Shake It Out
Even if it's cold. Every night. When you don't want to. You sleep outside, you take off your top and your boots. Why? Because it feels so good to put that stuff back on at zero dark thirty when there is a bit of a frost in the air. Before those items go back on... even if it's cold, even if it's raining, you shake them out. Why? Because critters like shelter as much as we do. Spiders. Scorpions. Better to not find a new friend inside of one's shirt after moving around. Shake it out.
Let's shake out the marketplace. Find out just what exists within the nooks and crannies of our world. The markets were weak on Thursday morning. Very weak. Again. 10 am ET. The ISM Non-Manufacturing survey for September. Still expansionary, but growing at a far slower pace than expected. We look within the numbers. One of the softest areas in this service sector survey was in Employment, at 50.4... just barely moving. To review, within Tuesday's horrendous ISM Manufacturing survey for the same month, the employment component hit the tape at 46.3, again one of the weakest slices of the report. What does this mean for labor markets? What does it mean for this morning's (Friday) numbers for job creation? Heck... where does this leave the consumer driven economy? Spiders and scorpions. Still better than snakes.
Size It Up
Now, we can actually dissect just what happened, and take a stab at interpreting what we saw. We know that equity markets were mired in a third day of heavy selling just prior to that ISM release. Both the Nasdaq Composite and Dow Jones Industrial Average (not my preferred measure of market activity due to it's narrow scope) had pierced their respective 200 day simple moving averages. (These, along with 50 day SMAs will provoke activity more so than other averages) Just as this crucial level came into the spotlight, the disappointing ISM numbers crossed.
Algorithms at that time, in Chicago, took the probability for a 25 basis point reduction in the Fed Funds Rate at the next policy meeting (October 30th) up over 90%, and the probability for another rate cut on December 11th over 50%. This forced a similar algorithmic reaction in equities traded in New York and elsewhere. Sarge, it was so quick. Indeed it was. Remember gang, these trades are measured in micro-seconds because milliseconds are now considered too slow and have been for years now. Remember clocking buy and sell tickets on clocks that only had the hour followed by minutes (no seconds)? Yeah. That was another epoch.
Now trading volume declined fairly significantly at both of New York's major exchanges on Thursday from Wednesday. In fact volume across S&P 500 constituent stocks landed 9% below the 50 day SMA for trading volume across that index. Block trades fell drastically as well. What does this mean to me? Simple. The "up" day was nice. There was not enough conviction behind it. The mindset among portfolio managers is likely one geared toward distribution as opposed to accumulation. Then again this is "Jobs Day", and all bets are off until those numbers hit the tape. Is bad good? Is good bad? Hope not, but that is how markets reliant upon algorithmic speed as input for use in the determination of price discovery as output tend to read these things.
Ever experience a rainstorm in a rain forest. There are different types of storms. There's the gentle rain that you don't notice because you're already soaked head to toe due to humidity. That kind of rain just weighs down your gear. Then there's the "whoa, what is that?" type of storm. The animals shut the heck up. In fact, they disappear. Then the winds, and a heavy rain that somehow finds different ways to pour through the jungle canopy, forming streams with rapids that were not there minutes ago, but may have existed on days like this for a thousand years before you got there.
The animals disappeared late on Thursday. After both the ISM Manufacturing and Non-Manufacturing surveys suggested weakness in September employment that makes us wonder about impact on the BLS data, there were some reductions to headcount announced at well known, NYSE listed public companies.
First came Kroger (KR) . The chain grocer made public a plan to reassess it's structure at the middle management level, and that the firm planned "hundreds" of layoffs nationwide. Then, HP Inc (HPQ) , and pans for a major restructuring that will result in the elimination of between 7K and 9K positions across that firm. At 8K, that would be 14.5% of the entire company.
Now, we must ask ourselves. There is always a multiplier effect when trends in labor markets turn. We do not yet know if this is the case. Isolated occurrences? Perhaps. Tip of the spear? Could be. Let's hope not. Consumer confidence is already waning.
This Must Be Understood
Year to date, not bad. The Nasdaq Composite is 18% higher, the S&P 500 16%. The far more domestic in nature Russell 2000, comprised of small cap firms, is up just 10%. Year to date is deceptive though due to the sharp late 2018 selloff that turned just as sharply higher just ahead of the new year. Lets go back one year to the day instead. This is about to get rough, kids.
Over the past one year, October 3rd to October 3rd... the S&P 500 is down small. The Nasdaq Composite is roughly 2% lower. The small caps. Sit down. The Russell 2000 is now 11% lower over a full year. At nearly full employment (they say), the makers of automobiles are relying upon seven year loans in order to push inventory, and that's with a crippling conflict with organized labor at General Motors (GM) in the equation. We already know that confidence has softened. Can that lead to economic contraction, even with GDP still hanging onto 2% growth over the most recently reported quarter?
Does a trade deal with China make it all go away? No. That will help in the short to medium term, but many lines of assembly and distribution have already been adjusted. Corporations that have made the effort to find cheaper supply lines are not likely to come back. Does Europe rebound as Brexit barrels on? Well, Mario Draghi is prepared to wind up the money machine and throw it in Christine Lagarde's lap on the way out. That should push at least some foreign capital into U.S. markets starting November. That will help stretch valuation metrics, but the economy? There is tale being told there.
Trouble With The Curve
The spread between what the U.S. two year note and the U.S. 10 year note yield has expanded a bit in recent weeks, and now stands at +15 basis points (bps). Some folks, who do not follow Treasury yields all that closely, see this as healthy, and it is not unhealthy. There is more to the curve however. Stay with me. The still inverted spread between the 3 month T-Bill/10 year note has been going the wrong way, and now stands at -16bps. That is clearly unhealthy. I'm not done. You may need to staple on your thinking cap.
The spread (I may be the only kook watching this) between U.S. 6 month T-Bills and U.S. two year notes is inverted and that inversion has been flirting with expansion. The 6 months now pays 1.66%, the two year 1.39% (This varies throughout the day). Does this tell us that the bond market is trying to price in the probability of an actual recession somewhere between six months and 24 months out? Seriously, it might be. Now... what does it mean that the two year note is mildly inverted right through the five year note, and any kind of discount appears to be ever so slightly priced in at the seven year note? In all honesty, I hope this is a worst case scenario, but Treasuries are betting on this recession (at six months to two years out) to be followed by three to five years of almost no growth.
Got your attention? Good. I'm still net long equities. I'm not retreating to the hills. I also think that one needs to take a diversified approach to not just wealth preservation, but the preservation of one's standard of living. Diversified. Not just across sectors, but across asset classes to include assets off the grid. Expect the government to protect your family? Have you seen these guys in action? That's your job.
Row, Row, Row Your Boat
You thought the streaming wars were already underway? It appears that perhaps, this is just round one. If that. We all know that the Walt Disney Co. (DIS) launches Disney Plus this November 12th. The new service will launch ad free on Apple (AAPL) TV, Apple's iOS mobile devices, Android based mobile devices, Chromecast, Roku (ROKU) , Sony's (SNE) PS4, and Microsoft's (MSFT) Xbox One.
What's still missing? That's easy. Amazon's (AMZN) Fire TV. Amazon, a direct competitor in the streaming space through Prime membership, just happens to be via Fire TV... the planet's second largest home for streaming entertainment applications. Amazon wants a piece. What? Amazon wants the right to sell a percentage of available advertising space across Disney's apps.
But Sarge... you just told us that Disney Pus will launch ad free? That's true, but there is more than one way to get blood from a stone. Disney runs plenty of other streaming apps. ABC, The Disney Channel, ESPN Plus, Hulu... it goes on, and Amazon wants a piece. Will there be a settlement ahead of November 12th? Disney needs this thing to go off without a hitch. A settlement would not shock.
On that note, Apple TV Plus launches ahead of Disney Plus on November 1st for just $4.99 a month. The already mentioned Disney Plus (If un-bundled from ESPN Plus and Hulu) will run at $6.99 a month. The pressure is on for the reigning champion of streaming television, Netflix (NFLX) . The reigning champ that is perhaps the most vulnerable, as the players mentioned above all run multiple businesses that provide massive cash flows. That means that should those firms so choose, that they can play this game at a loss for a while, if that makes sense. You can also place AT&T (T) in this grouping though we do not really know fully Elliott Management's intent as far as noncore business focus for that firm is concerned.
Investors may have noticed the opinion laid out on Thursday by Needham analyst Laura Martin. Martin clearly states "At $9 to $16 per month (current rates for Netflix), Netflix will lose 5M to 10M of it's 60M U.S. subscribers in 2020, unless it offers a cheaper service." Martin also suggests a $6 price point for the Netflix service, subsidized with advertising as a way to best avert "larger cash losses" that would damage the balance sheet. The coming battles across this space may be more entertaining for investors than the entertainment available on these services.
Where does one start buying back Disney? Is it time yet? I'm still long 25% of my original size, so this is really my homework.
You kids see the 200 day SMA at $126.34? You kids see the 50% retracement level at $126.82. That could be a sweet spot. These shares hit a low of $127.54 on Thursday, so we are in the neighborhood. My evil plan is to by something (maybe a 12.5% slice) back in that area. Why not more? Broadly the market still has a lot to digest, including both political and geopolitical risk. You see, should this area not hold... then the gap in April will form a technical perspective, likely have to fill. That means sub $122 prices, so if that is what actually happens, I want to leave plenty of dry powder available for such use. FYI, a trader so inclined can still sell DIS November 8th $122 puts for more than $2. The firm is set to report on November 7th.
One More Thing
Don't forget, after the jobs numbers post today, the clown car pulls over the trap door, and six Fed speakers pour out. This will include Fed Chair Jerome Powell who speaks on the Fed's twin mandate at 2 pm ET.
September Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 142K, Last 130K.
Average Hourly Earnings: Expecting 3.2% y/y, Last 3.2% y/y.
Average Weekly Hours: Expecting 34.4, Last 34.4.
Participation Rate: Expecting 63.1%, Last 63.2%.
Unemployment Rate: Expecting 3.7%, Last 3.7%.
Underemployment Rate: Last 7.2%.
Other Economics (All Times Eastern)
08:30 - Balance of Trade (Aug): Expecting $-54.7B, Last $-54.0B.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 713.
The Fed (All Times Eastern)
08:30 - Speaker: Boston Fed Pres. Eric Rosengren.
10:25 - Speaker: Atlanta Fed Pres. Raphael Bostic.
14:00 - Speaker: Federal Reserve Chair Jerome Powell.
14:10 - Speaker: Reserve Board Gov. Lael Brainard.
16:00 - Speaker: Reserve Board Gov. Randal Quarles.
16:00 - Speaker: Reserve Board Gov. Richard Clarida
Today's Earnings Highlights (Consensus EPS Expectations)
There are no significant quarterly earnings scheduled for release this day.