QE Is Dead, Long Live QE

By Michael Lebowitz and Lance Roberts | March 8, 2022
qe, QE Is Dead, Long Live QE

The Fed will officially end the latest round of QE on Wednesday. The schedule below shows that on March 9th, the Fed will make its last QE purchase of about $4 billion of shorter-term Treasury notes. Since March 2020, the Fed’s balance sheet has risen by nearly $5 trillion due to QE. The Fed will still purchase bonds but only to offset maturing bonds and keep its balance sheet stable. Given the new monetary policy regime, we must focus beyond the Russian conflict. This entails better risk management as a key source of liquidity is now officially ending. Have no fear; however, QE will be back.

qe, QE Is Dead, Long Live QE
qe, QE Is Dead, Long Live QE

What To Watch Today

Economy

  • 6:00 a.m. ET: NFIB Small Business Optimism, February (97.3 expected, 97.1 in January)
  • 8:30 a.m. ET: Trade balance, January (-$87.3 billion expected, -$80.7 billion in December)
  • 10:00 a.m. ET: Wholesale inventories, month-over-month, January final (0.8% expected, 0.8% in prior print)
  • 10:00 a.m. ET: Wholesale trade sales, month-over-month, January (1.0% expected, 0.8% in prior print)

Earnings

Pre-market

  • Dick’s Sporting Goods (DKS) to report adjusted earnings of $3.55 on revenue of $3.31 billion
  • Olaplex (OLPX) to report adjusted earnings of $0.10 on revenue of $157.11 million

Post-market

  • Bumble (BMBL) to report an adjusted loss of $0.02 on revenue of $209.64 million
  • StitchFix (SFIX) to report an adjusted loss of $0.25 on revenue of $514.81 million
  • MongoDB (MDB) to report an adjusted loss of $0.21 on revenue of $243.25 million

Market Breaks Key Support

Not a lot of good news from yesterday’s market. The S&P slid and closed at the lows of the day and well below its September support levels. While the market is now 2-standard deviations below the 50-dma, the market is not oversold and is triggering a short-term sell signal. Such does not mean we won’t see a reflexive bounce, but any bounce over the next day or two should be sold into.

We are looking to further reduce our equity risk and will likely reinstate our short-position on the rally failure. There is way more bad news particularly with analysts now starting to slash their previously over-bullish estimates for the S&P 500.

qe, QE Is Dead, Long Live QE

How Extended Are Oil Prices?

Several readers have asked how much of the increase in oil prices is due to the Russian conflict. To help answer the question, we share the graph below. The graph charts the price difference between the oil futures contract expiring 12 months from now and the front-month contract. The front contract is susceptible to changes in the immediate supply and demand for oil. Therefore it is heavily impacted by the Russian invasion. As you move in time, the forward contracts are less swayed by current events and focused on macro fundamentals.

Before this episode, the most the 12th contract traded below the current contract was -$10-$15 (blue circles). On Monday, the difference nearly hit -$30 (red circle). In 2008 oil approached $150 a barrel. At the time, the difference was only -$12. At the start of the Gulf War invasion of Iraq, where Iraqi oil fields were set ablaze, the differential also dipped to -$12. While hard to answer the question about current prices, it is fair to say the current price of oil could be overpriced by $20-40 a barrel.

qe, QE Is Dead, Long Live QE

Bearish Market Sentiment Yet Bullish Actions

Over the last few weeks, we have shared graphs pointing out that investor sentiment is historically bearish. The following note from Callum Thomas points out that sentiment may be bearish, but investors are not positioning in a bearish manner. “Investors might be saying they are extremely bearish, but their portfolios say they are wildly bullish.”

qe, QE Is Dead, Long Live QE

Definition of Perma-Bull

The Tweet below, from @RobinWigg, points out the amazingly bullish posture of BCA Research. The note bemoans the rising risk of the Russian invasion turning into a “nuclear apocalypse.” Despite the scary forecast, the piece concludes as circled, “The risk of Armageddon has risen dramatically. Stay bullish on stocks over a 12-month horizon.”

qe, QE Is Dead, Long Live QE

$4 Gasoline Coming To You

As if prices at the pump were not shocking enough this past weekend, prices are likely to be even higher over the coming week. Gasoline futures traded as high as $3.89 Sunday night. The average markup nationwide between gasoline futures and gas at the pump is about .75 cents. The graph below shows the national average is creeping up on $4 gallon, and many northeast and west coast locations have already surpassed that and, in some cases seeing $5.

qe, QE Is Dead, Long Live QE

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2022/03/08
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