(Not Financial Advice)

Table of contents:

1. Is the Balance sheet weak?

2. How higher inflation is going to destroy our economy

3. Things to look out for this October

4. Portfolio Update

5. Conclusion

Is the Balance sheet weak?

The correlation between equities and the balance sheet is strong. Throughout 2022, when the balance sheet started to shrink, we saw its effects on equities. The S&P 500 index finished 2022 at -20% on the year. Dropping as much as 28% on the year in October 2022. In March of 2023, we had a series of a few bank collapses. The Fed rolled out a program known as the Bank Term Funding Program (BTFP). This increased the Fed’s balance sheet, which is what sparked a rally all the way to a high of $4607. On July 5th, 2023, The Fed’s balance sheet made a new lower low, which triggered the recent leg down. We are now down 7% from the highs. So, we know that, as of right now, equities follow the balance sheet. The balance sheet is going straight down and is showing no signs of possible relief.

How higher inflation is going to destroy our economy

Inflation has soared in the last few months as the Fed’s interest rate hikes show weakness. Oil is now at 90$. The Federal Funds Rate is at 5.33%. The average consumer is likely exhausted. How will consumers pay off their debt if their pockets are being eroded? How will companies make earnings? In history, we’ve seen this before. High inflation + high interest leads to stagflation. The Fed’s 2% target seems like a long shot, especially without a hard landing.

Things to look out for this October

We believe that the first week of Q4 will be the week that fools everyone. This week, we think the market will increase, with oil easing a bit. The oil relief will spark a rally in the market. What investors have to worry about is next week. On October 13th, 2023, 3 bank stocks will report earnings ($JPM, $WFC,$C). The Fed’s quantitative tightening may influence the bank’s earnings. As we said before, the consumer’s pockets are exhausted.

Portfolio Update

We predicted this leg down and played it perfectly.

• We bought a put contract on $GOOG at $139 and sold at $131. We made a 93% profit on this trade.

• We bought a put contract on $WMT at $165 and sold them at $162. We made a 34% profit on this trade.

• Lastly, we bought a put contract on $LI at $38 and sold at $34. We made a 35% profit on this trade.

• We have no open positions as of right now.

Conclusion

As we navigate the complexities of today’s financial landscape, it becomes evident that the balance sheet’s trajectory plays a pivotal role in influencing equity markets. With the recent decline in the Fed’s balance sheet and the looming specter of stagflation, investors must exercise caution and stay vigilant in the coming months. The first week of Q4 may offer a glimmer of hope, but it is overshadowed by the uncertainty surrounding bank earnings and consumers' financial well-being. We remain committed to making informed decisions to protect and grow our investments.

In times of economic flux, knowledge, and adaptability are our greatest assets. We hope this report has provided valuable insights to navigate the financial terrain more confidently. As always, we encourage diligent monitoring of market developments and prudent risk management.

Thank you for entrusting us with your financial insights, and we look forward to the opportunities and challenges that lie ahead.