Ton of Earnings This Week + BTFP Ending Soon

Hello Traders and Investors and thank you for joining me for another edition of the Magnelibra Markets Podcast, I’m your host Mike Agne and today’s episode #25 is entitled “Ton of Earnings This Week + BTFP Ending Soon”

DISCLAIMER: The following podcast is for educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and may not be appropriate for all listeners.

So this week is the biggest corporate earnings of the season in regards to the number of firms reporting. Earnings Whispers posted this excellent graphic of this weeks releases, highlighted by the tech heavy weight’s on Tuesday, with Microsoft and Alphabet and Thursday releases coming from Apple, Amazon and META:

To add to all this fun we have the FOMC meeting on Tuesday and Wednesday where the consensus is for a 97% chance for rates to remain unchanged. We will expect the FOMC to start massaging the masses as to the potential for the FOMC to react to incoming data and begin to remove all rhetoric for a continued hawkish stance. We have seen the other global central banks reaffirm their hawkishness with the outlier PBOC desperately trying to salvage their own internal deflation and struggles. So we believe the FOMC will be the first major to actually cut rates here out of the gate beginning with the March meeting.

We also know that seasonality does not favor the equity markets here for the next two months and the negative chart structure on the daily and weekly charts of the Nasdaq futures indicate to us that profit takers may just be beginning. So we often talk about the earnings being used as reasons to take profits and we believe this week will see a continuation of the selling that plagued the end of last week.

All in all this is a pivotal week for markets and we know the debt problem as well is becoming increasingly problematic for the US treasury and 2024 and 2025 sees nearly $3T in maturing debt consecutively that has to be refinanced. Do we honestly think this can be done in a higher rate, QT environment? We do not and this is why we feel the FOMC will cut rates earlier and more aggressively than most think:

Source: Zerohedge

We also have a lot of data this week with consumer confidence and ADP on Tuesday and Wednesday with Thursday bringing jobless claims and ISM with Friday the NFPayroll report and consumer sentiment, we will talk about that data more later in the week.

Another highlight last week was the FOMC confirmation that the BTFP loan program will end on March 11th. They also eliminated the free arbitrage between the loan rate and the IORB, some 50bp by raising the loan rate from OIS+10% to the IORB rate itself. This arb if annualized based off the $160Bn in loans amounts to around $800million so we don’t feel that this was really a contributing factor but rather just more of a signal to banks that they better start using the discount window. This preemptive move is to smooth the transition from the BTFP to the Discount Window in regards to banks adding to liquidity via the window, which was historically the way things have been done. This is why the FOMC has also been very vocal lately in regards to removing the stigma for institutions that need liquidity which is the reason most banks try to avoid using the window, this could lead to speculation that the bank is having liquidity issues and could lead to deposit outflow. In a US banking system that has $18Tn in deposit but only $2.4T in actual cash, well you could see why this would be a problem.

In regards to the wind down of the BTFP, we know this program did 3 vital things:

1. Increased Liquidity: The additional liquidity from BTFP loans enabled banks to manage cash flow challenges potentially buying them time to restructure or sell defaulted loans in a more orderly manner.

2. Reduced Pressure to Sell: With access to BTFP funds, banks may not feel immediate pressure to fire-sell defaulted loans at depressed prices, potentially minimizing losses.

3. Market Confidence: A stable and well-functioning banking system supported by the BTFP can instill confidence in the financial markets, potentially lowering borrowing costs for banks and aiding in their overall financial health.

Also let’s not forget the US Treasury has also backstopped this program and agreed to reimburse the Federal Reserve for up to $25Bn in aggregate losses. So the removal of this safety net is the precursor to the initial rate cut and we suspect the markets to price the first rate cut in as we get closer to the FOMC meeting in March (19th/20th).

Ok so I know this is a lot to digest, but what we are seeing is the Federal Reserve is painting the picture for the next regime, which is a rate cutting regime. As we have talked about in prior podcasts, the underlying fundamentals are deteriorating and the evidence is in the continued deterioration of balance sheets via excessive credit debt and interest rates. Furthermore we continue to see an increase in the amount of layoffs, and coming from the tech sector none the less, so it will be interesting to see how quickly this spills over to either increased unemployment, or slowing income inflation. We also know that the real estate sector is starting to show signs of distress, that supply of homes are increasing and rents are falling.

All in all we feel the move from 2023 that we have seen spill over thru January, is about to hit some turbulence and the Nasdaq close last week may lead to further confirmation of this reversal this week:

Ok so let’s look at last weeks settlement page. We can see that the front end was hit harder than the long end of the curve leading to a flatter bias at weeks end. We saw the Nasdaq as the weak link and the futures closed below that important 17600 level. The US Dollar was weaker across the board accept vs the Yen. Energies continue to perform well and most likely bid due to the ongoing MEast tensions and metals were all weaker:

Here is pic of the US bond yield curve and the flatter close to the week:

When we look at the Futures Model Tracker, we have now reversed out of the Nasdaq and have gone with a small short position there once again:

When we look at the technical charts of the Nasdaq futures the weekly close was not good and now the bulls are going to start the week on the defensive with 17600 as the first hurdle which is now up to the bears to continue pressing things:

The SP500 futures chart doesn’t look as bad and could mean that money flows are starting to once again come into the SP500 broader markets and out of some of these tech names:

When we look at the spread chart we can see that the end of the week showed some resiliency of the SP500 vs the Nasdaq and this breakdown may have been just a false move and this week is important in confirming that:

As far as the MEGA8s Berkshire was the leader on Friday with our new addition the worst performer of course. Also please note the addition of the QQQ 426C 2/2 expiry as the hedge for this week. Seasonality does not favor the equities here over the next 2 months and we believe this hedge is appropriate at this point:

When we look at the QQQs the technical set up is ripe for a pullback here:

As far as the package chart wise 3375 now becomes our target support area and a trade below as a grouping should pressure a continuation move to ensue:

When we look at the total Market Cap chart Berkshire, Meta and Google continue to make new highs with Microsoft and Nvidia pulling back some for now:

Ok finally we leave you with an update from our January 4th post and analysis upon Tesla. We posted this chart showcasing the growing acuteness of the triangle wedge formation:

In this post we wrote,

When we look at the options markets, we see decent open interest in the $200 puts in the Feb 16 2024 expiry. The 220/200 put spread settled at 4.50 and would return 20.00 at full value so a decent 4.4:1 payoff:

Well it’s obvious now that this trade is trading near full value now (currently $18.6) These are the types of structures that an investor, well a well educated investor can constantly analyze, research and execute. It takes both knowledge and analytics, with a healthy dose of rational thought processes and you can find opportunities like this all the time. We hope we are informing you, allowing you to see markets and the opportunities they present. As we often talk about, there are many ways to get from point A to point B, no two investors or traders are alike, but what the successful ones have in common is they define their strategy, they execute it and they stick with the formulas that work, that are time tested, but let’s be honest, a little bit of good timing and luck does help but when things seem to be going your way, then luck tends to also be on your side, so maybe its just a byproduct then of doing the right things!

Anyways, we hope you learned something today. Please subscribe, give a like and if you can try to send our work to someone else, who may benefit from leaning about markets from those of us who have spent over 2 decades in the trenches, taking gains, taking losses and learning the whole way, just so we can convey these crazy idea’s to you. Stick with us and we will change your perception so that you too can see the markets from a different point of view…till next time, cheers.

DISCLAIMER: For educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and is not for everyone. Such investments may not be appropriate for the recipient. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. Nothing contained in this message may be construed as an express or an implied promise, guarantee or implication by, of or from the author Mike Agne owner of Magnelibra Capital Advisors. Magnelibra the CTA and its proprietary long/short commodities, futures and options managed accounts may hold long and or short positions in the various futures and markets that Magnelibra covers. We will never claim that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Although care has been taken to assure the accuracy, completeness and reliability of the information contained herein, we make no warranty, express or implied, or assume any legal liability or responsibility for the accuracy, completeness, reliability or usefulness of any information, product, service or process disclosed. If you are interested in opening an individual managed futures and options account to compliment your overall investment portfolio you can visit our website at https://magnelibra.com for more information. You can also contact or make inquires directly to our introducing broker Capital Trading Group, please contact Nell Sloane at nsloane@capitaltradinggroup.com

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