A pet peeve of mine. People who change lanes or make turns without using their blinkers. The unpredictable movements made by these drivers has been exacerbated by the fact that these same folks often drive with one eye on the road, and one on their cell phones. You've seen it a million times now. "What the heck is this guy doing?" Then you realize that they are reading text messages while driving. They think they compensate by moving more slowly, as they in reality... move more erratically. My small point would be that in all things, and on all days... we just don't know.
On Sunday, basketball legend Kobe Bryant died with one of his children and several others in a helicopter accident in California. I don't really follow the NBA anymore, though I did for a while when one of my sons was into that league as a teenager. Personally, this doesn't impact me in the way it obviously does impact many folks based on my Facebook (FB) feed. I may not have watched Bryant play as often as many of my old high school chums must have, but I most certainly have been picked up in one place and put down in another by helicopters often enough, particularly in my youth. There was indeed one trip I will never forget. I can imagine the terror of being in a helicopter that feels like its going down. I can not ever imagine going through that with one's child. Absolutely awful. Again... on all days, we just don't know.
It becomes impossible to mention the unknowable without also mentioning the spread of the coronavirus that saw its start in the Chinese city of Wuhan as a major news story, and now, also a market story. So, let's try to understand the threat to our immediate front, as understanding anything is always the first step toward adapting and overcoming whatever obstacles present.
Like lightning. It all changed. I did an interview on Thursday afternoon with Katherine Ross of TheStreet, where I was asked what traders and investors had to look forward to this week. While I did mention this virus, it was just barely a mention at all. My focus was upon the Fed policy decision this Wednesday, was upon the plethora of highly significant macro-economic data-points that include Q4 economic growth, as well on data on consumer level inflation, and was upon the deluge of high profile quarterly earnings releases as this would be the season's most active week.
Late last week, in this space, I did mention that our broader equity indices were showing signs of cresting for a third time since the rally went somewhat parabolic after the Federal Reserve bank aggressively addressed short-term liquidity concerns last October. Equity performance on Friday became rather heavy, and ended up forcing a week of contraction on the S&P 500, the Nasdaq Composite, the blue chips, the small caps, and the transports. Oh, especially the transports.
The worm, one must remember, turns on its own schedule. Not ours. As we work our way through the dark hours, global markets as well as domestic equity index futures, and industrial commodities have come under increased risk-off pressure. The flow of capital appears to be aggressively seeking refuge in the perceived safety of selected sovereign debt products (including U.S. Treasuries), selected currencies (including the U.S. dollar), gold and get this... Bitcoin. That's not crazy. We have seen Bitcoin strengthen in the past when the Chinese yuan (or any local currency) significantly weakens.
In short, if you thought that no story could be bigger for markets this week than the Fed, GDP, Core PCE, and earnings releases by Apple (AAPL) , Lockheed Martin (LMT) , Facebook, Microsoft (MSFT) , Telsa (TSLA) , Coca-Cola (KO) , Amazon (AMZN) , as well as several oil majors all combined... then, you thought wrong. I know, Apple is the single most important earnings release of the season. You still thought wrong.
Understand This (Important)
What this means, take a breath, is simple. Relevant information is suddenly less important, forward looking information is now less reliable. At a minimum, the Chinese economy will take a hit. By extension, so will everyone else. Are we talking global, or domestic economic recession? Now, I think such talk is premature. That said, our (the economic community) track record in recognizing such threats at their very onset would have to be graded as somewhere between terrible and extremely terrible. We're not good at this.
What I see beyond the masked faces,and the sheer misery of having to grab the metal pole on a crowded subway train, is this... Chinese President Xi Jinping, not a man given to exaggerate, has referred to the spread of this coronavirus in China as "a grave situation." We do know that on Saturday, the first day of the Lunar New Year, that in China, domestic air travel showed a 41.6% year over year decline. Rail travel? -41.5% y/y. Road travel? -25% y/y.
The impact on U.S. firms? Disney's (DIS) Shanghai Disneyland remains closed. Starbucks (SBUX) has shut down all locations in Hubei province, while the hotel chains... Marriott (MAR) , Hilton (HLT) , and Hyatt (H) have all started waiving cancellation fees in China.
On the demand side, not only have 3M (MMM) and Honeywell (HON) boosted production of protective head gear, but DuPont (DD) has made an effort to ramp up supplies of protective body suits. As for treatment, China's National Health Commission has stated that its latest treatment involves use of a combination of Lopinavir and Ritonavir under the Keletra brand name, which in an AbbVie (ABBV) product. This is a medication intended for use in the fight against HIV and is now under clinical trial for the treatment of this particular virus, while China's Center for Disease Control and Prevention starts the work on developing a vaccine. China, by the way, has lengthened their annual spring festival as a response the spread of the virus in order to keep children out of school, and as many folks as possible out of work for the time being.
I am tracking a website that continually updates the most current information available. As of this writing, there have been 2,794 confirmed cases of this coronavirus, 2,737 of those are in mainland China, five are in the U.S. Though the numbers constantly change, it appears that at least at this time, that there are 80 reported deaths due to the ailment, and that 54 people have fully recovered.
What To Watch (Important Part II)
There are two things that investors need to focus on in addition to not getting sick. First, the U.S. 10 year note. I beat you over the head with this on a regular basis because this is the single most important item for us to follow. This morning, U.S 10 year paper gives up just 1.61%. The spread between the U.S. 3 month T-Bill and this U.S. 10 year note (the spread that matters) is down to roughly eight basis points. Eight !! Got me? They will sell the Financial sector on this. Hard.
What this means, as that spread gets closer and closer to inversion, is that more and more and more investors will be provoked to take profits where they have them, or where they are economically most sensitive. That means that most likely, the airlines, the casinos, the hotels, and many retailers get hit in the teeth again. Maybe harder.
Something you may not have noticed... last week, the Federal Reserve in its weekly update showed the balance sheet at $4,145,912 in total assets. So what, Sarge, we've got bigger fish to fry. No, you don't, sports fans, and I'll tell you why. The markets have been on fire since October, right? Because the Fed turned on the liquidity machine, right? Well, gang, that balance sheet number is down almost $30 billion from the week prior. Huh? I thought the Fed was committed to purchasing $60 billion in T-Bills per month? They are for now, but this makes it clear that the Fed is trying at a minimum to get itself out of the short-term repo business, or trying to get its ducks in a row ahead of tax season. Know what else? The Fed's balance sheet has gone up and down all month, and in fact... has not been this small since the week ended December 18th. Don't fight the Fed? Sellers might not be.
Sell 'Em Now?
If you watched the Claman Countdown on Fox Business last Thursday, you know that I started targeting certain longs for haircuts on Wednesday based on the behavior of the yield curve in response to this ailment. The balance sheet number had not yet been released at that time. Although, that release did force my hand further on Friday, as well as provoke me to cover nearly every put that I had written across my book (thank goodness), it appears now that I probably should have been even more aggressive.
So, am I a seller this morning? Although my thinking does evolve in real time, I don't like to chase and that includes chasing the downside. I think I am probably most likely to watch the open, and if something that looks like an opportunity shows up as a significant enough discount, either buy back what I sold last week, or get involved in entry level size in something I should have been involved with on the way up. One thought... though, they'll get hit with everything else this morning, growth and bond proxies have beaten the heck out of value in the past whenever the U.S. 10 year pays diddly. One more thought... if Fed Chair Jerome Powell was going to talk about tapering that $60 billion per month purchase program, current events may have just altered somewhat... his presentation.
Economics (All Times Eastern)
10:00 - New Home Sales (Dec): Expecting 728K, Last 719K SAAR.
10:30 - Dallas Fed Manufacturing Index (Jan): Expecting -3.1, Last -3.2.
The Fed (All Times Eastern)
Today's Earnings Highlights (Consensus EPS Expectations)
(Facebook, Apple, Microsoft, Amazon, Disney, Starbucks, Honeywell and AbbVie are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)