What A Fool Believes:
No wise man has the power to reason away
What seems to be
Is always better than nothing
Than nothing at all
- Michael McDonald, Kenny Loggins, 1978
Last week came and went, nearly in silence. There were mild up days, mild down days. The S&P 500 pushed ever so slightly toward but not quite reaching all-time record closing prices. Our broadest measure of large cap market performance gained 0.6% over the past five sessions. The Nasdaq Composite scraped out a winning week as well, barely, increasing less than 0.1%. Only the Dow Industrials, up 1.8% for the week, managed to truly impress. Fitting? Perhaps. Markets do appear to be making a more than serious attempt to move the flow of capital away from what has been the leadership, toward what has lagged. The problem with that is that as markets cheer groups that have not worked as well for investors, they must cheer groups reliant upon economic growth. Industrials, led by the Transports, Energy, Financials, and small caps in general fill this bill.
That said, is the bill fillable? The real action last week was in debt markets as yield curves steepened. Investors sold the longer end of the curve, as equities to be brutally honest... remained eerily quiet all week long. In fact, by week's end, the silence was deafening. Trading volume for constituent firms of the S&P 500 for the entire week in aggregate, did not come within 20% of it's own 50 day (trading volume) simple moving average. Volume for the Nasdaq Composite fell 14% short for the week, measured against the very same metric. Equity markets are waiting on debt markets now that Congress has fumbled the ball at the goal line. The President, through a series of questionable executive orders, has made a public attempt to soften this blow for average Americans, but less support, is still less support.
"What now?" You ask. "Good question" is my answer. Are markets pricing in what appeared to be an outstanding retail sales report ex-automobiles? Are markets pricing in improving, but still quite awful, jobless numbers? Does anyone truly believe this economy stays on track as fiscal support (not to be confused with stimulus) takes a walk on the wild side? I would say that debt markets might simply be pricing in the expansion already necessary on the supply side as the Treasury does what they must in order to borrow what they must. More support may have been priced in here -- meaning that traders might buy the long end today and tomorrow -- and still might have to be. I would also say that bond traders could be responding to last week's data for both Producer and Consumer prices for the month of July.
Does one now assume that the economy might be escaping the perils of disinflation, or worse... deflation, only to be trapped in what could be an inflationary period? No. Nothing is that easy. Right now, markets recognize an emerging risk. That is all. Asset prices will at first celebrate oncoming inflation. Once conditions force the matter, and the FOMC reaches a point where the discussion is around fighting this inflation... that is when bubbles will burst. But Sarge... when? I just told you, when the FOMC Minutes show some discussion around inflation as a negative... so not this Wednesday. That day is out there though, and that day hunts. You. Until then, earnings season wraps up this week and next, with a bevy of retailers reporting. The short-term money will create fast moving markets for the likes of Home Depot (HD) , Walmart (WMT) , and TJX (TJX) .
The longer term? Well thought out money has already been working on defense which wins championships. Inertia at the legislative level may offer a last chance discount for those still working without any exposure to gold or hard assets. Assume nothing. Nothing at all beyond the love of your family. Everything else is subject to change. With the mostly virtual Democratic National Convention kicking off tonight, I might mention that there is a national election in two and a half months that will almost surely be contested by the perceived loser after the fact. FYI, former Vice President Biden goes into this event with what looks to be a commanding lead in the polls, but both he and President Trump poll negatively on a national level in terms of overall approval. Regardless of outcome. Bet the markets take that well.
On Your Side
This has still been the fastest recovery from a technical bear market (of course, we were never in a real bull market, the fiscal and monetary responses were both as quick as they were effective) since our hairier ancestors realized that fire could be both useful, as well as preserved. What have we learned here today? Markets are possibly fine until either growth or inflation force the Fed to change guidance on interest rates. Both growth and/or inflation are possible. Inflation without growth would be catastrophic.
Equity prices are higher due to an expansion in valuation multiples that in my opinion is supported by the fundamentals in this environment. Keep in mind, and I have written on this before, not only are both the fiscal and monetary environments vastly different from anything any one of us has ever experienced, but equity itself is scarce. There should always be an increased premium placed upon what becomes harder to find. Yes, Apple (AAPL) and Tesla (TSLA) are helping here, but this expansion in single stock share counts needs to broaden. Units need to be spun off, and there has to be a clear advantage for those beneath the radar to think about going public. When valuing equity, in other words, throw away those five year and 10 year averages for PE ratios. Those valuations existed under very different circumstances, so why would they apply now? Can't believe I even hear these numbers cited, and by "professionals" at that.
Still, market prices for equity assets, even if able to sustain what are perceived as elevated valuations, can still sell off significantly. There is still this darned virus out there that could force a further slowing of the national as well as regional economies, while the nation wrestles with increased bankruptcies and defaults, less fiscal support at the household level, potentially increased evictions, even as both commercial and residential vacancy rates in major cities such as New York soar. Less people working in the city, less people living in the city, less people paying income and sales taxes in the city. Simple math. This means of course, that as these economies slow their recoveries, or just don't come back in some cases, there will have to be a reduction in payrolls across the public sector, which has not been hit nearly as severely as has the private economy. At least it does appear that households have paid down some debt over the past few months in preparation for hard times. We have that.
Anyone Else Notice This?
Berkshire Hathaway (BRK.A) , (BRK.B) released the firm's quarterly 13-F filing on Friday. The "Oracle of Omaha" has been busy, it appears. Throughout the second quarter, Berkshire reduced holdings across the Financial sector quite aggressively. This would include a sale of the majority of the conglomerate's stake in JP Morgan (JPM) as well large reductions in exposure to a number of large banks. The most interesting take, at least for me, was the introduction of Barrick Gold (GOLD) , which has been a Sarge fave, to the Buffet portfolio to the tune of a $564 million long position.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (Aug): Expecting 15.5, Last 17.2.
10:00 - NAHB Housing Market Index (Aug): Expecting 73, Last 72.
16:00 - Net Long-Term TIC Flows (June): Last $127B.
The Fed (All Times Eastern)
No Public Appearances Scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (ATHM) (1.03)
After the Close: (UI) (1.37)