Oh, it's the price we gotta pay
And all the games we gotta play
Makes me wonder if it's worth it to carry on.
'Cause it's the game we gotta lose,
Though it's a life we gotta choose
And the price is our own life until it's done
- Dee Snider (Twisted Sister), 1984
Listening To Price
Equities, if anything, have been resilient... have been perseverant. If anything, traders, themselves, have hung tough, even adding risk in the face of information that would have provoked flight not so long ago. On Monday morning, a spate of Chinese macroeconomic data for July printed significantly weaker than expected. The PBOC was compelled to ease policy, swimming against the current tide of global central bankers. US equity index futures weakened overnight. Stocks opened lower in New York. Then a funny thing happened. Traders and investors bought the dip, minor as that dip was.
Doesn't a weakened Chinese economy mean a weaker global economy? Sure. That's what knocked the stuffing out of oil markets on Monday. WTI Crude traded with an $87 handle on Monday. The Energy sector S&P SPDR ETF closed down 1.95%, easily the weakest finish among the 11 S&P sector-select SPDRs. It wasn't just China either. What US-focused data we did have to work with was truly awful, from the Empire State Manufacturing survey to the NAHB Housing Market Index (home builder optimism index), both for August.
Still, they generally came for equities, drawn to downward sloping 200 day SMAs up and down the realm... like moths to a flame. Trading volumes were thin. In fact, they were very thin. Still, markets did not sell off on a day that maybe they should have, and would have in a different environment.
Was the complacency in this marketplace due to a belief that the Fed will have to pivot, or at least slow down with such weakness in the data? Maybe. Fed Funds Futures trading in Chicago are slightly more colored in a dovish hue this morning than they were 24 hours ago. That said, there will be more data, more important data to look at before we get there from here.
In the meantime, trade the environment at least as much as you invest. Often, you'll hear even the experienced say they are thinking long-term in order to avoid potentially sounding wrong on television. There are times when making money short-term is actually the easier route. Far less risky too.
Empire State Train Wreck
I don't think we can proceed without acknowledging the awful August release of the Empire State Manufacturing Index. This is the first of the five major Fed regional district manufacturing surveys released every month. The second, and what is considered by many to be the most important among the five is the Philly Fed, which will be released this Friday. Richmond is considered fairly important as well.
Remember, unlike with PMIs, the line of neutrality between expansion and contraction for these surveys is zero. The headline print for New York fell to -31.3 from July's +11.1. Expectations were for something with a +5 handle. Apparently, the manufacturing sector in the New York district went off the rails, crashed, and died a fiery death and not one of our esteemed private sector economists caught even a hint that such an event was ongoing as we proceeded through the last few weeks.
August was the third month in the past four that New York printed in headline contraction and the fifth in eight. This one, however, was a real doozy. New Orders (the lifeblood of any manufacturing survey) hit the tape at -29.6, down from +6.2, while shipments fell from +25.3 to -24.1. Perhaps, even more telling was the average workweek. Most economics students know that hours worked usually takes a dive just prior to jobs being lost. Well, the Average Employee Workweek fell to -13.1 from July's +4.3.
About the only bright spot in the report was in Prices Paid, where August still printed at a scorching +55.5, but that was a deceleration from July's 64.5. Prices Received, however... did not cool from July into August.
Now, Philly comes into focus, along with July data for Retail Sales and Industrial Production. This report out of New York is certainly consistent with what one would expect to see as an economy heads either into recession or more deeply into recession, depending upon one's view (political stance). The hope would be that any current or coming economic contraction might be confined to the New York region, or the manufacturing sector.
Philadelphia has printed in headline contraction for the past two months coming in. Richmond, due next Monday, has not printed in a state of expansion for three consecutive months coming in. There is almost no chance that New York rolled off of a cliff in isolation.
They Know Nothing?
Okay, they do know something. On Monday, competing camps out of Morgan Stanley and JP Morgan vied for investor attention. Strategists out of JP Morgan led by Mislav Matejka, who has remained bullish this year, sees the possibility that the current bull run (as several market measures including the Nasdaq Composite are technically in bull markets) could run through the end of 2022.
Conversely, also on Monday, strategists led by Mike Wilson at Morgan Stanley (who has long been known for his bearish views) released a note indicating the current rally is really a bear market rally, and just a pause. Wilson projects that throughout the second half, corporate profits will weaken while interest rates rise and economic activity slows.
Not surprisingly, these two "famous" strategists also sparred three weeks ago over whether or not the Fed would have to pivot or pause on its hawkish trajectory for monetary policy. Wilson sees inflation as sticky and a Fed that will need to stay aggressive even into a recessionary environment. Matejka, not surprisingly, sees inflation as past its peak, and weaker labor markets ahead, that will provoke a shift at the FOMC.
What do I think? I see inflation as being past-peak. I have been vocal on that since the spring when core inflation actually apexed (March). We have a divergence between the two BLS monthly surveys that can not be ignored as to how strong labor markets have been.
If one buys what the Establishment survey is selling (and the financial media has been eagerly going along with this), then one sees a really strong labor market.
If one follows the Household survey, then one actually sees a significantly weaker environment. I have tried to cover this closely. Outside of myself, Real Money's Peter Tchir of Academy Securities is the only other one of my colleagues who I have noticed actually take this drastic divergence between the two surveys over at least four months seriously.
As for Wilson, who has been a vocal bear since way before it was cool, and persistent bull Matejka, I really don't know why anyone would subscribe to either one of these two. We all understand the argument on both sides. If one has observed price, understood the mid-June low for what it was, and traded the environment instead of investing in ideology, one has had no problem outperforming the major sell-side investment banks this year.
Covid Booster News
This is purely anecdotal, but it seems to me that the folks I know that are testing positive for Covid are all having a fairly rotten time of it of late. While the lethality of the disease appears to have possibly ebbed, feeling the sickest one has ever felt appears to be more common now than it had been for a while.
On Monday, the UK's Medicine and Healthcare products Regulatory Agency cleared Moderna's (MRNA) bivalent mRNA booster vaccine for adults. This bivalent shot or jab targets two strains of Covid, the original version, and an early version of Omicron referred to as BA.1. That's the version that ran wild last winter.
Britain's MHRA states that clinical trials show that this bivalent vaccine triggers a strong immune response against both that original early 2020 strain and Omicron BA.1. The MHRA adds that exploratory analysis suggests that this shot also generates a "good" immune response against the latest sub-variants of Omicon, BA.4 and BA.5. These two variations have emerged as the dominant strains across much of the planet this year.
Beyond the UK, Moderna has submitted admissions for this shot with regulators in the EU, Australia, and Canada. In the US, the federal government already has a deal with Moderna to secure 66M doses of a different bivalent booster that will target the BA.4 And BA.5 variations in an effort to prepare for a potential late 2022 surge in infection.
News broke on Monday that Dan Loeb's Third Point investment firm had taken a "significant stake" in The Walt Disney Company (DIS) in recent weeks. Loeb penned a letter to Disney CEO Bob Chapek calling for a spinoff of the ESPN business, a continued halt in paying a dividend, increased integration of Hulu into Disney+, and new board members.
Loeb points out that spinning off ESPN could help Disney pay down its $46B debt-load, which was bloated due to the 2019 acquisition of the entertainment assets of Fox Corp (FOXA) , and has turned Disney' balance sheet into an eyesore. In defense of Chapek, who has done a good job throughout the pandemic, the assets of Fox (which is now considered by many to be a huge tactical blunder) were acquired on Bob Iger's watch.
While I get what Loeb is saying and ESPN would bring a pretty penny, at least temporarily boosting equity valuations, I also see Apple (AAPL) , Amazon (AMZN) , Paramount (PARA) , and Comcast (CMCSA) all bending over backwards and spending huge (even at a loss) to bring sports programming to their streaming services.
I see the probability of Disney having to then overspend in order to bring back sports programming after selling what is really the crown jewel of that programming niche. This only works in my opinion, over the long run, if Disney were to at least retain a controlling interest in the ESPN business. I remain long this name with a $158 target price.
Economics (All Times Eastern)
08:30 - Housing Starts (July): Expecting 1.65M, Last 1.696M SAAR.
08:30 - Building Permits (July): Expecting 1.48M, Last 1.559M SAAR.
08:30 - Capacity Utilization (July): Expecting 80.1%, Last 80.0%.
08:55 - Redbook (Weekly): Last 10.4% y/y.
09:15 - Industrial Production (July): Expecting 0.3% m/m, Last -0.2% m/m.
16:30 - API Oil Inventories (Weekly): Last +2.156MM.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)Before the Open: ( HD) (4.93), ( WMT) (1.60)
After the Close: (A) (1.21)