PAM Re-Initiates Modest Long Equity Trades Mindful Of A "Dead Cat Bounce," But Equities May Be Boosted By Bank Share Buybacks And Dividend Payouts
Robert P. Balan
Managing Owner and CIO at Predictive Analytic Models / FinaTech Solutions GmbH (CH)
By Robert P. Balan, Predictive Analytic Models
Period Covered: March 18-19, 2021 (Final)
Summary
- (March 18): We expected the sell-off to complete its downward sequence, with an eye out for what bond yields will do next, now that the Fed has ruled out extending the SLR relief. We expect the low to happen tomorrow, Friday, March 19.
- (March 19): We have re-initiated modest long equities but have to decide further early next whether a subsequent equity upmove is merely a dead cat bounce or a new bid for higher, all-time-highs.
- Quants have a propensity to put linear logic as guide to their conclusions, but market prices (a flow) match with corresponding data flows (change rates), not with nominal data values. Bond yields are surging due to inflation expectations triggered by forthcoming massive issuance of Treasury debt paper, but the correlation of inflation expectations (first derivative) matches with the first derivative of debt issuance -- and it is falling. The 10yr yield should correspondingly roll over soon.
- If the full SLR implementation kicks in (and it will) the MOTUs will de-lever their Treasury and bank reserve holdings, and use the clawed back capital to where it benefits them most. Simple. They will do what is required of them, but nothing more. The clawed back capital will go where the returns will be higher. And there goes lending too, as excess reserve will not stay that way for long under full SLR.
- Now that the Fed has ended the SLR waivers (although with "just-in-case" proviso), banks will likely pursue share buybacks and dividend payouts instead of government securities and bank reserves, which may push both equity markets higher. This thesis remains to be confirmed, however.
MARCH 18, 2021
GOOD MORNING EUROPE / GOOD EVENING WEST COAST
flamarkMar 18, 2021 11:25 AM
GM
robert.p.balanModeratorLeaderOwnerMar 18, 2021 11:25 AM
This is the Gold EWP illustration I posted right after the FOMC decision was released (above).
This is what we are having in Gold (XAU) right now (above) --* meaning, yields will rise further, and equities will get hammered some more.*
If the Gold outlook is correct, then the 10yr yield may be making a bid for the 1.90% area, before we see a larger decline in yields (below).
The ES EWP illustration in the chart could be the XAU's analog (below).
Ditto for the YM as XAU's analog in the chart below.
RTY analog in the chart above, and NQ below.
robert.p.balanModeratorLeaderOwnerMar 18, 2021 11:47 AM
PAM will be looking to buy the futures at the lower levels indicated. We will NOT be selling what appears to a final, intra-wave decline (of Wave 2 or Wave "B").
But ultra-scalpers who can watch the market may take opportunity to daytrade the downside -- your choice, your trade to watch.
flamarkMar 18, 2021 11:53 AM
Can you suggest the weakest of the futures to scalp, short/hedge vs my long stocks?
robert.p.balanModeratorLeaderOwnerMar 18, 2021 11:54 AM
As usual, rising rates hurt NQ the most, and ES comes second.
flamarkMar 18, 2021 11:54 AM
Thx
robert.p.balanModeratorLeaderOwnerMar 18, 2021 12:01 PM
I got a DM from a new member, who asked why PAM won't trade the downside when there appears to be a large potential.
The answer, which should be noted by other new members as well. The PAM funds are just the icing layers of a large cake -- there are other sets of funds which leverage off the trades that PAM undertakes. For instance, there is the so-called Joint XXX-FinaTech funds, which leverage the PAM trades by XX times (the leverage is variable). That is why PAM is very discriminating as to what trades to take. There is a huge tail-end impact, and truly the tail funds are much larger than the dog ("PAM").
sparketMar 18, 2021 12:56 PM
RB, earlier in the month you mentioned that SOMA transactions and seasonality would be negative factors until the third week of March. It looks like all of the equities charts you posted today pull back on that time frame. Can you share where you see seasonality heading into April and May? I’m trying to reconcile it with where we equities going in Q2. Thanks.
robert.p.balanModeratorLeaderOwnerMar 18, 2021 5:05 PM
sparket -- until we know how the Fed deals with the SLR issue and get a firm view of the next direction of yields, any longer term analysis of the equity markets is useless.
I will let you know when we have firm data to support a market strategy/analysis.
sparketMar 18, 2021 6:10 PM
Got it, thanks. Sounds like we’re in a holding pattern until Powell publicizes his decision.
henry.riveraMar 18, 2021 7:27 PM
robert.p.balan Robert, the scalper buys, you will execute them with reference to the probable arrival of US10Y @ 1.88. Or you are going to consider the supports that you sent in your graph, in which we are already close to arriving?
robert.p.balanModeratorLeaderOwnerMar 18, 2021 7:49 PM
I would like to see the yields make a small top HH, if you don't mind. The SLR situation is so fluid we could be jumping into a lake of gasoline, just because we could not wait. On second thought, I would use the yields to tell me when to start trading again. My fear of being burned alive is stronger than my greed.
But we should have relief soon. Quants have a propensity to put linear logic as guide to their conclusions, but market prices (a flow) match with corresponding data flows (change rates), not with nominal data values. Bond yields are surging due to inflation expectations triggered by forthcoming massive issuance of Treasury debt paper, but the correlation of inflation expectations (first derivative) matches with the first derivative of debt issuance -- and it is falling. The 10yr yield should correspondingly roll over soon.
fourscoreMar 18, 2021 8:01 PM
Patience, patience
vjapnMar 18, 2021 8:23 PM
Robert, your equities EWP playing out fantastically. Gold far stronger. Do you read anything into that?
robert.p.balanModeratorLeaderOwnerMar 18, 2021 8:40 PM
Yes, that means the bloodletting is not over yet.
john.derMar 18, 2021 10:46 PM
Will provide multi-lingual interpretation, LOL.
john.derMar 18, 2021 10:38 AM
Risk markets are waking up with a hangover as bonds continue to get hammered at the long end. Not good at all, imho, when coupled with March OPEX tomorrow, VIX roll gap having closed and SLR question still open.
bogeygolfMar 18, 2021 12:08 PM
could MOTUs be pushing up yields because they are still negotiating SLR w Fed behind the scenes?
john.derMar 18, 2021 12:09 PM
Possibly. ... OR, they could be bidding bonds during the day and shedding at night to offload as much as possible before the carnage.
Bonds getting bid during auctions and during the day to just be pounded overnight has been exactly the pattern last week and this week.
rickyman94Mar 18, 2021 3:58 PM
Bank stocks are through the roof today, likely bc of the lack of comment on SLR ?
robert.p.balanMar 18, 2021 5:31 PM
Bank stocks like rising rates rickyman94 .. that and a steeper yield curve-
rickyman94Mar 18, 2021 5:54 PM
Thank you RB! That makes sense
bogeygolfMar 18, 2021 6:00 PM
"Our research showed that the key limiting constraint this year for the banks has been the supplementary leverage ratio ("SLR"), part of the 2012 Dodd-Frank Act that harmonised US bank regulation with global Basel rules. The Federal Reserve sets the regulatory minimum SLR at 5%. At the end of June, the top six banks had an average SLR of 7%, comfortably far from the minimum."
This data is old, from last year, but you get the idea of how much difference the levels are for the dealers based on SLR provisions
Here is the letter from Senator Warren about how she doesn't want SLR relief to continue: Warren and Brown to Regulators: It Would be a Grave Error to Extend Capital Exemptions for the Nation's Large Banks and Holding Companies | U.S. Senator Elizabeth Warren of Massachusetts
Now, the Fed will shortly announce whether the special Covid relief measures will continue or not. Led by JP Morgan, the banks lobbied for an extension, *claiming that ending forbearance will increase market volatility.* In response, US senators Elizabeth Warren and Sherrod Brown wrote a stern letter urging Fed chairman Jerome Powell and other bank regulators to ignore such pressure and allow the relief to expire on 31 March."
flamarkMar 18, 2021 6:04 PM
All Assets 100% Correlation again
MARCH 19, 2021
GOOD MORNING EUROPE / GOOD EVENING WEST COAST
freer7Mar 19, 2021 3:06 AM
We await the Fed's "announcements" on this issue.
Note that Maxine Waters sent Powell a letter saying
"the temporary exclusion to the SLR is a mistake that should not be perpetuated after it expires at the end of this month."
Her opinion mattershttps://t.co/WbaJqNeXCF
sparketMar 19, 2021 3:17 AM
Lots of political wrangling ongoing it seems
TimK123Mar 19, 2021 7:39 AM
I'm wondering if a lot of the volatility this week is because the dollar had an open gap since the FOMC meeting, now closed, seems like all it wanted to do was close it at all costs:
TimK123Mar 19, 2021 7:39 AM
robert.p.balanModeratorLeaderOwnerMar 19, 2021 11:06 AM
Its looking like a mixed, incomplete bag all around.
YM -- needs one more dip to complete the EWP sequence.
RTY also need to complete that +c+ wave five to sew up the zigzag.
ES also needs to makes five waves to complete the +c+.
Ditto for NQ
robert.p.balanModeratorLeaderOwnerMar 19, 2021 11:19 AM
But here is the poser -- I have no idea if this incipient rally is a wave 2 and followed by wave 3 to much lower levels. Or we are seeing the launch of another rally to another ATH in the equities.
Simply put, are we looking at a "dead cat bounce" or at a real, new bif for higher all time highs ("ATH"), now that the SLR issue was resolved, in an ironic sense?
This is a long position we will not be falling in love with, and will bail at first sign of trouble.
Its is still the bond yield issue and the SLR that is making a mess of the analysis process.
robert.p.balanModeratorLeaderOwnerMar 19, 2021 11:27 AM
We are close to seeing a minor five wave sequence in the yield, in which case a new higher high completes that process. Or we may just get a test of the recent high, and then we see thereafter a larger decline in yields.
These are mini-moves and the impact of these yield moves on equities may be tradeable. BUT we need to know the finality of the SLR, its denouement if you may, before we can trade the TNs and equity futures, even PMs and DXY, with some degree of confidence.
Just after the FOMC Q&A session on Wednesday, Tim and I came upon the conclusion that the Fed will likely end the SLR exemptions on March 31. There are some analysts who say that the issue is a nothing-burger, but the markets are showing that how the SLR issue is resolved, matters. Quants, who do not trade, have this propensity to put logic over their conclusions, but the market looks at it not as a logic issue, but a game theory issue.
The MOTUs know that other tsunamis of debt issuance will be forthcoming as the US and the entire Western world money-print their way out of this COVID-19 mess. And the central banks need their (MOTUs') service (cooperation) to magically transmutate debt paper into cash. Like anyone who has a leverage, and the MOTUs do have that leverage, they can just either do what is REQUIRED of them as Primary Dealers, and not go beyond the call of duty. Or they can wholeheartedly embrace that magical process, and make it easy on the government (Fed and Treasury).
However, this SLR issue has devolved into a political, nay, even worse, ideological issue, and the hands of the Fed are being tied by the current rulers of the land. And this is where the game theory aspect comes in. If the full SLR implementation kicks in (and it will) the MOTUs will de-lever their Treasury and bank reserve holdings, and use the clawed back capital to where it benefits them most. Simple. They will do what is required of them, but nothing more. The clawed back capital will go where the returns will be higher. And there goes lending too, as excess reserve will not stay that way for long under full SLR.
Now that the Fed has ended the SLR waivers (although with "just-in-case" proviso), banks will likely pursue share buybacks and dividend payouts instead of government securities and bank reserves, which may push both equity markets and bond yields higher. This thesis remains to be confirmed, however.
freer7Mar 19, 2021 8:58 AM
Zoltan post FOMC.. robert.p.balan , like to hear your thoughts on this. TIA!
Zoltan interprets Fed decision today to proactively increase RRP limits to indicate SLR exemption will not be extended pic.twitter.com/8vb3z2K6cY
— Fire Fly (@flowfocus)
robert.p.balanModeratorLeaderMar 19, 2021 10:37 AM
freer7 --- You have to read the March 17 daily report.
PAM arrived at the same conclusions probably ahead of Zoltan.
freer7Mar 19, 2021 11:41 AM
Oh yes, missed that one. Will go read
robert.p.balanModeratorLeaderOwnerMar 19, 2021 11:54 AM
We have been using the negative divergence between yields and equities as analytical framework for the past few weeks, but at some point, we will likely see a change in the covariance to one of positive correlation. The trick is to know when to make that transition. It will likely be after the Fed finally makes a definite decision on the SLR issue. It cannot come before that -- unless the MOTUs are given prior warning and the market will change accordingly.
Mr. TK also suggested that we should continue to trade the negative divergence, as many in the community are chomping at their bits, and want some action pronto. But Old Nellie also suggested that we should be very wary, and very prudent -- meaning no reverse Martingales, and no double-, or triple-downs. Just monotonous, straight, directional trades. And that is what we will do.
Tim and I thank you for being patient this far, while we try to safely navigate our way out of this SLR mess.
rcmaiMar 19, 2021 2:03 PM
Federal Reserve Board announces that the temporary change to its supplementary leverage ratio (SLR) for bank holding companies will expire as scheduled on March 31
john.derMar 19, 2021 2:01 PM
Primary dealers saying this morning before the open: "If we can't get your attention by dumping bonds overnight, we are now going to do it in broad daylight." ... lol
TimK123Mar 19, 2021 2:02 PM
"Fed announces that the temporary change to its supplementary leverage ratio (SLR) for bank holding companies will expire as scheduled on March 31 $SPY $TLT streetinsider.com/Fed/Fed+a..."
john.derMar 19, 2021 2:07 PM
Sell the rumor buy the news? This is going to be an interesting day.
RM13Mar 19, 2021 2:13 PM
Well, no SLR deadline extension from the Fed..
Delta neutral at 98% for SPY, at 50% for QQQ, bullish for today.
I'd expect an up move today with these readings, but with quad witching and transition to new future values, gamma neutral value transitions to 398 on SPX upcoming futures for April, more volatility next week as SPX/SPY fall below gamma neutral next week ...
Implications of that to me is that we are not ready to settle to below 20 VIX regime..
ptTL9Mar 19, 2021 3:53 PM
RM13 remember your reading on SLR expiring, is Iit the same? I am also trying to figure out less lending higher -mortgage rates? no SLR postponement,
no change in Fed policy,
that means rates up ride continues,
that would mean bonds/tech down,
IWM/DOW/DXY up, that's my interpretation...
RM13Mar 19, 2021 6:07 PM
With no change in SLR deadline post ponement, barring Fed action on treasuries directly, yield up, tech down, IWM/XLF/DXY up.. SPY is a mixture of energy and tech, so it will be pulled apart by different narratives..
Then the pressure on yield dissipates 1-2 days before end of March, due to reallocation from 60/40 funds into bonds, TLT down 5% this month, SPY is flat.. We should have sale of some equities, due to quarterly rebalance, no significant change in monthly rebal. The good news is that selling of equities to pay capital gains will be spread out into mid May, due to IRS tax changes..
Scott007Mar 19, 2021 2:37 PM
If we speculate that the extension will come, wouldn't the regional banks be logical choice
flamarkMar 19, 2021 3:00 PM
XBI up 2%. I find XBI and CL to be good indicators of future equity moves. However today, I dont know if you view oil as Flat or down alot (yesterday). Obviously interest rates are key, I'm just looking a level deeper than rates.
Alan.LongbonMar 19, 2021 3:20 PM
Big drop in the TCB yesterday as the rescue package money went out.
cageorgiadisMar 19, 2021 4:34 PM
Alan, with regards to your last article in SA, how do you expect the change in tax day, now May 17, to affect your forecasting,
cageorgiadisMar 19, 2021 4:53 PM
If I have read that correctly, we had anticipated a (approx) $200 billion pull out of the private sector for April 15, now May 17. We might now consider that equities can continue to rise into mid-May, with a sharper decline between then and the next tax payment in June?
randyfloydMar 19, 2021 4:16 PM
an someone help me understand something please? a few days ago RB posted comments (or chat summary) on how commodities are ending their bull run. Today he speaks about how we are beginning a commodities supercycle. Are these pieces not in conflict with each other? thank you for anyone's help
robert.p.balanModeratorLeaderOwnerMar 19, 2021 4:41 PM
randyfloyd -- This latest commodity talks is about a commodity super cycle -- the previous comments were about end of the initial bull phase (Wave 1 if you may) and a correction coming (Wave 2). A commodity supercycle is not going to happen in a straight line.
randyfloydMar 19, 2021 4:41 PM
ah that's what i was hoping. thank you RB
robert.p.balanModeratorLeaderOwnerMar 19, 2021 4:41 PM
You are welcome sir.
It does look like we will have the lower top (with the longer tail) in the yield illustration (below).
That means we probably have seen the the LOD -- at least until the OPEX at close.
We will initiate long using ES, but we are also mindful of the OpEx later in the day.
all PAM BUYS 144 CONTRACTS ESM1 AT 3895 LIMIT OR BETTER, OR AT BREACH OF 3923, OCO, GTC -- ALL FUNDS
all PAM BUYS 144 CONTRACTS RTYM1 AT 2265 LIMIT OR BETTER, GTC -- ALL FUNDS
vjapnMar 19, 2021 5:45 PM
Robert, now that the SLR news is out, can you please update gold EWP?
robert.p.balanModeratorLeaderOwnerMar 19, 2021 5:53 PM
V -- yes the news is out, but I don't know if we are now safe at home base. The OPEX later in the day may just be masking real market sentiment. We do it Monday.
vm12953Mar 19, 2021 9:09 PM
Robert , are still buying ES or want to wait till Monday?
robert.p.balanModeratorLeaderOwnerMar 19, 2021 9:22 PM
Its a GTC order vm12953 -- so anytime we get the levels we want.
Scott007Mar 19, 2021 9:22 PM
Looks like soon!!!
robert.p.balanModeratorLeaderOwnerMar 19, 2021 9:23 PM
Then so be it!
Scott007Mar 19, 2021 9:25 PM
.75 away.... Worth nibbling for me. Have great weekend RB. Managed week well. Thanks as usual
robert.p.balanModeratorLeaderOwnerMar 19, 2021 9:33 PM
Nice w/e Scotty. Rest well.
Its a GTC order vm12953 -- so anytime we get the levels we want.
vm12953Mar 19, 2021 10:38 PM
Thank you , I was not sure because of your perilous statement to wait till Monday, is is about Gold or Equities
robert.p.balanModeratorLeaderOwnerMar 19, 2021 10:39 PM
A GTC order is good until cancelled.
vm12953Mar 19, 2021 10:44 PM
Thank you, good night
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