Cold November Rain
Nothin' lasts forever
And we both know hearts can change
And it's hard to hold a candle
In the cold November rain
- Hudson, Stradlin, McKagan, Reed, Sorum, Rose (Guns N' Roses), 1992
Turn The Page
Monday brings about the final calendar day of November 2020. On to December. On to the final month of a truly incredible year, not one I'll remember fondly, despite what has been a solid performance over the first 11 months, at least professionally. There are two things that I truly hate about month's end. One is the rebalancing act or the reallocation of assets that inevitably must be priced in by financial markets. The other is simply the amount of information that I jot down on my paper blotter (under my keyboard) that doubles as a wall (sort of) calendar. By month's end, this thing is more colorful than a New York City subway car circa 1978, and whatever it is that needs to be preserved must be found and rewritten elsewhere.
Back to that rebalancing act, that while almost surely will be more severe in nature next month, could provide for some otherwise inexplicable action late today (Monday). For the news kids, there are enough funds in our financial universe, not just pension funds, but those are a key component here that operate with some kind of mandate to rebalance their holdings in a timely manner. Put (very) simply, if a fund operates within a framework of... let's say... 60% equity, 35% debt, 5% other (precious metals, alternative assets, currency), and then there are oversized inflows into one of these areas that effectively impacts adherence to its mission statement, then toward the end of that period, said funds must return allocation to mandate. Now, some funds rebalance monthly, some quarterly and some probably semi-annually or even annually. While November has been a month to remember for equities, next month, December checks all of those boxes.
Ring That Bell (Twice)
That still leaves us looking at the last day of November. Know that more than $100 billion has poured into equities over the past three weeks or so, which I have read is the largest three week number in aggregate ever. U.S. equity market capitalization comes to roughly $30 trillion, or close to a third of the global number. Funds that operate through some kind of balancing mandate control a rough $7 trillion of that number or more than 23%. These markets can handle what happens today, especially since many allow for timing of these trades by mandate to occur over a number of days, and not solely on the last day of any calendar period. Trading volumes were elevated for a holiday week last week, especially at the Nasdaq Market Site, which has probably to some degree... been a beneficiary of some recent rebalancing. Remember, if you understand markets, this has been more a broadening of the bull market, not a rotation. Mind-blowing, what seasoned professionals do not understand.
Several financial professionals are already out with year end rebalancing models (even though there is still enough wood to cut) that show anywhere from $150 billion to three times that amount if December is another strong month, moving out of the equity space. It's not as if these same funds have been selling debt securities. While Treasury yields have remained stable, corporations even with little current revenue to show in this environment have been able to borrow and junk (high yield) has been in demand.
Basically, an ugly wiggle here or there, will not shake me out, especially if one should be timed with the end of a month (like today), or the end of the year (Santa?).
Why?
Why what? Why stay the course. There are a multitude of reasons. Of course, as a trader, I can change my mind as quickly as the circumstances that support my thought process can change. First and foremost, the result of the U.S. election a month after the fact appears on course. Regardless of your preference or mine, markets were clearly satisfied with what appears to be the return of less disruptive leadership to the executive branch of government, while also showing a clear preference for neither side. There is in this election the overwhelming lack of electoral mandate. Markets generally like that.
In supporting of this transition would be the incumbent's stated willingness to accept the result of the vote in the electoral college (December 14th) despite pursuing legal means aimed at determining the legality of the vote across several key states (which is within his rights). Remember, Al Gore did not concede until December 13th in 2000, and we still survived. He waited until he had run out of options, and I would not be surprised if something similar happened here.
Financial markets are also more than comfortable with the probable return of former Fed Chair Janet Yellen to high profile financial leadership. This is important. Yellen is thought of as a (an extreme) dove, and a dove is what the economy will need over the short to medium term. Current Fed Chair Jerome Powell, who has been outstanding, by the way, has shown through the crisis that he and current Treasury Secretary Steven Mnuchin could and did work together very well. Cabinet positions change as administrations change. Powell and Yellen have already worked together, and by all accounts, hold each other in high regard. This, in my opinion, has been the most market friendly item (though not fact yet) that I have heard or read out of former Vice President Joe Biden's transition team to this point. Yellen will get through any Senate confirmation hearings in a breeze, and is thought to be highly supportive of beefier fiscal support for the economy through this winter than any alternative.
The monkey in the works could be the composition of the Senate itself, or negative headline news regarding medical intervention in the spread of this pandemic. (Incredibly, I still see crowds and I still see folks without masks, though admittedly a lot less of them.) The Nasdaq Composite now appears to have resolved a period of great indecision to the upside. Vaccines that appear in the early data to be both safe and effective could be on the way within two weeks. Something that breaks down logistically, or new news that shows less efficacy or safety than thought would have to be priced in. In addition, a twin defeat of the Republican candidates for the U.S. Senate in Georgia that changes control of the upper house of the U.S. legislature is not priced in. As markets have now priced in a legislative inability to pass an increased tax regime that would include higher corporate tax rates, and much higher capital gains taxes, investment would obviously be discouraged and that would significantly alter market trajectory. At least, in that even... we would still have a general scarcity of equity that has helped support elevated valuations on our side. That said, we would have to greatly reduce exposure to equities.
This Week
1) Retail...
"Cyber Monday" may just become "Cyber Week" or "Cyber Month", as "Black Friday" was quite clearly a disappointment for brick and mortar retailers. Depending on just who you follow, foot traffic at physical retail locations decreased by somewhere between 48% to 52% for Back Friday, year over year. According to RetailNext, consumer spending on Friday decreased approximately 30%, suggesting larger average ticket sizes, but executed by fewer individuals.
Interestingly, according to Adobe (ADBE) Analytics, spending on e-commerce hit $9 billion on Friday, good for a 22% increase over 2019. While this seems quite robust, this number really only hit the low end of what had been the range of expectations. Today will be telling. While the public transitions toward e-commerce at an increased rate of acceleration due to the pandemic, will they spend more than last year, which is expected, but I do not expect? Or, will they hold back because they just don't have the dough? That's my guess. This benefits Amazon (AMZN) , Walmart (WMT) , Target (TGT) , and Costco (COST) in my opinion more than anyone else. The continued housing (Get the heck out of Dodge) boom should put a bid under Home Depot (HD) , and maybe even Lowe's (LOW) going forward, as the work/learn remotely will boost Best Buy (BBY) , again, just my opinion, but everyone else could be in a pickle.
2) Working Remotely...
While working remotely has become reality, there are still a number of scattered Q3 earnings out there that still have to straggle on in. Zoom Video (ZM) reports tonight, and while that firm has become emblematic of the entire concept of working from home, the concept itself has made Slack (WORK) appear potentially appetizing to a firm like Salesforce (CRM) . Obviously Slack has wildly underperformed Zoom Video in this environment. Salesforce probably feels that Slack could better compete for that client under different management. Salesforce reports Tuesday afternoon. This week, cybersecurity also moves into focus as CrowdStrike (CRWD) , Okta (OKTA) and Zscaler (ZS) all go to the tape with their numbers.
3) OPEC Plus...
The extended group meets on Monday and Tuesday of this week. Expectations are that the cartel and its allies will likely delay an increase in production that had been scheduled for January. Much of this is already priced into commodity markets as well as the energy sector. There is more downside risk around this event than there is upside in my opinion should revenue starved oil producing nations dissent.
Economics (All Times Eastern)
09:45 - Chicago PMI (Nov): Expecting 59.2, Last 61.1.
10:00 - Pending Home Sales (Oct): Expecting 1.3% m/m, Last -2.2% m/m.
10:30 - Dallas Fed Manufacturing Index (Nov): Expecting 9.5, Last 19.8.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (ZM) (.76)
(AMZN, WMT, COST, and CRM are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
