In June of 1812, Napoleon Bonaparte crossed into Russian territory with a "Grand Armee" or international coalition of an estimated six hundred thousand troops. The weather was warm. The army was used to quickly routing adversaries. The campaign should be short in duration. Winter clothing, and vast supportable supply lines would probably not be necessary. These same mistakes would be made by another army less than 130 years later, only that army's leader would not travel with his army.
The French forces and their allies won a number of seeming victories in Western Russia, working their way toward Moscow. Russian forces were fighting a war of harassment. Scorched earth and harassment. The Grand Armee over weeks would suffer from hypothermia, as well as a lack of food for troops, and fodder for the horses. Peace never came, nor did sustenance. The Grand Armee would have to break for home. They left Moscow in October with maybe 110K troops, and very few horses. They crossed out of Russia by December.
By January 1813, what was left of the army gathered behind the Vistula River in modern day Poland. Estimates are that maybe 60K soldiers made it that far, 25K French, and 35K allies. A slow, methodical retreat. There may have been panic in spots, but broadly, the French army took a beating in a barren, unforgiving land, by an enemy very willing to suffer their own great losses, and kept moving. Nothing to glorify here... except for the common soldier, who kept fighting, and kept walking. There was no panic.
Equity markets opened deep in the hole on Tuesday morning. The U.S. evacuation of Kabul is not really a market story, but it is deeply embarrassing, and an obvious weight upon sentiment. July Retail Sales were expected to show month over month contraction, but the report received was far worse than the one projected. Even non-store (e-commerce) retailers were slapped around in July. Basically, consumers spent more on food, drink and gasoline in July and pulled back on everything else. There have been no recent mass drops of helicopter money on the population.
There was some good news. July Industrial Production surprised to the upside, led by Manufacturing Production, perhaps as domestic businesses try to streamline or go around constrained international supply lines. This took Capacity Utilization to a level not seen since pre-pandemic times. Still, this is a consumer driven economy, and that consumer bought less stuff in July than they had in June.
The dip buyers did show up on Tuesday afternoon. Admittedly, even as I have been among the most vocal in warning over a late August/early September surge in volatility, I was among them. Even with the day's losses (at least at the large-cap headline level) nearly cut in half, what was left was ugly. There was, at no point, anything close to panic, no kind of capitulation.
Breadth was once again, quite awful, and the four sector select SPDR ETFs of eleven that did shade anywhere from unchanged to outright green were indeed defensive in nature. We have gotten used to defensive sector leadership on poor breadth that itself came on light trading volume. Two key differences. This time, the headlines matched market breadth, and this time, trading volume, while nothing we could call heavy, did increase at both of New York's primary equity exchanges.
As a Matter of Fact...
... While half of the nitwits who do appear on financial television have been touting the ongoing bull, and I have even heard a few mentions of "Goldilocks" conditions, which is absurd... the professionals have been behaving somewhat differently than what some of their talking heads (And their legal teams - remember, everything you hear from someone representing the larger broker-dealer/investment banks has had their questions and answers scrubbed by legal ahead of time.) have crafted as narrative.
We all know that the S&P 500 is up 18.4% year to date, up 32.5% over 12 months, and up 100%+ since the March 2020 lows. Even as second quarter earnings results have been better than good, State Street Global Advisors reports (and I read about in the Financial Times) that ETFs linked to defensive sectors attracted net inflows of nearly $5 billion in July, after experiencing net outflows of $3.6 billion for the first six months of the year combined. For comparison's sake, ETFs linked to cyclical or more economically sensitive sectors registered net outflows of $7.2 billion for the month of July, after attracting an aggregate $57 billion in net inflows over the first half of 2021.
Matthew Bartolini, head of State Street's SPDR Americas research, is quoted in the FT piece as saying that this trend "... has continued into August with healthcare (XLV) , and Utilities (XLU) sector ETFs, both taking another $1 billion each in inflows so far this month."
Death of NATO?
Not exactly, but the allies are not happy. The cold war era alliance does not sound all that much like an alliance in the wake of the abrupt, poorly prepared for, and poorly executed U.S. military withdrawal from Afghanistan. The criticism from within the NATO alliance is becoming deafening. Latvian defense minister Artis Pabriks speaks of chaos, and suffering... adding "The west and Europe in particular, are showing they are globally weaker." UK defense secretary Ben Wallace speaks of sacrifice, lamenting that all (Brits?) may not get out.
Former UK national security adviser Lord Peter Ricketts referred to the execution of the withdrawal as "humiliating and damaging to NATO." Spain's social policy minister Ione Belarra tweeted, "Afghanistan today is the umpteenth expression of NATO's failed supine policy."
It gets worse. UK Prime Minister Boris Johnson and French President Emmanuel Macron have spoken to each other on seeking common ground in preventing an increased humanitarian crisis in Afghanistan, while taking more of a global leadership role. Armin Laschet, German candidate for Chancellor referred to the U.S. withdrawal as "The greatest debacle that NATO has experienced since its foundation."
There's more, including assertions from political factions across Europe that EU member states be more responsible for the defense of their own interests. Some of this is anger. Some of this is politics... but make no mistake... The international credibility and reputation of the United States is currently at a modern day low.
China perhaps said the most without uttering a word. Chinese naval and air forces carried out simultaneous large scale assault drills to both the southeast and southwest of Taiwan. Taiwan's military reports that 11 of Beijing's aircraft violated Taiwanese airspace during the drills. Couldn't have seen that one coming?
What Does That Mean?
It may mean exactly the opposite of what you think it does. While the U.S. appears to be shrinking from a large global military presence, reality may force just the opposite. As allies look to reinforce military independence, they will spend more. As Asia becomes less stable, will a successor to SEATO arise?
This may end up being only the start of an era of increased demand for good data-based intelligence, surveillance, reconnaissance, unmanned aerial and naval systems, missiles, radars, and satellites. This could, and I repeat... could be a turning point for not defensive sectors, but the defense sector. This is where a basket including Raytheon Technologies (RTX) , Lockheed Martin (LMT) , Northrop Grumman (NOC) , L3Harris Technologies (LHX) , General Dynamics (GD) , Mercury Systems (MRCY) , Kratos Defense (KTOS) , Palantir Technologies (PLTR) , and even Leidos Holdings (LDOS) or Coda Octopus (CODA) becomes interesting.
Many of these names are trading at or near the bottom of their charts. Only L3Harris and General Dynamics have worked their way toward the top of their recent charts. Has Pandora's Box opened? No. Better to be prepared though... if it does. Better to sharpen your blades than to wish you had.
On Tuesday, Sarge...
1) Added to Home Depot (HD) on the dip for a trade as discussed at Real Money.
2) Initiated a long position in Roblox (RBLX) on that undeserved dip. Sales are still growing like a weed. Expectations were wrong, the stock is not. The stock may be forming a pennant pattern that could result in an explosive move.
3) Re-Initiated a long position in Nvidia (NVDA) ahead of earnings as that name bounced off of its own 50 day SMA.
On Wednesday, Sarge...
1) Is watching with eagerness what Lam Research (LRCX) does at its 200 day SMA. The stock is closer to that line than its peers, and has not been in Sarge's portfolio for months.
Economics (All Times Eastern)
08:30 - Building Permits (July): Expecting 1.615M, Last 1.594M SAAR.
08:30 - Housing Starts (July): Expecting 1.606M, Last 1.643M SAAR.
10:30 - Oil Inventories (Weekly): Last -447K.
10:30 - Gasoline Stocks (Weekly): Last -1.4M.
13:00 - Twenty Year Bond Auction: $27B.
The Fed (All Times Eastern)
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)