Morning Roundup

By Mark Masterson on August 5, 2024

Good morning,

Below are the news items moving markets today:

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Executive Summary:

Not a happy Monday across markets.

Last week I noted that something had changed after the Fed meeting.  We had a solid rally last Wednesday, followed by two strong down days on Thursday and Friday.

That selling is continuing in spades this morning.

I’ll explain why, and we can look at the possible path forward.

First – I saw the below headline on Saturday and knew it alone would cause market volatility…..

• Warren Buffett’s Berkshire Hathaway discloses that they have sold nearly 50% of their shares of Apple, $AAPL.
• Berkshire Hathaway discloses it sold ~49% of its stake in Apple during Q2 (CNBC)

Warren Buffett has been selling aggressively over the past quarter. 

Last quarter, Berkshire Hathaway sold more $75.5 BILLION worth of stock, according to Zerohedge.

This means that Berkshire Hathaway sold more stock last quarter than any other quarter in its entire history.

Now, Buffett is sitting on a record $277 BILLION of cash.

Take a look at Buffett’s cash pile right now.

Financial Times 8 4 24

The challenge is not that Buffett is raising cash.

The challenge is that he does not see any opportunities yet to deploy that cash.

Beyond that headline and news – I also mentioned that we saw extreme volatility in Japan last week.  That volatility continued overnight and has spilled into global markets.

The extreme volatility in Japan is being driven by currency moves.

Remember that the Bank of Japan has been manipulating its bond yields and currency for years.  I decided to defend the Yen against the extreme decline by supporting the Yen last week. 

The problem is that many players on Wall Street have been using the low rates in Japan to borrow in Yen, then use those proceeds to lever up and invest in all sorts of assets – such as tech stocks, etc.  That is called the “carry trade.”

It is now unwinding aggressively following last week’s BoJ rate hike.

The impact…..

• Nikkei 225 index just saw the largest 2-day drop in the ENTIRE HISTORY of 19% and fell into a Bear Market.
• USD/JPY is down 2.3% today and 13% over the last 5 weeks.
• Circuit breakers were hitting in Japan, South Korea and Taiwan
• Taiwanese stock market saw the BIGGEST one-day decline on record.

Japan’s stock market, the Nikkei 225, just posted its largest 2 day decline in history, down 18.2%.  The index fell a massive 12.4% today, nearly topping its single-day decline record of 14.9% in 1987 on “Black Monday.”

In just 3 weeks, the Nikkei 225 is now down 26% and has given up all of its year-to-date gains.

This has happened before.  Here are the periods…..

1. 1990: -21%, (February 14 – March 7), asset price bubble plunge in Japan.

2. 2008: -23%, (September 26 – October 16) post the Lehman collapse.

3. 2013: -21%, (May 22 – June 13), economic stimulus panic.

4. 2020: -23%, (February 21 – March 13), the COVID pandemic panic of 2020.

Via @BearTrapsReport

The markets are now looking at the Fed and wondering if an emergency rate cut is coming. 

Bond markets are now pricing-in a 60% chance of an emergency interest rate cut within 1 week.  This would mark the first emergency interest rate cut since March 2020 during the pandemic.

Fed speakers are getting out in front…..

Fed’s Goolsbee cautions on overreacting, though says Fed is paying attention to labor conditions:

• Speaking on CNBC, Chicago Fed President Goolsbee (nonvoter) stressed that while the Fed does need to be forward-looking in its policies, it should also not overreact to one data point.
• Noted Friday’s job numbers were weaker than expected but not necessarily indicative of an economy in recession (suggested that the margin of error could be plus or minus 100K jobs).
• When pressed on the issue of an emergency rate cut, Goolsbee said he didn’t want to bind his hands and that there will be more data coming in to process, but also said if conditions collectively start coming in that suggest a deteriorating trajectory, “we’re going to fix it” and that all options are always on the table. Also noted that the real Fed funds rate is as high as its been for some time, and policymakers only want to maintain levels that restrictive if there’s a fear of overheating.

I will say that large spikes in the VIX/volatility index often mark lows – at least temporarily.

Now – we are seeing a large spike in volatility and the VIX.

The volatility index, $VIX, is now up 122% today and the market hasn’t even opened yet.

Since July 1st, the $VIX is now up 328% to its highest level since 2020.

We are seeing pandemic levels of volatility.

Charlie Bilello 8 5 24

What to do:

Buffett has the right idea.  Sometimes it’s just best to step aside and raise some cash and let the dust settle.

The spike in the VIX suggests that the markets will likely get a bounce soon – maybe as soon as today or tomorrow.

Yet – we are seeing some changes across global markets that will take some time to heal.

We also have the election cycle directly ahead that has always been a potential source of market volatility.

We will no doubt get a Fed comment or reaction to the volatility – and you can bet that Janet Yellen will be “concerned” as soon as today and ready to provide some liquidity to calm markets where possible.

So – we’ll hold our cash, and look to raise some into the bounce.  We won’t panic as we anticipated volatility – albeit this volatility is more than expected at the moment.

I cancelled a business trip to be here in the office to address questions, comments or concerns.  Feel free to reach out.

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Articles of Interest:

• Markets:
  • Investors weigh buying the dip vs worries about growing economic weakness (Reuters)
  • Goldman says hedge funds increasing their short bets amid recent uncertainties (Reuters)
  • Investors rotated into dividend-paying, lower-volatility stocks last week (Bloomberg)
  • Private-capital groups deployed more than $160B in Q2 ahead of an expected resurgence in dealmaking (FT)
• Corporate:
  • Design flaws and a potential three-month delay of new Nvidia AI chips could impact Meta, Google, and Microsoft (The Information, Reuters)
  • Restricted US chips still finding their way into China, including through the black market (NY Times)
• United States:
  • Tropical Storm Debby could strengthen to a hurricane before it hits Florida tonight or early Monday (CNN)
• China:
  • China’s State Council outlines 20 steps to boost basic consumption across the economy (Bloomberg)
• Energy:
  • Libya orders a partial shutdown of its largest oilfield, though reasons unclear (Bloomberg)
  • Yemen’s Houthi rebels make first Red Sea attack since 20-Jul (Reuters)
• Geopolitics:
  • Saturday’s hostage/ceasefire talks in Cairo break down with focus on Netanyahu’s hardline stance (Axios)
  • Iran reiterates it will deliver “harsh punishment” to Israel following Haniyeh assassination (NBC News)
  • US preparing for “every possibility” regarding Iran retaliation (ABC News)
  • Western governments urge citizens to leave Lebanon amid fears of regional escalation (FT, Politico)
  • Top US general arrives in Middle East ahead of feared Iranian attack (Axios)
  • Venezuelan opposition leader Machado appears in public despite government arrest threats (Bloomberg)

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Charts of the day:

With so much going on – just one chart.

We’ve commented that the US has outperformed the rest of the world for so long that eventually there must be a rotation.

Elliott Management asks a very important questions today’s long investors should ponder:

“U.S. equities represent 70% of the value of all equities globally, while the U.S. only represents 18% of global GDP and 4% of global population.

Adam Taggart 8 5 24

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Quote of the day:

“The best chance to deploy capital is when things are gong down.”

— Warren Buffett