One week ago, when summarizing Powell’s unexpectedly dovish post-FOMC press conference, we retorted to the Fed’s WSJ mouthpiece Nick Timiraos that the “Keyest takeaway: Burns 2.0 just steamrolled Volcker 2.0.“

Keyest takeaway: Burns 2.0 just steamrolled Volcker 2.0 https://t.co/OQixemDItY

— zerohedge (@zerohedge) February 1, 2023

Wall Street, where bearish sentiment continues to dominate…

… did not like this assessment, instead arguing that the bulls only heard what they wanted to hear, that Powell was much more hawkish, etc, etc, and that the real Powell would be revealed today during his interview with David Rubenstein at the Economic Club in Washington, where he would shock the world with his unabashed hawkishness, or something. That did not happen, instead here are the highlights.

• Disinflation has begun but has begun in the goods sector, about 25% of the economy. Long way to go and it will not be smooth, it will be bumpy move lower.
• Labor market is extraordinarily strong. It’s good that inflation is coming down as we have not seen this before with a strong labor market.
• Powell says that he sometimes gets the data the night before but only him with no clarification on which types of data that he receives.
• On rate cuts by year-end, are markets wrong to remove those cuts? He had a data dependency type of response.
• Not considering changing the 2% target
• The shortage of workers feels more structural than cyclical, which is a problem.
• Says labor market is “at least at maximum employment” which he defines as when a person wants a job, they can get a job. Says we may be beyond max employment. As JPM explains, this is the fear factor that full employment triggers inflation. If last Friday’s print is true, it seemingly disproves the hypothesis.
• QT is passive not active and will take a couple years to get to a comfortable level. MBS sales are not on the list of active discussions.

Some more from JPM chief economist Michael Feroli:

Powell’s remarks today at the Economic Club of Washington were pretty similar to what he said after last Wednesday’s FOMC meeting: disinflation has begun, it has a long way to go, and further interest rate increases are likely needed. While he gave no sense that he was aiming to “set the record straight” after the perceived dovishness of last week’s presser, he did warn that the peak in the funds rate could be higher, particularly if the labor market remained strong. In short, this was a message of data dependency. 

Anyway, Powell’s speech has come and gone, and just as we warned last night, not only did he not flip his post-FOMC dovishness (instead beat the data-dependency drum), but with positioning so bearish ahead of his speech today, stocks suffered a blistering delta squeeze (this is how JPM’s desk framed it: “For bullish Equity investors, Powell’s speech was a welcome outcome: assuming the majority of the balance of Fedspeaks this week is in the Bostic camp (2x more hikes, avoid a recession, etc) Powell’s speech today could help balance the view.” More amusingly, it was what we said last week after the first Powell appearance, that prompted BofA’s chief economist Michael Gapen to title his Fed Watch post-mortem note today “Volcker has left the building: Hoping for painless disinflation.” At least he didn’t say Volcker was steamrolled by Burns…

Here’s why the chief economist at BofA agrees with what we said one week ago:

Volker has left the building: Hoping for painless disinflation

In remarks today at The Economic Club of Washington, DC, Chair Powell said that the stellar January employment report did not fundamentally change his view about the outlook for monetary policy, though it did “underscore” his belief that reducing inflation to the 2% target would likely “take time” and involve “ongoing rate hikes.” He added that continued strong employment gains could mean a peak policy rate above where markets are currently pricing (circa 5.0-5.25% based on federal funds futures contracts).

As he did during the press conference following the February FOMC meeting, Powell clearly stated that he believes the disinflation process has begun. That said, he emphasized that it is only clear in goods prices, which are only 25% of core CPI, while the process has yet to show through in services inflation. He said he continues to expect that housing services inflation will slow “in the second half of this year” and nonshelter services inflation will cool when wage growth cools. In addition, he said non-shelter services inflation is his “biggest worry” when it comes to the outlook for inflation.

It is what Gapen says next that goes on to explain the market’s eventual meltup, and close at session highs: i.e., “We’re not in Wyoming anymore“

As we noted following the February FOMC meeting, Chair Powell appears to have embraced recent disinflationary trends and expressed optimism that it will continue. In our view, Chair Powell is placing more weight on an “immaculate disinflation” scenario, where inflation pressures subside without some softening in labor market conditions, including higher unemployment. This stands in contrast to the Powell from Jackson Hole, Wyoming, last August, who leaned strongly into doing whatever it takes to bring inflation down and emphasized that inflation was unlikely to subside without some “pain” in labor markets. To be fair, Powell did say the Fed’ s baseline includes a softening in labor markets, but it took forty minutes of continued questioning to get to this answer.

A slightly different way of saying the same comes from JPM’s Feroli who writes:

Late last year Powell and other Fed speakers seemed intent on managing market expectations. More recently, they appear content conveying that they will respond to the data and letting the market take that as fair warning. This is sensible. While Powell has recently questioned the market’s more benign inflation forecast, he hasn’t protested it too strongly—after all doing so would be asserting with vigor that the Fed will miss its inflation target. Nor has he committed to maintaining restrictive rates for a certain amount of time. Instead, he’s emphasizing what conditions require more or less restraint. Last year the Fed guided the market for many steps of the way, which was easier when the goal line was far away. This year, the market shouldn’t expect the same degree of hand holding.

Incidentally, BofA’s Gapen is less sanguine about a favorable, “immaculate” outcome: “In terms of our outlook for monetary policy, we cannot fully rule out “immaculate disinflation” outcomes. We, too, are optimistic about being past peak inflation and have inflation falling back to the Fed’s 2% by then end of 2024. That said, we would be surprised to see inflation fall all the way back to 2% without a reconciling of the imbalance between labor demand and labor supply. The labor market remains exceptionally hot, labor demand far exceeds labor supply, and, although wage growth has moderated , it continues to run at rates above what the Fed believes is needed to achieve its inflation mandate.” 

It’s unclear how the market interpreted that last bit, but judging by the double reversal in stocks and final surge in risk (as well as yields) to close the day, traders were confident enough that “Volcker leaving the building” is good enough to push spoos back to 4300 which appears to be the market’s next destination, at least until such time as bears like Marko and Wilson capitulate.

More in the full note available to pro subs.

By Jessica Menton, Bloomberg Markets Live reporter and analyst

There’s a little bit of good news for investors worried that stock prices are going to be pummeled by shrinking corporate profits. The drop so far seems largely priced in.

When the S&P 500 Index hit a low in October, the market was effectively factoring in a 15% decline in earnings-per-share over the next 12 months, according to Bloomberg Intelligence’s fair-value model.

But the reality — at least for now — hasn’t been quite so grim.

With the fourth-quarter results from more than half of the S&P 500 companies already in, earnings per share have fallen 2.8% from a year earlier, according to data compiled by Bloomberg Intelligence. That’s less than the 3.3% drop expected before earnings season began.

The smaller-than-anticipated drop suggests that the profit contraction isn’t beginning as badly as once feared, lending support to share-price valuations. That’s likely one reason why the market is rewarding companies that exceed expectations and even dialing back the punishment of those that fall short.

“This earnings season was already projected to be pretty bad,” said Michael Casper, an equity strategist at Bloomberg Intelligence. “When results come in line with projections or slightly worse than expected, it’s clear that investors had already priced that into stocks so equities aren’t going to get punished as much this time around.”

That doesn’t mean that stock investors are in the clear, particularly given the broad uncertainty about how long the Federal Reserve will keep monetary policy tight to ensure that inflation continues to come down. As a result, the worst of the profit hit may not come until the economy slows further or even lapses into a recession, which has raised some concerns about whether price-to-earnings ratios are too high after the S&P 500’s nearly 15% rebound from the October trough.

“The fundamentals have started to change,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.

“When does the Fed reach its peak rates? Will inflation slow sufficiently in 2023? Will there be a reset in corporate earnings? We’ve gotten progress in all three that has been supportive for equity markets, but investors are still cautious given uncertainty with economic growth.”

The main locus of investors’ valuation concerns are the growth stocks that have benefited the most from the retreat of bond yields from last year’s peaks, since those rates are used to put a value today on profits that aren’t expected until years in the future. In fact, the forward multiples for technology, media and telecommunication shares in the S&P 500 have returned to levels above the pre-pandemic norm at around 20 times earnings, above the five-year average of 17.6 times shortly before the pandemic struck.

That may exert a limit on future gains, particularly after the recent surge in payroll growth cast doubt on speculation that the Fed would start cutting interest rates late this year. If a strong labor market keeps wage growth elevated and prevents inflation from coming down as fast as policymakers want, the bank may raise rates more aggressively — or hold them higher for longer — than the markets had been expecting.

“People are getting ahead of themselves with the Fed slowing down policy,” Casper, the Bloomberg Intelligence analyst, added. “It’s tough for stocks to move materially higher in the near term toward record highs. It’ll probably be a bumpy ride because there’s not a lot of room for equities to inflate further.”

Following a historic plunge in the net worth of Gautham Adani, who is still India’s richest and was briefly the world’s richest man, following a scathing report by short-seller Hindenburg Research which cut the market value of Adani’s network of businesses by more than half, hedge funds and distressed debt specialists have seen enough and are rushing to scoop up bonds related to Adani’s business empire as they look to capitalize on falling prices.

According to Bloomberg, Oaktree and Davidson Kempner, two of the largest US distressed hedge funds, were among those buying the debt in recent weeks. Distressed funds have been actively trading the bonds from their Asian offices, Bloomberg reports citing a person familiar with the matter. It was not clear whether the firms already held Adani bonds prior to US short-seller Hindenburg Research publishing its report on Jan. 24.

Last month all publicly traded securities linked to Adani’s sprawling empire tumbled after Hindenburg accused the group inflated revenue and stock prices. The conglomerate has repeatedly denied Hindenburg’s allegations of corporate wrongdoing and threatened legal action, but has largely failed to stem the drop.

Meanwhile, on a call with clients last week, Goldman traders said Adani securities had drawn interest from investors amid an equity rout and a debt slump that pushed some bonds to distressed levels. According to Goldman, Adani debt had hit a floor in the short term and bonds of Adani Ports & Special Economic Zone Ltd. had become interesting at the current price. The price of those bonds rose in the following days as investors looked to capitalize on the potential for a rebound.

Adani Ports said earlier Tuesday it will repay around 50 billion rupees ($604.6 million) of debt in a bid to improve its leverage metrics. Similar loan repayment news helped push Adani stocks higher for the first time after days of declines.

Update (1425ET): 

The death toll continues to climb. 

NBC News reported at least 7,266 people were killed in Turkey and Syria. 

President Recep Tayyip Erdogan said Tuesday evening that 5,434 people were killed and 22,168 injured. He said at least 8,000 people had been pulled from collapsed buildings. 

🚨 WATCH || Overwhelmed rescuers struggled to save people trapped under the rubble as the death toll from a devastating earthquake in Turkey and Syria approached 7,200 on Tuesday

– https://t.co/Jf9fs8w3s0 pic.twitter.com/fq8e2rpfll

— PiQ (@PriapusIQ) February 7, 2023

The Syrian Health Ministry said 812 people were killed, with another 1,832 injured. In Syrian rebel-held areas, about 1,020 died, and 2,400 were injured. 

Turkish Vice President Fuat Oktay said 338,000 people were in government shelters or hotels. Tens of thousands of others were taking refuge in community centers, stadiums, shopping malls, and other buildings that were still structurally sound. 

Erdogan also declared a state of emergency in the quake-affected areas:

“We are declaring ten cities impacted by the earthquake zone,” he said, adding the emergency order will last for three months. 

Here’s more shocking footage:

Kahraman Maraş southern Turkey, before and after the #Earthquake pic.twitter.com/XvdQBcXO46

— Asaad Sam Hanna (@AsaadHannaa) February 7, 2023

Drone footage from Malatya, #Turkey shows massive devastation after Earthquake. Entire buildings, neighborhoods wiped: pic.twitter.com/XI6QWLPHSK

— Joyce Karam (@Joyce_Karam) February 7, 2023

❗️Devastating visual from the earthquake affected region 👀

Turkey earthquake death toll rises to 5,434 with 31,777 injured

Video credit on the visual pic.twitter.com/hAgRx4f0JH

— OsintTV📺 (@OsintTV) February 7, 2023

WATCH – Turkey’s Iskenderun port on fire after earthquake https://t.co/bhAZaY1HO5 pic.twitter.com/slvoQbz8vn

— Insider Paper (@TheInsiderPaper) February 7, 2023

*   *   * 

The death toll from the powerful 7.8-magnitude earthquake that struck Turkey and Syria early Monday surged to more than 5,000 on Tuesday, according to WaPo. Thousands of buildings collapsed in southern Turkey and Northern Syria. Rescue teams from around the world are pouring into the region to comb through the rubble and search for survivors. 

Turkey’s Vice President Fuat Oktay said deaths had increased to 3,419. He said another 20,534 people were injured. Another 1,602 people were dead on the Syrian side of the border, bringing the total between the countries to 5,000. 

Two alarming estimates, one from the US Geological Survey and the other from the World Health Organization’s senior emergency officer for Europe, indicated that the death toll in both countries could surpass 10,000 and reach as high as 20,000. The high estimates are due to the powerful quake and aftershocks that toppled large multi-family residential structures. 

No words.. I can’t … this is hell #Turkey #earthquake pic.twitter.com/B6xn1g6r5y

— Abier (@abierkhatib) February 6, 2023

We never know when the ground we stood on gonna shatter and our lives crumble.
Prayers to all the souls and people in Turkey and Syria.

Everyday we are alive, is a day worth living for. #TurkeyEarthquake #syriaearthquake #bbrightvc pic.twitter.com/PmPirXroV1

— BrightVC UK Fanclub (@bbrightvc_ukfc) February 7, 2023

Since the quake struck early Monday, southern Turkey has recorded a staggering 285 aftershocks. A few of those quakes were enough to cause new buildings to collapse, said Orhan Tatar, an official from the Disaster and Emergency Management Presidency, who WSJ quoted. Tatar warned: 

“Every minute, new tremors are happening.” 

Here’s a map of where the first quake struck. 

President Recep Erdogan said the quake is the country’s largest disaster since the 1939 Erzincan earthquake that killed upwards of 30,00 people. South-central Turkey sits on major fault lines, with three tectonic plates sliding past each other. 

Via OilPrice.com,

• BP has just announced that it will be revising its emissions targets in order to produce more oil and gas to meet global demand.

• The British energy giant previously aimed to cut emissions by 35-40% by 2030, but now it is targeting a 20-30% decrease.

• BP has also recorded bumper profits which have been met with criticism, reigniting calls for tougher windfall taxes.

BP has scaled back its climate ambitions, easing plans to slash the amount of oil and gas it produces over the current decade to meet global demand.

The energy giant had previously promised its emissions would be 35-40 percent lower by the end of this decade.

It is now targeting a 20-30 percent cut and plans a greater production of oil and gas over the next seven years compared with previous targets.

This is a definitive pivot in policy from BP, which was one of the first fossil fuel producers to commit to net zero carbon emissions by 2050.

The company has also increased its payout to shareholders by 10 percent – spending a further £2.3bn ($2.75bn) buying back its own shares.

In total, BP handed back more than £11.7bn ($14bn) to shareholders in 2022 – £3.7bn ($4.4bn) in dividends and £8.4bn ($10bn) in share buybacks.

BP has revelled in record gas prices and a robust performance across oil markets

This follows a historic year of trading for the energy giant, which announced record profits powered by soaring oil and gas prices following the pandemic and Russia’s invasion of Ukraine.

BP’s earnings for the full year than doubled to £23bn ($27.7bn) in 2022 in line with record gas prices and 14-year peaks in the cost of oil.

This is more than double last year’s takings of £10.6bn ($12.8bn), in line with resurgent earnings across the energy industry.

The fossil fuel titan’s bumper profits were powered by another quarter of booming trading, with BP capping off the year with a three-month earnings window of just under £9bn ($10.8bn)

Shares in the company were up 5.7 percent in early afternoon trading on the FTSE 100 following the results, trading at 505p per share.

It follows Shell’s bumper £32.2bn ($39.9bn) profits for the full-year, alongside massive earnings reported by energy giants operating Stateside such as Chevron and Exxon Mobil.

Total and Equinor are expected to unveil their own results tomorrow, with Aramco scheduled for next month.

Energy giants have unveiled bumper full-year profits so far – with some of the biggest players still to announce their figures

Labour: Scrap investment relief from EPL

The latest wave in mega earnings has triggered familiar calls for the windfall tax to be toughened up with Labour calling for the investment relief to be ditched from the Energy Profits Levy (EPL).

Ed Miliband, Labour’s Shadow Climate Change and Net Zero Secretary, said:

“It’s yet another day of enormous profits at an energy giant, the windfalls of war, coming directly out of the pockets of the British people. What is so outrageous is that as fossil fuel companies rake in these enormous sums, [the Prime minister] Rishi Sunak still refuses to bring in a proper windfall tax that would make them pay their fair share.”

Last November, Jeremy Hunt hiked the EPL from 25 to 35 percent – which has been imposed on North Sea oil and gas profits to harness record profits for support packages to ease energy bills for households and businesses.

This was on top of the special 40 percent corporation tax the fossil fuel industry already pay.

However, the EPL also included a 91p in the pound relief rate companies investing domestically in the UK.

BP’s share price has risen significantly during this year’s trading (Source: London Stock Exchange)

Labour has labelled this a “fossil fuel investment loophole” and forecasts £13bn in takings from scrapping the relief scheme, and backdating the tax from the start of 2022.

Industry trade group Offshore Energies UK opposed calls for a toughened windfall tax, arguing that it was wrong to offer false resolutions to consumers.

Mike Tholen, OEUK’s director of sustainability, said:

“These calls for an increase in the UK windfall tax, linked to the global profits of energy producers, are deliberately misleading. The UK is subject to global tax agreements which say that it cannot tax profits made by companies outside of the country. That means such a tax could never be implemented. It is irresponsible to pretend otherwise.”

He noted that the windfall tax was already having an effect on the industry with Harbour Energy recently pulling out of the licensing round for further projects while Total has pulled out of £100m investment plans in North Sea.

Meanwhile, Shell is rowing back its pledge to spend £25bn in the UK over the current decade, and will now assess projects on a “case by case basis.”

As it stands, BP’s UK operations accounts for less than 10 percent of its global profits.

It is expected pay around cough up £880m ($1.06bn) towards the Energy Profits Levy in the fourth quarter and £1.52bn for the full year ($1.83bn).

BP has committed £18bn in UK investments over the current decade, including 75 percent in low and zero carbon.

President Biden will read a carefully prepared State of the Union Speech on Tuesday night in front of a newly divided Congress, where he’s likely to tout last week’s jobs report, and use it as a soft launch for his 2024 reelection campaign despite the fact that a majority of Democrats who don’t want him to run again.

Biden will likely argue that Americans are doing better on average than when he took office, and falsely claim that inflation isn’t his fault.

BIDEN SAYS HE TAKES NO BLAME FOR INFLATION

BIDEN SAYS INFLATION WAS THERE WHEN HE ARRIVED

Green light to raising inflation target: it was Trump’s fault

— zerohedge (@zerohedge) February 3, 2023

“Do I take any blame for inflation? No,” Biden said Friday. “Because it was already there when I got here, man. … Jobs were hemorrhaging, inflation was rising, we weren’t manufacturing a damn thing here, we were in real economic difficultly, that’s why I don’t.”

Except… inflation was 1.4% when Biden took office.

Even The Hill notes that “there are signs that even a productive past year that featured major investments in the economy and declining concerns about a recession may not be enough for Biden to excite even some in his own party about a 2024 bid.“

“I think this is an impossible speech to give because it’s a speech that requires him to speak both about the state of the union as it is and the direction he hopes to lead it, which is about playing the role of statesman. But it also is going to lay the groundwork for most likely his own run for office in 2024, which will call for him to be decidedly political and to cover all kinds of ground,” said William Howell, a political scientist at the University of Chicago Harris School of Public Policy.

What else will Biden say?

Biden will likely call on Congress to raise the debt limit without conditions, challenging Republicans to send him a ‘clean’ bill, while warning against cuts to Social Security and Medicare – cuts which House Speaker Kevin McCarthy already said were off the table.

He will undoubtedly mention the war in Ukraine, framing it as a broader fight against Russian aggression. Some foreign policy experts have suggested Biden may use the speech to lay out a possible roadmap to ending US involvement in Ukraine, The Hill reports.

Biden may also call for police reform following the beating death of Tyre Nichols at the hands of Memphis police – which was widely framed as an issue of white supremacy, despite involving only black officers, working for a black Chief of Police, and a black suspect. Nichols, 29, died in a hospital on Jan. 10, three days after he was beaten by the five officers – who have all been hit with several charges.

He may also encourage lawmakers to strike a bipartisan immigration deal after his administration spent the last two years encouraging unchecked illegal migration into the United States.

What won’t Biden mention?

Unless his doctors failed to dial in his cocktail, Biden probably won’t touch on his classified document scandal, the Hunter Biden investigations, or the removal of several Democrats – including Eric Swalwell, Adam Schiff, and Ilhan Omar, from prominent Congressional committees.

We also don’t imagine he’ll mention the embarrassing Chinese spy balloon he let traverse the entire United States before shooting down.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, we discussed why the more bullish technical formations were at odds with the many recession forecasts. Not surprisingly, that article generated substantial pushback from readers, pointing out various bearish fundamental measures.

As I discussed in our latest “Bull Bear Report,” the technical backdrop has improved markedly since the October lows.

“I previously discussed the inverse ‘head-and-shoulder’ pattern already suggests a market bottom has formed. A solid break above the downtrend line (with a successful retest) would confirm the completion of that pattern. Notably, the 50-DMA is rapidly closing in on a cross above the declining 200-DMA. Such is known as the ‘golden cross’ and historically signifies a more bullish setup for markets moving forward.“

“The market surge last week ran into resistance on Friday as markets pushed well into 3-standard deviations above the 50-DMA. However, while the weakness on Friday was not unexpected, it is also necessary to determine whether the current breakout is legitimate.“

Furthermore, our weekly technical composite gauge is not back into bull market mode as it has risen above a reading of 70. Such is the first time that measure was reached in over a year.

Also, investor sentiment has moved back into “bullish mode,” with our composite fear/greed gauge, which measures sentiment and positioning, pushing towards “greed” levels.

From a historical view, these technical measures have always preceded a continuation of a more bullish trend for the market. However, the critical point is that while the technical backdrop has improved, we must still acknowledge a risk to the technical bullish view. As I concluded:

“If the ‘bear market’ is ‘canceled,’ we will know relatively soon. To confirm whether the breakout is sustainable, thereby canceling the bear market, a pullback to the previous downtrend line that holds is crucial. Such a pullback would accomplish several things, from working off the overbought conditions, turning previous resistance into support, and reloading market shorts to support a move higher. The final piece of the puzzle, if the pullback to support holds, will be a break above the highs of this past week, confirming the next leg higher. Such would put 4300-4400 as a target in place.

A break BELOW the downtrend line, and the current intersection of the 50- and 200-DMA, will suggest the breakout was indeed a ‘head fake.’ Such will confirm the bear market remains, and a retest of last year’s lows is likely.

However, while the technicals are bullish near term, I can not disagree with the reader’s fundamental arguments.

Fundamental Problems

Greg Feirman made an interesting observation last week.

“Those of us who take a more fundamental approach are left scratching our heads because the price action does not match what we’re seeing from corporate earnings. Apple (AAPL) reported a 5.5% decline in revenue in its 4Q22 – and that quarter had 14 weeks compared to 13 in the year ago period. Net Income fell 13.4%. While Google’s (GOOG/GOOGL) overall revenue was +1%, if you dig a little deeper revenue in its core advertising business was actually -4%. And while Meta (META) had a huge relief rally, the fundamentals were far from stellar with revenue -4.5% and EPS -52% compared to a year ago.

And so it all sets up for a showdown in coming weeks. My contention is that “the market is a voting machine in the short term, and a weighing machine in the long term” (Ben Graham). That is, price will follow the crowd in the short term but the crowd will follow fundamentals in the long term. So while the market may continue to rally in the days and weeks ahead, eventually this rally will peter out and we will look back at it as just another bear market rally. If you’re interested in this debate between technicians and fundamentalists, pay attention because we’re all about to learn something one way or another.”

Greg is correct. Since the beginning of the year, the rise in the market has been purely a function of valuation expansion as both earnings, and earnings estimates, continue to deteriorate. As shown, valuations are rising to 29x, trailing real earnings, which is historically expensive.

Such is occurring as earnings and estimates continue to deteriorate sharply, even though analysts remain optimistic about a recovery later in the year.

However, the hoped-for earnings recovery is contingent on a much stronger economic environment to support that growth in earnings. Given that earnings remain 20% above their long-term growth trend. The expected recovery seems overly optimistic due to the massive stimulus injections that pulled forward consumption.

With much economic data pointing to further weakness in the months ahead, market fundamentals remain challenging to the technical bullish narrative.

However, historically, the markets tend to price economic and fundamental recoveries 6-9 months in advance. Such would suggest that the more bullish optimistic views of a “soft landing” scenario in the economy could be possible.

The only issue with that view, again from the fundamental perspective, is that historically with inflation running well above 5% and the Federal Reserve continuing to hike rates, “goldilocks outcomes” did not previously come to fruition.

Bull Now, Bear Later?

So, what should an investor due with such a dichotomy?

The answer is more simple than it seems.

The market can defy economic and fundamental realities in the short term. Greg noted that the market is a “voting machine” in the short term. In other words, the market will respond to the “votes” of the herd in the market. However, the market will “weigh” the fundamental measures and price accordingly over the longer term.

For investors, relying heavily upon either the “votes” or the “weight” can lead to more disappointing outcomes over the long term. As I have noted previously, many investors missed out almost entirely on the market’s advance from 2009 to the present for various valid, fundamental reasons. Yes, they missed the crash in 2008 but lost far more in missed capital gains over the ensuing decade.

“Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.” – Peter Lynch

Rules To Follow

For the moment, the market is back in a more bullish mode. As such, we need a set of rules to navigate that bullish trend until it eventually ends.

1. Cut losers short and let winners run. (Be a scale-up buyer into strength.)

2. Set goals and be actionable. (Without specific goals, trades become arbitrary and increase overall portfolio risk.)

3. Emotionally driven decisions void the investment process. (Buy high/sell low)

4. Follow the trend. (The long-term, monthly trend determines 80% of portfolio performance. While a “rising tide lifts all boats, ”the opposite is also true.)

5. Never let a “trading opportunity” turn into a long-term investment. (Refer to rule #1. All initial purchases are “trades” until your investment thesis is proved correct.)

6. An investment discipline does not work if it is not followed.

7. The odds of success improve significantly when the technical price action confirms the fundamental analysis. (This applies to both bull and bear markets)

8. Markets are either “bullish” or “bearish.” During a “bull market,” be only long or neutral. During a “bear market,” be only neutral or short. (Bull and Bear markets are determined by their long-term trend)

9. When markets are trading at, or near, extremes do the opposite of the “herd.”

10. Do more of what works and less of what doesn’t (Traditional rebalancing takes money from winners and adds it to losers. Rebalance by reducing losers and adding to winners.)

Don’t Pick A Side

Note there are several references to the “long-term trend” of the market. That trend remains bullish as measured by both trend lines and the 60-month moving average. With the market recently bottoming at those trendline supports, such suggests the longer-term bull market remains intact.

Yes, the fundamentals will eventually matter, and they will matter much more than many currently think. However, for the now, the bulls remain in charge of the market.

Set aside the idea of being either “bullish” or “bearish.”

Once you pick a side, you lose objectivity to what is occurring within the market.

How long with the technical bull run last? I have no idea.

But when it ends, and the fundamentals begin to re-emerge, we will have plenty of warning to adjust accordingly.

Update (0910ET): Bed Bath & Beyond is said to have lined up enough investors to cover the share sale we reported on overnight (in hope of averting a bankruptcy filing).

Bloomberg reports the firm has gathered orders from enough investors to cover the full offering, according to people with knowledge of the matter

“We see these capital-raising transactions as a ‘last gasp’ to survive before filing for bankruptcy protection where the common equity would likely be worthless,” Wedbush analyst Seth Basham writes

“In the event the transactions are successful, BBBY common shares could rise as they are trading like options on the company’s survival, but the ultimate value would be undermined by this highly dilutive offering of preferred stock that would have priority over the common shares”

BBBY shares are down 45% in the pre-market, erasing all of yesterday’s explosive gains…

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As we detailed overnight, after soaring 130% at its highs of the day, bankrupt-ish Bed Bath & Beyond (having already missed interest payments on its bonds) just pulled a Hertz, announcing its plan to offer series A convertible preferred stock and warrants, raising over $1 billion.

Bed Bath & Beyond Inc. today announced a proposed underwritten public offering (the “Offering”) of (i) shares of the Company’s Series A convertible preferred stock (the “Series A Convertible Preferred Stock”), (ii) warrants to purchase shares of Series A Convertible Preferred Stock and (iii) warrants to purchase the Company’s common stock. The Offering is subject to market and other conditions, and there can be no assurance as to whether or when the Offering may be completed or as to the actual size or terms of the Offering. 

The Company expects to raise approximately $225 million of gross proceeds in the Offering together with an additional approximately $800 million of gross proceeds through the issuance of securities requiring the holder thereof to exercise warrants to purchase shares of Series A Preferred Stock in future installments assuming certain condition are met.

And this is our favorite part – in case you thought this could be an effort to stave off bankruptcy and create any value for the equity…

The Company cannot give any assurances that it will receive any or all of the proceeds of the Offering.

The Company intends to use the net proceeds from the initial closing of the Offering, along with $100 million to be drawn under its amended and upsized FILO Facility, to repay outstanding revolving loans under its ABL Facility in accordance with the terms of an amendment to the Company’s Credit Agreement waiving existing defaults thereunder (the “Amendment”) to be entered concurrently with the initial closing of the Offering.

Under the Amendment, the Company will be required to use availability under its credit facilities to make the missed interest payment on its senior notes by March 3, 2023.

Outstanding revolving loans repaid using net proceeds of the Offering may be reborrowed, subject to availability under the ABL Facility, and the Company expects to use those borrowings for general corporate purposes, including, but not limited to, rebalancing the Company’s assortment and building back the Company’s inventory.

In addition, proceeds from the conversion of warrants to purchase shares of Series A Convertible Preferred Stock will be used to further repay outstanding amounts under the ABL Facility with 50% of such conversion amounts being applied against the borrowing base of the ABL Facility. Such repaid amounts may be reborrowed subject to availability under the ABL Facility.

Who could have seen that coming?

Maybe BBBY can sell some stonk and reverse its bankruptcy

— zerohedge (@zerohedge) February 6, 2023

The market cap of the company at the close today was $687.5 million, according to Bloomberg data.

BBBY share price plunged 25% after hours… but then – of course – it ripped back higher…before sliding back towards reality once again…

One thing of note, while we are fully aware that it’s comparing apples to carrots, the equity price briefly traded above its 2024 Bond price today…

Ironically, the timing of this issuance occurs as a new look into Bed, Bath and Beyond by Bloomberg this week claims that the company only has itself to blame for its dire financial straits. The company, which has now missed bond payments, is on the verge of bankruptcy. 

“Executives were mired in minutiae as the chain barreled toward bankruptcy,” the report says, citing former employees. For example, last summer the company’s executives urged white collar workers to return to the office four days a week despite the fact that many were already coming in. 

Interim Chief Executive Officer Sue Gove was even told by a former employee that an extra day in the office wouldn’t be the solution to help the ailing company. 

The article laid out how every solution the company tried only led them further into financial ruin. Even firing 20% of its workforce and shuttering 150 of its 770 stores before securing new financing didn’t help the business. 

Arthur Stark, Bed Bath & Beyond’s longtime president who left in 2018, told Bloomberg that the company started in 1971 with the focus solely on the customer: “Everything that we did was for the customer. If it meant carrying too much inventory in the store, it was OK. If customers made the commitment to come to our store, we would have it in stock.”

But the company failed to properly deal with the shift to online shopping and keep up with e-commerce. It continued to focus on its brick and mortar plans while companies like Amazon gained traction in retail. The company was reluctant to change due to its past successes, Bloomberg wrote.

In 2017, same store sales started to plunge. The company’s age-old tactic of sending 20% off coupons to households started to nibble away at the company’s bottom line. The company had difficulty generating business without the coupons, however.

Stark said: “Like any form of promotion, it becomes a drug. Once you’re addicted to it and your customer is addicted to it, it’s a very difficult thing to wean them off of.”

Activist investors came in 2019, urging “asset sales, more investment in private-label brands and online commerce, and more buybacks.” The activists board urged for more private label products and doubling down on well-known brands. But pandemic supply problems and a lack of cash made it difficult for the company to stock its stores with such items. 

By 2021 there was a push for six new private label product lines. When they arrived in stores they “failed to resonate” with the company’s legacy shoppers. Financial problems were then exacerbated by additional share repurchases. 

Dennis Cantalupo, CEO of Pulse Ratings, a credit-rating and consulting firm, told Bloomberg: “Rather than take that money and put it in the bank and assume that the tailwinds to the industry are going to subside or normalize, they initiated the buyback campaign.”

The company’s financial position is so stretched that the idea of liquidation instead of a reorganization is also on the table, Bloomberg reported: “If the company restructures in bankruptcy by closing more stores, it could emerge as a smaller version of its former self. However, Bed Bath & Beyond’s financial situation is so dire it’s also possible the retailer sells its assets and ceases to operate, Bloomberg News has previously reported.”

Top-level bankers at Credit Suisse Group AG were notified Monday that discussions about bonuses slated for today were canceled, according to Bloomberg, citing people familiar with the matter. 

The development adds further internal strain on Credit Suisse as it restructures its investment bank. The discussions might be rescheduled for later this month, the people said, adding bonuses are generally paid at the end of February. 

In a separate report early last month, Bloomberg said the Swiss bank was mulling over a 50% reduction of the 2022 bonus pool. 

Credit Suisse’s belt-tightening is more severe than other Wall Street banks, including Citigroup Inc. and JPMorgan Chase & Co., which are set to cut bonuses after dealmaking in 2022 slumped. 

Unlike other major Wall Street firms, Credit Suisse had major mishaps last year, including a $5.5 billion loss on investment firm Archegos’ bad bets. Also, the bank suffered billions of dollars in client outflows.

The bonus pool discussions aren’t yet finalized, and internal turmoil between employees and the bank might lead to the loss of talent. The bank also allowed for an upfront cash award to incentivize senior staff to stick around amid restructuring efforts. 

Bonus outcomes for 2022 are likely below 2021 levels, given the bank’s poor performance restructuring last year. Now the question top bankers are asking is when they get paid. 

By Michael Every of Rabobank

POP! Go more narrative balloons left and right than I had space to cover yesterday:

Russiagate (says Matt Taibbi); vaccines (says Scott Adams); a Ukraine peace deal (says former Israeli PM Bennett, claiming an April 2022 ceasefire was shot down by Boris Johnson); a Ukraine peace deal (says Newsweek: the US reportedly offered Russia 20% of Ukraine for peace in January – and Russia and Ukraine both shot it down); gold (Russia sold 3 tonnes to pay bills, though the FT says there is ‘colossal’ central bank buying); de-dollarisation (India says it’s switching oil payments from dollars to dirhams, which are pegged to the dollar!); literal balloons (President Biden says the recent incident has not harmed relations between China and the US, and Secretary of State Blinken says he will try to reschedule his visit – but China aren’t getting the bits of their balloon back); trade (the EU and UK are closer to a compromise over Northern Ireland trade); laws (the EU and UK will drift apart if the UK withdraws from the EU Convention on Human Rights); sport (English football giants Manchester City are accused of 100 breaches of financial fair play rules, potentially seeing them fined, docked points, banned from the transfer market, and perhaps even relegated and/or stripped of past title wins); and politics (Biden is to push for a billionaire tax in his State of the Union address: to a Republican House. Nothing doing, obviously.)

Of course, some balloons still have a lot higher to float. Japan is going to subsidise domestic electronics production more; the US may impose a 200% tariff on Russian aluminium, which is seen as relief for a market expecting a total ban; and the UK Labour Party has pledged to rapidly rebuild the armed forces if it wins the next election, on top of all the higher social spending it supports. If you are holding on to the ‘protectionism’ and ‘military spending’ strings you are not going to get stung as you reach for honey. However, it’s better to remain open to letting go of most others than to be lifted higher and higher above the ground.

Indeed, the Fed’s Bostic warns the “blow-out” payrolls report backs Fed Funds going higher than the terminal rate of 5.09% priced in yesterday. Bostic backed two hikes, and suggested a step back up to a 50bp move might be needed. Independently, according to Bloomberg, a chunky market position is being taken against emerging markets. Moreover, as early rumours of a dovish new BOJ governor are rebutted, Japanese cash earnings leaped 4.8% y-o-y, and even rose 0.1% y-o-y in real terms. That isn’t a complete surprise in that we had earlier seen retailer Uniqlo flag it would raise the salaries of all employees by 40% before March 2023. However, it is a problem if you think the BOJ are going to continue to remain dovish forever, when turbulence in the JGB market could flow through to USD/JPY and US Treasuries. In short, it’s only a week into the second month of the year and already the key 2023 market memes are blowing up again.

The main focus today is on two key central bank actions. First, we get the RBA. The market consensus is a 25bp hike to take rates up to an awkward 3.35%. Until relatively recently, the Aussie market consensus was that this might be the peak – if for no other reason than because anything more will hurt the housing market, and you aren’t allowed to do that in Australia. (They deport you to the cold, rainy UK if you do.) My helicopter view was that the RBA and Australia are not special cases, and that they would have to tighten far more than that: 3.75% to 4.0% seemed sensible to me from afar.

Then we got the strong CPI print for December; then the awful retail sales print for the same month; then the strong US payrolls print, and the Fed making clear they are still not done; yet we didn’t get the lift from China reopening Aussies were hoping for. (Indeed, there really doesn’t seem to be the usual massive Beijing stimulus flowing into commodities some had expected, though we need to wait for the March National People’s Congress to get a clearer picture on how artificially high the GDP target for 2023 will be set, and if we get there via bridges to nowhere or e-CNY consumption vouchers that can only be spent on things Beijing permits.) On balance, the Aussie market is now more open to the RBA rate moving higher than 3.35%. Though few think a 50bp move today is likely given housing, housing, and housing is on its mind, might we get a 40bp hike to 3.50%? At least it’s a round number and makes them look like they are doing something.

Indeed, we already see new narrative balloons being floated in the Aussie press. Apparently, the housing market is moving against would-be home buyers, not for them, in terms of the number of properties being withdrawn from the market. You see? Higher rates are also bullish for property prices in Australia! Of course, this is also a bursting balloon. Buyers are hurt by higher mortgage rates, and so are homeowners with mortgage-rate resets looming: that must lower home prices, or see market transactions freeze. You can say your house is worth whatever you want, but the proof of the pudding is in the selling, not the spruiking.

Second, we get Fed Chair Powell, who gets a second bite at the cherry in explaining to markets that he is not happy that US financial conditions are easier now than at any time last summer, when the market was saying “Fed pivot!” If he’s hawkish today we can expect risk off and a stronger dollar; and if he again fluffs his lines yet again, we can expect the opposite. One wonders what balloon string he is holding on to if he yet again can’t make it clear to markets that rates are going up more, and STAYING UP – like better quality balloons.

Meanwhile, grasping onto my own balloon string for a final paragraph, one can argue the Fed is wrong on the payrolls front longer term because it doesn’t grasp the enormity of what is about to hit in terms of AI. Neither does the financial industry. As ChatGPT is rolled out as part of the Microsoft Office suite, a Bloomberg markets’ survey about the impact of AI yesterday saw two thirds of respondents say it would not replace their job. I would posit that the correlation between the people who said that and the people who are easily replaced by an AI is positive and high. Indeed, the impact will be felt across the entire services economy: and we don’t even need humans for their political biases anymore from what ChatGPT will and won’t write so far. Then again, as Twitter perhaps shows, only a core of white-collar workers are needed to actually run firms, and the rest can go help rebuild the UK or US army, or such-like. What an irony that would be: the people who patronisingly told blue-collar workers to ‘learn to code’ being told to become blue-collar workers, because that’s just progress.

Again, how narratives can burst in your face!