The equity market had seemed to put in a nice day on Tuesday. The major (and even minor) equity indices all showed a great deal of strength, until they did not. There was a rough 30 minutes of what felt like free-fall type activity that started abruptly just about 45 minutes ahead of the closing bell, and stopped just as abruptly as it had begun with 15 minutes to go.
There was enough grousing among professional traders over just how light the trading volume had been. That said, aggregate trading volume increased on Tuesday from Monday for stocks listed at both the Nasdaq Market Site and the New York Stock Exchange. Trading volume directly attributable to component securities of the S&P 500 did tail off a bit, and for that index, trading has generally remained lighter since early April than it had been during the late February through early April period.
How useful that information is, I am not sure. It could mean that while traders have been quick to adapt to the current environment, investors may feel forced to preserve cash. That would be completely understandable. Digging deeper, market internals were mixed on Tuesday -- far more positive for Nasdaq-listed names than for those listed at the big board.
What gives? I think though the current environment presents as awfully complex, the risk proposition offered remains clear and simple. As states, even states that have been hard hit by this terrible virus, either start to reopen economically, or plan to do so in staged fashion, there is a certain level of market optimism restored that economic activity increases. Anything is growth from nothing, and in a lot of places there has been nothing.
The other side of the coin would be that with increased activity likely comes increased risks to public health. The risk is one of estimates. Regardless of outcome, most investors, most leaders -- and in fact, most common folk, will either underestimate the strength of this economic recovery, or the threat to public health. You really cannot have it both ways.
While on a day to day basis, I make use of what knowledge I do have of technical analysis, this is by necessity, not choice. I would rather invest in fundamentals themselves supported by economic data. For, we all know that price is considered truth, and while economic data and fundamental analysis do not lie, both at this time are more historical than forward looking. By bringing in significantly a time horizon, an investor becomes a trader, and by doing so, in my opinion, makes goal setting (and maybe reaching) more realistic.
How can one set investment goals that look out a year, when most of the companies that we invest in cannot? How can one say where the economy will be, beyond "vastly different" in a year, when we cannot accurately assess the impacts of policies implemented and debt levels that we would have referred to as "perverse" had we been in the comfortable seat of judging the actions of others and not viewing the action from the center of maelstrom instead?
What do I think? For long-term investors, permanent short-term rates, or enforced yield curve control will disincentivize what has been thought of in the past as the 'safety' trade. Don't weep for the Treasury market. There will be a buyer that will pay far more than market value. That's how the monetary base is grown as rapidly as necessary at minimal public expense. Where does this push the flow of capital? Riskier assets. We've seen that movie before. Equities, then investment grade corporates, then sub-investment grade, on down to the sloppier municipals as there will be a search for yield. Do the Federal Reserve's enforcement of easier credit create a possibility that some companies might survive that should not have? The goal here is the preservation of employment, while making sure liquidity flows, so yes. It is up to us to be smart ( or as smart as we can be) about what we do.
The focus, I think, still has to be on health care, as human beings remain a long way from where they need to be in terms of public comfort levels. That means therapeutics and vaccines. That protect, and that do not harm. Software and the cloud remain important -- and will, in my opinion, beyond the foreseeable future.
Folks work remotely now. Companies that could, have evolved. This does not completely unwind. That evolution will have to be run on semiconductor production. Then there is e-commerce and the essentials. Are folks going to keep ordering what they can online? Are folks, even once this bad dream passes, ever going to leave the cupboards bare? No, the new perception of what one considers being out of toilet paper, or canned food is going to be far different than what it was.
Some of these groups may actually be behaving well over recent weeks. In my opinion though, there are groups that will reopen as far smaller businesses than they once were. That's just a fact. As the U.S. economy that shut down was a $22 trillion economy, the one that re-opens will be smaller, so what comes off of the deck will look like growth, perhaps on a month over month, or even quarter over quarter view, but year over year will look far more negative. How do travel, lodging, or recreation even begin to recover if the consumer is unwilling to go on vacation? If the business opts for video conferencing instead of the business trip? What then happens to the restaurant whose best customers were those who were entertaining customers of their own?
Remember the experiential economy? Ballgames? Concerts? The theater? How about a nice cruise through the tropics? That economy has retreated to the virtual, and this virtual world, while a social regression in the evolution of the human race, does not run the risk of getting people sick. There will be an attraction there, that will not easily ebb into the background.
Task Force No More
Headlines circled after Vice President Mike Pence indicated while speaking with reporters that perhaps the White House coronavirus task force could be wound down over the next few weeks and pass the baton on to the federal agencies that are already in place whose primary objective is already the management of emergency situations.
Without going into anything political, my first thought is that anything resembling the termination of this task force in the short-term is probably premature. It is quite true that the press conferences had become at times off-topic as well as adversarial in nature. So, maybe these press conferences need to be held less often, and run by just one senior member of the task force well prepared to answer questions. The fact is that average Americans have come to see Drs. Fauci and Birx as straight shooters, and pipe down when these two speak. We will need to hear from these two more regularly, not less -- even when what they say is not what we want to hear.
I see the results. Honestly, right now they are almost meaningless. To be upfront, I did maintain a very small (25% of where it was last week) Walt Disney Company (DIS) long position going into Tuesday evening. So, results are no guarantee of future performance. The old financial industry adage could not be more true than it is for a firm that performs best when large crowds of consumers are willing to pay handsomely for what amounts to "shared joy."
What I am trying to say is that from both a family perspective, as well as from a corporate convention type view, there might be no firm that had a better toehold in the above mentioned experiential economy. Yesterday's roast beef? I would not undersell the company's brand, or the loyalty of its legions of fans. That said, the future of core businesses such as theme parks, cruise lines, lodging and the box office are obviously not what they once were -- even in a perfect recovery.
On an adjusted basis, the firm posted earnings growth of -63% on revenue that actually did increase. Some thanks to the acquisition of 21st Century Fox there. However that acquisition also created an increased debt load. Therefore, Disney's board made the decision to suspend the H2 dividend (Disney pays shareholders twice a year) that was to be paid in July. This move will preserve a rough $1.66 billion in capital. Smart move. Investors will not like it one bit. That is, for sure, a short-term negative.
Is there hope? Disney optimists only have to point out a few days, to May 11. This is when the firm is scheduled to reopen Shanghai Disney. This event either draws up blueprints for a safe return to reopening parks around the planet in due time, or not. Do I sell what I leave ahead of that event? With exposure so small at this point, I think I would like to see how that goes with a little skin in the game. I repeat, "a little" skin in the game.
On My Radar
Ever hear of Descartes Systems Group (DSGX) ? That's okay, a lot of folks have never heard of this Waterloo, Ontario (Canada) based cloud-based software provider whose focus is really on the logistics of the supply chain. A field likely to see a sustained increase in demand? As economies struggle with reopening? Perhaps.
The firm services transportation providers, and all that entails in conjunction with companies on the distribution end of the business. In full disclosure, I am not in this name, and it does not trade very heavily at all. I have been, though, watching the shares trade of late, with a technical curiosity. I may take the plunge, I may not. If I could just place the pivot, I would have a clearer path for the shares in my head. Take a look.
You see, there are possibly two cup with handles present. Yes, the daily Moving Average Convergence Divergence and Relative Strength both look to be in good shape. Back to the patterns created. The orange cup created a handle in mid-April with a pivot of roughly $40. If that's the fact, the game has been played and I'll move on. However, after the shares broke above the 200-day SMA, we see another small handle created in blue. This would provide a pivot of almost $44. That pivot has, to this point, simply provided resistance, twice. Should the stock knock on that door a third time, does it open? If it does, and there is a break-out, prices in the area of $53 become technically possible.
There is no home-run here, but I don't play the game to hit home-runs. This is the era of getting on base and then hoping someone else on the team (the trend) can drive you home. Can this name be a single or a double? Yes, I think it can. I do want to see one more attempt that that higher pivot point.
Economics (All Times Eastern)
08:15 - ADP Employment Report (Weekly): Last -27K.
10:30 - Oil Inventories (Weekly): Last +8.991M.
10:30 - Gasoline Stocks (Weekly): Last -3.669M.
The Fed (All Times Eastern)
13:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.