Insecurity. Just what does one see looking back from that mirror on the wall? Making sure everything is neat and tidy. Maybe looking for every flaw. Maybe focusing on the minutiae... Little imperfections known to the individual that others might not see, at least not at a glance. For the individual, issues become larger than maybe they need to be. What is that blemish that financial markets have started to focus on? The nominal cost of money? A Fed that appears at least at that first glance to be less than responsive to the earliest screams of a financial marketplace troubled by what it sees to the front? The insecurity ahead?
For the week past, all of your most closely watched equity indices flailed helpless at one point or another. That said, none of the large cap indices despite Thursday's beat-down really gave up all that much ground, probably because as longer-term US Treasury yields spike, or come in, the larger caps shift one way or the other, but haven't really headed for the exits, or into cash just yet. The US Ten Year Note paid as much as 1.76% at one point on Thursday. That market rallied on Friday, scraping more than three basis points off of that yield, which allowed the flow of funds to move back into the Nasdaq large cap indices, evening performance across "the big three" for the five day period.
The Nasdaq Composite turned in a weekly performance of -0.79%, only slightly out-performed by the S&P 500 at -0.77%. Nearly identical. Good chance you did not know how closely the two "majors" performed. The lesser of the three majors, the Dow Jones Industrial Average (which is "lesser" due to the narrow scope of the average) only gave up -0.46%, but keep in mind that the performance of Dow Industrials have close to no impact upon broader markets. Very little money actually tracks the Dow, that average is really just still a major at this point because much of the financial media does not think the public can understand that far more vast flows of capital track the S&P 500 and the Nasdaq Composite. (In other words, they think you're stupid.)
For an actual reflection of the impact for expectations of higher inflation that brings with it an increased cost of money, and a potential increase in business taxes, all one has to do is look at the averages most impacted by growth. The Dow Transports still managed small gains for the week, while the S&P Mid-Cap 400 surrendered 1.22%, and the two small cap indices were both taken out to the woodshed... The Russell 2000 -2.77% and the S&P 600 -3.05%.
Monday Morning Questions
This (Monday) morning, dark and early... The US Ten Year has continued Friday's rally. I see it last yielding a rough 1.68%. This has Nasdaq futures rallying just a bit, as S&P 500 futures were trading lower. Not alarmingly so, not just yet anyway.
I need folks to understand a few things as we lace up our gear and head out. One, markets more or less took the Fed as non-committal last week, simply because the FOMC took no immediate action to take the long end of the yield curve. Make no mistake, this Fed is committed... to funding the federal government, and to anchoring the short end of the Treasury yield curve. Would you like them to act every time the long end of the curve shows signs of free market pricing? Trust me (honestly, I know no more than any of you), should higher rates/yields cause a serious market correction, or worse, actually hamper the "still in its infancy" economic recovery? The Fed will intervene in markets for probably five year paper out to the 30 year. Why don't you fire at targets beyond 500 yards with iron sights? Besides letting the target know where you are, it's a waste of ammo. Never waste ammo.
In the longer run, investors need to keep in mind that a healthy economy produces free market pricing that reflects a positive price for credit over time (real rates). Although it may require a painful adjustment (and you and I will probably feel that pain), that environment would actually foster growth, whereas artificial suppression of interest rates over longer maturities not only forces skewed risk assessment, it actually slows down velocity. We know this. If the central bank has proven anything over the Greenspan, Bernanke and Yellen years, it is that as a group, academia has underestimated the relationship between velocity and inflation/growth. Far more important than full employment which has never been accurately defined anyway, at least not for me. Bill "A.W." Philips wasn't wrong. The environment in which we live is different from the one he interpreted. Understand. Identify. Adapt.
Prior to the pandemic, the U.S. economy was proclaimed to be at or beyond full employment several times, and just kept going beyond where it was not supposed to be able to go. The economy did grow, but largely due to increased deficit spending, as if there was an ongoing recession. The Obama and Trump administrations were vastly different across many concepts of governance, but not so much in how to finance the whole shebang. Both administrations relied heavily upon pulling future growth into the present.
Statistically, the last (non-pandemic related) recession ended more than a decade ago, yet for many especially in the private sector, recession-like conditions persisted through 2017. Even then, wages and productivity never fully recovered. Though at the headline, labor markets reflected "full employment", the economy itself never came close to approaching "full employment" in the broadest sense of the term.
While I go on and on like an organ grinder, the gist of what I am trying to say is that the FOMC will be slow to act, intentionally, and that is just fine with me. As long as they respond quickly when the time is right... and the Powell Fed has been good at this, since taking a beating in 2018, and apparently learning from that. We hope.
Why should the FOMC act prior to real rates going decisively positive?
Why should the FOMC act prior to at least testing the attractiveness of relatively higher nominal rates and a far higher vaccination rate than the rest of the developed world in terms of demand for longer dated U.S. debt securities from foreign accounts. This would also force higher U.S. dollar valuations? Just sayin'.
Why should the FOMC act ahead of the potential for a business environment that very likely must now make room for both increased regulation as well as increased corporate taxes? Want to kill growth in the womb? Go ahead... start wasting ammo ahead of actually knowing the depth of, and impact of such factors upon velocity, upon activity, upon labor markets... etc, etc, etc...
This and That
Investors need to be fully cognizant that on Tuesday morning, both Fed Chair Jerome Powell and Treasury Secretary Janet Yellen will testify (virtually) before the House Financial Services Committee and then do it again on Wednesday morning before the Senate Banking Committee. Away from those twin testimonies, I count at least 20 public speaking appearances (and a few extras always sneak up on me) to be made by either members of the Federal Reserve Board of Governors or Federal Reserve regional district presidents, and that's just Monday through Thursday.
It is more than clear that since the FOMC statement made public last Wednesday that the Fed has probably refined what message it is that it wants to put forth and has sent the minions out in force to speak its current version of "truth."
In addition, spring has sprung. The religious holidays for many are near, and everyone my age has baseball fever. That said, the calendar says that March runs out of time next week. That also means that the first quarter comes to an end as well, and with it, projections for sizable pension (and other) fund rebalancing acts as mandated by their own mission statements. The S&P 500 is up a cool 4.1% year to date, while the Nasdaq Composite has returned 2.5% over the same period. In contrast the iShares 20+ Year Treasury Bond ETF (TLT) has posted performance of -14.6%, while the iShares 10-20 Year Treasury Bond ETF (TLH) has done a "little better" at -12.5%.
The good news for these pension funds is that unless their managers are complete incompetents (extremely possible), that in an environment containing both higher equity prices, and rising yields that those funds that have been severely underfunded should have seen their conditions improve. The bad news for equity markets is that going into the quarter's end, these funds are going to be forced to pour money into debt markets and that capital is going to flow from somewhere. We have a very dicey few days to work through later this week and early next week. Remember that the selling pressure that equity markets may experience has an expiration date. The next day, which will be April Fool's Day, a large weight will be removed from equity market price discovery, Oh, and also on that day... baseball games actually count.
I did not know the man, or the family. The news that Kent Taylor, the founder and CEO of the Texas Roadhouse (TXRH) restaurant chain had passed by his own hand bothered me a great deal this weekend. His family, according to the article that I read, stated that Taylor suffered symptoms related to Covid-19 including severe tinnitus. For so many, symptoms related to Covid-19 do not disappear with the shedding of the virus itself. For so many, especially those who have served, tinnitus is a permanent problem.
I have nothing productive to add, just a request of those who do believe in a higher power or in an after-life or both. A prayer, for the repose of the soul of Kent Taylor, and for all the souls lost to the pandemic. For the full recovery of all those stricken with either the virus or the post-viral syndrome, and for the well-being of all who suffer in any way or for any reason. As always, we understand that our requests are naturally selfish in nature and that Thy will be done.
Such a Deal
Hey Sarge... tell us again about how you sold Kansas City Southern (KSU) at resistance. As Murray the Cop used to say... yup, yup, yup, yup. I mean I still like the rails. BNSF Railway is the main reason I am long Berkshire Hathaway, the B stock (BRK.B) . That and all of Warren Buffet's other goodies that likely do better in a reopened economy.
Readers may have already seen this news... Canadian Pacific Railway (CP) has agreed to acquire Kansas City Southern (KSU) for $25 billion in cash and stock in a deal valued at $275 per share. KSU closed at $224.16 on Friday. If approved, and the thought is that this deal will have to get through a rigorous series of regulatory hurdles, the merger would create the first truly North American rail network operating across Canada, the U.S. and Mexico.
The deal is a long way from getting there from here, and the value will fluctuate with passage of time given that only $90 of that $275 is in cold hard fiat. The rest will be in fractional shares of what will be the end company to be headquartered in Calgary, with regional outposts remaining in Kansas City and Mexico City and Monterrey. Gee whiz. No woulda, shoulda, couldas. Not in this game.
Economics (All Times Eastern)
10:00 - Existing Home Sales (Feb): Expecting 6.51M, Last 6.69M SAAR.
The Fed (All Times Eastern)
09:00 - Speaker: Federal Reserve Chair Jerome Powell.
10:30 - Speaker: Richmond Fed Pres. Thomas Barkin.
13:00 - Speaker: San Francisco Fed Pres. Mary Daly.
13:30 - Speaker: Reserve Board Gov. Randal Quarles.
19:15 - Speaker: Reserve Board Gov. Michele Bowman.
Today's Earnings Highlights (Consensus EPS Expectations)