Hey There Income Hunter,
This earnings season is really important as investors brace for Fed tightening to begin on May 4.
Out of the gate, it looks like we may get some negative guidance, judging from JPMorgan Chase’s (Ticker: JPM) message.
JPM’s results reflected:
- Downside risks for the economy
- Losses from funding spread widening
- Adjustments for commodities exposures
- Mark downs of derivatives receivables from Russia-associated counterparties
The last point is the most worrisome because it does not look like the west is winning this war as China if filling most voids left by the sanctions.
The third point is equally worrisome … Because of the freezing of Russian foreign assets, commodities firms are locked out of getting loans to cover their margin calls.
Even firms that have commodity collateral can not get loans because commodities are not considered acceptable collateral, only US Treasuries are.
The second bullet on funding is most important, and today I’d like take deeper dive because banks are critical for financial health.
Interest Rate Signpost
The chart below is the most important signpost for a potential breaking point for mortgages and corporate debt problems …
JPM reported that the average 30-Year mortgage rate rose 23 bps To 5.13 percent during the week of April 8 – the highest since November 2018.
The point is the banks have massive risk to housing and higher rates could trigger homeowner insolvency, which would mean loan losses.
Corporate Bond Defaults
The chart below is a critical number to watch because as refinancing rates of maturing corporate bonds rise above the existing fixed rate, liquidity will drain from corporations.
These higher interest charges would be on top of the rising producer prices that cause a narrowing of profit margins.
High Yield Corporate Bonds
Finally, The iShares High Yield Corporate Bond ETF (Ticker: HYG) is a great lead indicator of stock trends. HYG can not sustain an extended rally and stocks will continue to be a good sale into the Fed tightening.
Notice how during both 2008 and today (red box) HYG gave a great leading indicator of a trend change. If stocks do break lower, you can expect HYG to get crushed.
A debt crisis would have the most dramatic impact on the US economy and it would be most severe on banks.
If the US 10-year breaks above the down trend resistance at 2.80% level … then the Fed may be forced to go back to QE and buy as many bonds as it takes to hold rates down to keep corporations from defaulting on their debt.
Bring it Home
This earnings season is pivotal in terms of the damage inflation has done and how far the Fed will go to get inflation down.
Is the central bank willing to break the back of the economy and risk a debt default?
We’ll be ready either way in Power Income Trader. If you have questions about my easy-to-use method that has produced triple-digit windfalls in 2022, call 888-872-3301 and speak to our customer service team until 5 p.m. today.
And as always …
Live and Trade With Passion My Friend,
Griff