Spooking the Market | The Daily Peel | 3/23/23

Mar 23, 2023 | Peel #425

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Market Snapshot

Happy Thursday, apes.

Well, we hope it’s a happy Thursday at least because although Wednesday woke up on the right side of the bed, it sure didn’t go to sleep there.

Markets approached yesterday’s Fed meeting on an optimistic note, seemingly excited to get some clarity from the central bank and remove a degree of uncertainty. What they got was, in fact, the opposite. Equities entered selloff mode as soon as old man JPow opened his mouth, closing the day in the red across the board, with the S&P’s 1.65% fall leading the way.

On the other side of the coin, treasury yields sold off as the rate hike puts more emphasis on newly issued notes and signals a rotation into safety. The 2-year yield, seen as a proxy for intermediate to long-term fed funds rate expectations, ended the day around 3.96%, nearly a full point below the newly imposed target range.

Let’s get into it.

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DIVE INTO THE DETAILS

Banana Bits

• WSJ continues to bless us with free access to its unmatched Fed Statement Tracker tool. I mean, at least click the link; it’s really not that long, I promise
• TikTok CEO Shou Zi Chew is heading to literally the last place on Earth he could possibly want to be: a Congressional testimony
• Treasury Chair Janet Yellen tries to walk back the seemingly infinite deposit insurance the FDIC and Fed have apparently established
• Companies across the world are shaking in their shoes: the short-selling serial killers at the now even-more-infamous Hindenburg Research have something else cooking

Macro Monkey Says

25bps or Bust

Well, we were promised a fun day, and, as usual, JPow delivered. Just make sure you don’t look at returns in the equity market.

The Federal Reserve raised the fed funds rate by 25bps yesterday at 2pm, moving the target range up from 450-475bps to 475-500bps. This is the highest level for the economy’s base rate since August 2007, nearly 16 years ago.

Now, I’m not sure what’s more surprising: that rates have been so low for so long, or that 2007 was long enough ago that kids born in that year are now legally allowed to drive (watch out).

As we beat the sh*t out of this dead horse yesterday, the 25bps nudge was exactly what the market was expecting. For a widely expected outcome, however, the market’s reaction to the news was a little sus, to say the least.

Immediately after the numbers came out, the S&P ripped higher for a few candles but couldn’t hold at those levels. A gradual, insecure downtrend in Mr. Market’s mood dominated the afternoon trade, with the U.S.’s primary index settling below both its 50- and 200-day simple moving averages.

Although, the erratic psychopathy formed by the amalgamation of traders that is Mr. Market generally doesn’t have exactly the best track record when it comes to immediate reactions to a move in base rates. He’s a slow reader, but once Mr. Market has time to feel like he knows what’s going on, we could see a much different reaction.

The key here isn’t that rates moved to 500bps at the upper level but the fact that JPow and the gang had the absolute rock-solid stones to keep hiking in the face of what is being labeled the “Bank Run of 2023.” The direction is key here - rates are still increasing, meaning money supply continues to tighten, but is being directly tightened less so than before.

Emphasis on directly because, as we talked about yesterday, the $121bn that has flown into money market funds over the last few weeks is one hell of a wrench, too.

To get a sense of where we’re going next, JPow was kind enough to drop some ever-cryptic and borderline pretentious quotes on us. Some include:

• The change from expecting “ongoing increases in the target range” to saying they instead will “closely monitor” data and its implications for monetary policy while expecting “some additional policy firming may be appropriate”
• Of the banking crisis, Powell spit, “it is too soon to determine the extent of these effects, and therefore, too soon to tell how monetary policy should respond.”
• JPow goes on to say that “as a result” of the above point, “we no longer state that we anticipate that ongoing rates increases will be appropriate to quell inflation. Instead we now anticipate that some additional policy affirming may be appropriate.”
• “The U.S. banking system is sound and resilient.” was printed almost right at the top of the newly released statement

Now, let’s poorly attempt to summarize the message the Fed tried to send.

• The banking system is A-Okay and definitely not on the brink of collapse…because we and the FDIC are now defacto backstopping all deposits, not just those below $250k
• Inflation is still f*cked, but we recognize that in trying to unf*ck the economy from inflation, we may have f*cked up a bit, so we’ll chill out
• The labor market is still too tight, and services inflation is the name to blame

Not sure if that’s exactly the message the market received, however, but we’ll feel it out over the coming days. Market watchers were hoping that today’s announcement would clear up some of the floods of uncertainty plaguing global macro right now, but it could be argued that the more the Fed says, the less sure the market is in any one given statement.

Prior to the GFC, if you can believe it, Fed days weren’t like a Super Bowl every 6-8 weeks. Not to act like I was around back then, but the boomers in the industry remember a time when the Fed meeting was just that…a boring, run-of-the-mill economic meeting full of gray hair and Fedspeak.

Maybe too much is just too much? Someone’s gotta remind JPow that it’s quality over quantity. I’ve said it before, and I’ll say it again, every time this guy opens his mouth, the market tanks. Someone really needs to bring some duct tape to Washington state.

What's Ripe

GameStop ($GME) ↑ 35.24% ↑

• Oh, no, are the damn pirate songs and lowkey sexual fan fictions about this stock gonna come back now too? C’mon, all we want is just one day of sanity; doesn’t seem like too much to ask.
• Welp, never mind, I just checked the notes, and it turns out yesterday’s move for $GME actually kinda does hold some sanity to it. The gaming retailer / online NFT company (is that still a thing?) reported a surprise profit of $0.16/sh, the first time it’s done so in a few years, on a topline beat of about 3%. Have a day, apes.
• Obviously, shares have seen a massive fall from their glory days in the $300-$400 range, but the stock is still up well over 2,000% from when Keith Gill began his legendary crusade. If it’s not already there, that trade better be in the record books.

Carvana ($CVNA) ↑ 6.31% ↑

• Time to move on to another shitco. To be honest, I kinda thought this thing was dead and gone already, but I guess you learn something new every day.
• I guess I should’ve known, as the Carvana building right across the street from my apartment is still blasting light at me as I try to fall asleep. Nonetheless, markets were vibing with this one yesterday on news that the firm plans to restructure its debt portfolio and issued upbeat, early guidance for its next quarter.
• Carvana said it no longer expects losses in the $350mn range for the first quarter, only losing just a small $50-$100mn instead. Great! But the real kicker was the restructuring of this thing’s brutally victimized debt portfolio. Like McDonald’s, markets were lovin’ it.

What's Rotten

Regional Banks ($KRE) ↓ 5.69% ↓

• Calling the ride regional banks have been on lately a “roller coaster” doesn’t go nearly far enough. Seems more like a spaceship trying to fly through the asteroid belt if you ask me.
• Shares in just about every regional bank everywhere turned right back around yesterday, selling off in major fashion despite the consistent and resolute show of support these institutions have gotten and will continue to get from the Feds.
• Still, equity holders seem to know that if anyone’s gonna get hurt in potential further bank runs, it’s gonna be them. Moreover, although rate hikes are generally seen as a good thing for banks as it allows them to pad their net interest margins, doing so in a time like this is arguably a violation of the 8th amendment in the market’s view.

Coinbase ($COIN) ↓ 15.79% (AH) ↓

• Turning to the exact polar opposite of Regional Banks, let’s take a look at the digital currency exchange Coinbase. As if yesterday’s 8.16% plunge during market hours wasn’t enough of a beat down, after hours traders all but threw this thing in the gutter.
• During market hours, the selloff was likely primarily influenced by the day’s rate hike and rotation out of risk assets, or in this case, super-mega-risk assets.
• After hours, however, Gary Gensler might as well have gone and committed arson at the firm’s headquarters. The SEC Chair and his agency hit Coinbase with a Wells notice, alleging the exchange has violated some other still-nonexistent securities/crypto law.
• For Coinbase, threats from the SEC have just become part of the business model. Employees, including CEO Brian Armstrong, took to Twitter and company blogs to express their outrage. And to think, at one point, we were excited to have a “crypto expert” like Gary G running the SEC. Put that one down in the “coldest takes of all time” pile.

Thought Banana

Didn’t Stand a Chance

Congratulations to my Gen Z and younger Millennial apes out there. Turns out, you might actually be able to buy a home one day!

For the first time in more than a decade, home prices across the U.S. fell on an annual basis, as measured by monthly readings, as February 2023 saw a 0.2% drop in median existing home prices from a year earlier. It’s definitely not much, but it sure is honest work.

Don’t go throwing any parties yet, however. All jokes aside, this drop is so tiny it might as well be flat. Just like above, the significance isn’t necessarily the amount it moved but the simple fact that this is technically the first decline in more than a decade and, according to experts, is indicative of a continuing trend.

For those of you that own homes out there (boomers), don’t start going all 2008 on me just yet. A decline, as is expected now, is far different from the crash you all somehow made it through way back in the day. Only your doomer friends that trust random Redditors more than anything they see from a website ending in “.org” expect a crash.

According to the same report, the amount of existing home sales spiked like a meme stock at the same time. Last month’s figures were still down from a year earlier but jumped a massive 14.5% from January alone.

Average 30-year fixed rates sat just under 7% for much of February, so the recent decline tracing treasury yields that brought the average mortgage rate down to 6.3% for this month was all the break buyers seem to have needed. We’ve known for quite a long time that home demand is high in the U.S., but damn, this is quite the surprise.

All cash sales remained much higher than usual as well, clocking in at 28% for the month and emphasizing the rate awareness and sensitivity of buyers in the market looking to avoid mortgages.

One man’s trash is another man’s treasure, so as the value of a homeowner’s residence decline, the affordability for the next buyer only increases. Isn’t nature beautiful?

The big question: How can we expect home prices to perform over the next year, especially considering the more gradual rate hike path by the Fed?

Banana Brain Teaser

Yesterday — It can be cracked, it can be made, it can be told, it can be played. What is it?

A joke.

Today — It’s 150 bananas off the Venture Capital Course for the first 3 correct respondents. LFG!

It cannot be seen, felt, heard, or smelt. It lies behind stars and under hills, and empty holes it fills. It comes first and follows after. Ends life, kills laughter. What is it?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“Money is the most universal and most efficient system of mutual trust ever devised.” — Yuval Noah-Harari

Happy Investing,

Patrick & The Daily Peel Team

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