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Matthew Tuttle and Rob Isbitts discuss the reaction to the Fed not raising rates this past week (0:40), sussing out the real market narrative (7:00), technical levels and the 10-year (14:00).
Transcript
Rob Isbitts: Welcome to Seeking Alpha’s Wall Street Breakfast, Sunday Edition. I’m Rob Isbitts, Seeking Alpha contributor under the profile Sungarden Investment Publishing and creator of a brand-new site called, ETF Yourself. My friend, Matthew Tuttle of Tuttle Capital Management, is with me again. He’s a fellow Seeking Alpha contributor, a highly experienced trader and an ETF innovator.
So, Matthew, this is really supposed to be kind of a review of the week, but we might as well just review Wednesday and Thursday of this week. We’re recording this Thursday afternoon. And really, I mean, unless you want to talk about Philly Fed Manufacturing, which was down pretty sharply this morning, or jobless claims, which had the number two in front of it, it’s always in the 200 range and people try to make a lot out of this.
But I’m really curious to get your reaction to this because, of course, Fed did not raise rates. Nobody expected them to raise rates. So guess what? Everybody was right.
However, it’s always the reaction and it’s always the interpretation of the words, it’s always a pivot in the narrative. I happen to personally think that a lot of the stuff is overblown, but markets move on it, and they are moving.
And I guess the meeting on Wednesday and the press conference that Chairman Jerome Powell gave afterward with some fairly spicy questions, I would say. The narrative the next day here is it was a hawkish pause and that makes me think back to a Seinfeld episode, where they were trying to find a girlfriend for George Costanza and he was so particular at one point, he’s saying, “I like a pinkish hue, I really, really – I can’t date anybody who doesn’t have a pinkish hue.”
And pinkish hue was what came to my mind when everybody’s talking about hawkish pause. Can you explain to our listeners what a hawkish pause is, and do you think it matters?
Matthew Tuttle: So – and I’ll take the second part first. I think it matters. I think it matters a lot. Like you said, everybody assumed they weren’t going to raise rates. Why this was hawkish was two reasons.
I think you had a lot of bulls out there assuming that the Fed was done for the year, and people are still kind of betting on that. But Powell basically told you guys, no, we’re not, we’re thinking probably one more this year. I think you also had a lot of bulls hoping for significant cuts next year, sooner rather than later. And Powell said, not so fast with that. And that’s where the real hawkishness came out.
I think you probably had a lot of people expecting some hawkishness after PPI came out a little bit hot, oil moving up towards $100 a barrel. But I think this took everybody by surprise. I think he kneecapped the bulls. And I have been moderately bearish coming into this.
I’m now more bearish than I was before because I think a lot of the bull narrative was no more hikes this year and some serious cuts next year. And yeah, again, I don’t trust the Fed. I don’t trust what Powell is saying. But Powell is saying, “Hey, no, we’re not doing that”.
RI: So, I’m glad that we don’t rehearse a lot of these because I really get jacked up when I hear you basically say what was already in my mind, because we’ve both been around long enough, about 60 something years combined in the industry.
And what you said, Matthew, I think is spot on. And see, my reaction, I got a call from a reporter yesterday and asked for my quick review. And I said, “There’s – nobody should be surprised, okay?”. I don’t think Powell and the Fed – well, Powell in particular at these formal press conferences, okay, he speaks for them. You have the different Fed governors going and kind of saying their own things. But Powell ultimately is the bottom line and speaks for the group as a unit.
So, to me, this is nothing different. Like my reaction to when I was asked yesterday by a reporter was, there was nothing in here that I really thought changed what – forget what the Fed is actually saying, but it doesn’t change the market condition.
Because we’ve had – there are long-term problems in the economy that are now finally coming to a head because a lot of people who are Wall Street bulls, because they have to be, because of how they are compensated, we can have a whole session on that some other time. But there’s a lot of people that we’re kind of counting on the market not having as much risk as it’s had all year while it’s been going up, the wall of worry, if they will.
So what do you think about that? I feel like this was just maybe Powell finally said out loud what their actions have been dictating. They are going to prioritize inflation over everything else and darn the equity market and darn the labor market.
And yeah, because he doesn’t want to repeat the 1970s and be another Arthur Burns who was the Chairman back then and that was his legacy. Powell doesn’t want that legacy.
MT: Yeah, I mean, again, I think I ascribe some more significance to this. I don’t necessarily see a change because they’ve always kind of come out in big and hawkish. I just see this making it abundantly clear, not unlike Jackson Hole, I think, where – I mean, not this past Jackson Hole, last year Jackson Hole, where people were coming into it expecting one thing, and Powell basically told you buy (SPY) puts.
I think this was somewhat similar to that. And remember, what, about a month or so ago, the market was nearing all-time highs. And you’re kind of sitting there saying, “How is the market nearing all-time highs when interest rates are so much higher than they were when we were at all-time highs?” And I have to think that was bull saying, Fed’s done this year, Fed’s going to start cutting next year, market’s a forward looking mechanism, we’re assuming much lower rates. And Powell saying, “Not so fast”.
RI: And I agree with your explanation of that. I guess all I’m saying is that I think people were fooling themselves. And they needed the man himself to actually say it. And maybe this is an – and look, anybody who’s listened to us over the last few months or read my articles or yours on Seeking Alpha, I feel like maybe what happened yesterday is we finally, finally, finally went from narratives that are really kind of based on, like I said, people talking in their book, okay, if you manage money and you’re supposed to be fully investing in stocks all the time and that’s your mandate, are you ever going to say anything bad about the stock market?
If you’re a small cap manager, are you ever going to say, oh, it’s a lousy time to own small caps? I mean, this has been going on for decades, probably way before us, but of course, now we’ve got big media.
So to me, the bottom line on the Fed announcement or the conversation in the press conference by Powell and let’s say the aftermath at least almost 24 hours after, we’ll see what happens in the next week.
But to me, the bottom line is we’re going from narrative to maybe tipping over into emotional. And when it gets emotional, that’s when the market goes from turning over, hinting it rolling over to get me out, get me out, get me out at any price. Now that happens a few steps later.
I just posted something actually to ETF Yourself because I wanted to get the thought out right away. But I’m looking at the SPY and I’m looking at what was kind of like an envelope pattern, straight down in ’22, straight up for a lot of ’23. And on a daily basis, it finally broke. Now, will that be a fake out breakdown or will it be for real? We don’t know and we can only speculate and we won’t.
So, sort of pivoting, if you will, back to the markets, okay, pun intended because pivot was another one of the big words that they were using, right? No more pivot anymore. Now it’s a hawkish pause, pinkish hue, whatever you have.
So tell me before we finish up here, not – obviously not prediction, okay for the stock and the bond markets or any other markets you want to cover, but give me what I like to call the reward/risk trade off, the reward versus the risk. And maybe how it looks to you going into end of September and October, the ghoulish month.
MT: So, yeah, I mean, I’ve certainly ticked up to being more bearish. Our ETF model portfolio is set up fairly bearish. I’m still leaning much more towards cash. I’ve been selling some stuff short this morning, and I’m still on the short selling is still not easy. Whereas back in the beginning of the year, it was easy. Last year, it was easy. It’s not that simple.
I mean, I’m seeing stocks, they’re breaking down, I’m hitting them to the short side and they’re just not – they’re not breaking down anymore. And you make a couple of cents here. It’s just – it’s not the same. There’s not that panic in the markets yet.
So I’m more bearish, but until I see that panic, I don’t think you want to go long. I think you want to be very careful on the short side. Maybe you want to have a – I mean, if you can, you want to have a book balance between some longs and some shorts. And if not, I mean, cash is still 5%.
RI: That’s right. And one of the things I’ve written about quite a bit in my articles on Seeking Alpha, especially over the last couple of months, is at some point, 5%, it’s one thing when it’s only out a month or two, which was the original thing.
But now you’re talking – you’ve got two years, three years, and guess what? So I completely agree. I mean, more people are going to fall into that camp of, I’ll take 5% for a year knowing I can sell it whenever I want and a year from now, I’ll know a lot more than I do now.
So these are never all or nothing decisions and obviously none of it’s personal advice, but we have both discussed the idea that a humongous percentage, a tactical term humongous, a humongous percentage of both of our portfolios, personal portfolios are in T-bills and T-bill ETFs and things like that.
One thing I do want to say about the bond market and then just a couple of quick comments. So everybody talks about the Fed’s actual moves, okay? I think the – what they actually do to overnight interest rates, which is what they control is not nearly as important as what the market actually does with what it sees.
So here’s what’s happened to the 10-year treasury. On July 19th of this year, the 10-year treasury was about 3.75%. At the end of last month, August, so we’re talking three weeks ago today, the 10-year treasury was at 4.07%. As we sit here recording this on Thursday the 21st, three weeks later, it’s at 4.48%.
And I talked about 4.30% being the key technical level with busts through that. That’s what you want to see if you’re trying to make money off a falling bond market. The two ETFs I have discussed are (TBF) and (TBX), which do that. So those are a couple for people to check out if they like the sound of this.
But Matthew, I mean, 41 basis points, okay, 4/10 of a percent move up in three weeks. The market’s kind of doing the Fed’s job for it and I know they don’t control the 10-year rate, but like to me, how many more rate cuts they have is not that topical. It’s not a high priority. And the idea that they’re going to cut rates other than in a market calamity credit crisis, something like that, anytime soon, just seems like total hogwash to me. Thoughts?
MT: Yeah. So I’ve been watching what’s been going on in the 10-year, because, kind of, coming into this Fed meeting before PPI, what you were seeing is inflation numbers that were moving in the right direction, economic numbers favoring a soft landing, and you were seeing the 10-year at or near yearly highs.
And so on the one hand, you had the 10-year moving up, on the other hand you had the equity guys saying, Fed’s done. I figured the 10-year was telling us something and I think, yesterday is what the 10-year was telling us.
I actually did buy a little bit, a very little bit of (TLT) this morning. Didn’t quite get the low, but pretty close to it. We’ve also been seeing a bunch of call buyers coming in on TLT calls. Jonathan Krinsky at BTIG just sent out a note saying TLT might be the washout and may be ready to go back up. So we’ll see. Again, a very, very small position in it.
RI: And a short timeframe, right? I mean, you’re – in other words, you’re not – just so people understand, you’re not trying to predict that this is the top in interest rates for all time, or even for the next three to six months, this is a much shorter-term time frame…
MT: Right. Oh, yeah. Yeah, I mean, by the time this podcast comes out, I may be out of that position. So…
RI: Hey, that’s a great – it’s a great way to sum it up. So I’m just going to finish here by pointing folks to a couple of articles I wrote recently on Seeking Alpha, only because, look, there’s a lot of great articles out there, but there’s two in particular that if you want to see what I wrote, when I wrote it and how it blends in everything we’re talking about, okay?
I could run off the list of things that I have that are either inverse ETFs or out of the money put options, that are scoring on days like today, but it’s a very long list. So maybe one day in an article or a post.
But here are the two articles. So the first one was written on September 9th. SPY and S&P 500, big short two question mark, half to 3,000 easier than it seems? I’m here to tell you it’s way too early to start thinking about 3,000 on the S&P 500. However, we may have started the process that starts to put a bigger decline on the table, because we go from narrative-driven to emotionally-driven markets.
And then the other one is one I just wrote this week. I focused on four parts of the market: SPY, QQQ, so S&P 500, NASDAQ 100, the ARK ETF, which I know you’re so much familiar with. And also oil, not the oil stocks, okay? By the way, oil stocks dipping today while oil is up. Big difference between the commodity and the stock when people don’t like the stock market.
So that other article written on September 20th, SPY, (QQQ), (ARKK), oil conspired to point to a high return, high risk market. It’s a technical analysis piece. But what I basically said was, “Hey, ARK is already falling hard. It has been for a little while here. And it might be the canary in the coal mine that is followed by the Qs and the SPY, the oil price still may be a little bit from running into trouble.”
And so you put those four things together and you’ve got three parts of the stock market down and oil not collapsing. And you’ve got, kind of, what Powell talked about. It’s an inflationary environment, they’re going to fight it and darn in the stock market. Final thoughts?
MT: So, yeah, I mean, like I said before, I’m not willing to get uber bearish until I see some panic selling. Certainly the S&P right now, as we sit here at 4,350-ish, is not too far from 4,200. I think 4,200 is a very important level, because that’s the level we broke through to really have that bull run through June and July. And if we break through that to the downside, I think, that’s going to be really, really, really, really bad. But until I start to see panic selling, I don’t have a whole ton of conviction one way or the other, certainly leaning bearish, but I like cash.
RI: Yeah. And again, the timing is next to impossible. I think the bottom line of what we’re both saying, me a little bit more aggressively than you, is that this is a time where you really got to have your eyes wide open, because the threat of this turning into something big and emotional is much greater than it has been maybe at any point this year.
MT: Yeah, I mean, certainly, that threat is out there. I wouldn’t say more than any point this year, because the first quarter, whenever the regional banks were going under, I think, that was during the first quarter.
RI: True, true. Yeah, they shut that down quickly, but maybe not the same tools to do that this time around, because it’s not isolated, right?
MT: Correct.
RI: So, okay, good, good. Well, thanks, and thank you for listening to Wall Street Breakfast Sunday Edition. Nothing on this podcast should be taken as investment advice of any sort. At times myself, Rob Isbitts and my co-pilot Matthew Tuttle, or any guests, may own positions in the securities mentioned.
You can follow me on Seeking Alpha under the profile name, Sun Garden Investment Publishing. Matthew Tuttle’s Seeking Alpha profile name is Tuttle Capital Management. We also invite you to join the 1,000s of people who follow, actually, more than 1,000s, it’s like 100s of 1,000s, maybe millions, who follow the Wall Street Breakfast podcast on Seeking Alpha, where you will find a full transcript for all episodes, including this one.
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