"Moths and all sorts of ugly creatures hover about a lighted candle. Can the candle help it?"
- Estella from 'Great Expectations'... Charles Dickens (1861)
Have A Nice Weekend?
It is always difficult. This weekend, easily more so than most. To actually or intentionally take a mental break from the news cycle. Plop down in that big comfy chair? Local news was just as laser focused on events taking place in Washington as have been the national cable news networks. Sports? Sure, but mention was even made there, often. Read? Read a book? Any book. I love reading military history for personal intellectual stimulation, as well as sports history when in the mood for mind candy. Neither could pull my interest away from the events taking place roughly 230 miles to my south. So be it. The news cycle had without a doubt taken on the tempting beauty of a single flame in an otherwise darkened room, and I had become... nothing more than one insignificant moth.
Complexity
No not "Complexity Theory", which is something that I have tried to explain in the past. Complexity Theory is more or less the unknowable outcomes based on unrealized risks that complex systems, even seemingly unrelated can pose to each other, exponentially damaging what might have appeared to have been a controlled outcome prior to what becomes a series of less than certain results.
This is, I believe, to be short to medium term complex. We have a president who has fallen ill to the virus that has now plagued the planet for most of this year, just ahead of a national election where that president appeared to be trailing in his bid for reelection. This comes at a time where our legislators after months of "pretending" seem to be earnestly trying to find middle ground on fiscal policy while preparing to take polarizing views elsewhere -- the Supreme Court, the election itself. This mixing of both overt negatives with potentially positives has placed the financial markets in a sort of "Limbo" as there is reason to prepare for any number of likely or less than likely outcomes.
Mixed Messages
What the? I don't know. The president had apparently been showing mild to perhaps more than mild symptoms last week. Trust me, as a Covid victim whose recovery has been far worse and far more drawn out than the illness was itself, it is when medical personnel check one's oxygen levels that one holds his or her breath. You already know that your pulse and blood pressure are screwed. but oxygen one can not monitor on one's own. You need to hear something in the high 90's. The relief one feels when they hear that this number is "okay" is almost indescribable. Second only to getting back to back negatives on tests for this evil virus. Or hearing good news regarding one's inflammation markers.
So, the president at increased risk due both to age and weight, experienced a drop in these oxygen levels back on Friday. Off to Walter Reed the president went, under his own power which it seems is important to him. We have had presidents that hid the fact that they worked from a wheelchair in the past. That was then, this is now. The 24 hour, always watching news cycle allows for very little to sneak by. The president has been dosed with Gilead Science's (GILD) Remdesivir, as well as a still in clinical trials, polyclonal antibody therapeutic cocktail developed by Regeneron (RGEN) .
It was Saturday that the president's own doctor seemed optimistic, and the administration perhaps less so. The president sounded ill, or at least the way my family said I sounded back in March and April. He sounded much better on Friday, after receiving the above treatments as well as a steroid usually reserved for folks in a (by appearances) later stage of severity. There has been some implication by President Trump's medical team that he could be discharged from the hospital as soon as today to continue convalescing at the White House residence. Is that wise? I don't know. I do know that it usually takes eight to 10 days from the onset of symptoms if one is going to get hit with the inflammatory syndrome, and if that happens, then one is going to be sick for a very long time.
Markets
The S&P 500 broke a four week losing streak last week, while the Nasdaq Composite now has a two week winning streak. Why is this worthy of mention? First, Friday was an awful day for the Nasdaq. The Composite gave up 2.2%, while the 100 surrendered 2.8%, all while the S&P 500 took a lesser hit of sub 1%, and the blue chip Dow Jones Industrials less than half of one percent.
Pop the hood on Friday's action and poof... you'll find that the day was positive for the Dow Transports, as well as mid-caps and small-caps. What is the implication there? Take a look at Friday' sector performance tables... one through six... REITs, Utilities, Industrials, Energy, Materials, and Financials. Ugly? Communications Services, the internet in particular. Very Ugly? Information Technology. Software, Hardware and the Semis all hit hard.
Serious rotation out of growth back into value? Remember that including the September Employment report on Friday that our economy appears to still be recovering, but that this recovery has slowed. The nation, even more than the marketplace, needs more fiscal stimulus if the trajectory of this recovery is to avoid a rounded top. Does the president's illness increase the chance of a legislative compromise on increased fiscal support? Depending on what is agreed to, this could pressure dollar valuations, and impact credit spreads. Certain positives for various slices of our markets, at least for now. Both parties seem more willing to spend money and have the central bank create the dough for them to do so. At least that is a certainty.
So, what's with the rotation? Well, we still have almost a month to go, but the market on Friday started to price in former Vice President Biden's proposed tax policy on the chance that there could be a Democratic sweep. Remember, Joe Biden has proposed increases in corporate tax rates to include a floor of perhaps 15%, as well as increased taxes on capital gains, and foreign income. Why tell you this? Not to scare you. We don't allow fear to decide our action. We do try to interpret our environment so that we might adapt.
Prior to the president's diagnosis, the former vice president held a 7% to 8% lead in most national polls. Over the weekend, I saw at least one poll showing the former vice president with a 14% lead. I have also seen an aggregate report on those betting on this electoral outcome, and those show the former vice president's chances improving there as well.
Understand
Understand that increased corporate taxes will affect earnings. There is no way around that. The "gentlest" estimate I have seen is for a contraction of 10% for US large caps. The corporate tax floor will force a change in leadership, hence rotation. Many large caps that have found a way to reduce effective federal tax rates are tech stocks. Many have been my favorites. Increasing taxes on profits earned elsewhere will reinforce this rotation. Keep in mind that the tech sector in aggregate earns less than half of the sector's revenue domestically, which is not true for the S&P 500 broadly. Roughly 60% of S&P 500 revenues are generated within our own borders while for the information technology sector, this number drips into the low to mid-40%'s.
This has nothing to do with the political argument over who does and does not pay their fair share when it comes to taxation. This has everything to do with understanding that one has to to develop the idea that an electoral sweep by the left will force a decapitation of what has been market leadership. This does not mean that markets can not go higher. It does mean that you and I will have to rebalance our portfolio exposure.
Now, we do not know if markets got a little ahead of themselves on Friday. The Senate will surely be close, and the presidential election could still be very close. Just in my neighborhood alone, this weekend there was a tremendous increase in homes bearing "Biden" lawn signs as well as a tremendous increase in homes bearing "Trump" lawn signs. I have never, ever seen so many homes willing to publicly take a side. Many of these opposing signs are next-door neighbors. I have no idea what this means yet.
Summary
The short-term story for financial markets has been all about fiscal policy. This remains true. The health of the incumbent president only complicates the matter. Short to medium term, the virus itself is still in charge. Beyond the medium term, market performance and asset allocation will rely upon tax policy, thus... electoral outcome. It has become clear that October will likely be at least as volatile as was September.
The spread between short and long term rates is expanding. Put/call ratios are as well, while currency exchange rates act as if confused. The VIX remains moderately elevated, and VIX futures are pricing in increased fear well beyond the election, even beyond the new year. Whether that has to do with expectations for a contested election or expectations for higher taxes and increased regulation I can not tell you.
I can tell you that as traders and investors, we have probably picked the low hanging fruit. From here on out, this job will become more difficult. Can that be a positive? It can if in the end, valuation ends up being based on fundamental analysis. The way it was supposed to be.
What Sarge Needs To See On Monday
Selfish? Yes. I think of my own book. You should be doing the same. Technically, it's still all about holding the 50 day SMA. Bear in mind that there is a difference between a level being pierced and a level being broken. On Friday, both the S&P 500 and Nasdaq Composite closed just below their respective 50 day SMAs. Not broken. Definitely pierced.
Same goes for Sarge faves. Amazon (AMZN) . Apple (AAPL) , and Microsoft (MSFT) . All three would be highly exposed in a negative way to increased corporate, minimum, and foreign taxes. Other Sarge faves closing just north of that technical line would be Adobe (ADBE) , though currently flat that one... I am in and out of ADBE quite often of late. It's a trading name... and Advanced Micro Devices (AMD) .
You Need To Know
Possibly lost in the news cycle this week could be the GPU Technology Conference to be hosted by Nvidia NVDA today (Monday) through Friday (Oct 9th). The "Main Event" will run Tuesday through Thursday as CEO Jensen Huang and Arm CEO Simon Segars will host a number of talks together. This will impact not only the stock but perhaps semiconductors as a group. On that note, Marvell Technology (MRVL) hosts a "Virtual Investor Day" itself on Thursday.
Economics (All Times Eastern)
09:45 - Markit Services PMI (Sep-rev): Flashed 54.6.
10:00 - ISM Non-Manufacturing Index (Sep): Expecting 56.3, Last 56.9.
The Fed (All Times Eastern)
10:00 - Speaker: Richmond Fed Pres. Thomas Barkin.
10:45 - Speaker: Chicago Fed Pres. Charles Evans.
15:15 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
No Significant Quarterly Earnings Scheduled For Release.
(Amazon, Apple, Microsoft, Advanced Micro, and Marvell Technology are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
