Silicon Valley Bank Goes Under, Where Do We Go From Here?

To start the Wealth Watch I would like to let everyone know that we had almost no exposure to SIVB or the banking sector in general, and we do not own any bitcoin. Neither met our requirements for an investment.

While I have been writing to expect volatility over and over for weeks, I think it is now clear to see that I was not kidding, was I? The last week has weakened the HCM-BuyLine® and we are watching closely for any break. The markets have been trading just about as we had anticipated, with a nice run-up in January, then a pullback followed by a period of consolidation which is to be expected. What was not anticipated was a bank failure. That caused a two-day selloff that was very hard. The trend is still intact, but just barely. Even if the HCM-BuyLine® is breached, we do anticipate a recovery back above the trend in short order.

We spent a lot of time over the last three days analyzing whether we felt other banks were not being managed very well, and our conclusion is that this is most likely a one-off. In other words, the bigger banks look to be more sound. They are not taking on high risk loans like Bitcoin and tech startups like SIVB was. Furthermore, most of the larger banks are very well diversified whereas SIVB was not.  I’m not sure how they were able to give loans to a lot of these startups, but it has created some good buying opportunities in the banking sector. Our top pick would be Bank of America, and while we do anticipate investing in that bank soon, we will give the banking sector time to stabilize before looking to invest.

SIVB, the 16th largest bank in the US, is one of Tech industry’s largest lenders and media stories suggest VC and PE firms might be advising founders to move cash away from SIVB — essentially fueling a panic among Financials that continued right up until regulators shut it down.

SIVB’s failure highlights the fact that banks collectively are sitting on sizable losses on loans due to the rise in interest rates. The FDIC reported that at the end of 2022, the total unrealized losses is $620 billion (vs ~$15b 2021), and if these banks had to liquidate their portfolios, would substantially deteriorate book value.

But with investors and depositors rattled by the troubles at SIVB, financial conditions are tightening. This potentially reverses some of the hawkishness one would expect from the Fed. Basically, restricted lending by banks amplifies the impact of Fed hikes in place now, and would reduce the need for future hikes.

While the NFP jobs report will be very important for the Fed, the SIVB-induced bank scare actually offsets the inflationary risks for the Fed to an extent. That is, even if Feb jobs is really strong, the continued second-order effects of the SIVB-issues will likely contribute to a tightening of financial conditions. This means the odds of the Fed having to accelerate its pace of hikes might be reduced.

Volatility Can Be Scary, But The HCM-BuyLine® Remains Positive

The markets are trading about as we would expect. With the strong run-up in January, a pullback and period of consolidation was warranted. There is room for the market to move either up or down, with the trend still up as identified by the HCM-BuyLine®. The S&P 500 has traded down to support and is close to the 200-day MA. Like I stated last week, volatility is to be expected.

The S&P 500 ex-FAANG is trading at a 14.8 P/E, which shows a lot of value for most of the underlying issues in the S&P 500. A 14.8 average PE is not high for the rest of the S&P 500.

We hear investors say the market is too expensive. But this is distorted by the higher multiples of FAANG, and we think the higher multiples of FAANG are justified. FAANG stocks are also very strong financially and making a lot of money even in this volatile market.

The Conference Board’s Consumer Confidence Index fell 3.1 points in February to 102.9, down for the second consecutive month, and below the consensus of 108.5. While the index is down 26.0 points from its cycle high in mid-2021, it has been range-bound over the past several months and is holding up well above the lows during the pandemic. The current level is consistent with a continued economic expansion.

Consumers felt better about the present situation, with that index component up 1.7 points to 152.8, its best level in ten months. The main driver was a pickup in job availability, which is running close to its highest level since 2000 and implies continued downward pressure on the unemployment rate over the near-term. At the same time, current business conditions were broadly viewed as neutral.

Consumer expectations, however, dropped 6.3 points to 69.7, a seven-month low and near the worst level since March 2013. Expectations for jobs, business conditions, and incomes all worsened from the prior month. The confidence spread (present situation minus expectations) widened to 83.1 points, the most since March 2001. It suggests that even though consumer confidence is still high, consumers are nervous about the economic outlook. A peak in the confidence spread, followed by a sizeable decline, has historically been associated with slower economic growth or recession. Although this indicator has not yet peaked, we have it on watch for early signs of deterioration.

Don’t Blink – Bullish Signals Abound

The market has pulled back to the point of being oversold. After a nice rally a period of consolidation can often be expected. This has little effect on the HCM-BuyLine®, and it remains positive. The S&P has set into what is called a golden cross, where the 50-day moving average crosses above the 200-day moving average, reflecting another bullish pattern. Also, the S&P 500 remains above the 200-day moving average, and a breadth signal occurred on 1/12, another bullish signal. VIX, the volatility index, is now oversold and a reversal is probably imminent. Pullbacks are buyable until the HCM-BuyLine® turns negative, and it has a good amount of room to move before that happens.  Remember, you sometimes have to do what is not comfortable to be successful, and sometimes markets are a very uncomfortable place to be.

The S&P Global Flash U.S. Composite PMI climbed 3.4 points in February to 50.2, its best level and in expansion territory for the first time since June 2022. The improvement in private sector activity comes on the back of some better-than-expected economic data for January, including nonfarm payrolls and retail sales. Although the latter may have been impacted by seasonality and benchmark adjustments, and the risk of recession later this year has not been eliminated, the cumulative evidence still suggests that the odds of a soft landing for the economy have improved.

In both services and manufacturing, cost burdens eased but selling prices picked up. This suggests that firms continue to have pricing power, which bodes well for their profitability, but also implies that consumer price inflation may be stickier than anticipated.

Risk-On! – The HCM-BuyLine® Flashes Buy

The HCM-BuyLine® is positive, and risk should be taken. Pullbacks should be considered buyable. We have been adding exposure to equities and are near 100% back in the market. What can investors expect? Volatility, and I highlight that word for emphasis because there is a lot of fear out there due to the bruising 2022 market, not just for stocks but also the worst bond market in over 40 years. So, anytime Fed chair Powell steps in front of a microphone, hold on because the markets are going to move, and which direction is anyone’s guess. With the HCM-BuyLine® being positive the odds are a 73% chance that the market will continue to climb higher, and a 27% chance it does not hold and rolls over. In that case we again reduce our exposure to equity. 

What could be a very encouraging sign that not only are we now in an uptrend, but that a new bull market could be developing is the S&P 500 is setting what looks like a cup and handle pattern. The cup and handle is one of the more powerful technical chart patterns there is. They do not set up very often, but when they do set up and follow through, it usually leads to a very explosive and long-lasting rally. Time will tell.

Consumer prices firmed up in January, driven by a rebound in energy and continued strong gains in shelter. Additionally, revisions to the seasonal adjustment factors converted the 0.1% decline in December to a 0.1% increase and showed stronger price growth in Q4 overall than previously estimated. Year-to-year price growth eased less than expected. Coming on the back of strong payrolls growth and further tightening in labor market conditions in January, this report confirms that the Fed is not yet done raising rates.

We currently expect two more rate hikes this year before the Fed pauses to evaluate the impact of cumulative tightening. The Consumer Price Index (CPI) increased 0.5%, the most since last June, and above the consensus of 0.4%. Energy prices rose 2.0%, following two consecutive declines, while food prices rose 0.5%, still much stronger than the 0.15% average monthly gain in the year prior to the pandemic.

Core CPI, which excludes energy and food, increased 0.4%, the most in four months, and above the consensus of 0.3%. Shelter was the biggest contributor, up 0.7%, accounting for more than half of the increase in the core. Both rent and owners’ equivalent rent rose by the same amount. Shelter’s increase was off the peak of 0.8% at the end of last year, but still near the biggest gain since August 1990. While private surveys show that rents have already started to decline, the change is captured in the much broader shelter CPI with a significant lag. We expect shelter CPI to moderate later this year.

HCM-Buyline® Goes Positive – Look For Your New HCM 401(K) Allocations Now

The HCM-BuyLine® has turned positive on a short, intermediate, and long-term basis after giving a very strong buy signal. Several other indicators have also been close or have turned positive. We have sent out new allocations for our 401(k) Optimizer participants, along with readjusting our allocation in other investment areas such as annuities. Thus, until/unless there is some type of meaningful pullback under 3949, dips in the next 1-2 days should be buyable into/post FOMC for rallies back over 4100.

The equity comeback of the past three months has been broadening out globally, with the U.S. market now participating to a greater extent and the performance of risk-on proxies becoming more decisive relative to the performance of risk-off proxies.

I have enclosed this week’s strongest sectors for your review:

Inflation pressures continued to recede in December but are still elevated. The PCE Price Index edged up 0.1%, the least in five months, largely due to lower energy prices. The core PCE Price Index rose 0.3%, in line with the consensus

On a y/y basis, PCE prices posted 5.0%, down from 5.5% in the prior month, and the lowest inflation rate since September 2021. Core PCE inflation eased to 4.4% from 4.7% in the prior month, the lowest rate since October 2021, and matching the consensus. The deceleration supports a continued downshift in Fed rate hikes. We expect a 25 bp rate increase at the FOMC meeting next week.

The main contributor to the deceleration was goods inflation, particularly durables. Durable goods prices were up just 1.4% y/y, the least since February 2021, and a steep drop from the cycle peak of 10.6% y/y in early 2022. Services inflation, which is stickier, was unchanged from the prior month at 5.2% y/y. It has ticked down from its cycle peak of 5.5% y/y last October, but it is still near its highest level since 1985. Housing and utilities prices, which accounts for more than a quarter of the services price index, are still posting above-average monthly gains. They were also up 8.4% y/y in December, the most since October 1982, keeping upward pressure on services inflation.

Personal consumption expenditures (PCE) fell 0.2% in December, below the consensus estimate of -0.1%. This was the second consecutive decline in spending and the most in a year. It suggests that demand is slowing under the pressure of higher interest rates and still elevated inflation.

Will The Bull Come Roaring Back? Positive Signs Abound

The HCM-BuyLine® has again firmed up substantially over the last few weeks giving us some optimism that a new uptrend could be materializing. Also, this week the NASDAQ Composite A/D indicator moved to its highest level since September 2021 and QQQ long-term breadth also improved. More indictors are turning up, which is a very positive sign. Most bear markets last about 9 months, and we are into month 13 on this one, so we believe we are getting close to the end of this bear cycle.

2022 was an incredibly volatile year. With unemployment very low, a good economy, banks very solvent, and companies making a lot of money, you would think things would be fantastic. But inflation and the Fed do not see it that way. A business owner I know put it pretty much spot on “they are going to kill everything else just to kill inflation, not sure if that is very prudent”. If the Fed does not slow down with rate increases, they will push the economy into recession which will lead to millions of job losses, everyone getting poorer, and a lot of emotional destruction. I don’t see too many politicians sitting idly by with the “let’s kill everything just to kill one thing” mentality.

But there is good news! Inflation does appear to be rolling over, and at a pretty good pace. Supply chain issues are starting to ease, oil is stabilizing, housing is rolling over, and labor markets and wages are all slowing, which leads us to believe the Fed will start to slow the pace and amount of rate increases in the near-term. In fact, we believe the bond market is already starting to sense this.

We have added some bond exposure over the last few weeks by taking long positions in EM bonds (PCY) and long-term corporates (LQD). Has the bond market started to turn up for a new bull market? Time will tell, but things certainly look a lot better.

Stocks like AMD and the semiconductor index are firming up and could be big winners this year after a very painful 2022.

Since 1950, if the first 5 trading days are up 1.4% or better and the previous year was negative (which has happened 7 times) then the market has finished positive the following year.

  1. 1958 first five trading was up 2.5%, the year ended up 38%
  2. 1963 first five trading was up 2.6%, the year ended up 19%
  3. 1967 first five trading was up 3.1%, the year ended up 20%
  4. 1975 first five trading was up 2.2%, the year ended up 32%
  5. 2003 first five trading was up 3.4%, the year ended up 26%
  6. 2012 first five trading was up 1.8%, the year ended up 13%
  7. 2019 first five trading was up 2.7%, the year ended up 29%
  8. 2023??

-from Fundstrat

Goodbye 2022, Hello 2023 – Vance Howard’s Predictions For The Coming Year

As we close out the year it looks like Santa will not be showing up this year. After one of the most volatile years in history we are thankful to see it come to an end. Bear markets come and bear markets go; it’s just part of the process. The only sector that will probably close up this year will be energy. You don’t see just one sector end up positive for a year that often, in fact you probably have to go back to 1929 or 2008 to find this occurrence.

As this is the last Wealth Watch of the year, I’m going to give my predictions for 2023.

The first quarter of 2023 will be very volatile, and since we are closing out the year on a weak note, that volatility will likely carry over into the first quarter.

2023 will end up in double digits for the year. The economy is strong, unemployment is weak, anyone who wants a job can find one, and our banking system is very solid. Inflation is starting to roll over, the Fed will stop raising rates at the March meeting and that will take a lot of pressure off the markets. Historically, the market has only closed lower 2 years in a row 4 times, so the odds are very high for a positive year in 2023. 

Bonds will start to rebound after the first quarter. The bond market has overshot and will finish up in 2023.

West Texas Intermediate Crude will close over $100 dollars a barrel in 2023. China is opening back up which will create a lot of demand in Q2, 3 and 4. Also adding to high oil prices is something that it appears many have overlooked. The Biden administration opened the strategic oil reserve a few months before the election, pushing a lot of stored oil out into the market and pushing prices lower. A few weeks ago, they stopped depleting the strategic oil reserves and oil has started to climb again. They will need to replenish what they took out of the strategic oil reserve along with the fact there will be more demand in 2023.

Supply chain issues are also starting to correct themselves which will help bring down inflation.

Again, these are just my predictions, but there are a lot of positive signs that 2023 could be a very good year for investors.

Did The Fed Put The Economy On The Naughty List This Year?

I have been looking back at a lot of historical data on the markets and most of the time I would say that just about all bear markets are the same. However, this bear market is quite unique. We have a very good economy, unemployment is very low, basically anyone that wants a job has two waiting for them, our banking system is very strong, companies are making very good profits, and wages are up. But, and here is the difference, the Federal reserve is trying to kill all that. In the late 70s Paul Volker was Fed chair and he raised rates to double-digit levels to stop rampant inflation, but unemployment was high, the economy was weak, and there were a lot of other problems during that period of time.

Why are things so good yet the Fed is trying to destroy it all, and why is this time different? This is an easy one: Covid-19, the pandemic! No question about it, the federal government threw out too much money and started printing money like there was no tomorrow. These are clearly my opinions and I’m sure some will totally disagree, but we never should have shut down the economy like we did. I was in Texas, and we basically shut down for about 4-6 weeks while other parts of the country shut down for months on end.

Johns Hopkins University came out with their findings that said, “ill-founded Covid lockdowns did more harm than good” and “The researchers say lockdowns had no noticeable effect on reducing COVID- related deaths but had a devastating effect on the economies and social ills.” The report is on the web and easy to find if you’re interested. I can’t find anyone these days that has not had Covid. I have had it at least once for sure, and probably twice.

So, where does this leave us? I have been trading the markets for over 35 years and I can say this has been one of the tougher markets to trade in that I have ever seen. 2015-2016 was challenging and I have enclosed a chart of the HCM-BuyLine® at that time. Remember, the HCM-BuyLine® has a 73% success rate, but it also has about a 27% failure rate. We trade a system and that is what our mission is, so when it fires off a buy signal, we take the trade even in uncertain times. The Covid-19 selloff in 2020 was very intense, and when the BuyLine went positive and gave us a buy signal in late-March/early-April, we took the trade as we should have. This was when the Imperial Collage was saying the United States would have well over 30 million deaths. Thank goodness they were very wrong, and in all candor they were irresponsible in making unfounded statements like that, but in the end 2020 was one of our most profitable years.

The HCM-BuyLine® did turn positive a few weeks ago on a short-and-intermediate time frame. This gave us some hope and optimism for the market to turn back up, just to drop straight back down after Fed Chair Powell stepped in front of the microphone a week back. We have since pared our holdings back down to about 50-55% invested.

So, what is the conclusion to all this? If you trade a system, which we do, you must commit to the system and expect that not all trades will be winners, but over a full market cycle a good system should produce very strong gains.

I make a long-standing joke that the only perfect system was Bernie Madoffs. He never had a drawdown or a loss! But until the SEC shut him down you must give him credit, he stuck to his system. LOL

Stocks Find Some Footing After 5-Day Losing Streak

The HCM-BuyLine® is still above the short and intermediate-term trend. In other words, some risk should be taken at this time. We have been carefully adding to positions and buying new ones on pullbacks. We are still holding a lot of cash, and the longer-term trend is still negative. The S&P 500 came awfully close to closing multiple days above the 200-day moving average, which would have been positive for stocks, but has since pulled back below it. Equities sold off sharply to start this week with a 2% decline. Nobody needs a reminder that investors remain hypersensitive to “hot” economic data because this pushes the Fed towards “higher for longer” and the strong Nov ISM Services falls into that category.

A couple of stocks that are looking interesting are (CVX) Chevron, (AMGN) Amgen and a real-estate equity Crown Castle (CCI).

Click to enlarge images

Initial claims for unemployment insurance picked up 4,000 last week to 230,000, matching the consensus. While claims have been choppy around the Thanksgiving holiday, their four-week average has barely budged, up 1,000 in the latest week to 230,000. It has picked up from its cycle trough last spring but is only modestly above the pre-recession level of around 200,000. Amid an increasing number of industry reports of layoffs in the tech sector, the subdued trend in initial claims indicates that labor demand, in aggregate, remains solid.

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