I was inside looking outside
The millions of faces
But still I'm alone
Waiting, hours of waiting
Paying a penance
I was longing for home
- Jones. McDonald, Gramm (Foreigner), 1978
Arms Wide Open
Stretching one arm out into the unknown. Into the mirror. Not that mirror. More like a window into something different. A spatial and temporal dimension not void of human interference, but a space and time created solely through such welcome or unwelcome (whom among us is bold enough or bright enough to say?) interaction.
What comes back after venturing in some way to the unknowable? Too hot or too cold to the touch? Either way, certainly uncomfortable. The marketplace. The point of sale. The arbiter of what should be the timing of contact between demand and supply for anything and everything. The beauty. The purity. The ugliness of all that is skewed by imperfection, potentially leading one and all to adore the dishonesty of artificial impact. Ahh, so now you see. For what is left after what we all think we know is stripped bare?
Arms wide open, willing to embrace. Fooling. Fooling not one. Foolish are all. You think you know? You know more than yesterday. That is all. The path is dangerous. The path is dark. The path is possible. The path is necessary. There is but one method. There is but one way. Arms wide open. Mind opens wider still. Willing to learn. Arrogance no more.
Inputs abound. Outputs not so much. Equities in general sold off mildly on light volume on Monday. Both the Dow Industrials and S&P 500 gave up little ground. The Nasdaq Composite managed a tiny increase. The guts of economic glory... the Dow Transports and the small to mid-cap indices were slapped around more seriously than were large-caps.
Defensive sectors led performance on a day where trading volume decreased from the prior trading session at both the New York Stock Exchange as well as the Nasdaq Market Site. By day's end, aggregate trading volume stood 9% below the trading volume 50 day simple moving average for those names constituent to the Nasdaq Composite. This metric has failed to reach that mark for each and every session dating back to July 20th. Aggregate trading volume for constituent members of the S&P 500 did manage to hit the 50 day trading volume simple moving average as recently as July 30th. That said, S&P 500 aggregate trading volume has ended the day lower than the day prior for four consecutive sessions, and on Monday landed an incredible 25% short of that 50 day line.
In other words... Nobody cares. Nobody cares, Sarge? You mean like how nobody cared about the Olympics this year? No, silly. That's extreme. People care more than that. It's more like people just don't know. Real Money contributor Helene Meisler calls it "the chopfest." I kind of think of it as the chop at the top. We hear so much about how there will be an everything rally once the Delta variant peaks. We have not already had "an everything" rally? You think nothing has been pulled forward? Foolish mortal.
Black cauldron over a campfire. Let's toss in highly valued equities. That's a good start. Add some consumer level inflation. Add some more. Some more. Okay. Now, let's screw with policy. Create a wall of liquidity and throw it in the pot. Create some more, and some more. Pretend to prepare to pull back on monetary policy. We'll taper, and then raise rates, you know... to normalize, even as that wall of liquidity only threatens to grow even larger. Are we going to have to tackle inflation?
Then how will we support a federal government that never stops demanding more, and more, and more. Taxes. That will boost the economy. We'll only tax businesses and the rich. That will support job and wage growth. Right? Okay, we'll tax the almost wealthy, the not so almost wealthy, and then anyone with a job or savings. Who knew this was so easy? Deficit spending. Defi-what? This is free. We don't pay. The guy behind me will cover this. Look how rich he is.
It's so easy. We can tell these folks anything. They already think that job creation was awful when we added almost a million jobs as in May. They already think job creation is awesome in months where job growth unseasoned actually contracts. Yes, July. We tell them anything. The media goes with it and voila. Instant narrative.
The Senate closes in on passing that $550 billion to $1.5 trillion (depending on what counts and who's reporting) bi-partisan infrastructure bill, probably on Tuesday morning. Cryptocurrency lobbyists appear not to have gotten their way. This leaves intact language providing for broad oversight of virtual currencies. Bitcoin still traded higher on the news. Gold and silver traded lower. Apparently, those actively engaged in trading alternative investment products see it differently. For they, as a group, must believe that either this fight has not been lost, or is still to be fought in some other place and time.
Passage of this infrastructure bill in the Senate will send the bill to the House, and begin discussions over the $3.5 trillion-ish spending packages that mostly targets social programs in the Senate. This will be where the legislative process stalls for quite a while. The House of Representative, never a group known in aggregate for an abundance of good old American work ethic, is in recess. Committee work is set to resume on August 31st. The broader House gets back to work on September 20th. Some work if you can get it. Gee whiz. Now get back to your work a day job with no benefits, peon.
What That Means
This means, in my opinion that within a couple of months, the establishment of an increased or suspended debt ceiling will result in a new avalanche of even greater liquidity. In the meantime, the Federal Reserve Bank will signal a withdrawal of monetary accommodation at Jackson Hole later this month. You all saw the trial balloon floated by Atlanta Fed Pres Raphael Bostic on Monday.
Stay with me. The Fed will signal reduced stimulus and eventual rate hikes while Congress continues to pick lint out of their navels... all while the Delta variant (potentially) peaks, forcing reduced human interaction, putting healthcare systems under regional strain, and keeping students and their parents home in various locales. You've all seen credit card usage slow down significantly over the past two weeks.
The broader large-cap equity market looms like this (how nice) year to date...
...while the Transports (egads) look like this...
...and while the small-caps and commodities (nothing to see here) in general move forever sideways.
In plain English... With our major large-cap indices still trading at or near all-time highs, this market is narrow. Extremely narrow. Even at the large-cap level, three of 11 sector select SPDR ETFs are down over the past three months. Energy (XLE) , Industrials (XLI) , and Materials (XLB) , while Financials (XLF) have rallied sharply in recent days as yields have spiked, pulling that fund just a smidge above breaking even over the past 90 days. What do these four underperformers all have in common? In common with the transports? In common with most small-cap corporations? They are cyclical. They are reliant upon the business cycle. They are telling you to put your helmet on and buckle your chinstrap.
Planet of the Apes
AMC Entertainment (AMC) reported second quarter earnings on Monday evening. AMC, if you are following along, supposedly ripped the cover off of the ball. You mean that as the economy has recovered that folks have poured back into movie theaters, and that Delta is showing no impact on the business? Not exactly.
AMC posted a loss of $-0.71 per share, easily beating estimates by more than a quarter. Revenue printed at $444.7 million. That number beat Wall Street and was good enough for year over year growth of 2,253%. Before we get all excited, the nation was basically locked down for the comparable period one year ago. Revenue generation for Q2 2021 was -70.5% from Q2 2019.
By June 30th, AMC was operating 593 U.S. theaters and 335 theaters outside of the U.S. That's 100% of domestic locations and 95% of international locations. In short, AMC is open for business. The firm states that excluding $28.4 million in restricted cash, that the cash balance stands at $1.811 billion after raising $1.24 billion in new equity capital. The firm mentions $2 billion in total liquidity when including revolving lines of credit. Is that worth mentioning when more than $1.8 billion of that liquidity is in cash?
CEO Adam Aron plainly said on Monday, "We are still burning cash. We're burning less of it." Digging into the material provided by the firm... admissions amounted to $229.1 million at an average price of $10.38. Food and beverage sales added up to $159.4 billion. Operating expenses added up to $723.3 million. Net losses came to $336.6 million. Free cash flow for the quarter printed at $-251.7 million. Yes, as the CEO mentions, there is less burn. For Q2 2020, free cash flow with the nation shuttered... came to $-266.9 million. Some improvement with almost 100% of theaters in operation. As a matter of fact, free cash flow for H1 2021 prints at $-576.5 million versus $-542.6 million for H1 2020.
Would I buy this stock? No. Will this corporation even have earnings and cash flow data to post for H1 2022? Probably. H1 2023? That's one heck of a bet to make. But... not with my money.
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (July): Last 102.5.
08:30 - Unit Labor Costs (Q2-adv): Expecting 1.0% q/q, Last 1.7% q/q.
08:30 - Non-Farm Productivity (Q2-adv): Expecting 3.4% q/q, Last 5.4% q/q.
08:55 - Redbook (Weekly): Last 17.2% y/y.
16:30 - API Oil Inventories (Weekly): Last -879K.
The Fed (All Times Eastern)
14:30 - Speaker: Chicago Fed Pres. Charles Evans.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: IIVI (.76), SYY (.60), VSH (.59)
After the Close: COIN (2.57), WW (.67)