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Wall Street Breakfast: Goodbye TINA

Goodbye TINA

The latest selloff in stocks and bonds may be signaling the end of one of the best trades of the COVID era. The TINA (there is no alternative) trade has been a reliable support for equities, with the buy-the-dip crowd always willing to come in to help the major averages. But the surge in bond yields and projections for the fed funds rate are giving investors option.

That’s not to say that buy-the-dip is gone. While the Dow (INDU) (DIA) fell to its lows for the year, the S&P 500 (SP500) (SPY) bounced right off the June lows and the Nasdaq 100 (NDX) (QQQ) and Nasdaq Composite (COMP.IND) are also holding above the nadir of the year.

But now investors have an alternative. The 2-year Treasury yield (US2Y) (SHY) can give investors a 4.2% return compared with the S&P’s dividend yield (SPYD) of around 1.7%. The fed funds rate is projected in the latest FOMC dot plot to hit 4.4% by the end of this year. So, money market funds will finally be an alternative again. Cash could also rotate into bond funds if investors think the fixed-income selloff is reaching the end. And it’s not a good outlook for stocks.

“The combination of the S&P 500’s bearish trend and poor seasonals suggests trading conditions are likely to get worse before they get better,” Oppenheimer technical analyst Ari Wald wrote. While “we see an opportunity for the long-term investor, we caution that extreme pessimism can linger over the near term. For the S&P 500, we see near-term downside risk to 3,500 which would mark a 50% bull market retracement.”

Where to look: Goldman Sachs slashed its S&P (SPY) target to 3,600 last week. The equity team recommends defensive positioning amid uncertainty. With surging rates short duration will outperform long duration and investors should own stocks with “quality” characteristics like strong balance sheets, stable sales growth and high returns on capital.

BofA’s Bull Bear Indicator hit max bearish at 0 again. But with housing close to traditionally recession levels they spy “diamonds in the rough” in stocks and credit absent a “financial event”: SPDR Homebuilders (XHB), Russell 2000 (RTY), Philadelphia Semiconductor (SOX), emerging markets (VWO) (EEM), investment grade bonds (LQD) and high-yield bonds (HYG).

In bonds, MKM says (TLT) is down “nearly 32% from its level late last year.”

“Some of this was a necessary adjustment as rates were too low and very out of whack with the business cycle last year. What a difference nine months makes: we now have a 4.6% peak Fed funds rate priced into the market (the expectation was for only 75 bps of rate hikes during 2022 at the end of last year), the 10-year Treasury yield has more than doubled (TBT) (TLT), and inflation expectations have been cut by one-third (from their March highs).” (0 comment)

Cable crash

Sterling dropped to its lowest level against the U.S. dollar in history Monday before bouncing back off the lows of the session. The pound (FXB) fell to $1.0350, sliding below $1.04 for the first time ever, before buyers moved in. The cable cross rate is now around $1.07, still -1.3%. The pound is continuing its selloff from Friday after new Chancellor of the Exchequer Kwasi Kwarteng unveiled a budget of tax cuts and spending that worried traders.

“Cable’s ‘flash crash’ to a record low 1.0350 overnight came as a surprise, however the direction of travel did not, given the dim view that the market has taken on UK assets since Chancellor Kwarteng’s fiscal announcements on Friday,” Michael Brown, head of market intelligence at Caxton said. “Clearly, investors are becoming increasingly concerned about the unsustainable path that UK borrowing is now on, and the worsening twin deficit problem that the UK will face.”

The U.K. 2-year gilt yield is soaring 55 basis points to 4.47%. The 10-year yield topped 4% for the first time since 2010. (5 comments)

October Prime

E-commerce giant Amazon (AMZN) has scheduled another big sale on October 11 & October 12 called Prime Early Access. This global shopping event exclusive to Prime members will be held in 15 countries.

The new 48-hour event gives Prime members exclusive early access to discounted holiday deals. The “Prime Early Access Sale” follows Amazon’s annual Prime Day on July 12 and 13. (0 comments)

Musk deposition

Tesla (TSLA) CEO Elon Musk is scheduled to spend the next few days with lawyers for Twitter (TWTR), answering questions ahead of an October trial that will determine whether he must carry through with his $44B offer to acquire the social media platform.

The deposition, planned for Monday, Tuesday and a possible extension on Wednesday, will be behind closed doors. It was not clear whether Musk will appear in person or by video. The trial is set to begin October 17 in Delaware Chancery Court, where it’s scheduled to last just five days. (2 comments)

Bitcoin vs. 4%

As many central banks across the globe further embrace their interest-rate hiking marathon, bitcoin (BTC-USD), a gauge for risk appetite and overall sentiment, could keep seeing downward pressure. The same goes for other risk assets like equities.

“Does it mean cryptocurrency investors need to brace for more than a year of a continuous downtrend? Not at all. On the one hand, the chances that we’re nearing the end of this bear market did get substantially lower,” said Anto Paroian, CEO and executive director at crypto hedge fund ARK36. (24 comments)

I-bank ranks

Investment banks have been facing headwinds in 2022 as climbing interest rates make M&A more expensive and raising capital in the debt markets less appealing. And volatile markets have resulted in some companies delaying IPOs and other equity offerings.

Through Sept. 14, the 10 biggest investment banks generated $56.4B in revenue this year, an almost 39% decline from $92B in the same period a year ago, according to Dealogic. Earlier this month, JPMorgan Chase (JPM) President and Chief Operating Officer Daniel Pinto said at an industry conference that he expects the company’s Q3 investment banking fees to fall 45%-50% from a year ago. And while the fees are declining, the bank isn’t quick to eliminate jobs to match the activity. “You have to be very careful when you have a bit of a downturn to start cutting bankers here and there because you will hurt the possibility for growth going forward,” Pinto said. (2 comments)

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