Market 10/21: Budget Deficit Reaches 1.8 Trillion in 2024

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China aggressively cuts interest rates

5-year lending rate cut 25bps to 3.60%, more than 20bps expected
Prime lending rate cut 25bps to 3.1%, more than 20bps expected

LPR (Loan Prime Rate) is the benchmark interest rate set by major banks for prime customers, typically the floor for market lending rates.

Hang Seng index drops -2% overnight.

→ Contrary to expectations, the larger-than-expected rate cut makes investors fear weak economic conditions after Hang Seng rose for the 6th straight day on good economic data.

Economic indicator LEI continues to point to recession

CB LEI -0.5% MoM, more than the -0.3% forecast
- August revised from -0.2% to -0.3%
LEI has been negative for 56 of the last 57 months

US issues nearly 500 billion in new debt in 3 weeks

As of last Friday, government borrowed additional ~473 billion in new debt
FY 2024 report: budget deficit of 1.8 trillion
- Revenues 27% below spending
- Largest deficit since COVID

Interest burden hits 28-year high

Q3 deficit at 6.3% GDP and Q2 at 5.6% GDP, last time deficits this high unemployment was 7.2% at 2008 crisis bottom

Boeing reaches agreement to end strike

35% wage increase over 4 years, up from previous 25%
$7,000 one-time bonus after signing for all employees
$5,000 one-time 401k bonus
Maintain annual bonus levels as before
Boeing incurs $1 billion loss from this strike
Total damage about $6 billion for the quarter due to delays

→ Boeing did not accept job security terms and will surely accelerate automation

Spirit Airlines reaches agreement to defer payments with creditors

Spirit Airlines has $1.1 billion in bonds due today 10/21
New agreement gives additional 2 months to restructure and find solutions
In total has $3.3 billion in debt and declared chapter 11 restructuring bankruptcy last week
Morning short-squeeze rally up 65%, shorts hold 33% float, short ratio is 7.8

Bond yields weigh on the market

After Bund (German bonds) and Gilt (UK bonds) fell last night in Europe, oil prices rose 2% this morning, causing investors to dump US long-term bonds, pushing 10Y yield to 4.184%, the highest since before July FOMC.

Interest rate fears weigh on small caps, declining in the session and pulling SPX back to 5825 before NVDA carries the entire market higher.

Bond yields rise → lending rates rise → companies find it harder to borrow → impacts small companies more, who need to borrow, while large companies, which borrow less, are less affected.

Structurally speaking SPX still maintaining bullish bias above 5800 in the prior environment positive gamma with pinning force maintained at the upper end towards call wall 5900.

However, the biggest risk is also just from the current bullish bias and investors' view on volatility. Steve has written quite a bit about how the current market has almost no hedge or risk. After last week's OpEx, the first two level 2s weakened significantly but investors still see virtually no risks in the market. VIX hedge rises for the election but expectations SPX daily range still only at 0.4% per day.

Looking back at the previous 2 elections, VIX spiked and the market broke temporarily. Not only did SPX correct around 5% but the dispersion ratio (performance divergence) between overall SPX and key stocks also rose sharply. Dispersion is temporarily correct when comparing SPX to NVDA but recently the whole market has been rising.

Looking specifically at NVDA now, NVDA hedge demand is almost nonexistent, expected range almost nil.

Dispersion trade (long gamma NVDA and short gamma SPX) with most large caps reporting earnings before the election except NVDA:

→ Simply put, unlike every year, investors this year have almost no fear of the market and fully price-in the election as “nothing surprising”, at least up to now. However, Steve still thinks it's pretty 50-50.

Apex has 80% discount - Way to make money without capital from Funded Account: