Optimism
The dictionary defines optimism as hopefulness or confidence about the future or the successful outcome of something. I like confidence more than hopefulness. We hope "everything turns out OK." When faced with a challenge, we're "pretty sure we'll figure it out." There is nothing at all wrong with hope, for it is hope that keeps civilization going when outcome becomes uncertain. Indeed, it is when all hope is lost that people become dangerous.
However, confidence means, at least in my experience, that one has an idea. If one doesn't "know," that individual is not completely in the dark. Confidence is the difference between "I can't" and "not yet"... always go with not yet.
Have you landed that job? Not yet. Have you made that first million? Not yet. Have you figured this thing out? Not yet. Have you lost weight/improved your conditioning? Not yet. Have we defeated this virus? Not "I can't" nor "we can't." and not "I hope"... Just "not yet."
Are major equity indices trading at or near all-time highs on what some call outlandish valuations a mere sign of optimism? Of course. Is it just hope, or confidence? Or maybe just a lack of confidence in the U.S. dollar? Now the questions come, as if hiding in a desert gully only to realize rather abruptly that the lightning you saw in the distance is about to drastically change your environment. Let's try to take this apart piece by piece, and see what we come up with, shall we?
Price Discovery
As markets come off another solid week, we have a vaccine story, an earings story, an energy story, a fiscal/monetary policy story and a debt story seemingly all lined up to support higher prices supported by higher structural valuations for nearly everything, with the notable exception of longer-term debt securities. Nobody seems willing to gamble against medium- to long-term inflation, and probably for good reason.
According to FactSet, with 74% of the S&P 500 already reporting their fourth-quarter performance, up from 59% from a week earlier, the blended rate (reported and expected) of year-over-year earnings growth for the quarter is now 2.9%, up from 1.7% in a week's time. Blended revenue growth has improved slightly over the past week from 2.7% to 2.8%.
Now, I want you to think about this: 2020 was a tough year, for you, for me, for corporate America. Yet, the S&P 500, in aggregate, is almost surely now going to show positive earnings and revenue growth for the fourth quarter of 2020 over the fourth quarter of 2019, which was prior to the pandemic's impact on North America. (I know, we still have retail to report.) This was almost unthinkable just a few months ago.
Moving forward? Yes, earnings growth for the second and third quarters looks fantastic. That's because the comps reflect the negative impacts of the pandemic on the economy. As of Dec. 31, consensus earnings growth expectations across the analytical community for the S&P 500 for the fourth quarter were for -9.3%.
Only the Industrial and Energy sectors have underperformed expectations, while Materials, Financials, Technology, Health Care, Communication Services, Consumer Staples and Consumer Discretionaries (seven sectors) all beat consensus by such wide margins that perhaps you and I should think twice about considering anything thought to be "consensus" as even remotely reliable. I mean, if a ballplayer just can't throw strikes, then maybe someone else should pitch.
The S&P 500 now trades at 22.2 times the next 12 months' earnings expectations. Now, before you cry "valuations are stretched," is it the price that is wrong, or the expectations that are incorrect. Serious food for thought.
Blame 'Operation Warp Speed'?
The rollout of the Covid-19 vaccines may have been far sloppier than expected. That said, the rapid development of these vaccines has put civilization two to three years ahead of where it might have been in a different era. There is no doubt that, of late, the curve has turned for the better. New infections are in decline across the nation, as are hospitalizations, with "hopefully" Covid-related deaths to follow. Deaths did spike last Friday.
We hear medical professionals on television speak of some version of a return to normality, which is incredible just to hear. Some talk mid to late summer. Others are talking about as soon as April for when an improvement to daily life might be noticeable. This, along with the expected passage of a next-phase fiscal support package, is the driver.
In other words, an improving pandemic outlook supported by ongoing ultra-loose policy is now the bus, more than market or corporate fundamentals. Longtime readers know I have always taught that fundamental analysis defines which way the bus will move, while technical analysis determines where the bus stops are. I have also always taught that for a trader/investor to be truly successful or skilled at his or her craft that one needed to be as adept in working their way through a corporate balance sheet as they are in the art of pattern recognition. Well, gang, as if you did not know, you also need to understand how taxation, government expenditures, interest rates and money creation all impact pricing as well. The good news? You can do this. You just need to put in the work.
Sweet Kisses
Valentine's Day? Uhm... No. Note that, toward the end of our three-day weekend, bond traders sold the long end of the U.S. Treasury yield curve with some "prejudice." (The legal definition of the term is simply to cause harm.) The 30-year bond gave up the 2% level late Friday and seems to be approaching 2.05% as Monday night melts into Tuesday morning. The U.S. 10-year note has been flirting with 1.25% since about 21:00 ET Monday. On that note, the Treasury Department will drag $27 billion of 20-year paper to market tomorrow (Wednesday) afternoon.
What does this tell you? Medium- to long-term rates are headed higher (hope you already refinanced), and yield spreads are expanding as the curve steepens.
Signs of growth? Signs of inflation? Even if the January Consumer Price Index (CPI) said differently? The U.S. 10-year/3-month yield spread went out at 116 basis points on Friday. Here on Tuesday morning, I saw it at 120 basis points. Over five days, U.S. 10-year yields have swung 12 basis points while the U.S. 3-month, due to its 90-day maturity lifespan and the fact that the Federal Open Market Committee (FOMC) has stated an intention to lean on the short end, has permitted a set-up for growth/inflation to not just exist, but perhaps to flourish.
Remember, there are three ways out of broad national debt once debt becomes a crisis. The most desirable and most difficult to achieve in a large, mature economy is pure growth. Yes, government spending counts as growth. No, it is not pure and cannot sustain itself, unless that growth expands to include organic revenue generation at the businesses and household levels. Options two and three are both ugly and painful. Option No. 2 is austerity. There is absolutely no political will to go that route. The third is to debase the currency, which has been well underway, on and off, since 1913.
This is what the Fed is really there for, but now with, as I explained last Friday, the honest U.S. debt to GDP ratio approaching 400% and President Biden basically going on the road to make a supportive case for his $1.9 trillion stimulus/support plan, the idea moves to the center ring. He'll be in Milwaukee today, will visit a plant run by vaccine provider Pfizer (PFE) this Thursday, and address the G-7 this Friday, where he is likely to encourage a globally coordinated approach to fiscal policy. The more folks in the pool, the more scalpel-like and less sledgehammer-like the soon-to-be, if not already necessary, debasement becomes.
Listen, gang... I only write essays. I think all financial readers need to read "Endgame: the End of the Debt SuperCycle and How it Changes Everything," written by John Mauldin and Jonathan Tepper in 2011, then back it up with "Currency Wars," written by James Rickards in 2012, to at least gain a basic understanding of what the nation and planet will be up against at some point. Yes, these books are a little aged at this point. There is, of course, more to read. This is where you begin.
Speaking of SuperCycles....
Black gold... Oil that is. Natty gas, too, for that matter, and it does not stop there. Front-month West Texas Intermediate (WTI) crude futures were back below the $60 level early on Tuesday morning after peaking at nearly $61 per barrel. Not only has progress been made versus the pandemic, and not only is the U.S. dollar showing signs of renewed softness, but a deep freeze has forced Texas to shut oil refineries in the state, reducing short-term availability while pipelines are scuttled elsewhere and labor strikes potentially threaten Norwegian production. All this, while the Saudis had already signaled a pullback in output.
The Electricity Reliability Council of the state of Texas has been forced to call for rolling shutdowns as widespread power outages have become a potential reality. I know fossil fuels pollute and have become a political football, but you know what else oil, natural gas and coal are? Reliable.
I am sure that most of you have already seen Goldman Sachs and J.P. Morgan refer to a new SuperCycle for oil. Indeed, Cristyan Malek, who heads oil and gas at J.P. Morgan, states that oil could "overshoot towards, or even above $100 a barrel. So much for headline-level inflation staying out. Good thing we're energy independent. Oh wait... we're not. Anymore.
Oracle of Omaha
Later today (Tuesday), Berkshire Hathaway (BRK.A) , (BRK.B) will file its quarterly form 13-F with the Securities and Exchange Commission (SEC). This will reveal its holdings as of Dec. 31, the end of the fourth quarter. Some may recall that back in November, as Berkshire revealed holdings as of the end of third quarter, that the company had made use of a confidential filing for an unidentified investment, which the SEC does grant use of if there is good reason to believe that public disclosure would impact the share price of the given corporation, thus making competition of any intention to purchase a set number of shares more difficult.
There is quite a bit of speculation over just what this mystery corporation is, which I will not go into due to the fact that I am long to have derivative positions in several of the names I have seen written about.
This is one of the charts that I showed you on Friday afternoon at Yahoo Finance if you were watching. Yes, I am long the stock, but I did receive a request to go over this one, more slowly, so here goes. Readers will see that a cup with handle pattern formed from the early days of this pandemic through late October. That's when this stock rallies off of the handle, creating a gap, which could eventually be problematic.
The shares take and hold the pivot ($235) in early November, and the breakout runs out of gas. Why do I have faith (or confidence) in this rally? Because the shares found support at pivot when the algos tried to sell the name. Of course, that was also the 50-day simple moving average (SMA) at the time, so we never really know, do we? That said, my price target remains $283, and my panic point $218, or an 8% discount to pivot.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (Feb): Expecting 5.9, Last 3.5.
16:00 - Net Long-Term TIC Flows (Dec): Last $149.2B.
The Fed (All Times Eastern)
11:15 - Speaker: Reserve Board Gov. Michele Bowman.
11:10 - Speaker: San Francisco Fed Pres. Mary Daly.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AAP) (1.97), (AN) (2.01), (CVS) (1.24), (ECL) (1.25), (PLTR) (0.02), (VMC) (.99), (ZTS) (.87)
After the Close: (A) (.90), (AIG) (.93), (OXY) (-.58), (RNG) (.27)
