"You keep on shoutin', you keep on shoutin'.....
I wanna rock and roll all night, and party every day"
- Simmons, Stanley (Kiss), 1975
Auld Lang Syne
Dawn? Not even. Man in the darkened window? Oh, he's working on something. Maybe he'll let us know. What's that? Was that Latin? No. He says. New day, new month, new quarter, new year. Last two days of the traditional "Santa Claus" rally. Don't be surprised if equity markets act a little funky on Monday (today). Not everyone is back. That said, trading volume, which has been off considerably for two weeks, shall return this week. We come out of a week where the indices were generally higher but much of that strength was led by defensive sectors, especially the REITs (XLRE) and the Utilities (XLU) . Cyclicals were found in the middle of the pack, while the "growthy" type sectors Technology (XLK) and Communications Services (XLC) finished last week in tenth and eleventh place (of 11), respectively. For the year, all 11 sectors, or at least their corresponding Sector-Select SPDR ETFs, scored gains of at least 15%, though breadth was for much of the year poor, and that positive performance does often tend to be narrow. Just an FYI, according to Citi, there was a cool $42B worth of inflows into U.S. equities last week... and we still kind of limped into Friday's close.
The Year Ahead
I'm pretty sure that the New York Mets will win the World Series, and I will probably run a sub five minute mile for the first time since boot camp. Everything else seems a bit less certain. So much to consider. We have to ask ourselves a number of questions.
1) Where are we in the business cycle?
Some might say it's late. (It's late)
2) Where is monetary policy going?
Certainly the pace of growth in terms of liquidity is already slowing. Not contracting. Not yet.
3) Where is fiscal policy headed?
Got that infrastructure deal through. The defense budget is healthy. "Build Back Better"? On life support if that.
4) Is the pandemic still in charge?
Yes. That said, while Omicron appears to be shutting down and hampering service based businesses everywhere, to include medical services. The hope is that this version, while seemingly milder than other variants, might burn itself out, and become what will be looked back upon as the beginning of the end of the "pandmeic era", at least economically... and hopefully socially.
5) What about inflation?
Tricky question. Very tricky question. As the nation and planet move past the pandemic (acknowledging that new infections have never been higher), supply chains should ease. The acceleration in prices for goods should also ease. Does that mean that this inflation was indeed transitory? Yes, in my opinion, it does. I do not think however that getting inflation back down to something like 2% is very likely... and may not be what the Fed is trying to accomplish. Quite possibly, sub 2% inflation might not be, in a very general sense... in the best interest of the nation.
While the policy of corporate globalization had led many multinational corporations with large scale manufacturing operations to place these operations in nations where it was cheaper in terms of labor costs to put things together, even when accounting for shipping expenses. Much of this business was done in China. It has become clear, I think that while not only will U.S. and European businesses benefit in terms of consistency from the shortening of these supply chains, that China itself has headed into a new era of the centralization of power focused on the supremacy of the Communist party in that nation.
In addition, a state of "Cold War '' currently exists between China and not just the US, but Europe and Asian democracies as well. Sure, it's about Taiwan and Hong Kong, but also about much more of that. Global corporations have gained a conscious about benefiting from slave labor and consumers are demanding more information in regards to the where and how when it comes to the products they use. This comes at a time when Beijing is cracking down not just on individual success, but on the flow of that kind of information both domestically as well as across its borders. The growth of the Chinese economy can no longer be counted on to drive global growth, nor can that same Chinese economy be counted on as a global wage deflator. Good and bad? Nobody likes to pay more for anything. Everyone likes to get paid something close to what they think they are worth in relative terms. A decoupling between U.S. multinationals and long supply chains could be the best thing to happen to the American middle and lower-middle classes in decades, but only if these jobs are indeed repatriated.
While we are chatting about inflation, we do have to mention ESG, or green investment as the nation appears intent on going in that direction and building up the required infrastructure, while also demanding that legacy means of providing energy not fail while moving in that direction. This will certainly prevent inflation from falling as far as it might have without this transformational shift in how energy is provided already at a point where there is probably no turning back. For prices, I am not talking about Armageddon, I am talking (and have been talking) about 3% to 3.5% consumer level inflation as being long-term sustainable. Then again, what do I know? I'm just a kid from Queens with a knack for figuring things out.
Seasonality
This week, as it does contain the first couple of days of January where some early December tax-loss sellers re-engage with those names, will likely strut its end of season stuff. That said, life for equity traders gets dicey after that, at least on average.
Using a 15 year lookback, and sourcing the seasonality model at TrendSpider... this week has posted 10 positive returns for a median return of 0.88%, however, either next week or the third week of the year, it is not abnormal for a three week period of weakness to set in. January has a reputation for being a positive month, but that is more true the further back one goes in time, than it has been in this modern, algorithmic era. I first took a small unit leadership role (responsible for more than just me) on the trading floor of the New York Stock Exchange in 1987, so I like to use that year because it also includes the "Crash."
Since 1987 (35 years), January has been a positive month 60% of the time, for a median return of 1.73%. However, if one moves the start of this snapshot of large-cap equity performance from 1987 to the turn of the millennium (2000), January has only been positive 45% of the time with a median return of -0.64%. Since 2000, January has been slightly weaker than September, while September remains the weakest month over the longer term. I'll bet a lot of folks did not know that.
Full Battle Rattle
"They" often say that one should sell in May and go away. That might be because, using this same model, April, since 2000 has been positive 77% of the time (best month of year) for a median return of 1.35% (3rd best month behind October, believe it or not, and November). This year, the FOMC will make a policy decision on March 16th, and possibly complete its withdrawal from its balance sheet expansion program that same month. The FOMC will not meet again until May 3rd and 4th. That leaves April without a meeting. How this impacts the April trend, I am not sure, but depending upon inflation and the slope of the US Treasury yield curve at the time, if March is not in play, and I don't think it will be, then May certainly will be.
Why Do I Tell You All This?
Simple. Because the man in the darkened window told me. Would you not want me to pass on the words of this wise, devilishly handsome fellow? Wish he would have told me that my pants would shrink if I ate only cookies and salami in between Thanksgiving and New Year's.
Oh, By The Way...
... Johnny Lawrence might just be the greatest character in the history of scripted programming. If you know, you know. Hashtag... "Cobra Kai"... hashtag... Netflix (NFLX) .
The Week Ahead
A lot going on this week. Not only will OPEC+ meet on Tuesday (tomorrow), forcing a reaction across commodity markets, but a significantly diminished CES tech conference gets under way in Las Vegas this Wednesday (actually sooner) and lasts through Saturday. While Amazon (AMZN) , Meta (FB) and T-Mobile (TMUS) are among some big names taking a pass on this year's event due to the pandemic, it now appears that enough large firms, to include chip makers such as Advanced Micro Devices (AMD) , Micron (MU) , Nvidia (NVDA) , and Intel (INTC) will go on with the show. EV charging company Blink Charging (BLNK) is expected to try to make a significant splash.
The fact is that this week will be about the macro. With earnings season still almost two weeks off, December job creation and wage growth will take center stage. With four days to go, I expect participation to have ramped while unemployment dips slightly. This probably resulted in wage growth that cooled from the torrid pace of this past autumn. We'll know for sure soon enough.
Whoa Baby
Tesla (TSLA) delivered 308,600 electric vehicles in the fourth quarter, well above the 277K or so that Wall Street had in mind. This breaks down to 296,850 Models 3 and Y, and 11,750 Models S and X vehicles. Q4 production totaled 305,400 vehicles. In response, five star (at TipRanks) analyst Dan Ives of Wedbush called the numbers 'jaw-dropping." Ives has a "buy" rating on the stock with a $1400 price target. Philippe Houchois of Jefferies, also a five star rated analyst, reiterated his "buy" rating and also set a $1400 target for the stock.
Tesla bear Ryan Brinkman of JP Morgan (2.5 stars) maintained his "sell" rating and price target of $295 for the stock. By my count, and I certainly could be off a little, this would be the twentieth time since the start of 2020 that Brinkman has placed or maintained a "sell" rating on TSLA. Just thinking for myself... at some point, maybe just pipe down a little bit and watch the action. You may have a bearish opinion, but once you're wrong for this long and to this degree... gee whiz. Even if the stock goes down significantly some day, that won't make you right. Not even in the ballpark of right.
The stock is up a rough $80 or more than 7.6% in overnight trade. I am long for a trade and will probably take those profits this morning. Not because I don't think Tesla can or can not go higher, but because this was a simple trade and "mission accomplished."
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (Dec-F): Flashed 57.8.
10:00 - Construction Spending (Nov): Expecting 0.7% m/m, Last 0.2% m/m.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly results scheduled for release.
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