CWS Market Review – April 9, 2024

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Maybe the Fed won’t be cutting rates!

It’s hard to say for certain, but on Wall Street, doubts have started to creep in about what the Fed will do with interest rates.

For months, Wall Street had assumed that the Federal Reserve would jump in and cut interest rates. The Fed admitted it as well. Lower interest rates, quite naturally, would help the stock and housing markets. The line of reasoning was simple: “Why not cut? Inflation’s fading away.”

Now it looks like the economy is stronger than expected, and inflationary indicators are running hot. The prices of gold and silver, for example, have rallied. The price for oil has also moved up. In fact, Mark Zandi, an influential economist with Moody’s, said that higher oil prices is the “most serious” threat to the economy. That’s not supposed to happen when inflation has been defeated.

What’s the market thinking? Check out the five-year “breakeven rate:”

This is the market’s bet for what inflation will do over the coming five years. Notice how the breakeven rate has gone up since the start of this year. This is getting hard to ignore.

Now some Fed officials are hinting that rate cuts may not be as generous as assumed. Neel Kashkari, the head of the Minneapolis Fed, said the Fed could delay in cutting rates. Lorie Logan, the President of the Dallas Fed, said it might be too soon to cut rates. Not to be outdone, Jamie Dimon, the top banana at JPMorgan, said interest rates could eventually rise to 8%.

The problem for Wall Street is that so much of the recent rally was predicated on the idea of lower rates. It’s as if the stock market was told it got a bonus, and it quickly ran out and spent all the money before the bonus appeared in its bank account. Now it’s being told that the bonus may be canceled.

Even subtly, the stock market appears to be getting nervous. I’ve noticed that a few times recently, the stock market has been unable to hold onto early-day gains. Until recently, the bears were easily scared away. Now they’re able to push back and reverse morning rallies.

It’s interesting to note that growth stocks (in red) strongly led the market (blue) from the start of this year until two months ago. Since then, growth stocks have largely performed in line with the overall market, perhaps slightly trailing.

The Fed admitted that it sees itself cutting rates three times this year. Now, many traders think we’ll only get one or two cuts this year. There’s a growing number of people who think we won’t get any cuts this year.

The futures market currently thinks there’s a 60% chance that the Fed will cut rates by 0.25% in June and a 75% chance that it will come by July. Traders see only two rate cuts over the next seven months. That recession that was promised to us seems to be taking its time.

The Economy Created 303,000 New Jobs in March

Last Friday, the government reported that the U.S. economy created 303,000 net new jobs last month. That was an impressive number. Economists on Wall Street had been expecting a gain of only 200,000. Also, the unemployment rate ticked down 0.1% to 3.8%, and the labor force participation rate increased by 0.2% to 62.7%.

But there were some concerning stats in the report. For example, the jobs gain for February was revised lower to 270,000. Also, the broader U-6 rate was unchanged at 7.3%. The revision for January was an increase of 27,000 to 256,000, but that’s still below the initial estimate of 353,000. I’m also suspicious when too many of the new jobs are in government.

Growth came from many of the usual sectors that have powered gains in recent months. Health care led with 72,000, followed by government (71,000), leisure and hospitality (49,000), and construction (39,000). Retail trade contributed 18,000 while the “other services” category added 16,000.

I was particularly interested to hear the number for wages. For March, average hourly earnings increased by 0.3% which matched expectations. Over the last year, average hourly earnings are up by 4.1%. That’s not bad, but it needs to be better.

Workers have seen that the rate of earnings growth has slowed down considerably (see above). To be clear, wages are increasing but at a slower rate.

However, the household survey, which is used to calculate the unemployment rate, posted an even more robust gain in March, up 498,000, more than absorbing the 469,000 increase in the civilian labor force level.

Gains tilted heavily to part-time workers in the household survey. Full-time workers fell by 6,000, while part-timers increased by 691,000. Multiple job holders rose by 217,000, to 5.2% of the total employment level.

The next inflation report is due out tomorrow. The last report showed that headline inflation increased by 0.4% in February, and the year-over-year rate is running at 3.2%. The core rate also rose by 0.4%, and it’s up by 3.8% over the past year. For tomorrow’s report, Wall Street expects to see both the core and headline rates increase by 0.3%.

Why Shorting Is a Very Tough Game

Two weeks ago, Trump Media (DJT) started publicly trading. The company merged with Digital World Acquisition Corp., a publicly traded shell company.

By any rational measure of value, Trump Media is wildly overpriced. The company currently has a market value of $5 billion even though it had total revenue last year of $4.1 million. That’s probably equivalent to a few 7-11 stores.

For the year, the company lost $58 million. On its first day of trading, DJT nearly hit $80 per share, but lately, it’s around $37 per share. I bring this to your attention not for any political reason but to show you how dramatic Wall Street can be.

Trump Media is currently the most expensive stock to short, meaning to bet against. In fact, it’s the most expensive to short by far. If you want to borrow shares of DJT to sell them short, you’d have to pay financing costs that run at an annualized rate of 750% to 900%. That compares with the average stock to finance at 0.71%.

This means that if you took a short position in DJT, you’d have to pay about $1 per day in financing costs. According to CNBC, “to break even on a new trade after one month, a short seller would have to see the share price of Trump Media drop by more than $30.”

I use this as a lesson that on Wall Street, even if you’re right, you can be wrong. The folks shorting DJT are betting on a sudden collapse. Even if the company turns out to be terrible, it could be a long, painful death. In fact, that’s what happens to many stocks.

I generally steer clear of shorting stocks. To be sure, it’s not hard to find stocks that are overpriced. But with a short, you’re making a few bets and only one is that the stock is too high. You also need to get your timing right. You need to see folks convinced that you were right all along. That’s not so easy.

Bear in mind that with a heavily shorted stock also runs the risk of a short squeeze. That happens when a widely-shorted stock starts to rise. Investors who are losing money then cover their short which pushes the shares even higher.

That can spark a cycle of ever higher prices, which essentially happened with Game Stop (GME) three years ago. Shares of GME rose from $5 to $87 in just 10 trading days. Now it’s at $11.

This is one of the many reasons why I prefer the long-only approach with no margin. Even if I’m wrong, time is on my side.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on April 9th, 2024 at 5:31 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.