an old man misses someone gone forever.
a young child cries herself to sleep, or
parents don't understand why.
an addict has given up,
painful memories persist,
illness weighs upon resilience, or
anguish torments a soul
You know them all
You are them all
Then, you love them all
You always have
Each other, we have. Always.
Potsie? No. Investors flocked into equities yet again on Wednesday, for a third consecutive session in the wake of Friday's seemingly forgotten meltdown. Global equities worked their way higher on Thursday morning, building further on this week's gains, and led by Asian stocks. More love? While you rested that weary head of yours, the Chinese Ministry of Commerce announced that it would halve up to $75 billion worth of tariffs on (a list including 1,717 products) imported U.S. goods. The cuts, which are to be implemented on Valentine's Day (February 14th), will reduce 10% tariffs to 5% and 5% tariffs to 2.5%. You will recall that February 14th is the day set by President Trump to halve U.S. tariffs of Chinese goods, at least those included in the September 2019 tranche.
This move by Beijing comes on top of massive injections of liquidity into that nation's financial system earlier this week that halted a meltdown in Chinese equities and certainly put a floor under global markets leading to this week's aggressive "risk on" behavior. The Chinese government was busy on Thursday morning. The National Health Commission acknowledged that the Wuhan coronavirus had now claimed more than 500 lives in the country, and that more than 28,000 there had been confirmed as infected. Have markets taken this illness too lightly? Have markets moved on to the next thing, while disregarding potentially significant negative impacts to global macro-economic performance?
These questions are serious, yet, I gladly take what the markets offer. As surely as a lone slip of paper is picked up on Wall Street by a cold breeze and lands by chance somewhere else, I must be as flexible. Play the game in front of you. What's your mission statement? Don't have one? I have taught this before. Each and every investor needs to have, understand, and make central at least one mission statement. I think it fine for an individual running multiple portfolios to write a mission statement for each and every one of these portfolios, with respect to varied investment objectives employed. There needs to be one core understanding though, at least at the headline level.
I learned this a long ago, and not in the financial markets. My primary mission is to excel in the environment provided. Nothing more. Nothing less. See the big picture? Great. Invest strategically. At the expense of what you don't understand? Not one in our ranks has all of the information, nor will we always interpret what we do have correctly. Trade tactically. Got it? Something not working? Fall back on what you know that you understand best, or what you know that you do well.
Never say... "This makes no sense", when looking at one's P/L ratio. Obviously, if you feel this way, somebody with more capital behind them has taken the other side of that trade. The best traders that I have ever known have all had one thing in common. They all had a keen ability to change stripes on the spot, with no ego involved (at least not in real-time), and with no behavioral memory.
On That Note
A number of market metrics have really turned on the juice this week. Incredibly so. Remember that 3 month/10 year U.S. Treasury yield spread, that I harp on so often? That spread, our most important, inverted on Friday, remaining negative on Monday. Then as investors became more confident, as the safety trade came off, investors sold the long end of the U.S. curve. That spread went out on Wednesday afternoon at +9 basis points, and I have seen it as wide as +11 bps overnight.
The Nasdaq Composite rallied (0.4%) to a new record on Wednesday, despite that fact that Tesla (TSLA) was working against the index for the first time this week. Trading volume attributed to that index has climbed from the day prior on both Tuesday and Wednesday. Trading volume attributable to the S&P 500 (which soared 1.1%) was also higher on Wednesday. This, our broadest large cap equity index, is now suddenly up 3.4% year to date, having put together three consecutive winning sessions for the first time since January 14-17, and having posted back to back 1% gains for the first time since September 4-5. Market breadth has been excellent both down on Wall Street, as well as up at Times Square. Rock on.
It was the Energy sector that led the way on Wednesday, as WTI Crude finally found support. The Energy Select Sector SPDR ETF (XLE) rallied 3.76% for the day, as short sellers taking profits across the space joined discount shoppers in taking action ahead of an expectation that OPEC may further reduce production in response to projections that Chinese demand for crude this month could decline by as much as 25% or 3.2 million barrels per day.
One hundred and eight victories. In one season. The 1986 New York Mets. Still tied with the 1975 Cincinnati Reds for the National League record. Well, the National League record since the invention of the curve ball, and since racial integration... so the National League record.
1986 was also they year that the U.S. Treasury issued its last 20 year bond. Why? because there was no real demand. The 20 year had inverted with the 30 year for no good economic reason, and it started costing the U.S. government more money to borrow for 20 years than to borrow for 30. Well, conditions are different. Interest rates are certainly different. Fiscally? If in 1986 we only knew.
Treasury has made some details of this coming issuance available. Twenty year paper will go out, according to plan, in the third week of the months of February (not this year), May, August, and November. No mentions of size, but we all know that with projected Federal deficits set to average $1.3 trillion for pretty much the next 10 years (unless something different is tried, nah.. forget it.), so Treasury is going to have to push.
We also know that the Federal Reserve Bank would like to stop, at some point, expanding the monetary base. Though the threat to global economies presented by the coronavirus may slow down the current program targeting short-term debt, they do want to halt the program. That said, Treasury's focus will have to shift from borrowing for months to borrowing for years. Many years. What would make sense to me, would be even longer maturities. Test the waters, while interest rates are tiny. If "they" don't want it, don't issue it. Does that seem difficult? If they want it, borrow it... for 50 years, 100 years, even 500 years. If we end up extinct by the year 2520, I guess we'd be off the hook.
Peloton (PTON) reported the firm's fiscal second quarter on Wednesday evening. There was good news. For the quarter, EPS printed at -$0.20, a solid beat, on revenue of $466.3 million. That number also landed above consensus. A problem might be the rapid deceleration in this revenue growth. While 77% year over year growth might be (actually it is) quite robust, this is now the third consecutive quarter of a slowed pace.
The firm added 712K connected fitness subscribers over the three month period, more than expected. Gross margin has held at 42.3%. The firm increased guidance for full year 2020 Connected Fitness Subscribers to 920K-930K. The way I see it, and I am just a kid with an opinion, is that Peloton's services remain pricey. In addition to the guidance for subscriptions, the firm also guided Q3 revenue below consensus to $470 million-$480 million.
Readers should note that in December, Peloton reduced the monthly price of a digital-only membership to $12.99, which more or less puts that kind of membership in a position to compete against other firms engaged in that business. That monthly membership jumps however to $39 when paired with Peloton equipment, and that equipment itself prices out the vast majority of U.S. consumers. A Peloton bike, according to Investors Business Daily will run the consumer $2,245, or $58 per month over 39 months. A Peloton Treadmill goes for $4,295, or $111 per month over 39 months.
Perhaps this is acceptable to consumers of certain means. A membership at the local Planet Fitness location will cost that same consumer $10 per month. Seems like a better bet for the average Joe or Jane who might be too tired after a long day of working and raising kids to exercise as often as they would like. I belong to an "upscale" gym that runs me $29 per month, and they throw in a similar virtual service for that price. Plus, all of the other stuff (weights, live spin classes with other actual humans) that gyms offer. I still don't see a reason to get long Peloton, even on this dip.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 214K, Last 216K.
08:30 - Unit Labor Costs (Q4-adv): Expecting 1.1% q/q, Last 2.5% q/q.
08:30 - Non-Farm Productivity (Q4-adv): Expecting 1.4% q/q, Last -0.2% q/q.
10:30 - Natural Gas Inventories (Weekly): Last -201B cf.
The Fed (All Times Eastern)
09:15 - Speaker: Dallas Fed Pres. Robert Kaplan.
19:15 - Speaker: Reserve Board Gov. Randal Quarles.
Today's Earnings Highlights (Consensus EPS Expectations)