Jay Powell May Not Be the Yellen Clone People Think He Is: Market Recon

 | Nov 03, 2017 | 7:07 AM EDT
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"Practice rather than preach. Make of your life an affirmation defined by your ideals, not the negation of others. Dare to the level of your capability, then go beyond to a higher level." -- Alexander Haig

Man of Many Hats

We spoke Thursday morning in eager anticipation of both a GOP tax plan and the nomination of Jay Powell to the post of Fed Chair when it comes available in February. This morning, both events are fact. Both are now in the rearview mirror. Equities did not react with any fervor to anything on Thursday, with some tepid exception. Odd as it may seem, both the banks and what we in the industry refer to as "bond proxies" did well in Thursday trade. To see those sectors perform together can be unusual. A reaction to the tax plan? I really don't think so, gang.

Though the Russell 2000 did finish Thursday's trade in the green, that action was tame, and provided about as much interest to traders as does the next bite of delicious melba toast to a starving dieter. Jay Powell's reputation as a "status quo" type on monetary policy helped push Treasury prices higher (yields lower), thus unleashing the Utilities and the Real Estate space. Keep in mind that your typical dividend type plays compete with government debt for the same kind of investor. The more interesting move came from the Financial sector, particularly capital markets and the banks. Why is that? May we profit from this?

Jay Powell, the man, is far more complex than the mainstream media may have given him credit for. Under examination, you find quite a resume. Powell has been an investment banker, has worked for and even founded several private sector business, has served as under-secretary of the Treasury for Domestic Finance in the early 1990s. The point here is that although this banker is not by definition an economist, probably he could lend to this nation a more pragmatic view going forward than some of his predecessors might have been able to project.

What I mean by all of that mumbo-jumbo is that Jay Powell might not be as eager to push the limits of regulation to extreme levels, allowing banks the chance to behave as businesses. He may not be the Yellen Clone on policy that some expect either. In reading Danielle DiMartino Booth last night, I learned that Powell was not really on board with QE 3. On this, Danielle would know far better than I.

Political pressure pushes all central bankers toward the dovish side of the spectrum. We understand that. An independent thinker, who is seen -- as was his immediate predecessor -- as careful, who has also shown leadership quality throughout a career in the private sector, may just be what the doctor ordered, and what the banks have needed for quite some time.

Kicking Tires

Throwing darts? Not exactly. If you read me, you all know that I like Citigroup (C) -- which is also a holding in the Action Alerts PLUS charity portfolio that Jim Cramer co-manages. Based on the valuation, this one is my favorite stock in the space. I also have gotten myself long the SPDR S&P Bank ETF (KBE) . This one had been an underperformer until about a month ago. You have time (the weekend) to think on this. Powell will not take the helm at the central bank until February (if confirmed). Opportunity? The banks as a group remain undervalued, in my opinion.

Given a (hopefully) rising rate environment, and a less rigorous regulatory one as well, of course you would look at the big banks like C, like JP Morgan (JPM) , and like Bank of America (BAC) . I think they, too, are all undervalued to some degree, but then again, all of those stocks have outperformed broader markets this year.

Why not do some homework on the next tier of banks this weekend, banks that are more regional in nature, with stock prices that may be down year to date. Hmmm. Remember, buying low is half the battle. Without kicking too many tires, KeyCorp (KEY) , First Horizon (FHN) , The Bank of the Ozarks (OZRK) , and People's United (PBCT) come to mind immediately. KEY is up small this year. The others are all lower. I am long KEY, though I have taken some profits and reduced that long on simplistic measures of discipline. The time for serious study across this space, if not already begun, is now.

It's Not Like We Didn't Tell You

Overnight reaction to Apple (AAPL) earnings has been quite favorable. For those of you who stop working at night, the firm released fiscal fourth-quarter earnings after the closing bell, and voila! Top and bottom line beats. The firm saw 3% year-over-year growth in iPhone sales despite known pent-up demand for the highly touted iPhone X. Impressive. How about iPads? We keep hearing that the market for tablet growth has dried up. That folks don't buy these very often. Pow! How does 11% year-over-year growth in that space sound?

Listen, gang, everything looks better in these results, and I suspect that the iPhone X super-cycle will allow for even better quarterly results in three months. What is important to me, though, as someone who has pounded the table for this stock, is service revenue. For it is the servicing of the Apple ecosystem that will provide sustenance for the firm going forward, across borders and through changing financial environments. Service revenue accounted for $8.5 billion, or more than 16% of the whole pie. This particular business saw 34% y/y growth, with both Apple Music and iCloud sporting giant gains. iHome may not need to take off on its own. This is the single greatest consumer electronics company in history, and as time passes, it becomes that much more difficult for the consumer to ever make a break. Bang.

October Employment Situation Tearsheet

08:30 comes quick. This Friday is perhaps the most important, and definitely the most fun day of our macro month. At least if you happen to be a numbers nerd. So, let the games begin. September employment data was obviously skewed by weather conditions that impacted results across many areas of the country. Payroll gains were obviously depressed, while many people in these regions were unable to travel to their places of employment.

Thus, average hourly earnings were likely artificially high. Now, for the snap-back. Look for the data to at least start to look normal, particularly when looked at through a two-month window rather than the usual one-month look.

-- Non-Farm Payrolls: Expecting 313K. September -33K.

-- Average Hourly Earnings: Expecting 2.7%, September 2.9% y/y.

-- Average Workweek: Expecting 34.4, September 34.4 hours.

-- Unemployment Rate: Expecting 4.2%, September 4.2%.

-- Underemployment Rate: September 8.3%.

-- Participation Rate: Expecting 63%, September 63.1%.

Pricing in the Trajectory of Monetary Policy

The probabilities of an increasing fed funds rate according to futures markets as displayed at the CME's website:

December 13, 2017: 98.2%

Probability of an increase on top of the December increase.

January 31, 2018: 4%

March 21, 2018: 41.2%

May 2, 2018: 44.3%

June 13, 2018: 63.3%

Note: Markets are now pricing in two rate hikes by June. Prior to news breaking that Jay Powell was to be nominated to the post of Fed Chair, that second rate hike had been priced roughly 50/50 for March.

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: 2602, 2590, 2581, 2575, 2567, 2558
RUT: 1511, 1506, 1499, 1489, 1483, 1477

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (AXL) ($0.66), (DUK) ($1.54), (MCO) ($1.36)

After the Close: (ATRA) (-$0.98)

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