Sound and Resilient
Posted on Sunday, February 4th, 2024
On a personal note, January was a month spent trying to get back in shape from the “Holiday Over-Everything Binge.” The month was spent trying to get to the gym and watching what I ate. On the positive side, Diane and I also enjoyed our time by the fire and watching Downton Abbey. No. I’m not ashamed to admit that. My favorite character was Isis, the labrador retriever they killed off in Season 5. I hope I didn’t spoil anything there. On a professional note, I spent most of my month doing paperwork. I’m looking forward to more sunny days in February.
As much as I look forward to turning the page on the calendar, the market usually does not look kindly on February. Over the last 50 years, February has been the second worst-performing month of the year. The last two weeks of February are historically the worst two-week stretch of the year. But this February, it seems as if the entire universe is looking for a drawdown this month to add to their Nvidia and Microsoft holdings.
Keep this in mind.
George Soros’ “Theory Of Reflexivity.”
“First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times, it is quite pronounced. When there is a significant divergence between market prices and the underlying reality, there is a lack of equilibrium conditions.
I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced… Eventually, a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.
Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions.”
The big news this week in my mind was the earnings of the New York Community Bancorp. The stock of the regional bank with significant commercial real estate loan exposure was down 40% this week as it took substantial loan loss provisions. The CRE crisis is starting to hit home. There is a regional banking crisis on the horizon again.
The Federal Reserve stated this week that they may be able to lower rates in 2024. Why would they do that if the economy is fine, jobs are up, and inflation has been tamed? The most recent statement from the FOMC took out the line about a “sound and resilient” banking system. So, if the market usually goes down in February and a banking crisis is on the horizon, why was the market up this week? The stock market is front-running the banking crisis. They know the Federal Reserve will lower rates, add liquidity, and save the day. Combine that with an economic recovery from deficit spending, and away we go. Remember that Congress will refuse to slash spending in an election year, and the Fed will not want to crash markets, which would only get Trump elected.
Some analysts I respect are starting to compare our current stock market to the market of 1998-99. That market went parabolic in late 1999, as you might recall. Now, this market is beginning to show some signs of exhaustion. The market internals are showing that the rally is getting a bit too narrow, and some negative divergences have developed but the speculative bubble is still booming.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.