It's so easy, easy
When everybody's tryin' to please me baby
It's so easy, easy
When everybody's tryin to please me
- Rose, Arkeen, Hudson, McKagan, Stradlin, Alder (Guns N' Roses), 1987
In late August, we saw market turbulence ahead. Last week, we called what we saw as the end of the U.S. market's corrective phase. It's perhaps the easiest part of portfolio or risk management, having an opinion. It's perhaps the most difficult part of portfolio or risk management, actual allocation adjustment in the real-time environment. If you wake up every morning thinking of ways to make some bread, and read columns such as this one and others here at this site, you probably are managing some kind of portfolio. You are definitely your own risk manager.
U.S. equity markets turned in a fifth consecutive positive performance on Tuesday. The composition of this ongoing rally has already started to evolve however. This week, "growthy" and defensive type sectors have started to lead, with cyclical types still green, but not quite seen so consistently at the top of the daily performance tables. The large cap Nasdaq indices (the 100 & the Composite) and the S&P 500 have just started to edge out the small to mid cap indices as well as the transports. This could just be an algorithmic shift as disappointing September data for Industrial Production and Housing Starts replaced robust numbers for Retail Sales and still hot (but cooler than feared) inflation reports as the macroeconomic underpinnings of market based sector selection.
Interestingly enough, for both the S&P 500 and Nasdaq Composite, but the action is more pronounced for the Nasdaq Composite. These indices have not only closed near enough to their highs of the day for each of the past five "up" days, but have closed near the lows of the day on "down" days and near the highs on these up days going all the way back to the big selloff of September 28th. That's semi-incredible, and is striking evidence of a point of sale under algorithmic control. Human traders could not create such a pattern with such regularity. Perhaps the recognition of this pattern might aid readers in the entry into, or exit out of, positions once a decision to act has been made.
So, Tell Us Something...
All that said, I stare out and into a darkened window. The past-middle aged man staring back points to a few evolutions evident in the overnight session as the wee hours start to melt into early morning. For one, US Treasuries out on the long end of the yield curve showed real weakness in Asian trade late Tuesday night, but seem to have caught a European bid, now well off of their worst levels. The U.S. dollar seems also to be rebounding off of Tuesday afternoon weakness, while commodities traders appear to be swapping out of energy based commodities and back into metals and agriculture. Time to evolve yet again? I do think that this is far more than a bear market rally. I also think that the low hanging fruit has been picked. It was so easy. As earnings season moves into a heavier release schedule, warts (margin pressure) will become evident. As fiscal and monetary policy makers move toward key dates (or deadlines?), volatility will spike in financial markets. Doesn't mean we have to run for our lives. Does mean that we have to wear out helmets and flak jackets. Safety first.
On Tuesday, your pal Doug Kass wrote a distillation (dissertation?) of his bearish market view. Doug makes many points founded on shifts in structural support for price discovery, and the piece is required reading for anyone trying to do more than "ride the wave" or to simply get by on nothing more than technical analysis. I remind readers, technical analysis is in my opinion a key component in determining decisive action. That said, "technicals" are no more than a "key" component. You still have to do your homework. Put it this way, fundamental analysis requires a much heavier workload and a much longer learning curve than does TA. Sure, TA tells investors where the bus stops are, but if you want to know which direction the bus will ultimately move, you also have to be able to work your way around balance sheets, cash flows, and income statements.
Doug points out a global economy heading into a broad period of slug-flation (stagflation) where inflation becomes persistent despite stalling or sluggish growth. Doug points out that the Citigroup Global Economic Surprise Index has turned negative and now stands at levels historically associated with economic contraction. Can anyone argue otherwise? Danny Blanchflower of Bank of England and Dartmouth fame points out that current levels of consumer sentiment point toward potential economic contraction as soon as late this year into early next year. These are pretty smart cats we're talking about here, who do not see the gummy bears over the rainbow scenario to our front that so many talking heads have pictured.
While I, myself do see the current bout of inflation as more transitory than do most of my peers at this point, I am not blind to the fact that I might be wrong, or that my understanding of what "transitory" actually is... might be a bit longer than everyone else's. Off the cuff, I would consider nine to 15 months to be transitory, but pressed for a date, my answer would be simply "when the pandemic permits normal human interaction and when all of the political/geopolitical theater of the bizarre quiets down a bit. That last one could take a lifetime.
Kass points out the national debt load and only increasing deficits as headwinds. He points out a less robust, heavily leveraged Chinese economy, now in a state of deterioration that will leave that economy unable to drive global growth, and its authoritarian regime more likely to posture itself as regionally and perhaps globally belligerent.
Then, at last, Doug reminds readers that central bankers are now poised to withdraw future piling on of systemic liquidity and possibly pivot toward tighter conditions. My favorite take-away from the note, and I quote Doug Kass... "Liquidity and volatility are inversely related, so less liquidity means more volatility and less predictability."
What we need to do now is understand that we can not understand it all. Will we finally conquer this pandemic? Will fiscal policy ensure everlasting structurally uncontrollable inflation? Will efforts to reign in monetary policy ultimately fail? Does that mean TINA... forever? Does the attempt of this legislature to expand on unfunded federal expenditures coupled with a Fed that appears less than thrilled to have to fund that government mean that we are already stuck in some version of "Modern Monetary Theory"? Does that maybe signal the eventual catastrophic end of the many decades old debt super cycle?
The answer to all of these questions is yes, but when... we can not know, and so therefore, we play the game. We play it to the best of our abilities, and when the sky does fall, we'll play that the best way we can. Why? Because we adapt at all times and to all circumstances. We have never lost and we can never lose until we admit we lost. There, we have control. So, let us stand back to back, and shoulder to shoulder. Let us face the wicked and see who leaves this field upright today. For we are who they told you about. We are the mighty. We are still... "undefeated."
On That Note...
You have probably noticed that President Biden has been meeting with key Senate "moderate" Democrats such as Joe Manchin of West Virginia and Kyrsten Sinema of Arizona in a rush to decide what stays and what goes as the size of that $3.5 trillion climate and social services focused budget framework is rapidly shrinking in size. The federal government is able to fund itself through deficit spending through early December. That said, the president is headed to Glasgow on October 31st for an international meeting on climate change and the appearance that he is actually getting something done at home might carry some weight at the summit.
It appears that Democrats have agreed to jettison tuition for community college and perhaps even greatly reduce in length the expanded child tax credit, as the package is being forced to lose weight in a hurry in order to get closer to Joe Manchin's $1.5 trillion line in the sand. Congressional Progressive Caucus Chairwoman Pramila Jayapal emerged from meetings last night and indicated that she sees the package costing between $1.9 trillion and $2.2 trillion once all is said and done.
Oh, and in other news, the Chinese government raised $4 billion in dollar bonds on Tuesday, borrowing on the cheap from the international community. The four part sale came with maturities of three, five, 10 and 30 years. Can you imagine lending the Chinese government cash over a 30 year window for just a 0.53% premium over what US 30 year bonds yield or for 10 years at just a 0.23% premium? Survey says... XXXX. No thank you.
Netflix (NFLX) reported third quarter earnings on Tuesday evening. I know I told you that the stock would sell off into the numbers and that I would try to take advantage of that. Instead the stock rallied into the numbers and I was forced to hold off my short rental until just before the closing bell. Good thing.
Netflix posted EPS of $3.19 on revenue of $7.48 billion. The EPS number presents a nice beat, but revenue was in line with expectations. Netflix added 4.38 million new subscribers, mostly international, which is considered lower margin over time. This beat Wall Street's expectations for 3.78 million new subs and the company's own guidance of 3.5 million. The firm thinks it can add 8.5 million new subs during the current quarter, above Wall Street's consensus of 8.41 million. I think that where Netflix lost the overnight buzz last night in the growing expense on content and in the guidance.
While the hit show "Squid Games" came quite cheaply, Netflix spent $4.7 billion on content during the three month period, which is up 77.4% year over year, and brings the year to date total up to $12.7 billion. For the fourth quarter, Netflix guides performance toward EPS of $0.80 on revenue of $7.71 billion. Wall Street is looking for EPS of $1.13 on revenue of $7.66 billion. The stock in my opinion was quite expensive at 48 times forward looking earnings. Now those forward looking earnings are smaller, that PE ratio is higher. That said, I am not so brave as to stay short NFLX for very long. My average price is just above $639. I will cover this position this morning. Most likely after this note is published but before I hear the opening bell.
Xbox mini-fridge? How can any red-blooded American say no? Oh, and Wedbush analyst Dan Ives sees still tremendous growth ahead for the cloud as "Only 40% of workloads are currently on the cloud today, and that's poised to hit 70% by 2025." Ives basically sees spending only going higher for the cloud and for cybersecurity. He names Microsoft (MSFT) as one of his top cloud picks, and Apple (AAPL) as his top tech pic overall.
Microsoft is set to report in less than a week's time. Wall Street sees 14% earnings growth on 23% revenue growth. The stock has been a recent market leader. I think it's the mini-fridge, but what do I know?
Was not so long ago that this name broke out of a smooth looking cup/saucer early this past summer. Now, the shares have been consolidating, forming a base since mid-August, and though now "overbought" by some metrics, stand just above the $305 pivot built by (and twice tested) that base. Can the name go for a ride from here? You know me. I have been beating Satya Nadella's drum since he took over.
The shares will in all likelihood retest pivot from above, maybe prior to next Tuesday's earnings release. Maybe not. Unless the firm turns in an uncharacteristically poor performance, I think this name is poised to be a leader in 2022. Betting on Dan Ives hasn't hurt too many folks over the years, I don't think.
- Target Price: $360 (up from $320)
- Pivot: $305
- Panic: $280
Economics (All Times Eastern)
10:30 - Oil Inventories (Weekly): Last +6.088M.
10:30 - Gasoline Stocks (Weekly): Last -1.956M.
13:00 - Twenty Year Bond Auction: $24B.
The Fed (All Times Eastern)
12:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
12:00 - Speaker: Chicago Fed Pres. Charles Evans.
13:45 - Speaker: St. Louis Fed Pres. James Bullard.
14:00 - Beige Book.
20:35 - Speaker: San Francisco Fed Pres. Mary Daly.
Today's Earnings Highlights (Consensus EPS Expectations)