "Irrational Exuberance" as SMCI, which we showed with a number of charts in our mid-week chart package. The chart to the right (which we showed in the package) is close to a near perfect matching top, as exhibited by the 2000 darling stock "Cisco" - before crashing!
Mid-Week Chart Update:
We have seen manias like NVDA before and they often tend to end in tears. The chart overlay with Cisco (the "darling" of the Dotcom Bubble) will serve as a cautionary tale for everyone. Note that Cisco traded around 80% above the 200 day moving average at the dot.com peak.
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The chart to the right and two directly below show that there is a major shift underway on the perception regarding the Global and US Economic outlook.
This is attracting institutional money into the market. Institutional managers are measured against other funds and simply can't afford to miss trends that others are reacting to. They are forced to follow the herd. Meanwhile Smart Money indexes and various stock distribution charts show "Distribution" is underway.
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Global Stimulus leads PMI by ~8 months which is being interpreted as a coming upturn in the global economy. | | |
The BoA's Fund Managers Survey shows sentiment is the most Bullish since January 2022. | | |
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Earning projections (charts: right and below) reflect the increased optimistic outlook of the "Sell Side" analysts with their traditional year-end "Hockey Stick" for earnings.
MATASII is not in that camp and believes earnings will turn out to be closer to the red line shown.
A Recession is ahead and it will be a "Hard Landing" with Increasing layoffs, loan default and bankruptcies increasing into the the US Presidential Election. It likely only exploding on the scene in 2025 when the Presidential year liquidity pumping finally ends!
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3 - TECHNICAL ANALYSIS
US EQUITY MARKETS
CONTROL PACKAGE
There are FIVE charts we have outlined in prior chart packages that we will continue to watch closely as a "control set".
- The S&P 500 (CHART LINK)
- The DJIA (CHART LINK)
- The Russell 2000 through the IWM ETF (CHART LINK),
- The MAGNIFICENT SEVEN (CHART ABOVE WITH MATASII CROSS - LINK)
- Nvidia (NVDA) (CHART LINK)
S&P 500 - Daily - Our Though Experiment
Our Though Experiment, which we have discussed previously, suggests we have put in a near term top (or very close to it) and will now consolidate before possibly completing one final small impulse higher or put in a 1-2 Wave of a much higher degree. Important tops are a PROCESS.
NOTE: To be perfectly blunt, the black labeled activity shown below, between now and July, looks like a potential "Killing Field" where the algos take Day Traders, "Dip Buyers", "Gamma Guys" and FOMO's are carried out on stretchers!
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YOUR DESKTOP / TABLET / PHONE ANNOTATED CHART
Macro Analytics Chart Above: SUBSCRIBER LINK
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MATASII CROSS: SIGNALLING A MAG-7 BUY
A price retracement to "touch" the rising red MATASII CROSS signal would normally be expected at this point!
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YOUR DESKTOP / TABLET / PHONE ANNOTATED CHART
Macro Analytics Chart Above: SUBSCRIBER LINK
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SIGNALS FROM THE BOND MARKET
FISHER EQUATION
CURRENTLY
10yr BEI 2.310%,
10yr TIPS 1.963%
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10yr NOMINAL 4.263%
PROJECTED (CHART RIGHT)
10yr BEI 2.25%,
10yr TIPS 2.25%
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10yr NOMINAL 4.5% (10Y Daily TNX Chart Bottom)
10Y UST - YIELD - TNX
The Tuesday "CPI Panic" aggressively took the 10Y bond yields to precisely our near term target of the 20 WMA at 4.31%. Our current expectations are that rates will stay within a trading range between the 20 WMA and the 80 WMA as the 20-40-8- WMAs more tightly "band". The Fed is currently likely not to start reducing rates before Q3 or if a crisis event forces them. The next key milestone for rates is the PCE, which is to be released on Feb 29th.
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YOUR DESKTOP / TABLET / PHONE ANNOTATED CHART
Macro Analytics Chart Above: SUBSCRIBER LINK
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YOUR DESKTOP / TABLET / PHONE ANNOTATED CHART
Macro Analytics Chart Above: SUBSCRIBER LINK
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NOTICE Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. MATASII.com does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.
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