Post-FOMC fallout creates temporary "Fed put" on regional banks -- hence, recommend 4-6 week tactical OW in regional banks $KRE plus 5 regional stocks Array ( [cookie] => 1fbc5a-1aed7d-439683-625e00-dd39a6 [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 0 [user_id] => 0 [reason] => Usage under limits [method] => ) 1 and can accesss 1

NEW: Notice new section (below): added so you can see our tactical ideas

Last week, we were in Boston visiting with our institutional investor clients. Investors are overall cautious, which is not surprising, given the gauntlet of negative headwinds buffeting markets since early 2022.

• The gains in equities YTD has been good for some managers, particularly those that tilted somewhat growth/quality. And this was a reversal compared to 2022, where low earnings variability seemed the only place for investors to find relative performance. But those doing well didn’t just own FAANG, but have had success with stock selection. After all, earnings performance has surprised to the upside, relative to muted expectations.
• It is clear many are cautious. Most see a recession as likely given the current “tight” policy of the Fed, the signal from the steep inversion of the yield curve (harbinger) and generally gloomy assessments by CEOs (the ISM sort of proves this, sitting at 47). And if a recession is their base case, then naturally, they expect earnings expectations to materially weaken in the coming months.
• Bonds lean more “recession-y”: Some of the most experienced investors consider this to be one of the most “uncertain macro environments ever” (Druckenmiller, PTJ, etc), so caution is warranted. And the current low yields in the bond market (below Fed funds) and the Fed fund futures market pricing in cuts leans more recessionary pricing in bonds. At a minimum, this is a view of a slower growth economic environment.
• Stocks lean more “soft landing”: And many investors contrast that view with what seems to be happening in equity markets. 1Q23 results have been so far above consensus (+6.7% surprise) that 2023 EPS full year estimates have actually increased from $218 (low in 2023) to $220. So far, 77% of companies have beat on EPS in 1Q23 (83% reported) and YoY EPS is now forecast to be down only -1.2%. In 4Q22, EPS was down -3.2% YoY, so 1Q23 is tracking better than the prior quarter.
• Bonds or stocks right? There is a divergence between the somewhat sanguine equity performance YTD (+8%) vs recession-like pricing in credit. This is where the Fed and inflation sit at that intersection. There are several ways these views reconcile:
  – US is engulfed in a recession, creating uncertain equity outlook
  – US avoids a recession, but investors will then price in “more hikes”
  – then, the following is considered least probable (below)
  – US inflation falls faster than expected, then bonds and stocks are correct
• Macro takes back seat ceding to regional banks? Over the next few weeks, we believe macroeconomic data might take a back seat, as regional bank crisis could dominate Fed reaction function. While not the “official” Fed public view, our conversations with credit investors suggest Fed officials are concerned that the widening ripple effects of the regional bank crisis could threaten to create a larger financial crisis. There are multiple Fed speakers this week and the SLOS (Senior Loan Officer Survey) is released today at 2pm ET. As we noted last week, we think much of the Fed speak will be “regional bank damage control” tour.
• TACTICAL UPGRADE REGIONAL BANKS: Temporary “Fed put” on regional banks + 5 other: Regional banks are down -35% YTD (KRE -6.40% ) versus +8% for S&P 500. We believe there is a 4-6 week rally of at least 10%-15% ahead for regionals based upon:
  1. Fed H.8 showed regional deposits + lending both increased by +$6.4b and $30.6b = good
  1a. Regional banks even managed to raise $1.3 billion in public debt!
  2. Regional bank sentiment “near absurd” levels last week (see notes)
  3. There is a “Fed put” on regional banks temporarily
  4. Regional banks near capitulation as identified by Mark Newton, Head of Technical Strategy.
  5. Credit still available for regional banks, but low (thus, see “Fed put”)
  6. Debt ceiling risks cause surge in US Govt CDS spreads, risking greater financial stability
• Longer term, regional banks face structural issue until Fed cuts: This is only a tactical bet, since regional banks have multiple headwinds: (i) deposit flight to money markets (all banks have this); (ii) unrealized losses on “held to maturity” securities, (iii) credit risks on CRE and (iv) hampered ability to raise private capital

STRATEGY: See 4-6 week rally in regionals: KRE -6.40%  NYCB EWBC -7.76%  WAL -7.72%  BANC -7.14%  CNOB -6.41% . For the reasons noted above, we are recommending a tactical trade in Regional Banks.
– KBW regional bank ETF: KRE -6.40%
– 5 regional bank stocks, using 3 criteria:
(i) down bottom quartile YTD
(ii) top quartile sellside most recommended (of regionals)
(iii) top quartile IBD stock ratings
– NYCB EWBC -7.76%  WAL -7.72%  BANC -7.14%  CNOB -6.41%

Additionally, last week, we introduced a tactical recommendation to overweight Industrials XLI -2.98%  based upon a bottoming of the US ISM manufacturing survey. Since 1950, when ISM is below 48 and bottoms, Industrials consistently see strong absolute return.

MACRO: To take a backseat short-term, but CPI, PPI and U Mich key next week

Below is the key economic data due in the coming week, but the keys will be:

• April CPI –> could be “hotter” but markets might ignore
• April PPI –> no sense yet
• U Mich mid-May 1-yr inflation –> hopefully softer than 4.6%

FED SPEAK: Regional bank damage control tour

Starting last Friday 5/5, Fed speakers began their “damage control tour on regional bank fallout” — that is, there will likely be some walking back on the tone of hawkishness and “higher for longer.”

• Of the Fed speakers Friday, Bullard came out dovish (see below) but he is not a voting member
• Goolsbee warned of bank strains, and that, in our view is behind the “Fed put” on regional banks at the moment

The Fed speak this upcoming week is below.

FED PUT ON REGIONAL BANKS: We are being slightly glib, but we believe the Fed doesn’t want bank stocks to tank

Mark Newton early last week noted he expected Regional banks to bottom short-term. And as shown below, the KBW Regional Bank Index KRE -6.40%  looks like it made a “13” buy signal using DeMark daily indicators.

And regional banks have managed to raise some private debt in the past week. But this issuance is the worst weekly raised in 2023. But this shows the debt and equity markets are not entirely closed.

And fortunately the most recent Fed H8 shows a positive rise in both bank loans and customer deposits. So while there is a structural problem with banks between low deposit rates (paid) versus what money market funds offer, the banks are seeing diminished headwinds.

1Q23 EPS: better than expected

As many noted, including us, 1Q23 EPS has been a good results season:

• 77% of companies beating EPS results by 6.7%
• EPS tracking to be -1.9% YoY vs -7% originally expected

And even full year 2023 EPS estimates have started to increase. After falling to ~$218, that estimate has risen $2 to $219.72.

ECONOMIC CALENDAR: Key May data is inflation and ISM, and April was overall “tame”

Key incoming data May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey
• 5/10 8:30am ET April CPI
• 5/11 8:30am ET April PPI
• 5/12 10am ET U. Mich. April prelim 1-yr inflation
• 5/12 Atlanta Fed Wage Tracker April
• 5/24 2pm ET May FOMC minutes
• 5/26 8:30am ET PCE April
• 5/26 10am ET U. Mich. April final 1-yr inflation
• 5/30 Conference Board Consumer Confidence

Key data April

• 4/3 10am ISM Manufacturing Employment/Prices Paid March Tame
• 4/4 10am ET JOLTS Job Openings (Feb) Tame
• 4/7 8:30am ET March employment report Tame
• 4/12 8:30am ET CPI March Tame
• 4/12 2pm ET March FOMC Minutes Tame
• 4/13 8:30am ET PPI March Tame
• 4/14 7am ET 1Q 2023 Earnings Season Begins Better than feared
• 4/14 Atlanta Fed Wage Tracker March Semi-strong
• 4/14 10am ET U. Mich. March prelim 1-yr inflation Hawkish
• 4/19 2:30pm ET Fed releases Beige Book Tame
• 4/28 8:30am 1Q23 Employment Cost Index Semi-strong
• 4/28 8:30am ET PCE March Tame
• 4/28 10am ET UMich April final 1-yr inflation Hawkish

STRATEGY: Focus on Industrials, a week to make a tactical positive bet

Both the ISM PMI and S&P Global US PMIs are released on Monday:

ISM Manufacturing PMI has been better than consensus.

• Actual 47.1 vs Street 46.8 and last month 46.3

S&P Global US PMIs has come in slightly lower than consensus, but remains above 50.

• Actual 50.2 vs Street 50.4 and last month 50.4

Whenever PMIs bottom (see below), Industrials tend to bottom. This first chart shows rolling change for US PMIs and US Industrials returns.

This distribution table puts this in a clearer light. When PMIs are rising and from low levels, Industrials see strong gains.

• Since 1948, when PMIs are over 50 and are rising (n=60), Industrials see positive forward 6M and 12M gains of 85%/95% of the time with median gains of +12.6%/21.5%, respectively.

• Those are very favorable risk/reward and high absolute return opportunities.

Industrials are oversold vs S&P 500 on 20D %-change, with a z-score of -1.2.

• The top chart is the relative price ratio of Industrials vs S&P 500
• The bottom is the z-score of the 20D % change.
• The most recent 4 times this was seen, Industrials staged strong rallies vs the broader market.

• This is not that different than the signal we highlighted two weeks ago regarding FAANG/Technology. And we know that FAANG powered higher in the past two weeks

And Industrials are the most oversold vs other sectors, particularly against Staples.

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34 Granny Shot Ideas: We performed our quarterly rebalance on 4/26. Full stock list here –> Click here

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