Good Morning, Wednesday. First day of September. On Tuesday, traders closed out the calendar month of August in what felt like listless action. At the index level, Tuesday appeared slanted toward the negative, with the S&P 500, Nasdaq Composite, and Dow Industrials all registering the slightest of "down" days. Only the Dow Transports (-1.2%) took a beating of any magnitude, while only the small-cap induces (S&P 600, Russell 2000) showed minor increases. Sector leadership was mixed as well, as the REITs led the way, and Energy stocks weighed upon the marketplace. Fact is that no single sector select SPDR ETF gained as much as 0.6%, nor surrendered as much as 0.7%.
All of this "churn" was not the result of a lack of interest however, as the Nasdaq Composite and S&P 500 both turned in their seventh consecutive winning month at up 4% and up 2.9%, respectively. Tuesday's action showed some pretty decent breadth, which is fitting because the breadth went missing on so many of the month's "up" days. Winners beat losers by a rough 9 to 7 at the NYSE and by more like 3 to 2 at the Nasdaq market site. Advancing volume beat declining volume by more than 3 to 2 for NYSE listed names and by more than 2 to 1 for Nasdaq listed issues. Aggregate trading volume actually increased for stocks domiciled at both exchanges, as well as for names constituent to both the Nasdaq Composite and S&P 500. In fact, the end of month action pushed S&P 500 associated trading volume well above its 50 day trading volume simple moving average for the first time since the last trading day of July. Aggregate trading volume associated with the Nasdaq Composite fell "just short" of hitting that metric and still has not reached that mark since July 20th.
Interestingly, the US Ten Year Note closed the month paying more than 1.3% and I see that yield standing at 1.325% early on Wednesday morning, up nine basis points from one month ago, while the US Thirty Year Bond yields 1.941% as we work our way through the wee hours, actually contracting two basis points from August 1st, as the deep end of the curve seems to be "bow-ing" just a bit. What seems to have happened is that Fed Chair Powell has successfully threaded the needle in recent weeks, informing markets that he (they) have every intention of winding down the balance sheet expansion program (and the sooner the better), but that the aggression with which the central bank pursues this end is still reliant upon improving labor market conditions, while also divorcing the concept of tightening monetary policy from the idea of slowing accommodation. For now. Eleven million individuals fall off the back end of federal pandemic era support this coming Monday (Labor Day).
Turn the page. On with September, the market's historically worst month. How will the economy itself and wage growth on average absorb 11 million new participants on the supply side of labor markets? How will the pandemic evolve as children around the nation head back to school, and potentially introduce community spread of the infection among their social groups and to their households? How will the pandemic evolve geographically as the seasons change? As southerners head back outdoors? As northerners head back inside? Tis' the season. The season of all that is unknowable.
Studying Interest Rate Pressures
Every year for those who don't know, a number of academic papers are submitted, presented and discussed at Jackson Hole (The Kansas City Fed Economic Symposium), even when the whole dog and pony show is done virtually. This year, one (so far) paper has caught my eye. Amir Sufi of The University of Chicago Booth School of Business presented a paper that he worked on with Atif Mian of Princeton and Ludwig Straub of Harvard. If interested, the paper can be found at this link.
Long story short, as I am not going to rewrite this work, is that the case is made that after studying steadily falling natural interest rates crossed against both the demographics of aging as well as increased income inequality since the 1950's, but especially since the 1980's, that interest rate compression is still largely, at least to some degree the (a) result of increased saving rates among certain groups. However, the source of this saving might be more refined. This, I think most economists can agree on, as savings accumulated and drawn upon as persons age draw capital away from business activity or aggressive investment.
Sufi, Mian, and Straub make the point that the top 10% of folks in terms of income distribution were responsible for 30% to 40% of total private savings across the nation from 1995 to 2019. (They get a lot more granular than I do here.) The authors find less correlation in increased saving across age group cohorts than they do across income groupings. Basically, it's not the Boomers, but a minority of the Boomers that have amassed funds that are effectively removed from circulation, suppressing activity and then drawn upon as a supplement for income in old age, and then finally on healthcare or just plain care as life meets its latter stages.
Am I simplifying this way too much so that I might fit it into my morning column just to inform interested readers that this paper exists? Of course. I am not looking to write a 30 page summary of someone else's work. I am looking to provide an avenue for inquisitive minds seeking knowledge who look for a path toward not necessarily correct determinations of economic conditions, but access to learned thinking that might become a component to one's own determinations, or if so inclined, outcome/policy modeling or remodeling. The agenda to last week's entire clambake can be found here. Bon appetite.
On Tuesday, we learned that home prices have soared more than 19% in a year's time to this past June. We also learned that consumers were considerably less confident in August than they had been in July. That's a Delta variant story. In addition, we learned that US Treasury Department estimates for when the Social Security trust fund will run out of dough has shortened during the pandemic.
As pandemic induced business closures and payroll deductions took a toll on social security tax revenues, the virus has left many with long-term health issues requiring long-term care. All as the "Baby Boomers" start to retire, and both birth rates and reduced immigration have taken a toll on supplies of labor available for participation. In addition, as the CPI has warmed a great deal this year, so must the payout to beneficiaries next year. Early estimates are for a potential 6% cost of living increase for 2022.
As it stands now, the fund should be able to pay full retirement benefits until 2033, one year earlier than prior estimates, and the disability program should not run dry until 2057, eight years earlier than prior assumptions. How to halt this pending doom for our aged, and our disabled? Two ways. Divert funds from elsewhere to replenish the program. Or... borrow more of the green stuff to replenish the program.
One thing I do not think you and I have to worry about is either of this nation's major political parties finding the will to take the blame to ever terminate nor significantly reduce these programs. Not gonna happen. Oh, they will use the idea as leverage to scare voters their way, or keep their base in line. It's a political football, and it's a political priority. Both sides know it. They just hope that you're ignorant. In fact, they count on it.
Clap, Clap, Clap...
On Monday, in an interview published at Barron's, SEC Chair Gary Gensler said that a full ban of payment for order flow is "on the table." Gensler said that the practice has "an inherent conflict of interest."
I tell you, I am starting to like Gary Gensler more and more all the time. I have a feeling that he and I might not agree on all that much politically, but we are certainly aligned on a number of issues, and apparently anything that skews the purity of honest price discovery, which should be sacred to all of us, is on that list.
On that note, can someone of influence please talk the National League out of adopting the DH Rule. I don't mind the two leagues having different rules, but if they must assimilate, why dumb the game down?
Alphabet (GOOGL) and Apple (AAPL) . A law passed in South Korea requiring the two firms that basically provide operating systems, and hence... app stores to the smartphone world to allow alternative payment systems on those app stores. Failure to comply will result in a fine equal to 3% of South Korean revenues.
It's not South Korea, but the potential for regulators around the world to adopt something similar that could threaten the profitability of this duopoly. Both firms collect commissions of as much as 30% on transactions made in their app store platforms. Legislation has already been introduced in the US Senate that would allow developers to circumvent not only app stores provided by the two firms, but also their payment systems. The UK and EU are also known to be looking at this. Something to take action on? For me, right now... something to just keep my eyes on.
1) Did Reinitiate a small CrowdStrike (CRWD) long on Tuesday night's after hours selloff. They crushed the quarter. So far, up small.
2) Did the same thing with Zoom Video (ZM) the night before. So far, down small.
3) Sitting on my hands, with Wells Fargo (WFC) . Apparently, regulators are dissatisfied with the bank's progress as far as compensating victims of the bank's past behavior is concerned and in the cleaning up of current compliance issues. Is a fine coming? Are new sanctions on the way? Possibly. Listen, we are up nicely in this name, +25% even after Tuesday's selloff. We bet on CEO Charles Scharf, and on the likelihood that the Fed will eventually lift its cap on the bank's assets. My view is that Scharf is still the right person, and that even if it takes longer, and the stock reacts poorly on some kind of regulatory action, this name among all of its peers remains a coiled spring.
Readers will note the break-out from that closing pennant in July, followed by the negative reaction on Tuesday that comes in the wake of a sloppy double top in August. Short-term? WFC gave up both the 21 day EMA and 50 day SMA on Tuesday. The former forced out the swing crowd. The latter came as a kick in the shins to some portfolio managers, though that crowd does not appear to have run for the hills just yet. WFC retakes the 50 day line, I take a knee and go into the half with a lead. The name fails here, and I look to add down to $41.
Economics (All Times Eastern)
08:15 - ADP Employment Report (Aug): Expecting 596K, Last 330K.
09:45 - Markit Manufacturing PMI (Aug-F): Flashed 61.2.
10:00 - ISM Manufacturing Index (Aug): Expecting 58.7, Last 59.5.
10:00 - Construction Spending (July): Expecting 0.3% m/m, Last 0.1% m/m.
10:30 - Oil Inventories (Weekly): Last -2.979M.
10:30 - Gasoline Stocks (Weekly): Last -2.242M.
The Fed (All Times Eastern)
12:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CPB) (.47)