One week ends, another begins. A strong week in terms of equity index performance strengthened ahead of, as well as in response to, the virtual Jackson Hole address made by Fed Chair Jerome Powell. The current week will yet again be a week of anticipation as traders await this Friday's BLS survey data for August employment. Capital flowed into all corners of the equity space, however, the separation in this performance clearly favored more cyclical groups or groups more dependent upon an economy that would still be in the growth phase of the business cycle.
Small-caps outperformed mid-caps and mid-caps outperformed large-caps. Cyclical sectors outperformed growth-sectors and growth-sectors outperformed defensive sectors. At the headline level, the transports outperformed the Nasdaq indices and the Nasdaq indices outperformed the S&P 500 as well as the Dow Industrials. Yet, all who did anything but play defense did well.
Both the Nasdaq Composite and S&P 500 closed Friday in record territory, albeit on light trading volume. Lack of conviction? Vacation season's last gasps? Could be a bit of both. Trading volume did increase on Friday from Thursday at both of New York's primary equity exchanges on overwhelmingly positive breadth. That said, aggregate trading volume for names constituent to the S&P 500 have still not kissed their 50 day trading volume SMA since July 30th. For the Nasdaq Composite, the streak goes all the way back to July 20th. That seems kind of incredible, but I did check out last year's trading patterns. Very similar. Going into the last week of August 2020, neither the S&P 500 nor Nasdaq Composite had hit their 50 day trading volume SMA's in more than a month. Both indices would suffer a very nasty September contraction in 2020 that began on September 2nd and lasted for about three weeks. Just an FYI.
While all cyclical equity sectors did well, last week's push into more economically sensitive equities was indeed led by the energy sector. The sector select SPDR Energy ETF (XLE) stole the show last week, gaining 7.45% over the five day period, more than doubling the weekly increase made (+3.48%) by the second place finisher, the select sector Financials SPDR ETF (XLF) , that benefitted itself from volatility in a Treasury yield curve that whipped around over five days, like the tail of a hungry gator trying to hold onto something bigger than itself.
Energy shares reacted last week to more than 90% of all Gulf of Mexico oil production shutting down ahead of Hurricane Ida. The Gulf is home to 17% of all U.S. oil production as well as 15% of all U.S. refining capacity, so there is a chance that some or all of you, who live nowhere near the part of the country impacted by the storm will still pay more at the pump this week. While New Orleans and the surrounding areas remain dark, oil, natural gas, and gasoline futures seem to have peaked on Sunday night, with oil futures coming in just a bit quicker than either natty gas or gasoline very early on Monday morning, Let's not forget that OPEC holds both the cartel's official semi-annual meeting as well as their monthly meeting with OPEC allied (non-cartel member) producers this Wednesday (Sept 1st). The meetings come as OPEC has been increasing projected supplies, and as the Delta variant of the SARS-CoV-2 virus has been slowing global demand along with IEA expectations.
It is just an opinion, but I think I can say that it is an educated opinion. Fed Chair Jerome Powell's address on Friday was indeed one of the best speeches I have heard delivered by any Fed official for as long as I have been listening to Fed officials, which is a long time. Powell did precisely what had been expected here in this space, and did so with the agility of a well conditioned athlete. What Powell did so well was, with certainty, inform the marketplace of where he wants to go... which is gradually reducing (tapering) the Fed's monthly asset purchase program to a point where the central bank's balance sheet is not being added to on a regular basis.
Powell mentioned the Fed's two mandates, managing inflation (price stability), as well as working toward maximum sustainable employment. The Chair feels that not only has the Fed probably accomplished it's inflation goals, but that inflation has been a bit hotter than expected. He also reinforced his expectation that the unexpectedly hot consumer level inflation is more focused on what will prove to be transitory parts of the economy where COVID has impacted supply chains more.
The Fed Chair made sure to clearly state that the work is far from done whereas labor markets are concerned. He cites the pandemic as a primary risk keeping large swaths of the population outside of the labor force. Those risks only increase this week as in most states, children return to in-person schooling.
Then there are the 11 million or so individuals who will, by this coming (Labor Day) weekend, receive their final "paycheck" from the Federal government including about 1.5 million still receiving state level bennies who will see a $300 weekly pay cut. The rest go from some level of sustenance to none.
One thing this does, for macro-watchers, is make this Friday's August report on the Employment Situation nearly meaningless. That's right... meaningless. You will be able to figure out which talking heads have their heads in the sand this week, by how much importance they place on a monthly employment report that measures employment the month before 11 million persons are forced to look for work. For that reason, the September and October Employment reports, released early in October and November, are the two that will measure how well the U.S. labor market has absorbed these 11 million individuals beefing up supplies of available labor and how negative that impact is upon wage growth.
For small to medium sized businesses who have either been unable to find labor, or find labor at their price... this is the opportunity that they have been waiting for. At Market Recon, we are still expecting an actual tapering of asset purchases to start in December as long as the Delta variant is indeed leveling off, with more jawboning as Autumn drags on. A definitive announcement is to be made by the November 3rd statement at the earliest, but that date is risky as November 5th is October "Jobs Day".
On That Note...
Bloomberg News reported on Sunday just how stark the negative impact of the Delta variant of COVID has been on parts of the economy that do better as folks return to behavior that was once considered normal.
Bloomberg cites that last Tuesday, 1.47 million travelers took flight according to the TSA. The seven day average has declined from roughly 2.05 million a month ago to 1.76 million a day in late August. The piece at Bloomberg also notes that seating at U.S. restaurants, according to OpenTable, has of late been running at a 10% to 11% deficit to 2019 levels, after having already closed the gap to 5% to 6% by late July. Hotel occupancy is another Delta casualty.
According to STR, a firm that tracks this data, average room rates (prices) have declined for three consecutive weeks, while occupancy itself has declined for four. As a matter of fact, of the 25 largest U.S. markets exactly zero saw increased occupancy for the week ended August 21st, compared to the same week in 2019.
That Leads To...
You may or may not have noticed on Friday that President Biden spoke with Israeli Prime Minister Naftali Bennett. The president stated, "We're considering the advice you've given that we should (booster COVID shots) start earlier. Should it be a little as five months, and that's being discussed."
Remember when the Biden administration had stated that "booster" shots would (assuming regulatory approval) be offered to the fully vaccinated eight months after their second dose of either the Moderna (MRNA) or Pfizer (PFE) COVID vaccine beginning on September 20th? Then we heard six months. Now, as per this presidential conversation, we hear five months, which is what Israel and others are now doing.
Pfizer had reported last week that a third shot provides a threefold increase in neutralizing antibodies, according to Reuters. Common side effects of the booster are the same as those experienced, according to the story, with the second dose of what is still considered (for the moment?) to be a two shot regimen.
The U.S. military launched a drone attack on Sunday against a vehicle posing an imminent threat to the airport at Kabul. At U.S. Central Command, Captain Bill Urban stated, "Significant secondary explosions from the vehicle indicated the presence of a substantial amount of explosive material." There are unconfirmed reports at the time of this piece being written that there may have been civilian casualties.
Approximately 2K more individuals were evacuated from Afghanistan by U.S. military forces on Sunday, bringing the total evacuated by the U.S. alone since August 14th up to more than 115K. It is still estimated that 300 American citizens remain in the country.
No one needs to be told that last Thursday, terrorists launched an attack at an airport security chokepoint that took the lives of more than 150 human beings including those of 13 U.S. service persons. What investors want to be fully cognizant of is that the most effective way to combat terrorists, specially as the number of boots on the ground dwindles, is going to be through the use of unmanned aircraft or drones, and nobody (in my humble opinion) does drones better than Kratos Defense (KTOS) .
Early in August, Kratos Unmanned Aircraft Aerial Systems received a $338 million maintenance contract from the U.S. Air Force for work on existing vehicles. On August 17th, Kratos announced that the firm remains committed to be ready for a 2023 Skyborg Vanguard Program one day after the U.S. Air Force updated said program. Ever hear of "swarm warfare"? You will. Think of a swarm of Kratos XQ-58A Valkyries flying escort for a pilot driven Lockheed Martin (LMT) F-35 fighter. Yeah, that's what I'm talking about. How about an M-1 Abrams with a swarm of unmanned mini-tanks on the flanks? Yeah, get some. Okay, that part was just me, but a boy can dream, can't he? You bet your tail, somebody's already working on that one.
Readers will note that as it appeared that the Biden presidency might ring in a new era of peace, names such as KTOS had a pretty tough year (to date). As the withdrawal from Afghanistan has been executed at a level far below what any military mind would even consider worst case comprehensible, the likelihood has increased that global adversaries will try the U.S., and the U.S. will likely have to respond from afar in many cases, or at least be prepared to.
KTOS obviously made a turn for the better on the Air Force update, and picked up momentum as U.S. reliance upon drone warfare increased last week in response to the deadly attack at the airport. I won't get into it now, but Kratos is also a major player in the development of Hypersonic weapons, where until recently the U.S. had been well behind both the Russian and Chinese armed forces. As these weapons are currently indefensible, closing that gap must be a priority second to nothing else the federal government spends money upon. Nothing else.
Traders will see that the stock completely ignored a "death cross" last week, and retook its 21 day EMA, as the daily MACD finally showed some life with a bullish crossover of the 26 day EMA by the 12 day EMA. The Full Stochastics Oscillator says that this stock is close to being technically overbought, while the RSI (Relative Strength) says the stock could have ways to go. I think it has a ways to go.
Upgraded from "Buy" to "Strong Buy"
Price Target: $31
Pivot: $26 (50 day SMA / 200 day SMA)
Panic: $20 (new low)
Economics (All Times Eastern)
10:00 - Pending Home Sales (July): Expecting 0.4% m/m, Last -1.9% m/m.
10:00 - Dallas Fed Manufacturing Index (Aug): Expecting 25.0, Last 27.3.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CTLT) (1.11)