Twenty-four hours ago, in this column, I borrowed a line from the original Star Wars movie. "These are not the droids that you're looking for." The line was uttered by Jedi Knight Obi Wan Kenobi in the movie. I used it in reference to the tremendous run this past Monday made by high end chip producer Nvidia (NVDA) as in the stock though up more than 6% that day, had not technically broken out. Indeed, on Tuesday, NVDA traded as high as $583 (vs. a $589 pivot) prior to closing down around $570. This (Wednesday) morning, that quote still rattles around inside that cavernous melon on top of my shoulders, the catalyst however... is quite different.
Tuesday did not bring with it the selloff that perhaps equity markets might be working toward, or some traders even ready for. Sure, there were certain items that we could pick out that might be characteristic of broader equity market weakness, but when threatened markets found resilience. Perhaps, we'll have to wait for this fiscal support package that has powered not only recent northerly moves for equities but for pressure out on the longer end of the US Treasury yield curve, to be more fact than fiction before the tension eases. That said, certain markets did pause on Tuesday. No, there were no significant moves across the various put/call ratios that we keep an eye on, nor any real upward thrust for the VIX. The Dow Industrials gave up just a smidge, as did the S&P 500, and the Nasdaq 100.
Curiously, the Dow Transports, and the two small cap indices (Russell 2000, S&P 600) were where there was a limited level of strength in equity markets on Tuesday, which would still imply that there is room to run for the re-opening trade, or for speculation in general, and the speculation argument was pointed out last night by Helene Meisler. In her nightly "Top Stocks" piece, she noted the gap in trading volumes between the New York Stock Exchange where volume has leveled off and even started to wither, and the Nasdaq Market Site where trading is also leveling off, but at consistently much more active levels. Making this code even more difficult to crack, one glance at the sector performance tables tells the observer that on Tuesday, defensive types outperformed cyclicals. The REITs led the way for the day, with Health Care and Utilities rounding out the top five. Discretionaries, Materials, and Energy took the bottom three places in that order. Of course, bids did move into the long end of the curve, which might explain some of this, but dollar valuations weakened on Tuesday relative to reserve currency peers, and should have lit a fire under both materials and energy. Not so. Should the U.S. dollar remain weak on Wednesday, I would not expect those two sectors to slumber for a second consecutive day.
What I find of interest is that as we stand (or sit) here very early in the morning on February 10th, a number of indices, and industry groups have already had very decent to solidly good years. The scoreboard shows the S&P 500 up 4.1% year to date, with the Nasdaq Composite up 8.7% for 2021, and the Russell 2000 up 16.4%. Hmm. Let me show you the chart below, which truly illustrates the impact that broader yield spreads can have not just from the macroeconomic perception of potential for future growth or inflation, but directly on the banks... where net interest margin is indeed the very fabric of valuation for the group.
You are looking at a year to date chart of several banking indices superimposed on a chart of the S&P 500 (just used for background). The green line and the gold line that seem to run together, represent the KBW Bank Index (+10.34%), and the Dow Jones US Bank Index (+10.05%), respectively. That other, pinkish line that is now up 17.44% for the year, even outperforming small caps? That's the KBW Regional Banking Index. We always try to tell whoever will listen that regional banks would benefit the most should the long end of the curve ever show some life as regionals do not have the many business units available to large money center banks. Here's the proof.
Need some regional banking ideas? I picked US Bancorp (USB) going into the new year, which I was too early on. (That's how talking heads with media experience say they were wrong.) All of the momentum in the world is behind New York area Signature Bank (SBNY) , especially now that JP Morgan (JPM) added that name to its "Focus List" as Signature is well positioned to benefit from any increase in the banking of digital assets such as bitcoin. Signature has created its own digital asset platform.
Away from some of the more obvious names, two names that I am watching (but have not yet moved on) would be Triumph Bancorp (TBK) , already up 40% this year, and is a momentum play, but pays no dividend and trades at well above broader sector valuation levels. The sleeper may just be First Foundation (FFWM) , a west coast bank (+9.6% ytd) that pays a modest dividend and trades at just 10 times forward looking earnings. This could be my "catch-up" trade. The name has stalled in between $20 and $22 and seems to be basing. The 50 day SMA appears to be a place to start.
You know... Canadian Geese live on Long Island year round these days. They do not go home anymore. They live here. Despite their national identity, these geese have moved. Permanently. Anyone else notice the opinion piece penned by Stacey Cunningham, current president of the New York Stock Exchange, at the Wall Street Journal on Tuesday? Basically, Stacey lashes out at the financial transaction tax currently under consideration by New York State legislators. The exchange president makes a compelling argument that illustrates all of the potential negatives that could arise from such a tax such as less efficient price discovery, as well as reduced business levels... meaning that those customers would sell assets elsewhere intentionally. Cunningham points out that the financial and insurance industries drive 60% of all private sector wages in New York City, and that the securities industry alone generates 18% of all New York State tax collection. In other words, New York State legislators understand that they indeed have one golden goose, but fail to understand that their potential actions could damage their "providers" long-term. Perhaps badly enough to force what was once unthinkable.
The fact is that Cunningham quite overtly threatens to take the New York Stock Exchange elsewhere in the title... "The NYSE Isn't Moving Yet." She is not wrong. For what is New York if not the financial capital of these United States, if not the very hub of global capitalism itself? Destroy the financial industry in New York, and the financial industry with all of its jobs and ability to generate tax revenue will go elsewhere. We already heard several months ago, at least rumblings that the Nasdaq Market Site could move. Cunningham also points out that the state of New Jersey had already considered and taken a pass on the implementation of such a tax.
New York State and City both have obviously piled one mistake upon another since this pandemic began almost a year ago. Should the state go this route, the exchange obviously would not have to go very far. I wonder if any other location would consider incentivizing such a move. Hmm. Use your brains, Albany.
Economics (All Times Eastern)
08:30 - CPI (Jan): Expecting 1.5% y/y, Last 1.4% y/y.
08:30 - Core CPI (Jan): Expecting 1.5% y/y, Last 1.6% y/y.
10:00 - Wholesale Inventories (Dec-rev): Flashed 0.1% m/m.
10:30 - Oil Inventories (Weekly): Last -994K.
10:30 - Gasoline Stocks (Weekly): Last +4.466M.
13:00 - Ten Year Note Auction: $41B.
14:00 - Federal Budget Statement (Jan): Last $-144B.
The Fed (All Times Eastern)
14:00 - Speaker: Federal Reserve Chair Jerome Powell.
Today's Earnings Highlights (Consensus EPS Expectations)