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Stocks Drop Sharply On September 29, 2022, As Liquidity Stress Builds

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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9/29/22

STOCKS – $NKE, $MU

MACRO – $SPY, #Liquidity

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The S&P 500 dropped by around 2%, with the index closing at a new 52-week low, 3,640. The index traded to about 3,610 and found some support around a big option gamma level.

It looks to me like the consolidation phase of wave four down is over, and the index has already started or is going to start its next move down. There is a gap up to 3,720 that could get filled, but even if were to be filled, say tomorrow, I don’t think it changes the pattern, and the potential for the next move down to around 3,500.

Liquidity

I think we may be seeing liquidity getting sucked out of this market. Today, reserve balances fell below $3 trillion for the first time since November 2020. We are heading into the quarter end, which is driving a significant amount of the reserve decline, as reverse repurchase agreements hit a record high today at $2.371 trillion. Tomorrow is the last day of the quarter and that number could be higher—the higher reverse repo’s go, the more significant the drain on reserves.

There has been a massive move in overnight funding markets, with the FRA-OIS spread, which measures the difference between Libor and the Fed Funds rate. The higher the value gets, the more funding stress there is on the market. It is not at an alarming level of stress yet but needs to be watched.

Additionally, there appears to be funding stress on the Japanese Yen 3-month currency basis swap, meaning it is getting more expensive to acquire dollars. Again, this may be nothing or the start of something, and given the decline in reserve balances and the issues in the UK Gilt market, everything needs to be watched.

Meanwhile, the China 5-yr CDS is exploding higher and trading up to 112. Again, are all of these things linked, or are they by chance? I do not have all the answers, but if all these things continue to trend similarly, they may be linked.

Nike (NKE)

Nike is getting crushed after reporting results, noting a significant decline in gross margins and rising inventories. The stock is falling after hours by 6%, and there is a gap at $87, which may help to offer some support, if not 73.50 comes after that.

 

Micron (MU)

Micron is falling after it reported the company noted it was cutting the fiscal year 2023 CAPEX. I think that is important because the whole time the stock was rising and things were “good,” the company never really expanded CAPEX. I had speculated that they didn’t raise CAPEX, because they didn’t believe the cycle was long-lasting. Now they cut CAPEX; maybe my view was correct. I don’t know, but the stock is down an awful lot, and filling the gap at $46 doesn’t seem like a stretch to me.

See ya,

Mike

Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.