VRA Letter: Worst Fed Chair Bond Market & Megacap Tech Opportunities

Good Thursday morning. As I explained on my podcast yesterday, J Powell went off script at his presser and likely just made “another” policy mistake, which will be his 5th since taking the appointment to Fed Chair.

I repeat; J Powell is the worst Fed Chair of my time.

Powell’s off the cuff answer to a late question “It’s not likely that we will cut rates in March” may not be in league with “we don’t see inflation as a problem” or “we see inflation as transitory”, but Powell’s latest mistake was a substantially boneheaded one in its own right.

And so completely unavoidable. Big Unforced error.

The FOMC Statement was cut & dry. “Data dependent with more evidence needed…” Basically boilerplate for “we don’t know.”

But then Powell went off script and said something that was nowhere near being in the Fed statement; “no cut in March”. And that looks like another policy mistake.

Because, after March’s meeting there are just 4 Fed meetings before the election and one of those is in September, just 45 days before the election. The Fed doesn’t like being perceived as influencing elections so that really leaves just 3 meetings after March.

If the markets are right, and the Fed cuts rates 6–7 times in 2024, Powell’s pronouncement will almost certainly wind up putting the Fed on an accelerated rate-cutting schedule, this year, with 2–3 before the election, likely before the Feds September meeting.

And if the economy were to weaken, yields would absolutely collapse (as they did yesterday and again this morning!), forcing the Fed’s hand to start cutting by a full 1%, at a single meeting. Maybe back to back.

All Powell had to do was stick to the script. But that’s never really been his way, has it.

Unforced error, maybe another big one.

The bond market sure thinks so. Fed front-running looks to be picking up speed. Bond market “vigilantes”, in reverse.

Here’s the one year chart of 10 year yields. The annotations I’ve made mark a technical pattern that I call “Larry Loser”, as this clear bearish trading channel breakdown, combined with a weak reversal higher back to the 200 dma, breaks back down again into the next round of lower prices. This is not the chart of an investment you would want to buy.

We see it clearly in this 1 month chart of 10 year yields, with the trading action of the last 24 hours highlighted.
Even as Powell was saying “no rate cut in March”, look what the 10 year yield did. Absolute collapse in yields.

Someones not buying what Powell is selling. Folks, this morning the 10 year yield just fell below 3.9%. Yields are collapsing.

These charts of 10-year yields tells all, as rates have begun their sharp move lower, a move that will only pick up speed from here. With the Fed funds rate at 5.50% and 10-year yields at just 3.9% this AM, the markets are telling us what’s about to take place; Fed rate cuts. Highly bullish for precious metals, miners, tech stocks, small caps and the broader US economy.

New York Community Bank Reminds of Commercial Real Estate Issues

Right on cue, following a profit warning from New York Community Bancorp on Wednesday (partially attributed to turmoil in the commercial real estate sector), Japan’s Aozora Bank slashed the value of some of its US office tower loans by a massive 50%. New York Community Bancorp’s move to slash its dividend and bolster reserves led to a 38% plunge in its shares yesterday, also triggering the largest drop in the KBW Regional Banking Index since the collapse of Silicon Valley Bank last March.

Aozora Bank, the 16th largest in Japan by market value, recorded a 20% plunge in shares on Thursday after reporting a net loss of 28 billion yen ($191 million) for the fiscal year. This was in stark contrast to its earlier projection of a 24 billion yen profit.

Here at the VRA we’ve looked closely at the commercial real estate woes in America over the last year. What we learned was that these loans are widely spread over 100’s of large banks, meaning that we never bought into the “CRE will collapse the banking industry’ fears. Having said that, it was less than 1 year ago when the regional banking crisis occurred and yes, it could absolutely happen again were the Fed to back away from their endless support.

Powell’s blunder yesterday could have ripple-effects. Powell strikes again.

Fortunately for Powell, he will likely be bailed out by a strong US economy. But once again, I stress…watch the 10 year yields…they’re screaming “Fed Rate Cuts Are Nearing!”

VRA Market Update

The reality, as we began warning last week is that a short-term sell-off in megacap tech should surprise no one.

Across the board (essentially) on the VRA Investing System they’re trading at extreme overbought levels on each of our momentum oscillators (stochastics, RSI, MACD, MFI).

A “buy the rumor sell the news” event (on earnings) will likely continue.

Most importantly, it will provide the next great “buy the dip” opportunity. Buying the dip has been the smartest of smart money strategies from the 10/13/22 bear market lows. We expect this repeating pattern to continue.

Key Investing Notes for 2024

- Our 3 VRA Inflection Points (from late August 2023 on) will continue to drive stocks higher; disinflation, lower rates and lower USD.

- We’re only now hitting all-time highs, which is when major bull markets begin to accelerate.

- We’re in just the first inning of the “innovation revolution”, as should be made clear from tech earnings this quarter & going forward.

- We’re in just the second year of a new bull market, which have been higher 100% of the time since 1952 (by approx 14%, S&P 500).

-As we did throughout 2023, we will be buying dips. We will continue to shine a spotlight on the strongest opportunities (from a market timing point of view).

- We look for semis/tech to continue to lead the markets higher in 2023 and look to re-add housing (NAIL) back to the VRA Portfolio. Housing will continue to lead the consumer-based economy higher, in 2024 and years to come.

- We also expect small caps and precious metals/miners to have a stellar 2024. Our forecast remains for gains in the 40% range for small caps and possibly double that in the miners, as we look for gold to hit $2400 with upside to $3000+.

VRA Bottom Line: it remains our (strong) view that we are in the Roaring 2020’s, powered by our “5 Big Bribe Megatrends”. This bull market will ultimately rival the 1995–2000 dot-com melt-up. As we’ve covered with our VRA Members, we are coming off of extreme overbought readings on the VRA Investing System, with (some) investor sentiment surveys hitting extreme greed levels. Some weakness should not surprise, however we expect it to be short-lived.

Until next time, thanks again for reading…

Kip

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