A sigh of relief is billowing around Wall Street, for now, with stocks higher after CPI data showed some ease in inflationary pressures.
A too-hot number may have been too much for investors to handle as they watch for further fallout from SVB and Signature Bank collapses and ensuing stress on the financial sector. And some are indeed warning of that.
JPMorgan’s Marko Kolanovic, told clients on Monday that many carry trades — basically borrowing at a lower interest rate and investing in one that offers higher return — that have developed during cheap financing “can’t all be bailed out.” Commercial real estate, auto loans, levered loans and credit cards among others, are all potential worry zones, said the strategist.
Onto our call of the day from Stock Traders Daily and portfolio manager at Equity Logic, Thomas H. Kee Jr., who in January warned about fallout for markets from liquidity leaving the financial system thanks to Fed tightening that could upset markets in 2023.
Kee has talked about similarities between current markets and 2019. A crisis emerged in the latter part of that year as big banks questioned liquidity levels amid a Fed drain, which led to a surge in overnight lending rates and ultimately required massive injections by the Fed to steady markets at the time.
In a fresh interview, Kee says his concerns are now materializing about a repeat of liquidity-linked stress, though he fears risks are much higher now. “This time, the FOMC does not have stimulus as a tool, at least not like it did back in 2019,” he said.
And he also doesn’t see the current crisis as finished playing out. “This is a sign, a precursor to a much more serious decline…and investors need to have something that controls risk. They should not wait until it is obvious to get it done. That would be way too late,” said Kee.
“Once an investor prepares his portfolio so that it can handle anything that happens, he won’t ever need to change,” he adds.
His big message is that investors must “simplify” their portfolios. The first step, he said, is to ascertain which market their portfolio tracks, whether it be the Nasdaq
the S&P 500
the Dow industrials
or the Russell 2000
“Then use the ETFs [exchange-traded funds] for those markets to efficiently manage risk,” such as the SPDR S&P 500 ETF Trust
Invesco QQQ Trust Series
ProShares Ultra S&P 500
ProShares UltraShort S&P 500
ProShares UltraShort QQQ
and ProShares Ultra QQQ
Not without risk of course, Ultra ProShares are leveraged ETFs that magnify the performance of the stock market. The above magnify once or twice, which is as risky as Kee said he would get.
The simplest way he said is to just “sell all existing stocks and ETFs, buy SPY with 100% of the portfolio. Then, when risk-signals come, sell it all. That creates a completely protected portfolio,” he said.
That’s also the most nimble option, using the most liquid instrument available, completely cutting out market risk at times, and the emotional factors, said Kee, though he adds that that may not be the best solution for taxable accounts.
Kee points to his CORE investment approach, which he says has been working for clients during these volatile times(see more here). “The portfolio is a simple as it can get. SPY is the most liquid equity instrument in the world, and that makes it even better. CORE tracks the S&P 500 when it is exposed and it does not have market risk when it is neutralized,” he said.
His CORE strategy was in cash all last week, said Kee, protecting from the rout seen for stocks. The strategy has gained over 20% year to date, he said. The S&P 500 has dropped 4% over the last three months.
Read: Banking industry jitters could mean more pain for stocks by dragging out Fed’s battle with inflation
Opinion: SVB and Signature Bank failed after 2 looming risks went against them — and many other banks are facing the same fate.
have opened higher as banks rebound and CPI data largely met forecasts. The 2-year Treasury note
has surged 31 basis points following the biggest one-day plunge since 1987. The dollar
is barely up after three days of selling, but oil
continues to drop on SVB-fueled recession worries.
Asia had an ugly session with financials getting hit hard in Japan — Mitsubishi UFJ Financial
fell more than 7% as government bond yields
is up another 0.5% to $24,248.
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U.S. consumer prices rose 0.4% in February, meeting forecasts, though core prices came in slightly higher at 0.5%. The annual rate slowed to 6% from 6.4% and to 5.5% from 5.6% on the core side. Fed fund futures are now predicting an 88% chance of a March quarter-point hike.
More bad news from the tech sector as Facebook parent Meta
says it’s cutting 10,000 more jobs and cancelling 5,000 job listings. Shares are up.
Moody’s Investors Service has put six regional U.S. banks under review for downgrades — First Republic
Intrust Financial Corp. , UMB Corp.
And: After Silicon Valley Bank collapse, startups describe ‘roller coaster of emotions’
Read: Regional banks are seeing flight of deposits to too-big-to-fail megabanks
are down 30% after the code-hosting platform’s revenue forecast fell short of expectations.
United Airlines shares
are off 7% after guiding for a quarterly loss as it saw weaker Jan.-Feb. travel demand and higher fuel prices.
is up 14% as chemical company got a $8 billion buyout by Apollo Global Management.
says it has agreed to be bought by Blackstone in a $4.6 billion deal. Shares of the events technology platform were halted in premarket trading.
AMC Entertainment’s Preferred Equity
units are up 7% as investors wait for a key shareholder vote from the theatre chain owner that may allow the company to raise capital.
Momentive Global stock
is up 19% on news the SurveyMonkey maker is being acquired by private-equity firm Symphony Technology Group LLC for $1.5 billion.
have emerged victorious in their California battle to keep treating drivers as independent contractors.
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