I don't know about you. Speaking for myself, it is difficult to even imagine being quarantined aboard a cruise ship while the number of folks on board who are sick continues to grow, while we all breathe the same circulated air. Why lead this morning's Recon note with a Wuhan Coronavirus story at this point? Even as global financial markets for the better part of a week have seemed to reach new levels of nonchalance in regards to this ailment?
For one, today is Friday, and even if today is also a BLS (Bureau of Labor Statistics) "Jobs Day", and that data may certainly impact the marketplace, Friday trading sessions do in fact often invite some measure of "risk off" behavior when there is indeed an air of uncertainty permeating that same marketplace. No promises. I myself will likely shop my own book for names not to exit, but that might be in need of a clean shave. No panic. Just risk versus reward. Cash is a hedge, especially in a rising U.S. dollar environment.
Early Friday morning, the Jerusalem Post reports that there are now 61 confirmed cases of the Wuhan virus on board the Diamond Princess (CCL) as the ship anchors off the Port of Yokohama, south of Tokyo. This number is out of 273 individuals tested, and roughly 3,700 on board. In addition, also on Friday, the New York Post reports that a Royal Caribbean Lines (RCL) vessel returning from the Bahamas and scheduled to dock at Bayonne, New Jersey has at least a dozen Chinese nationals on board (in isolation) as some of the passengers are complaining of having pulmonary issues. These patients are to be tested for the Wuhan ailment once in port. These developments are in addition to the story reported on Wednesday at CNBC of the 2000 passengers currently held aboard the cruise ship World Dream at Hong Kong as roughly 30 on board have complained of having at least some symptoms associated with this virus.
Oh, by the way, as you rested that grape on top of your shoulders, China's General Administration of Customs announced that for that nation, January trade data would be delayed and then combined with February's numbers. To be fair, for those who may not follow Chinese macro-economic data-points all that closely, this is common practice for China's National Bureau of Statistics for this time of year as the numbers can be lumpy around the Lunar New Year. The NBS is the government agency responsible for tracking Retail Sales, Industrial Production, and Fixed Asset Investment. The move will align more closely the monthly data provided between the two agencies. I see no other reason for the delay being officially mentioned. According to the Wall Street Journal, estimates for both imports and exports (year over year) are expected to have contracted significantly for China for the month of January.
Okay... not really "bad". Certainly toppy? Yeah, we'll go with that. On Thursday, U.S. large cap equity indices posted a fourth consecutive positive performance after having reestablished something close to trend coming out of last weekend. Trading volume, however did stop climbing. Leadership among sectors or industry groups leaned back toward internet, or software type names. The energy sector, after a one day reprieve, returned to the basement. Losers outnumbered winners by a slim margin at both the New York Stock Exchange and the Nasdaq Market Site, even if advancing volume at the Nasdaq remained higher than declining volume.
Away from equities, put/call ratios remained quite low across all three metrics (equities, indices, overall). However, that spread between three month and ten year yields for U.S. paper contracted to eight basis points on Thursday, and has contracted further overnight. I see it now at just +3bps as zero dark thirty melts into early morning for normal folks.
I am sure that by now, most of you have at least noticed the study released by MIT Sloan School of Management and State Street Advisors that analyzed four economic/market factors through the use of what is known in mathematics as Mahalanobis Distance. The outcome of the study was that there is now a 70% chance that the U.S. economy will go into recession within the next six months. The four factors analyzed were non-farm payrolls, industrial production, stock market returns, and the slope of the yield curve. Why even go there? The story came up in my appearance on The Claman Countdown (Fox Business Network) on Thursday afternoon, and I received enough interested correspondence afterwards to try to slow this down for the purposes of public cognizance.
Mahalanobis Distance is a complex statistical model (actually there is more than one formula), and some folks use a different formula known as Cook's Distance to determine influential outlier input in a set of predictor variables. I am not about to write up my own version of the Dead Sea Scrolls here, so this is my attempt to simplify the whole thing (especially for myself). Mathematics majors may want to turn their heads. In short, this method measures distances between two or more points in multi-variate space.
The accuracy of Mahalanobis has been questioned in several pieces over the years, so at least know that going in. The model is most useful where simple charting on an x,y (right angle) type axis is less helpful due to the doubtful expected correlation of the data in something beyond 2D space. I also know that an inverse value of the correlation matrix is needed to complete the calculations. I don't know how that was done here. Know that such factors as Consumer Confidence, the ability of central bankers to add or subtract liquidity almost upon necessity, and the fact that this is an election year were not part of the study, though all matter greatly.
Can This Study Be Correct?
To be honest, I do not see a recession coming this year. That does not mean that the authors of this study are not on to something. Treasury Secretary Steven Mnuchin told all of you on Thursday (also at Fox Business) to possibly expect less than 3% GDP this year due to the impact on the overall economy of the slowdown (especially of exports) at Boeing (BA) . Mnuchin went on to mention the virus in China as having potential for negative impact, but also stated that it is too early still to know the depth of significance.
I'll take it form there. Think of the U.S. economy as a box. What fills that box. In school, that space was refereed to as volume, not area. Remember, the data is beyond two dimensional. So our box, the economy, has a height, a width,and a depth. What fills this void known as volume, in real-life, not in geometry class? One might just point to everything on Table One on the BEA's regularly released GDP materials. One might simply refer to "economic activity", and for that I use the velocity of money... the speed of transaction. That is what fills our box, and as our box grows, due to the laws of size and scale... this volume must grow exponential faster than the box itself. Everyone still with me? Hello, hello, hello...
One more time. A box (the economy) that stands 2 feet x 2 feet x 2 feet has a volume of 8 cubic feet. A box of 3 feet x 3 feet x 3 feet has a volume of cubic 27 feet. 4x4x4=64. Got it? Now, if this volume is to be perceived as it is in my view as velocity, then in fact, the gang at MIT and State Street, though I might think that their timing could be off, might be getting warm, at least statistically. As I have stated, other factors such as confidence and conditions of liquidity do matter.
The fact is that the St. Louis Fed tracks the velocity of money, and it has been slowing. Use whatever measure you want for money supply, be it M1, M2, or MZM (zero maturity), all measures bearing different levels in broadness as to what is defined as money, and the velocity of money has been slowing in general since 1959, but steadily since Q4 2018. A whole year.
How can this study be correct on timing? Let me ask that a different way. What could bring the velocity of money to a screechingly slower pace? As it likely already has in China? This virus. That's what. Not to alarm, but sick people don't spend. Quarantined people don't spend. Scared people don't spend. They don't travel. They don't eat out. They don't seek out entertainment. Sometimes, as we have seen in mainland China, they don't go to work. They don't produce.
By the way, Federal Reserve Governor Randal Quarles also said on Thursday that it was too early to determine the negative economic impact of this virus. My guess is that even with a recent improvement in some economic data in both the U.S. and Europe, that central bankers will be forced to err on the side of accommodation. This puts, in my view, recessionary risk (as long as the virus stays largely contained) beyond the election. Of course... if Pandora's box (consumer level inflation) opens prematurely, or erratically (in unexpected places), then all bets are off.
Let's just hope the Lancet paper, which has largely been forgotten, but scared the stuffing out of folks a week ago, was overly cautious. Let's just hope.
While I will look to trim some risk on what are my more profitable positions shall I see that opportunity this day, I will also follow the adventures of Estee Lauder (EL) . This is a name that I looked to enter below the 50 day SMA and missed my pitch. I will also look to re-establish discounted longs in both Disney (DIS) and Amazon (AMZN) , as you know I have levels in mind, but the market has not given me my price this week (for these two). Just have to wait and see if this weakness in equity index futures on Friday morning develops into something more.
January Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 159K, Last 145K.
Average Hourly Earnings: Expecting 3.0% y/y, Last 2.9% y/y.
Average Weekly Hours: Expecting 34.3, Last 34.3 hrs.
Participation Rate: Expecting 63.1%, Last 63.2%.
Unemployment Rate: Expecting 3.5%, Last 3.5%.
Underemployment Rate: Expecting 6.7%, Last 6.7%.
Other Economics (All Times Eastern)
10:00 - Wholesale Inventories (Dec): Expecting 0.1% m/m, Last -0.1% m/m.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 675.
15:00 - Consumer Credit (Weekly): Last $12.51B.
The Fed (All Times Eastern)
No public events scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)