Blood on The Saddle
There was blood on the saddle and blood all around
And a great big puddle of blood on the ground.
-Everett Cheetham (performed by Tex Ritter), 1945
After a couple of rather quiet days, the great rotation out of growth, or should I say, out of software, semiconductors, computer hardware, and the internet, as well as some media and entertainment type names, and into the open arms of the energy, and financial sectors, and the airlines as well as the cruise lines was indeed back on. Hooray. What happened? Simple. We have been mentioning on an almost everyday basis now, the competition between what the US Ten Year Note yields and what the S&P 500 pays in average dividend yield. That level has been around 1.48%, and on Wednesday that spot was indeed the trigger. Understand that this is a moving target. As equities trade broadly up or down, this average dividend yield like yields on debt securities moves inversely to price.
On Wednesday, I saw the US Ten Year at the lows, giving up as much as 1.497%. Of course, in theory, this makes US Ten Year paper more competitive in the eyes of revenue driven, revenue dependent or yield starved investors. More demand here means less demand there (equities), especially for growthy type equities that had become crowded trades over the long-term. Need to pay some bills? Meet some obligations? There is no question as to where that funding will have to come from. The smaller to mid-cap names have fared somewhat better than large cap tech, but make no mistake... there is a circle of life/death here. While smaller caps are more dependent on broader economic growth than some large caps, and a steeper yield curve can be reflective of expectations for future growth/inflation, smaller caps also tend to be more highly dependent upon the ability to cheaply service debt in order to run their businesses. After "they" finish beating down some of the fancy stocks that measure market pricing in sales multiples instead of earnings multiples, they will come for smaller cap businesses. Make no mistake.
The All-Star Team
One interesting thing about this rotation, is that for the most part, price discovery has been a matter of micro-second execution and not one of thoughtful discernation of pertinent input. So, when you spot blood on the saddle, which is that steepening yield curve, there is also going to be plenty of quality in that great big puddle on the ground. Notice the Dow 30 stocks that fell 1% or more on Wednesday? Salesforce (CRM) , Microsoft (MSFT) , Apple (AAPL) , Intel (INTC) , Nike (NKE) , Walmart (WMT) , Johnson & Johnson (JNJ) , McDonald's (MCD) , and Home Depot (HD) . Folks, this is the darned all-star team of corporate execution.
I mean, okay, Intel was down for a reason, but (check this out), Intel was off 2.09%, while the Philadelphia Semiconductor dropped a stiff 3.11%. Intel, down for a reason, outperformed its peer group. Nvidia (NVDA) gave up 4.5%, Advanced Micro Devices (AMD) surrendered 3.9%, Broadcom (AVGO) was down 3.6%. More all-stars. More beatdowns. In fact, I had to take off a partial in AMD as that name went through my panic point like a hot knife through butter (and I had to do it on live TV).
Let's take a look at some of those names found in that great puddle. They sold Salesforce and Microsoft, cloud kings, and integral to working from anywhere which is a concept that's not going anywhere even once this virus is defeated. Did you see what "they" did to Zoom Video (ZM) ? What if they had reported a lousy quarter? They sold Apple, still sitting on a mountain of cash, and smart enough to have borrowed heavily when debt was cheaper. They sold Walmart, even as Walmart makes noise about moving into consumer banking. They even sold Johnson & Johnson. Good thing JNJ isn't trying to save a nation or a planet or anything. Oh, wait... never mind.
While I am still looking at tech sector weakness as opportunity, this will not be like taking candy from a baby. This is a longer-term opportunity. There will be winners and losers. There will be survivors and there will be those who disappear. Then there is the Federal Reserve Bank. We have been discussing the potential for a renewal of "Operation Twist" here in this column daily. The rest of the macro world seems to have caught up to that thinking on Wednesday. As if the imposition of overt yield curve control down under was not some kind of clue.
Futures markets trading in Chicago are now pricing in an 8% chance of a short-term rate hike by year's end. Fed Chair Jerome Powell is set to speak today from the Wall Street Journal Jobs Summit. There is a Q&A session scheduled for this event. Powell will have to publicly respond very likely to all of the questions now swirling around in your head. Algorithms will whirl. Don't be caught off guard. Tomorrow is "jobs day" as well. I like the quote attributed to Fed Gov. Lael Brainard on Wednesday in response to a question regarding Treasury markets. "Some of those moves last week, and the speed of the moves, caught my eye." What a relief. Imagine if a member of the Federal Reserve Board of Governors had not noticed significant changes in Treasury markets. Sometimes, you just can't make this stuff up.
Listen, the past two "Operation Twists" in 1961 and in 2011 have both been effective at flattening the curve, and at taming the long end without overtly expanding the Fed's balance sheet. That said, this is not easy out. When you place increased unnatural force on what is supposed to be natural price discovery, you force both outperformance and underperformance into corners of the economy that probably should not have been impacted. (These are called bubbles.) That last Operation Twist did what it was supposed to do, but it also killed velocity, slowed wage growth, exacerbated income inequality, and prevented the post-Great Financial Crisis economic recovery from ever reaching potential. But, by all means, do your thing. Never forget, the Fed is not on your side. Your participation in the economy is welcome, but you might also very easily serve as collateral damage.
When The Bough Breaks
For the short-term, volatility reigns. No doubt. Despite a relatively tame reading for the VIX, and despite a lack of interest in index related put option buying.
So, still enough complacency. Still enough investors holding on...
The Nasdaq Composite has now given up the 21 day EMA, and the 50 day SMA. That last gasp you heard on Wednesday was portfolio managers in aggregate fighting with their risk managers as that blue line provided Wednesday resistance. That said...
The S&P 500 continues to hang on for dear life, even after giving up 1.3% on Wednesday. The S&P 500 survived this very same test both in late January, and in late February, and now again in early March. The S&P 500's 50 day simple moving average, currently at 3817 is the bough. The index closed at 3819. As I finish up this column, I see the earliest of pinkish light to the east just start to illuminate the sky, I see my dear friend... the man in the blackened window disappear once again, and I see S&P 500 e-mini futures trading below 3800.
It's early, but I would expect an attempt to be made to rally the S&P 500 at least to the point where that 50 day line is either held or retaken. Without such a move, not only will the cradle fall, but the cradle will rock. Failure here would feel like an avalanche, and in this age of passive investment, possibly impact even recent winners. Now, load up. Full battle rattle.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 730K.
08:30 - Continuing Claims (Weekly): Last 4.419M.
08:30 - Unit Labor Costs (Q4-rev): Flashed 6.8% q/q SAAR.
08:30 - Non-Farm Productivity (Q4-rev): Flashed -4.8% q/q SAAR.
10:00 - Factory Orders (Jan): Expecting 1.7% m/m, Last 1.1% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -338B cf.
The Fed (All Times Eastern)
12:05 - Speaker: Federal Reserve Chair Jerome Powell.
Today's Earnings Highlights (Consensus EPS Expectations)