They walk among us? Of whom do we speak? We speak of those who see differently. Who can find that something. The view is one of the same collection of circumstance, the same cause and effect available for all to envision. The interpretation however is well defined, thus conclusions become both theoretically believable, and practically actionable.
That ability to compartmentalize, to channel thought toward determining realistic goals and outcomes is probably also what allows one to see the beauty behind the mosaic where another might see nothing more than wretched confusion. This talent surely comes naturally to a few. My thinking though is that through sustained effort, not only where effort is measured through overt metrics, but also in silence... progress made toward increasing patience. I believe that one can improve one's own ability to "see".
Rise and Shine
Monday morning. All fired up. How many times did you wake up ready to burst into action? Time's up, buttercup. Let's rock. Equities soared on Friday, seriously extending the Thursday rally, to close out a volatile week close to flat depending on the index used. The day though... just how believable was it? The S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average all moved higher to the tune of 1.4%. Almost as if price discovery at the point of sale had been managed through electronic means or something. Color me cynical.
The fact is this... trading volumes were so light on Friday as to make this observer doubt the validity of the day's gains as useful in one's analytical development. In fact, we are looking at two straight "up" days for the broader markets on successively lower trading volume. There has simply been a profound lack of professional participation in the equity marketplace since last Wednesday.
In a world of constant change, there are some things that for investors are eternal. When I leased my first seat on the trading floor of the New York Stock Exchange, making me a "member", I was (like all members) awarded a coin with a bull on one side and a bear on the other. Once upon a time, flipping coins had been used on the trading floor to help decide unresolveable disputes between buyers and sellers. Don't worry, those days were long gone by the time that I showed up. These coins, a relic of simpler times, were collector's items only.
Where I'm going is this. Once upon a time, the financial marketplace could be described in basic, relatable terms... the bulls versus the bears. So quaint. It is through the weathering of experience that investors at some point come to the understanding that the marketplace is really the balancing of risk. Risk in trend comes first. Secular impact (longer-term) must be balanced against cyclical impact (the business cycle). That same investor must determine when and where this balance makes a permanent or semi-permanent turn. (For example, historical cyclical behavior might not be applicable where as mall-based retailers have suffered negative secular impact.) This is true of any industry subject to disruption through changes in technology or behavior.
Slow down now. Lets those words sink in. This balancing act between the secular and the cyclical is for the investor, the start of a "scrap paper" allocation. Where the rough draft is created. Everyone is capable of carefully developing conclusions based on the evolution of their own thought... a very necessary step forward. This is where the game afoot becomes infinitely more difficult. This is where that balance must then be weighed across a series of environmental inputs. These inputs can create a much higher level of complexity in the financial ecosystem. These "environmental" factors would be monetary policy, fiscal policy, political risk, geopolitical risk, and headline news.
This is where allocation is worked through, and at least to some degree... finalized, though never really final. Why? Because, the environment constantly evolves, and investors always make mistakes through either a lack of available information, or human error. Lastly, and perhaps the greatest risk of all is that of systemic complexity, and this is as close to an unknowable risk as there is. This risk grows in response to increased layers of leverage, across every area of the economy that produces input providing analytical conclusion (output) based upon data that may or may not be reliable elsewhere. If, and when there is another stock market crash, caused by financial crisis, my belief is that the danger will be in risk taken reliant upon a chain of data perceived as reliable, but with a weak link early on in that chain.
The deal is this. The domestic macro, despite an employment report that was less bad than feared, has been softening. The Atlanta Fed's GDP Now model now shows the third quarter "humming" along at 1.8% q/q SAAR. Fed Funds Futures trading in Chicago is currently pricing in an 80% probability of a short-term rate cut on October 30th, as well as a 45% chance for another reduction in December. On that note, this week presents as a very heavy five day period in terms of the Federal Reserve's public presence. Fed Chair Jerome Powell speaks every day today (Monday) through Wednesday, with a minimum of two Fed speakers making appearances somewhere each and every day of the week.
The Fed will not however... dominate the news cycle. The arena of headline news will focus on both the U.S. domestic political sphere, as well as trade talks between U.S. and Chinese leaders in Washington all week. Lower level talks get underway early in the week, as soon as today. High level talks commence on Thursday for what could be the first meeting of consequence since the mid-summer talks that famously broke down.
The problems here are plenty. The U.S. economy appears to be slowing, as the nation prepares to go into the electoral season. The Chinese economy also appears to be slowing, as that nation simultaneously appears to be losing control over it's own people. Perhaps this makes significant concession on behalf of either president unrealistic. Some pundits will argue that President Trump needs a win. That may be true, but maybe he needs a win next summer, not now. Some pundits also argue that President Xi needs to shore up the Chinese economy, to preserve what supply chains are still in place. Likely if cornered, a show of power may be of more importance there than what is economically expedient.
Bloomberg is reporting that China's Vice Premier Liu He, who is the leader of this Chinese delegation, recently indicated that China will not commit to reforming industrial policies or government subsidies. This is the primary reason why equity index futures are lower in early trading. This may also be why institutional participation had been thin in the rally late last week. Stay focused. The next increase in U.S. tariffs on Chinese imports is scheduled for October 15th. That's a week from tomorrow. That's also when the big banks such as Citigroup (C) , JP Morgan (JPM) , and Wells Fargo (WFC) kick off what is expected to be a fairly awful earnings season.
Penny For Your Thoughts
The Fed in aggregate does finally seem to have their head in the game, and does also seem to understand that through tightening policy too aggressively in late 2018, that they negated much of the short-term positive impact created by looser fiscal policy, while also forcing the surprise unforeseen shock in overnight money markets. (Despite being warned on these matters nearly constantly by financial professionals.) That said, the Bureau of Labor Statistics will report September CPI data on Thursday (the day that negotiations begin), and nobody needs to be told that according to the CPI, that core inflation has just started to run a little hot.
The central bank prefers to use PCE as their measure of inflation if only due to the fact that the series has run well below the CPI data (used by everyone else on the planet). This allows policy makers to delay a potentially painful fork in the road. Obviously, the Fed needs to pressure short-term rates in order to repair the yield curve. Obviously, the Fed needs to expand the balance sheet for the liquidity needs of the current environment. Obviously, the Fed should not want to raise rates in a slowing economy embroiled in a serious trade war. Obviously, the Fed should not want to raise rates with a U.S. dollar already too strong relative to it's reserve currency peers. What if the central bank has to finally worry about fighting inflation? What if they waited too long to get their act together?
How the Fed's many public appearances evolve this week around this macro as well as the trade negotiations, will not just be interesting. This is crucial.
Lots of Bad News
Delta Air Lines (DAL) reports this Thursday. I have had no exposure to any airline in quite some time. That has been one of my better allocation decisions. There have been lousy ones. This was a good one. Delta was inundated with bad news last week. The firm raised expectations for both third quarter and full year costs based on rising wages as well as increased maintenance costs. The there was President Trump's victory at the WTO over Europe's subsidization of Airbus (EADSY) in their never ending turf war with Boeing (BA) . Delta has already placed billions of orders at Airbus, and those orders upon delivery will now likely face a 10% tariff.
The stock has been a falling knife of late. One quickly sees the successful breakout of the cup with handle pattern in June followed by failure. Then one sees the sideways action at pivot that lasted two full months. Now. collapse. The 50 day SMA. Gone. The 200 day SMA. Gone. Weak relative strength going into earnings. Awful looking daily MACD.
Support? $51 would be too easy. If that doesn't work, it's either $48 or don't even say it, $44. Just an idea. I want to see this thing open, but the bar has been lowered going into the numbers. If the shares stay weak going in to Thursday, a small equity stake paying an annual dividend of $1.61 might not be such a bad idea. Then, a trader might dress up net basis through the sale of puts that expose one to equity risk at a discount that might be enhanced during a week where there is so much clear and present danger. Currently, I am eyeballing the January $45 puts. That series went out at $0.84 on Friday night.
Economics (All Times Eastern)
15:00 - Consumer Credit (Aug): Last $23.29B.
The Fed (All Times Eastern)
10:20 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
13:00 - Speaker: Federal Reserve Chair Jerome Powell.
Today's Earnings Highlights (Consensus EPS Expectations)
There are no significant earnings releases scheduled for today.