Macrosynthesis

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Market indexes had wild swings last week, thanks to a slew of off-brand comments from Federal Reserve Presidents, reports of higher labor costs and fewer jobless claims, and treasury yields rising in anticipation of more hikes from the U.S. Federal Reserve. Thursday looked set for a bad day, with the S&P 500 down at the open then rising slowly to end the day in the positive.  

To sum it up, some Fed Presidents spooked the market by noting they could see interest rates raised by .5% at the next meeting and being kept above 5% "well into 2024." Those comments were walked back Thursday, creating the relief rally after the same Fed claimed he was "firmly in favor" of only doing .25% increases all along.

The interest rate paid on 2-year Treasury bills reached nearly 5% before pulling back - a reflection of the anticipated moves by the Fed. Higher rates are less favorable to equities as they create competition for investor dollars and reflect the expectation that borrowing costs will be higher for businesses and consumers.

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The January rally in stocks was partially fueled by falling yields on the 2-year Treasury, which fell to a low of 4.1%.

For low profit companies, higher borrowing rates means the present value of future cash flows gets discounted, making them worth less today.

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A Little Bit of History Repeated

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The last time the 2-year note was this high was April 2007. In case you don't remember what happened after or weren't old enough to remember: it wasn't pretty. We're not predicting another 2008 financial crisis, but higher interest rates aren't usually supportive of market rallies - rather the opposite.  

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In 2006, the 2-year reached 4.9% and remained elevated for 18 months before falling as the economy began to lose steam and the Fed cut rates, as shown in the graph above. It's largely anticipated that the U.S. will enter some sort of recession late in 2023.

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Boring Looks Better

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When sentiment in the market shifts negative, the safer sectors outperform. These are the ones that aren't the sexiest, but are more stable. The utilities sector, represented by the XLU ETF, and the the XLP - consumer staples ETF - both began a recovery Thursday following selloffs since December.

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The fact that the XLU rose despite interest rates being high is quite telling. Normally, utilities are inversely correlated to interest rates as their dividends become less attractive when compared to risk-free, higher yielding bonds. Likewise, utilities are capital intensive businesses. To build a new facility, they typically need to borrow money from banks and those loans at higher interest rates make the endeavor less profitable unless they can pass those cost off to us customers (which they will try).

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If utility stocks are rising, it's an indicator that investors are flocking to safety while expecting rates to get cut by the Fed sooner rather than later (which would send utility prices higher, in theory).  

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Housing Remains Unaffordable

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The 30-year mortgage hit 7% last week - a rate not seen since November of last year. Housing sales continue to slow due to low demand and supply, and with interest rates rising it's not likely to get better for the industry.

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COVID Came From a Lab in China Afterall?

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In case you missed one of the biggest 180-degree turns in media history, the U.S. Gov't reported last week that the COVID-19 virus which killed 7 million people and disrupted the lives of nearly everyone on the planet in some form may have come from a lab in Wuhan, China which studies, um, novel Coronaviruses.  Previously, the Biden administration had labeled this belief as unsupported by any facts and extremely unlikely. And the debate turned political thereafter, unfortunately, especially following Facebook's ban that such a theory be allowed on the platform.

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If you want an entertaining take on all this, check out the interview with John Stewart about it from 2022 where he lays out the plausibility of the lab leak.

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Noteworthy Events

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Morgan Stanley Gets Bullish on Apple

Morgan Stanley named Apple as their top investment idea and may have rescued the stock from selling pressure. The stock jumped 3% on the PR press.

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Pfizer Targets Cancer Next?

The Wall Street Journal reported last week that Pfizer intends to acquire Seagen Inc - a maker of cancer-fighting therapies. The deal, which has not been announced by either company, would add $30B to Pfizer's market cap and give the company an impressive pipeline of new drugs. Shares of Seagen rose on the news.  

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Knowledge Corner:

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DON'T TRUST AFTERHOURS PRICE ACTION

Pricing of stocks outside of regular trading hours can move swiftly, but it's often reversed during trading hours and prone to MASSIVE overreaction. It cannot be trusted because the volume of trades can be so thin, two people can change the price of the stock swiftly.

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Let's say Joe wanted to buy 1 share of stock really badly and didn't want to wait for a price. Imagine the stock was a $60 stock. If the price of that stock closed at $50 and the asking price of the stock was $55, and Joe put his order in at market price, Joe would've bought the one share for $55 thinking worse case, the stock drops back to $50 and he loses $5.  

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The problem is, Joe just changed the share price by 10% for others looking. But did he?

If you're watching the share price and not paying attention to volume, it's easy to get tricked into thinking the share price has moved when in fact, it hasn't. Joe bought a little stock, but the rest of the market has not decided what that stock is worth and many of them won't pay that much. Someone else will probably come along now and try to sell their stock at $60. When they don't get it, they'll take $58. When they don't get it, they'll take $56. And so forth.

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Usually, there are a few more shares trading but the process holds true if there are only dozens or hundreds of shares being traded.

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Take a look a the afterhours action of Celsius stock from last week. The stock fell over -10% following its earnings announcement March 1st after the market closed. It then reversed two more times, rising +8%, then falling -7 percent. The next day, the stock rose +14% from open to the day high.  

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If you looked only at the first move, it would have seem like this trade was over. The market had reacted. But afterhours action is neither reliable nor complete.  And some of the price movements were driven by just a few hundred shares changing hands.

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CASE STUDY: Silvergate Capital Bankruptcy

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Silvergate Capital Corp, a US bank that caters to the cryptocurrency sector, has reported that it requires additional time to assess the extent of damage to its finances that resulted from last year’s crypto rout, including whether it can remain viable. The bank has already reported a loss of $1bn for Q4 2022, a figure that may increase as it continues to assess the cost of selling assets quickly to repay advances from the Federal Home Loan Bank System. The bank may also need to mark down the value of some remaining holdings, which could result in “being less than well-capitalized.” This admission from a lender with federally insured deposits and more than $11bn in assets will add to the debate among US lawmakers and regulators over whether banks can manage the risks associated with digital assets.

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Silvergate created the Silvergate Exchange Network (SEN), a private blockchain to service its crypto clients by providing 24/7/365 dollar transfer services. The bank provided depository services for crypto exchanges, funds, and stablecoins.

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Since the announcement, Coinbase and other crypto firms have announced that they will be severing ties with the bank.

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MicroStrategy (MSTR) announced that although they did receive a $205 million loan from Silvergate in March 2022, the loan terms wouldn’t change in case of insolvency.

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LevelField users were alerted to Silvergate Capital's "Bankruptcy" alert. SI then plummeted -30%

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Key Earnings Announcements This Week

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March 6

Notable Earnings:

• Lordstown Motors (RIDE)
• Trip.com (TCOM)
• Ciena (CIEN)

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March 7

Notable Earnings:

• Casey's General (CASY)
• Sea Limited (SE)
• Thor Industries (THO)
• JinkoSolar (JKS)
• Manchester United (MANU)
• CrowdStrike (CRWD)

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March 8

Notable Earnings:

• Earthstone Energy (ESTE)
• Noodles & Co (NDLS)
• MongoDB (MDB)
• United Natural Foods (UNFI)

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March 9

Notable Earnings:

• Ulta Beauty (ULTA)
• Allbirds (BIRD)
• DocuSign (DOCU)
• JD.com (JD)
• Smith & Wesson Brands (SWBI)
• Genesco (GCO)
• FuelCell Energy (FCEL)

See More in the Earnings Calendar

Economic Reports:

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Tuesday

• Powell Testifies to the Senat

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Wednesday

• Job Openings
• U.S Trade Balance

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Thursday

• Jobless Claims

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Friday

• U.S Unemployment Rate

The LevelFields Team