Market themes that have been in place over the latter part of 2020, and into 2021, remained in place... for the most part on Tuesday. Investors still appear set to favor the broadening out of at least some equity allocation as the flow of capital found favor in more cyclical type businesses. From the perspective of sector performance, Energy led the way yet again, followed by Discretionaries, Materials, Financials and Industrials, all (using Sector SPDRs as proxies) gaining a full percentage point or more. Left behind once again were the Information Technology, Health Care (which is at least a little surprising, we'll dig into that a little bit down below), and the Communication Services sectors. At least the Utility sector and the REITs were able to move toward the middle of the sector performance pack as yields for longer dated Treasuries peaked, only to start contracting just a bit as Tuesday wore on.
Readers will note that the US 10 year note went out at a yield of 1.15%, has eased overnight toward 1.11% and the last sale I see puts that yield at 1.12%. Now readers will see how as the yield spread between the 3 month T-bill and 10 year Treasury note paused on Tuesday, so did the large cap S&P 500...
You already know (or you should) that small to mid-caps outperformed large caps on Tuesday (ex-the airline led transports), now note that unlike it's much larger cousin, the S&P 600 (small-caps) actually accelerated as this spread contracted on Tuesday.
How interesting, don't you think? Just one more thing to think about as you try to make money throughout the day.
School Circle On Me, Move
Hey Sarge, I have a question. Okay, shoot... How come you always use the three month/10 year yield spread in your models, and the financial media seems to favor the two year/10 year spread in their broadcasts? That's actually a good question, and I can offer you a mildly complex answer. First, the financial media sticks with what lay folks understand best for two reasons.
One... I think most in the media underestimate you, the consumer of business/financial/economics type news, and your level of sophistication.
Two... Most in the media are simply lay people themselves. Many are journalists and have never been practitioners. Why do you think "they" lead their reports with the Dow Jones Industrial Average every day? Nobody in the business looks at "the Dow" any more than they do the Nasdaq 100, or the Dow Transports. Actually, those two tell investors a lot more than does the DJIA, correct? The S&P 500 and the Nasdaq Composite are "the market" in professional conversation. The Dow 30 has not held that distinction in almost 30 years.
Now, the reason we focus on the 3 month/10 year over the 2 year/10 year is because this is truly more representative of the gap between long-term rates and short-term rates, which is how lenders generate net interest income. In addition, the San Francisco Fed has published research papers confirming that the 3 month/10 year spread is the most accurate predictor of economic contraction used by the Fed. I simply figure that if I am going to wade into the marketplace everyday without the safety net of a salary or an employer sponsored retirement fund, I must attack with the aggression of the pure hunter who must kill in order to feed his family. That said, I would do best to focus where those charged with the implementation of monetary policy are focusing. The 2 year/10 year spread has its merits. It can be helpful in the determination of inflation expectations. So can the 5 year/30 year. These are tools, just not the best tools we have.
Remember, you and I must take our living from the market. One must become the market, breathe the market, adapt in something close to real time. Learn how to write algorithms, so you can at least forensically figure out what they are doing. Defeat your enemy. They'll beat you a few times. They have weaknesses, and are not even close to invincible. They have speed. We have cunning. They'll ambush you once. Then you ambush them five times. They don't even know. They are happy to be up on the day. They are reading the sports pages and watching YouTube, completely unaware that they have become the prey unless their little alarm goes off. Then it takes them another five minutes to figure out that someone is on to them. They have forgotten how to work. That is the most exploitable weakness I know of.
By the way, breadth was again quite good across the equity landscape on Tuesday. Winners beat losers by more than 2 to 1 at both of New York's primary exchanges, on increased aggregate trading volume and as advancing volume easily outpaced declining volume at both locales.
Swing, Batter Batter, Batter
The U.S. Treasury Department went to auction on Tuesday afternoon with the intent to borrow $38 billion over 10 years. I had some reservations going into the auction. Apparently my concerns were either misplaced, or simply ahead of the curve. The federal government borrowed 89% of the allotment at the high yield of 1.16%, which was in-line with the secondary market at the time. Bid to cover, at 2.5. equaled the strongest seen for this series since July. Most interestingly, I think was the participation of foreign investors (indirect bidders) who took down $23.6 billion of the offering, or 62.1% of the whole. Basically in-line with recent trends. I have been expecting to see a decline in foreign participation for months which has just not materialized, at least not to a level of significance I have been expecting.
I get why a foreign bank or foreign central bank might like the idea of a nominal yield above 1%, but one must understand that this 1.16% is still less than the expected 1.3% levels of headline consumer level inflation, and the U.S. dollar has been rapidly losing value versus it's peers which for a foreign investor would exacerbate that negative real yield. Next Wednesday, Eurostat will report December CPI for the Eurozone. The series has been running at -0.3% y/y. In that environment where (except for this morning with the euro in retreat) the home currency had been strengthening versus the U.S. dollar, would not Italian (yes, they have their problems) 10 year debt that pays +65 basis points, or 95 basis points above regional inflation make more sense in local currency? Spanish 10 year debt also pays a nominally positive yield. Even in the UK, where the rate of inflation year over year has been cooling, the CPI is still positive at 0.3%, while 10 year UK Gilts pay 34 basis points. It makes no sense for at least accounts from these areas to keep loading up on U.S. longer dated Treasuries, unless they are betting that this is a bottom for the U.S. dollar. Now, what do they know that we do not?
Need To Know
From the JP Morgan Healthcare Conference...
1) Johnson & Johnson (JNJ) CEO Alex Gorsky stated that the firm is now in the "final stages" of analyzing data from its (45K patient) Phase 3 trial of its (single dose, one and done, one shot-one kill) Covid-19 vaccine candidate. You may recall that earlier this week Bloomberg News reported that there is hope that the firm may submit this data to the FDA as soon as January 21st for "Emergency Use Authorization''. If all goes well, JNJ could be able to immunize a billion individuals this year just by themselves, in addition to the vaccines already in circulation.
2) Medtronic (MDT) CEO Geoff Martha indicated that the firm has potentially made progress in the treatment of drug resistant hypertension. Medtronic, some may recall, failed back in 2014 to meet endpoints in testing a new (renal denervation) product. It has taken six years to make the necessary improvements, but there should be data available later this year. The FDA has already designated the "Spyral renal denervation" device as a "breakthrough" which helps fast track the process. I believe that starting very soon the time has come to start building a long position in this name. This device, if successful... is a big deal. It would save someone you love from having either a heart attack or a stroke.
From CES 2021...
1) Intel (INTC) introduced four new processor families meant to retarget market share across the worlds of gaming, education, business and mobile applications. Intel ran more than 3% on Tuesday but I don't think on this news. It appears that Intel, which has fallen behind in its ability to meet demand, opening the door to competitors bent on taking market share, will rely upon Taiwan Semiconductor (TSM) to help with the production of a second generation discrete graphics chip which is an enhanced version of the 7 nanometer product that has not turned out to the driver once expected. At least not for Intel.
2) Advanced Micro Devices (AMD) CEO Lisa Su told the conference in her keynote address that she expects "the number of notebook designs powered by our new generation of Ryzen mobile processors to grow by 50% compared to the Ryzen 4000 series." Su expects the Ryzen 5000 to launch later this year. Su also told the conference that the firm's third generation Epyc server processors would be due to launch later this quarter. This is the high performance space where Nvidia (NVDA) is the alpha dog.
Economics (All Times Eastern)
08:30 - CPI (Dec): Expecting 1.3% y/y, Last 1.2% y/y.
08:30 - Core CPI (Dec): Expecting 1.6% y/y, Last 1.6% y/y.
10:30 - Oil Inventories (Weekly): Last -8.01M.
10:30 - Gasoline Stocks (Weekly): Last +4.519M.
13:00 - 30 Year Bond Auction: $24B.
14:00 - Federal Budget Statement (Dec): Last $-145B.
The Fed (All Times Eastern)
13:00 - Speaker: Reserve Board Gov. Lael Brainard.
14:00 - Beige Book.
15:00 - Speaker: Federal Reserve Vice Chair Richard Clarida.
Today's Earnings Highlights (Consensus EPS Expectations)