Investors Are Trying to Figure Out the 'Powell Put'

 | Feb 07, 2018 | 7:58 AM EST
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Stock quotes in this article:

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has

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hum

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sny

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fisv

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nxpi

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znga

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ba

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rtn

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gd

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bac

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gs

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mcd

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cmg

"Anybody can jump a motorcycle. The trouble begins when you try to land it." -- Evel Knievel

"Wonder if this ever crosses Jerome Powell's mind at night?" ... Your Pal

The Intersection of Policies

Equity index futures are trading deep in the hole again on Wednesday morning. Haven't we found a bottom yet, Sarge? Perhaps. Adapt. Overcome. We'll have to let you know about that bottom a little later on. Markets are still contending with many moving parts at this time, all of which could cause, as we now know, ridiculous volatility at tremendous speed. This is the age of mechanical and forced trading. We likely have not seen the end of the great volatility unwind. There's also the question of just how much of a "Powell put" there is, what is the strike price, and/or what the expiration date might be on such plunge protection. The obvious point here is that the U.S. Treasury will see their needs to borrow increase dramatically at a time that the largest buyer for those debt products is trying to take a hike.

While thinking on the point where fiscal and monetary policies intersect, traders must be cognizant of two things that are undoubtedly adding negative impact to price discovery at this time. One, the United States government faces shutdown again at midnight tomorrow. That's less than 48 hours away, for those of you that wake up a little bit on the sloppy side before you get your tail in gear. There is movement on this front, though. The House yesterday passed a bill that would fund Defense through this September (the end of the fiscal year), and the rest of government spending into March. The president has been firm on addressing immigration reform, saying: "If we have to shut it (the government) down because the Democrats don't want safety. Let's shut it down."

Although the House bill appears unlikely to pass in the Senate, Senate Democrats do appear willing to separate immigration from putting together a budget deal. This is key, gang. Once the market believes in this deal, there will be some relief seen at the point of sale, particularly across defense and aerospace names (Boeing (BA) , Lockheed Martin (LMT) , Raytheon (RTN) , General Dynamics (GD) , Northrop Grumman (NOC) ). The deal currently being put together in what seems to be bi-partisan fashion would last two years, and boost that already mentioned defense spending from the current $516 billion to $629 billion. Rock and Roll.

Monster Under the Bed

Even more important than keeping the lights on for the U.S. government is boosting the debt ceiling. Treasury appears from my office window at zero-dark thirty to have enough dough on hand and enough flexibility to get itself into mid-March without permission to increase deficit spending. Short-term government debt maturing at that time is trading at a discount (higher yield) to T-Bills that mature both earlier and later, so there is some risk associated with the ides of March this year.

The last time we, as a nation, ran into this, was in 2011. That year, Standard & Poor's stripped the U.S. of its AAA debt rating. Big deal. Just remember, this obstacle is a separate fight from a budget deal, so even if everyone holds hands and sings campfire songs together by tomorrow night, there will still be political risk in our near future.

Maybe I'm Doing It Wrong

Don't get me wrong, I have some exposure to banking. Before it's too late, I would like some more though. I have spent the last two days "strategically" placing bids beneath the market in some of our big banks. My hope is that while these algorithms make their best attempt to seek and destroy the marketplace, maybe I could pick one of them off, and "steal" some cheap shares.

I have been selective, though, only playing the sport when I see the spread between the U.S. two-year and the U.S. 10-year rising. I would like to see 80 basis points. That's how the bankers "make bank" through traditional measures. I'm a lifelong Mets fan. What that means is that I understand that I am not always going to get my situation handed to me the way I want. You know who's going to have a good quarter, even with a yield curve that just won't spike? The banks.

Not only do the increased volumes (for both equities and debt) end up pushing commissions for these guys, this is precisely when their traders actually do more than look pretty. Remember how well these fixed income desks performed following the national election in 2016? This is really their first chance to shine since. Throw in the volatility in foreign exchange, and poof, you may soon have something on the grill for supper. You've missed the lows in these names, but they are likely to open lower this morning.

What am I going to do? Open with a bid for about an eighth of a target position size (you need to know that) somewhere likely to get hit, and lay in wait for what I think to be an artificial dip. That's where I will add 200% of my entry weighting. If you follow the math, I will then be three eights of the way in, and can digest. New Sarge targets: Bank of America (BAC) for traditional consumer banking, and Goldman Sachs (GS) for their aggression in the trading arena. If you play this game, bear in mind, BAC is cheap enough to play naked, GS is not. Don't even try it. You'll need to hedge that one.

The Kid From St. Louis

I have knocked James Bullard in the past. He has, at times, changed his mind on the trajectory of monetary policy, often quickly, and seemingly out of left field. This, he has not done of late. Well, if I will be critical of Bullard when I think he deserves it, I am also going to back him up when I think he deserves that. By the way, St. Louis does not vote on monetary policy until 2019.

Yesterday, Bullard cautioned "against interpreting good news from labor markets as translating directly into higher inflation." Hmm. You have seen Core PCE, I presume, apparently nailed to 1.5%. How about Core CPI? That cute little guy is stuck around 1.8%. About January's employment data. We did in fact see wage growth of 2.9% y/y. What has not made the rounds, media-wise, has been the reduction in the average work week from 34.5 hours to 34.3 hours. Gets me thinking.

I am the parent of two millennial children in their 20s. Both work full-time. Both recently saw raises in their hourly rate. Looks like the Guilfoyle family is playing a scripted role here. Now this. Both (different industries) have seen their hours reduced over the last few weeks. In a nation of 340 million folks, a sample size of two does not mean a thing, but it fits with the data supplied by the Bureau of Labor Statistics, and it fits with James Bullard's train of thought. A raise in one's hourly rate doesn't feel like a raise when the paycheck on Friday is not what one expected. So, how much of an increase in demand for labor are we really seeing? I extend that the jury may still be out on this.

Chart of the Day: Chipotle Mexican Grill

Let's get this out of the way. I love burritos. I mean I really, really love them. I, like many others, have stayed away from Chipotle (CMG) for quite some time. I have stayed away from the restaurants, and I have steered clear of the stock, with the exception of occasional short positions, never in size.

The firm reported last night. CMG did beat expectations for EPS by two cents, and it did meet revenue projections on a year-over-year increase of 7.8%. Comp store sales increased 0.9%. Operating margin did increase 140 basis points. Labor costs were stable. Expenses were lower.

It sounds like the company is trying. Unfortunately, the stock went out last night at 24 times forward-looking earnings. McDonalds (MCD) is trading at 20 times. MCD pays you nearly 2.5% to own the shares. CMG doesn't pay you. Okay, let's try to figure out, on a tactical level, where this thing is going.

The last sale (overnight) that I see for this name is roughly $281. That is troubling from a technical perspective. You can see on this chart that the stock has been experiencing an upward trend from late October that includes broadening top and bottom trend lines. That's sloppy. Sloppiness extends toward a lack of confidence. That's my opinion. You may disagree. Relative Strength, as well as the daily moving average convergence divergence (MACD), also exhibit weakness. Money Flow looks to be showing some kind of improvement, but that will likely change once this morning's action is added to the chart.

Herein lies the problem. The stock bounced at $293 this week. That was nearly a precise 61.8% re-tracement of the low-to-high move from October through early January. If the market were higher, and if this name were trading higher, being this stock displays obedience to standard Fibonacci levels, you probably could have targeted $313, or aggressively $325.

See the purple arrow? That's a serious violation of what past performance of this name according to its own Fib levels implies. This will not be lost on the algos this morning. They look at the same charts we do. Now, if the stock does indeed open down here ... $293, if you're lucky, is likely to show up as resistance. This is also below December support and November resistance. A 100% re-tracement, which would place this stock in the low $260s is not beyond possibility.

My thought is to eat your burritos here if you like, but to sit this one out from an equity perspective. As for options, a long position in something like a $275 put expiring in a month might be worth the risk/reward. Caution, though. You could have paid $6.50 for this last night. You'll pay a lot more this morning.

Sarge's Trading Levels

These are my levels to watch today for where I think that the S&P 500 and the Russell 2000 might either pause or turn.

SPX: 2733, 2720, 2707, 2694, 2680, 2667
RUT: 1530, 1515, 1508, 1500, 1485, 1478

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (BLL) ($0.51), (HAS) ($1.81), (HUM) ($2.00), (KORS) ($1.29), (SNY) ($1.16)

After the Close: (FOXA) ($0.40), (ALL) ($1.53), (EFX) ($1.35), (FISV) ($1.38), (NXPI) ($1.79), (ORLY) ($2.78), (PRI) ($1.43), (TTWO) ($0.99), (TSLA) (-$3.11), (TDW) (-$0.77), (TMK) ($1.23), (XPO) ($0.43), (YELP) ($0.27), (YUMC) ($0.18), (ZNGA) ($0.03)

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