Had To Smile
The regular trading session on Thursday told traders a lot. Sure, equity markets sold off a bit. Kind of. The Nasdaq Composite gave up a whopping 0.14% on light trading volume. The S&P 500? Beaten far more severely, at -0.16%, also on little action. Small-caps and Mid-caps rallied. Winners and losers ended the day close to tied at the NYSE. In fact, at the Nasdaq market site, they were tied, and advancing volume up at Times Square actually did manage to beat declining volume. You had to smile. You really had to smile.
Overnight, Wednesday into Thursday, China's Province of Hubei started counting those merely clinically diagnosed as confirmed cases of the Covid-19 virus. This retroactively forced the number of total cases, as well as the number of deaths attributed to the virus, much higher. Apparently, the problem is far broader than anyone who simply bought the numbers at face value all this time had realized. I don't think it really took a whole lot of common sense to figure that one out ahead of this change, and that's the way markets reacted after the algorithms were done trying to force a larger event.
The facts? Sectors that led on Thursday were defensive in nature. Utilities, REITs, and the Staples ended the day broadly in the plus column. In fact, the major large-cap indices had all gone green at one point or another in the afternoon. The minor turn toward the negative into the closing bell had nothing to do with China, or that terrifying virus. The Fed caused that wiggle that ran through the marketplace.
Confidence, I Think
So, it came out that the Federal Reserve would cut back on its repurchase agreement operations more quickly than any of us had thought. On Thursday, the Fed announced that starting with next week's operations, maximum levels for providing overnight cash will drop from $120 billion to $100 billion, while the allowance for term repos will drop from $30 billion to $25 billion, and then drop again on March 3, if nothing blows up.
The fact that the Fed is trying to get out of the short-term repo business surprises nobody. The fact that, for a second month in a row, maximum allowances would be drawn back would have not surprised the guy writing this piece -- had there not been an obvious impact placed on both global economic growth, and multinational large-cap corporate performance that will start becoming more and more obvious in coming weeks as estimates of all kinds are sliced and diced.
Not that one is reliant upon the other, if financial markets continue to play ball. To be fair, as a fierce supporter of free market pricing for all things from gummy bears to credit markets, I would love to see the Fed enabled to completely withdraw from open market operations. That said, I also would prefer to not witness another inversion of our most important Treasury yield spreads, and see those inversions hold, so I have to become comfortable with being uncomfortable. I live with perverse impacts upon free market pricing as I live with the Designated Hitter rule in the American league even as that rule has turned the beautiful complexity of chess into a simple game of checkers.
Basically, I think it an acknowledgement that external impacts -- such as the coronavirus still primarily contained to China, as well the dumpster fire that is the German economy (see this morning's preliminary Q4 GDP print) -- have not been enough to more than just shave U.S. economic performance. Confidence? Or tapering ahead of easing? Guess we'll know for sure soon enough.
Sticking Up for Judy Shelton
People like to bash Judy Shelton because she thinks differently. Shelton has run into an apparently bi-partisan lack of support among those with a seat at the Senate Banking Committee as her nomination to the Federal Board of Governors proceeds. Now to be clear, I do not align well with Shelton on all matters. I do, however, absolutely love that she thinks for herself. Has not the very lack of diverse economic thought been a persistent problem not just at the Fed, but among central bankers around the planet for decades? Have not central bankers in general, consistently failed to understand how significantly (or not) certain inputs impact what were thought to be simple outputs such as wage growth, consumer level inflation, or productivity?
Shelton's many ideas are now being used to make her sound foolish. Okay. Know what? Would you prefer that every single economist approach monetary policy from exactly the same background? The same economic credentials? The same political or personal ideologies? Shelton has doubted the very necessity of a national central bank in the first place. That doesn't mean that she wins over Washington, DC in its entirety, but that perspective is certainly healthy enough for inclusion.
Shelton, in the past has supported a gold standard. Think if she is confirmed that the U.S. and then planet earth suddenly gives up on their cotton candy fiat currencies? Of course not. Yet, what economist worth their salt has not at least spent time in careful consideration of just how to once again back currency with hard assets in such a way as to allow elasticity in money supply, or at least create avenues for both preventive as well as responsive policy making. If you have not, well, no offense, but you're not an economic thinker. (By the way, this is possible. See me after class.)
Of course I think the Fed should be independent. But also of course, the Fed needs to be cognizant of dollar exchange rates. I think most who understand these matters also believe this. If anything, the Fed has become more independent in recent years, as the Jerome Powell FOMC, though it was clearly policy error at the time, did try to increase the Fed Funds Rate and draw back on the size of the balance sheet simultaneously, although being warned against the pursuit of both policy aims at the time here in this space as well, as elsewhere, over and over.
The Fed kept the Fed Funds Rate at 0% or darned close to it right through 2016, far beyond what would have been completely logical increases years earlier. Anyone else think that all three QEs were entirely necessary? Anyone else think that "Operation Twist" was simply the most ridiculous policy move of our times. Suppressing the long end of the curve in order to provoke economic growth. They actually thought that would work. Really, how bad can some variance in economic thought be?
All I ask of those comprising the Senate Banking Committee is not to scoff at something, or someone, different. The world needs more "outside of the box" thinkers, and this one deserves careful consideration, not wise cracks. Praise for the outlier? No. Not praise, but bring the same seriousness to the discussion that you would bring in judgement of someone less controversial.
Use the Force
You know. If I had a light saber, I would be so very cool. Hmm... Then again, I've seen more than one guy hurt himself by accidentally hacking though thick foliage with a machete. Never mind. I'll do without.
In a somewhat surprising move, a federal judge actually granted a preliminary injunction that would block Microsoft (MSFT) from working on the DOD's (Department of Defense) potential $10 billion cloud computing project known as JEDI (Joint Enterprise Defense Infrastructure) in response to a complaint made by Amazon's (AMZN) AWS that the selection process had been unfair due to an ongoing rivalry between President Trump and Amazon CEO Jeff Bezos. Bezos also owns The Washington Post, a newspaper that has been highly critical of the president. Amazon has been ordered to put up $42 million for costs associated with the case, just in case it is determined that the injunction should not have been ordered.
From the cheap seats? Of course this is a coveted deal for the provider. Not just $1 billion a year potentially over 10 years, but for all of the ancillary business that the deal could possibly be leveraged into. AWS is the industry leader, but there is no doubt that Microsoft has fast been gaining market share. The JEDI award was certainly a major victory for Microsoft. That said, given the obviously high level of execution of both platforms, I don't think any astute investor would have been surprised had the DOD gone with either of these two firms. The surprise would have been had the DOD gone with either International Business Machines (IBM) or Oracle (ORCL) , as both of those firms were also involved in the process.
There is no way for us, this far removed from this decision, to know if there was indeed any bias that factored into the decision that was made. How can I possibly know? I do know two things though. One, this matter needs to be resolved quickly. Lt. General Bradford Shwedo was quoted in the Financial Times on Thursday evening. He said "Any further delays negatively impact our national security, both now and in the future. Our adversaries are employing these technologies and our war-fighters need this capability now."
Readers well know that I would like to add to my Microsoft long at a discount. Readers also know that I got a little too cute ahead of Amazon earnings and I missed that pitch. How's this for a consolation prize? I promise to buy the shares of the loser. Oh, I'll probably buy the shares of the winner too. That's if I can just be a little less adorable about it.
Note to Readers
I wish you all a nice President's Day. I will be taking next week off and heading south for my annual Spring Training trip. I will visit my beloved New York Mets as well as the Miami Marlins, having always been a Don Mattingly fan. That said, I will not be writing up my financial columns at zero dark thirty every morning. Even I sleep when on vacation.
Market Recon shall return (God willing) on Monday, February 24, and I'll top that day off with an appearance as "The Closer" on "The Claman Countdown" (starring Liz Claman) at the Fox Business Network. See you then.
Economics (All Times Eastern)
08:30 - Retail Sales (Jan): Expecting 0.3% m/m, Last 0.3% m/m.
08:30 - Core Retail Sales (Jan): Expecting 0.4% m/m, Last 0.7% m/m.
08:30 - Import Prices (Jan): Expecting -0.2% m/m, Last 0.3% m/m.
08:30 - Export Prices (Jan): Expecting 0.0% m/m, Last -0.2% m/m.
09:15 - Industrial Production (Jan): Expecting -0.2% m/m, Last -0.3% m/m.
09:15 - Capacity Utilization (Jan): Expecting 76.9%, Last 77.0%.
10:00 - Business Inventories (Dec): Expecting 0.1% m/m, Last -0.2% m/m.
10:00 - U of M Consumer Sentiment (Feb-adv): Expecting 99.4, Last 99.8.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 676.
The Fed (All Times Eastern)
11:45 - Speaker: Cleveland Fed Pres. Loretta Mester.
