My mantra is simple and what drives my Macro-To-Micro trading style: Policies lead economy. Credit leads equities. And Volatility reprices everything.

My Gone Fishing Newsletter is divided into basically three parts:

  1. Reflections and Inflections
  2. Sector Watch
  3. Macro Considerations

My theme last week in my live trading room was simply: “Indices are hanging out, not breaking out.”

And yet, under the seemingly calm of market indices, there has been large waves of distribution selling taking place in Momo land: ROKU and NFLX in dramatic sell-off mode Friday rotated into TSLA and lots of Unicorns today. We had sharp reversals in SNAP, TWTR and FB as Trump talked down social media; continuations lower in NFLX SHOP and many more. Other stocks we caught live included roll-overs in GS, AMZN, BABA, NVDA, AMD and IWM, to name a few.

Note: Live Trading Room recordings with Closed Captioning and Saved Chat come with Membership in addition to great calls 😉

But market indices of SPY, QQQ, DIA didn’t roll-over – to play catch down to IWM – until the economic data late morning showed U.S. consumer confidence plunged in September – the largest shortfall relative to Wall Street’s expectations since 2010, the most in 9 months, and basically just far more than expected. Trump didn’t help market sentiment with his tough talk against China and Iran when he spoke to the World in his live UN address!

And although I originally dismissed the chances of Impeachment on the Trump-Biden-Ukraine intrigue, I did reconsider after retweeting this:

I found it more than curious with the timing of Warren’s big lead…

Add to this: Recession risks rise as consumer confidence falls so that may have also contributed to sentiment souring.

And just like that, sellers stepped out of the market! With the economic data of poor consumer confidence dropping precipitously, converging with Trump’s hawkish stump speech signaling no likely resolution coming soon on China or Iran, Impeachment proceedings that hit “go”, and fall-out from WeWork losing valuation, confidence and its CEO impacting all those holding overvalued Unicorns, it’s no wonder we have heavy distribution of momentum/tech stocks under the surface, a steady bid in risk-off proxies of Gold and Bonds, and now finally volatility emerging.

And it was time: basically for 7 of the prior 12 sessions, the S&P 500 closed up or down by less than 0.1%, so the Volatility that finally emerged today is what we need to watch moving forward.

And some upcoming dates of importance:

  • Oct 9th: FOMC minutes released from Sept rate-cut. Will they signal they’re done cutting this yr?
  • Oct 10th: REPO ends. Will there be a pause to test Fed’s liquidity claims?
  • Oct 11th: Mnuchin claims they meet with China on Trade deal. Will they ever have one?

Repo Market Madness… and Flash Crashes!?!

I stand by my call that risk of Flash Crash increases with Major Momo distribution under the seemingly calm surface and major structural USD implications spur potential panic for Cash.

Perhaps the repo ruckus isn’t totally over…..the NY Fed’s $30 billion term repo operation was 2x oversubscribed. This is the first such operation; the others were overnight repos.


Big Banks with “large excess reserves” chose not to make 10% (most ever) on their money in the REPO market last Monday night. Read that again: TEN PERCENT or 5 times their money begs the question: WHY? Could they have been worried about the cost and return of deploying that cash? Or was it tied up in the currency markets?

Now we’re getting to it…. New York Fed examines banks’ role in money market turmoil


Bottom line: here’s what the market thinks of the Fed’s temporary solution… It’s a joke.


What’s LIBOR got to do with it? Well, John Williams is worried so maybe it’s time to consider how REPO intersects with a $400 trillion market that recently moved 8+ standard deviations because of a “regularly scheduled tax date”

To say that last week’s repo debacle was precipitated by either the KSA or by the timing of corporate taxes & bills supply is a little like saying World War I was caused by Gavrilo Princip. Yes, that’s true – but the conditions had to be right & the stage appropriately set.


Mini Intermarket Chart Attack

In follow up to my newsletter – Intermarket Chart Attack: Some Things are Really Broken  – I wanted to detail what I present to those in my Live Trading Room daily as my ‘roadmap’ for market action – both near term and further out. I warn you now: some of these charts are very geeky but they are also deeply valuable tools that help me make my (sometime’s famous) market timing calls! 

Resistance Matters: NYAD

Yield Curve Inversion Matters…

Yield Curve Bounce Then Trounce?

Staying Within The Lines – NYSE Roadmap

Small Cap Surprise – or Why I shorted Last Monday

Earnings Matters

As we approach end of month and end of third quarter, stock buyback desks will be winding down next few weeks as we approach Q3 Earnings kick-off. That removes one of the large buyers of stocks and makes them more susceptible to headline macro and geopolitical risks. The biggest market-moving headline for over a year has been the market’s anticipation of a Trade Deal or escalation of a Trade War. But we’ve seen these headlines so many times, we’ve grown numb to them, so much so that portfolio managers have “given up” on worrying about the Trade War.

Trade War

But with Q3 Earnings approaching, we should get a better feel for how US companies are faring in this global market of uncertainly, tariffs and de-globalization. Fedex (FDX), Corning (GLW) and Steel companies (X, NUE) have already warned about future earnings, signalling that customers have already reduced spending due to trade uncertainty. What about Micron (MU) with it’s leadership in not only Semi stocks but also China trade? We will see soon and the bar is pretty darn low to jump over:

Micron Technology, Inc. is expected* to report earnings on 09/26/2019 after market close. The report will be for the fiscal Quarter ending Aug 2019. According to Zacks Investment Research, based on 9 analysts’ forecasts, the consensus EPS forecast for the quarter is $0.43. The reported EPS for the same quarter last year was $3.5.

One reason Indices may be hanging out not breaking out is for more proof that company profits are heading down which would weaken the consumer, employment and the market’s advance.

Consumption has really tended to collapse when financial conditions tighten rapidly.
Financial conditions tighten rapidly when profits collapse.
Speaking of Earnings… Q3 EPS Reports are queuing up! Comparison with Q3 2018 will be tough, so estimates have been lowered (lower bar to jump over), but even with that, we are kicking off the first quarter of negative earnings growth in three years (h/t @EddyElfenbein).

Financial Conditions Matter

The U.S. Treasury Yield Curve remains deeply inverted, has been for four months, and this despite two quarter-point cuts in the fed funds target totaling 50 basis points. The rate cuts should have help to help un-invert by reducing the front end of the curve but that didn’t happen. In fact, the back end has fallen too, suggesting growing concern about the economy.  Every sustained inversion like this has been followed by a recession in the last 50 years.
History Rhyming?
Indeed almost 12 years to the day Bernanke also cut rates in September 2007 and told Congress in November (after the market had topped in October at a further new high) that while the US economy was indeed facing some risks, it did not appear headed for a recession. A month after that, the US economy fell into the Great Recession. The price action isn’t that different either. Curiously the very top in 2007 was triggered by minutes from the September rate cut meeting that encouraged traders’ hopes for a further rate cut that year? Sound topical? And if we want to take the analogy too far, the minutes for last week’s meeting will be on October 9th. Ed Matts

Things never turn out well in global finance when bond managers are worrying more about the RETURN ON their capital not the RETURN OF their capital. 

So what changed from the last rate hike – just 8 months ago in December – to the rate cutting pause announced by Powell Jan 4th 2019, followed up by him signalling a cut June 2nd and then actually cutting July 31st? Trump’s US-China Trade War sent the US into a Manufacturing Recession. Although some will claim this Manufacturing Recession was telegraphed by Fed tightening and/or China’s deleveraging, the timing of the pressure on business uncertainty, profit margin compression and declining exports has had the biggest impact on World Trade Volumes and, correspondingly, Profits.
Despite Trump’s Trade War and Manufacturing Recession, mixed US economic data and very poor global economic data, including Technical Recessions in Germany and South Korea, for example, markets have not sold off. Similarly, despite strong US consumer and employment data, a Fed that has cut 50 bps as insurance against trade war impact and has stepped up to create backstops to help unplug the Repo markets, markets have not broken out. All the while the rest of the world has accumulated $17 Trillion of negative debt by global central banks which brings with it a whole host of other unintended consequences on confidence (recession fears) and consumption (saving not spending).


Sold-To-You Rally

When Global money supply diverged from market price, beginning of July, it became a “Sold-to-You” market in my eyes. As a result, I am still expecting SPX to take out recent lows and trade sideways-to-lower into 2020 elections.


Concerns Can Become Reality

Since Trump announced his first tariffs on Steel – US Steel is now down 75% since – the trade war has dragged on near 400 days.
Frustratingly for bears, indexes are still near all-time-highs – despite a panic in December when credit markets froze and equities sold off ~20% peak-to-trough at which point Treasury came in to “fix” the panic and markets quickly reversed, proving once again that each of the past 36 corrections since 2009 were buying opportunities.
This is why the mantra of “Don’t Fight The Fed” seems apt, but is it? So much credit has been given the Fed but it is really a mis-used saying for stock market’s strength these past few years in particular, past few decades in general. There are other compelling reasons US equities have stayed higher for longer:
Our pensions were only about 60% of GDP in ’84. Now they are 120% of GDP. That’s massive spectacular growth. There’s nothing on earth that’s grown that fast from such high base. So they’re the dominant global investor, but they’re so underfunded they need to make 7.5%. 
So what we’ve seen over the last 10 years, especially the last 5, is more and more pensions reducing their low yielding cash in favor of more aggressive credit investments, that helps increase the intensity of this credit boom and it exacerbates these up and down panics, because it removes shares from the stock market, which means that the money that remains can move shares with less effort.
And the result is this Daisy chain of money coming in from taxes to pensions, going into credit, which is then used to artificially push up stock prices.

Brian Reynolds

It is clearly a case of “Don’t Fight The Pension Funds” as they are the ones MANDATED to buy, and it is the scarcity of Liquidity and US Dollars that can turn this Credit Bonanza into a Credit Bust.
And lately the market has felt very fragile. The following historic moves occurred within the span of two weeks:
  1. We had a 3.5 standard deviation move in Bonds
  2. The Gold + Silver Parabola broke down next day.
  3. A Historic 8.5 standard deviation move triggered from Momentum to Value plays.
  4. Global markets had the largest one-day surge in Oil Prices in history.
  5. The Funding Spreads in the REPO markets exploded higher than in Sept 2008!
Market has miraculously recovered from each of these ‘anomalies’, but that doesn’t mean confidence has. The market gains we had after the Fed’s July 31st “mid-cycle” “insurance” cut, followed by another one on Sept 18th, have not been exactly compelling to attract money to come back in. From Hedge Funds to Retail, many distrust this rally, distrust the President, distrust the Fed. It is more than a Wall of Worry, it is a Wall of Money that sees more risk than reward.

The Fed is Cutting but Loathe to Cut

Just a little more than a year ago, the yield on the 10-year Treasury got to 3.2% (October 3rd – I called an audible for a Market Correction). Soon after, yields reversed hard and got to under 1.5% (September 3rd – I called an audible for a Bond Correction). Talk about a rate reversal.

Also last November, the 2-year yield was more than 70 basis points above the Fed and by June of this year, the 2-year was 60 basis points below the Fed. Is it any wonder we had the Powell Pivot and Fed cut? And this was the reason for the “Insurance Cuts” (plural) we were given by Fed Chairman Jay Powell:

Since the middle of last year, the global growth outlook has weakened, notably in Europe and China. Additionally, a number of geopolitical risks, including Brexit, remain unresolved. Trade-policy tensions have waxed and waned, and elevated uncertainty is weighing on U.S. investment and exports. Our business contacts around the country have been telling us that uncertainty about trade policy has discouraged them from investing in their businesses.

Given the Fed decision and intonation, I suspect they hold the fed futures rate at 2% for both the Oct 30 and Dec 11 meetings. I know that isn’t what the market or Trump wants, but that is my chart read. Also, it won’t provide the fuel to embolden Trump’s Trade War as he has done at the last two FOMC meetings. Instead I expect Fed will announce expansion of their balance sheet – aka QE.
  1. Further balance sheet expansion means fewer cuts.
  2. Means bullish long end of curve $TYX $TNX
  3. Means Higher Inflation that results from QE especially if used for Fiscal policy.
And when/if rate cuts are done in the US, for the year, despite what market and Trump may signal they want, I expect we get an upward push in Inflation Expectations. The case for higher long-term rates … is rising with CPI.



Escalating Trade War Tensions with Oil

Powell himself said the latest rate cuts were ‘insurance’ against further geopolitical and economic risks from Trump’s Trade War. And in keeping with my thesis – Stock market will be sorely disappointed by a Fed rate cut – Trump took each opportunity to escalate both tariffs and tensions after each rate cut. No less than the same day after the 1st rate cut did Trump raise the tariffs and threaten to make US companies leave China. On this 2nd cut, Trump immediately took to sanctioning Iranian banks wherein China is a key customer of oil from Iran including partnering a deal to infuse $280M to develop Iran’s oil, gas and petrochemicals sectors.   Trump had this news before FOMC but he chose not to act until after FOMC, at which point China cancelled their meetings to talk further and said they wouldn’t be going to Montana and Nebraska where they were slated to discuss agriculture purchases. I had been waiting for the tweet. 
And then after market close Friday – with price action very unlike a typical September Quad Witching month/quarter – the White House announced further escalation:

Pentagon will deploy US forces to the Middle East on the heels of the Iranian attack on Saudi Arabian oil facilities. CNBC

Despite Pompeo saying the deployed troops are for “deterrence and defense”, the potential for accidental war grows and with it so should market volatility.

But there is something else that the potential for higher oil prices can cause, should the Saudi-Iran, US-China square off: a far greater geo-economic risk to China than tariffs imposed by the US. And that is what I think Trump is doing now:

  • Using the Fed’s rate cuts to empower his Trade War against China through higher tariffs.
  • Using Saudi attack -whether real or orchestrated – to add pressure on China through economic pain.

Other than headline risk of Iran conflict, I saw no reason to be long before these recent drone attacks. After the 20% oil price surge Sunday, I said in my live trading room I expected it to fade. We closed the week +7% Crude, not 20%. Despite the risk premium now in the oil price from this outlier event (poor Saudi air defenses!?!), we now have deployed troops. No, I do not expect US to go to war for Saudi Arabia, let alone invade Iran, but I do expect Trump to keep a presence in the area to keep pressure on Iran so as to put economic pressure on China and in doing so lift the price of oil.

But keep in mind: Trump had/has been mercurial on waivers for companies/nations doing business with Iran, which in turn has kept oil speculators out of the market. That and his tweeting to keep prices down. Further, there was very little Open Interest to back up the lack of investment. Most were divesting not adding – other than China that is!
That is not likely to change with current tensions. What is likely to change is the price of oil, factoring in not only a renewed “Risk Premium” from Supply Disruption, but potentially adding in More Risk Premium for War, accidental or otherwise. As a result, speculators can drive up price in the short-term on supply disruption but fundamentals are needed to keep oil prices from crashing after tensions settle down.
And that’s when we would see the picture more clearly as time will have passed so as to get a better measure of economic conditions to determine demand of oil – separate from the supply shock currently occurring. And let’s face it, the jury is still very much on the side-lines regarding Demand Destruction story that was just starting to heat up as Global Trade and Global Economic Slowdown worries entered the market picture. With that the growing risks/cases of bankruptcies in the oil patch that would be threatened with Oil under $60 for an extended time, which not only threatens the Energy sector (Shale companies and their bond holders in particular), but it would by association be a headwind on US equities market.
Trump’s Iranian Conflict that happens to benefit his Trade War with China is Trump basically re-framing the picture so it looks a little different, but it’s still the picture that matters most.


In short, companies need the expansionary affects of global economic growth and trade, and lots of US Dollar Liquidity to prime the pump of financing. We have the opposite but we have Pension Funds to serve as buyers of last resort, Yield Differentials to attract foreign money, and stock buybacks to keep domestic money parked in equities. So why worry?

That’s my job.