A Thousand Burning Suns
Late January morning. 8 am. So very long ago. I looked through the window of a closed classroom door. What I saw changed my life. I had never been struck like that before. Nor since. So beautiful. So freakin' cool. Sat behind her intentionally that day. Maybe, she'll have to talk to me. Just maybe she did.
Sunday morning, just yesterday... we strolled the beach. The waters were remarkable placid. The sun was warm. So nice. Sunday evening, on our way to Mass, I noticed that a breeze had kicked up. As we made our way around a nearby lake, I saw whitecaps. The waters had grown just a bit choppy, on what was still overall, a gorgeous night.
So simple. So meaningful. So telling. Together on one beautiful day, we were able to experience delight in both stillness as well as in turbulence. That's life. That's the marketplace of ideas, of values, of yes, even finance. That's also marriage. The children are now productive adults. The relationship remains forever, a relentless pursuit of elusive perfection providing it's share of glory in both victory and at times, defeat. Always thrilling. Never boring.
I can offer no advice. Different folks face different obstacles. I do know this, though. That person that you love, is obviously lovable. Always will be. Always was. I am still struck in place upon sight. I am still helpless when she cries. I still feel the passion of a thousand burning suns.
Magnificent 7
Mention the number seven, and for most, the late, great Mickey Mantle comes to mind. Being from the other side of town, number seven for me will always be Ed Kranepool. Maybe not draped in Hall of Fame glory. Maybe not worthy of multiple championship rings, but Ed Kranepool, in the rose colored hindsight of a childhood memory, seemed to have a habit of coming up with a clutch hit when a usually very bad team found itself in dire need. He was also one us. What? He was as close as a street urchin from the outer boroughs of New York City could come to imaging themselves batting in front of 50,000 screaming empty seats. He was an underdog who made good. Just like his team. Just what we all saw in ourselves.
The broad marketplace has been a clutch performer of late, plating a seven day winning streak. Equities, and debt securities alike, have really been dancing to the same music. Support has been delivered via many different avenues. The big dog has been a belief that a trade deal between the U.S. and China was nearly imminent. In addition though, economic growth, responding to substantial stimulus had made a seemingly significant turn for the better in China. Just witness the action in the Shanghai Composite. Santa made that visit too, and has kept on giving, now 30% off of the bottoms of December versus the S&P 500's 15%.
What has become clear as well, is that economic growth in the U.S. has not slowed to the degree that many economists seemed to have pointed to early in the first quarter. The Atlanta Fed's GDPNow snapshot currently stands at a "robust" 2.1%, which would place the quarter right back in line with the longer term U.S. economic trend. The question now begs, really, not just are equities expensive here at 16.7 times forward looking earnings, but how expensive are U.S. Treasuries? Or the U.S. dollar for that matter?
You May Have Noticed
A few big sell-side firms have been cutting year end forecasts for what the U.S. 10 year note will yield by year's end. One thing that I learned early on in my career was that often enough, these kinds of predictions are meaningful, at least to me as nothing more than an expression of real-time sentiment. Not that these projections should be immediately discarded, juts keep everything in context. If those research departments were so good, they would not all need to adjust midyear. Got me? These kids are no smarter than you are.
On that note (literally), the U.S. Treasury Department will put $24 billion worth of 10 Year Notes to the tape this Wednesday afternoon. So, why would these bigger firms reduce their levels for year-end Treasury yields if the picture was indeed clearing up. Unless, the picture is far sloppier than appears. True, first quarter earnings projections just keep getting worse. That is as much a response to an apples to apples comparison in the wake of last year's change to the tax code as it is to an expected slowdown. Expectations for the S&P 500 are now at -4.2% y/y, according to FactSet. The glaring positive would be that this at least presents a lowered hurdle to the creation of a positive response across the equity space.
Facts are, quite honestly, that even though the 3 month/10 year has un-inverted, that the three month is still inverted through the five year. The top end of the target range for the Fed Funds Rate, in fact, remains inverted right through the 10 year note. Still not the least bit healthy. In fact the U.S. 30 year bond will only yield a rough 47 more basis points than that fearsome three month T-Bill. Please let that one sink in. Treasury will sell $16 billion worth of 30 year paper on Thursday. My guess is that someone will buy much of it, right in here somewhere. Good chance that someone will be vaguely disguised as foreign accounts. It will be very interesting to see if the bid to cover for this auction can rebound from the 2.25ish level of the past two, and if the percentage of the issuance taken down by indirect bidders (often foreign central banks) increases from the mid to high 50%'s where it was "back" when the product yielded more than 3%. That said, the ECB has not flipped the money machine back on. Yet. That is the economy in the deepest hole. Though the UK is not part of the Eurozone, the nation departing the broader Union is without a doubt, an economy that Europe can ill afford to lose.
Quantitative Easing
Obviously, the Federal Reserve is not about to start buying bonds again at this stage of the game. I had to chuckle just a bit last week as President Trump mentioned such items as buying bonds and 50 basis point rate cuts last week. Not chuckling at the president's mentions at all. They were exaggerated. They were meant to be. No, I more or less had a laugh at the expense of several serious financial journalists and economists who took those mentions as seriously as they did. I would love to be the used car salesman when these folks wander in.
Has anyone here ever negotiated anything, or placed pressure where they thought it needed? Guess not. More than one Fed head last week mentioned the possibility of increasing the Fed Funds rate later in the year. Clearly not what the president wants to hear, and clearly not what would serve the nation in the least, until the yield curve is first repaired, and the necessity to chase consumer level inflation becomes a reality. This is maybe Eco 102.
There has to be coordination between the central bank and the Treasury Department. I have advocated often for an "Operation Un-Twist." That's obviously a little aggressive for those at the central bank who, as they wind down the Quantitative Tightening program, would like to adjust the composition of the balance sheet through reinvestment. Unsheath thy sword, and wade into the abyss like you mean it. If only. Okay, I'm back.
With a central bank that is always a step and half behind where they need to be in terms of policy, the action required to repair the curve will fall to Treasury. The need to borrow an unheard of size is well-known. While coming demand from damaged economies is likely to increase moving forward, the timing may be perfect to take these accounts to the cleaners at the long end. Sell them as much as they'll buy at 10 and 30. Heck, see what they might pay for a 50. Excel in the environment provided.
Chartwork
I look at a lot of charts on weekends. Okay... I look at a lot of charts all the time. Came across one this weekend that I don't know how I had not noticed in this way until now. I'm looking at Essent Group (ESNT) . Not a really heavy trader, this private mortgage insurance company is a little off the beaten path. The name has been growing across all of my favored fundamental metrics such as revenue, operating income, tangible book value, and levered free cash flow. ESNT has beaten earnings expectations on a regular basis as well, and to be honest, the shares are reaching for the top of the chart, so do I see a trade. Technically, I think so. If so. Let's go there.
Now, this may be a little tough to see, and I'm not really sure how valid it is, but it took a year for these shares to complete a "double bottom" or "Capital W" formation January 2018 through February 2019. This is outlined for you in orange. Then there is the much less significant. "lower case w" that also formed a barely noticeable double bottom since then (boxed in green). I see the action as probably more bullish than bearish, or at least I see the potential for at least a moderate breakout. The purple horizontal line would be your pivot point based on the larger formation. Not quite sure what to do with that smaller formation on the right, as the center of that "w" was a spike. That could possibly turn my pivot from a point into a zone.
My thought is to enter close to the last sale with a small long, and add on either a moderate dip, or even a move toward the high point of the lower case w on the right. After that, it's time to wait and watch for the possible break. Sure thing? We ain't got none of those today, sport. All we've got is some guts and some homework. My target will be the $55 level, my panic down at $42.
Trade Idea (minimal lots):
- Purchase 100 shares of ESNT at or close to the last sale of $45.80
- Sell one ESNT May $45 put (value: $1.60)
- Sell one ESNT July $55 call (value: $0.55)
Note: The short sale of what is simply a calendar strangle provides a net credit of $2.15, reducing net basis to $43.65. The reason, I push out to July for the call (which bears my target as the strike price) was simply to find some premium. The put is timed around potential earnings, yet to be announced.
Best Case: Position is called away at $55 in July for a 26% profit.
Worst Case: Position is doubled in May, bring net basis up to $44.33, with he shares trading below $45. Keep in mind that we have place our panic at $42.
Economics (All Times Eastern):
10:00 - Factory Orders (February): Expecting -0.5% m/m, Last 0.1% m/m.
10:00 - ex-transportation (February): Expecting 0.1% m/m, Last -0.2% m/m.
Today's Earnings Highlights (Consensus EPS Expectations):
None Scheduled.
