Echoes of Time
Awake well before the alarm, always set, usually unnecessary. Tick, tick, tick, forever, tick, tick.... My hand reaches out into darkness. Nothing. Is anyone even there? Just me. Again. I am here to protect. I will. Forever. If that is what you need. On this night, for as long as I shall breathe, we shall find a way. Always, there shall be a way. Not just the strong, but all of those bound by duty, by honor, and by virtue..... to defend. Some one else. Those who count on you this night shall never suffer fear nor concern. You do that for them. Evil shall not pass. On this night, as on all others, we stand in the darkness... we are ever at the ready. Fear is but for the wicked.
We Have Been Waiting
Earnings are in the books, mostly. Evident across corporate America has been solid execution. The comparisons now become that much tougher. How priced in is that? One would think that by now that this change is well understood. Domestic U.S. equities had a solid week (three months) last week (this year). The tech sector, led the Nasdaq Composite, which in turn led the major indices. 200 day simple moving averages were taken, and not only held but never really retested in earnest. News that trade talks between the U.S. and China would be delayed seemed to have no impact. Nor did rumors of solid progress on that front. Brexit? Most Americans see this as a trade, and not as real life unless family members are impacted. The market mood is currently under the control of the yield curve and the central banks. Shocker.
So Be It
How significant might it be that the U.S. 10 year Treasury Note broke through the 2.60% resistance level last week? The real battle, I have felt would really come at 2.55%, FYI. That line in the sand still stands. The parabolic move to the upside for equity markets has regained it's footing. Equity markets love low yields in theory. There was a time when debt markets moved to counter moves in equity markets and vice versa. There is a point where as debt markets become so highly valued versus face that money is then forced into riskier assets. That is what I mean when I refer to TINA (There is no alternative). No, here is the U.S. we are not quite in a TINA mindset as of yet, but the thought is there. As earthly central bankers remains rooted to ZIRP (Zero Interest Rate Policy), and near-ZIRP, what are global investors to do?
European equity markets are hot. Chinese markets are roaring. Other emerging markets are off to a great start in 2019. Here, in the U.S., that story is the same, as the Federal Reserve made a U-turn just after that absurd rate hike on December 19th. Perhaps it was that one extra rate hike that (is still working it's way into the economy) forced the central bank into a more sentient understanding of what they were doing to the economy in terms of the pace of removing necessary liquidity. It is this week, Wednesday to be exact, that Fed watchers and investors alike have been waiting on.
You Rock and Rollers
Maybe you can't turn and face the strange (maybe you can), but you can watch capital flows, and those are red hot. Those flows are turning toward equities globally as the trajectory for monetary policy takes a slower, easier path in a more coordinated way. As global economies slow, these flows become more U.S.-centric. Least smelly shirt in the hamper. Central bank in the best position to do something other than lend more, buy more, and then kneel to pray.
Changes. The Fed will not touch short-term interest rates this week. That said, there will be at least two places that investors need to keep focus upon this Wednesday. The FOMC will have to address the "Quantitative Tightening" program. Obviously the ongoing $50 billion per month pace put too much stress upon the economy. It is my judgment that the Fed will announce some kind of a schedule for tapering this roll-off down to zero. The Fed's balance sheet at 19% of GDP, is still in my opinion too high. I would prefer to hear that the central bank will reduce the pace of tightening without promising to end the program sometime later this year. Scuttlebutt has it that autumn 2019 will be the target. Of course, that would be the Fed once again herding themselves and all of their ideas in one direction without regard to perhaps using a little finesse in the application of policy. Am I ever all in or all out? Are you? Nor should the policy makers be.
In addition, the economic forecasts will be in focus, as the pace of domestic growth has certainly taken a powder through the first quarter. My guess would be that a lot of dots will have moved in dovish directions. The dot plot, as we all know, is foolishness. Even our central bankers likely understand this, yet the practice goes on. The media still pays homage. We do not need dots to tell us that even with the mandates of price stability and maximum employment largely met, there is no impetus to raise rates in the offing. In fact, futures markets trading in Chicago have been far more effective over recent years in projecting short term rates than has the FOMC, as they are far too data (and maybe agenda?) dependent. Traders, far from perfect, are always anticipatory. That's the way money is made, thus making that group so much more effective.
Just so you know, futures markets are now pricing in a 73% probability that the FOMC will not touch the Fed Funds Rate this year. In cascading order, current probabilities are for a 23% chance that there will be one rate cut, a 3% chance that there will be two, and a fractional chance that there will be three. Odds of a rate hike? Have you met Senator Blutarsy?
For those on "recession watch, no the U.S. 2yr/10 yr spread has still not inverted, though that spread traded at less than 15bps on Friday. That said, the two year still gives up more than the five year does. Heck, T-bills yield more than the five year. Basically, that means that no, recession is not likely imminent, but that we still walk the tightrope all these years later. Paltry economic growth is itself deflationary. A deflationary environment keeps central banks from getting more aggressive. Fiscal policy? Do we even go there today? The debt super-cycle. 4-eva.
I would expect some tough sledding over the next day or two ahead of the FOMC policy meeting. Weakness on light volume has actually become quite the norm over the last 20 or so years, going back to what we used to call "triple witch." I moved some dough around in preparation.
- Boeing (BA) , and Broadcom (AVGO) , both offered fantastic day trading opportunities on Friday. Twitter followers know this. I come in flat both. That said, I would expect the Boeing news to continue to evolve. This may be a well we go back to. As for Broadcom, what this means exactly for the rest of the semiconductor space, I don't know, but it's probably pretty good for the hardware crowd.
- That said, I took my profits and went home flat Intel (INTC) late Friday afternoon. First time that I am flat that name in a very long time. I do like the name moving forward. I do like the aggression that CEO Robert Swan has shown in both hiring and in design. I also believe that there will be a chance to reenter more cheaply, so I extracted my capital. That said, I left some Micron (MU) on for earnings this Wednesday night as that name has softened a tad of late.
- Across Tech, I took some Zuora (ZUO) off ahead of earnings. Still my favorite. Still crushing the broader indices for the year at +29% ytd. Just discipline. I gave this name to you as my stock of the year, and I meant it. Holding at 75% of what I consider a full position. I will either add those shares sold back on ahead of the numbers this Thursday, or after. Depends on when the wiggle comes. While we're on tech, I also took my profit in Alphabet (GOOGL) and vacated the name. Just don't need the headache. Yes, I still listen to Marine generals.
Economics (All Times Eastern):
10:00 - NAHB Housing Market Index (March): Expecting 63, Last 62.
Today's Earnings Highlights (Consensus EPS Expectations):
Before the Open: (LL) (.16)
After the Close: (SYNH) (.82)
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