Surrender at Appomattox
The month is November, the year 2020. A nation stands politically divided, One candidate for president appears very close to reaching the required 270 electoral votes that would grant him the right to occupy the Oval Office for the next four years. The other candidate, the incumbent, has the support of almost half the nation, an energetic base at that, and claims to have been wronged in one way or another at the state level in a number of closely contested spots. The media paints these claims as baseless, but the media is not trusted by this energetic base that I speak of, so that means absolutely nothing.
What do I think? How the heck do I know?
We all have personal political prejudices. None of us really know if this incumbent does have a legitimate case. The memes on social media are just plain stupid and meant to be incendiary. There are some stories that, if true, appear troublesome at least from a statistical perspective, but not impossible. There is no doubt that, moving forward, this nation needs to seek legislation that provides for a minimal standard of transparency and verification of eligibility that all 50 states must clear, so that legitimacy can never again be doubted.
As for this election, I do not think it can be saved. There is almost no way that half the country will believe that this election has not been stolen from their candidate. One side believes it is already being stolen, the other fears that this will be done through the courts. We as a nation do not have time for this. The virus spreads, forcing economic recovery to slow.
Let me tell you about a general that you likely have a poor opinion of. The man was, if anything, charismatic and revered enthusiastically in his time by his own troops. That general has become a historical villain, as he fought on the wrong side of perhaps the most painful issue ever tackled by our nation. He did make an ethical and quite honorable decision that most of you never heard of on his way out, though. That decision definitely saved lives, and may have saved the soul of a nation. We all know that on April 9, 1865, General Robert E. Lee surrendered the Army of Northern Virginia to the Union Armies under the command of Ulysses S. Grant at Appomattox Court House in Virginia. This is the headline. There's more.
That very morning, Brigadier General Edward Alexander Porter, Lee's best artillerist, approached his commander with an idea: "We must either surrender, or the army may be ordered to scatter in the woods and bushes and either rally upon General Johnston in North Carolina or to make their own way, each to his own state, with arms and to report to his governor." Porter was suggesting protracting hostilities through guerrilla warfare as a means of avoiding surrender. With the Confederacy's most-effective fighting force nearly surrounded and largely out of provisions, Porter was known to have the support of a cadre of Lee's officer corps and his thinking was thought to be in line with that of Confederate President Jefferson Davis.
Lee, who must have already thought about such an idea, rejected the proposal, stating that these troops "would have to plunder and rob to procure subsistence," Lee added "The country would be full of lawless bands in every part and a state of society would ensue from which it would take the country years to recover." Lee, to make a long story short, went ahead with the surrender though still in command of more than 26,000 troops. For the good of the nation and "his" country, which was Virginia, he told his troops to go home and become good citizens.
The man is no hero, and is not seen in that light 155 years later, but on that day, faced with a painful decision, he did make an honorable choice that served the public more than himself. He could have disappeared had the troops scattered. They would have died for him. By turning over his sword, he expected, obviously, to face serious charges.
Not that this election bears any similarity in comparison to the bloodshed of the early to mid-1860s, but there is probably no way to legitimize the occupant of the White House over the next four-year period for half of a nation unless an example is shown once one candidate does clinch the required number of electoral votes (not before). Optimal situation? No. Correct these gross electoral deficiencies for next time? Yes. Leadership can be painful. Leadership is also sometimes more visible in graceful defeat than in triumph. For the good of a nation.
I am no political animal. I am known in my circles as the guy who hates both sides. That said, perhaps it is best at this time for me to get my feet back on turf where there is at least some historical evidence of personal proficiency. On Thursday, the current equity market rally extended itself as the U.S. 10-year note more or less moved sideways but the U.S. dollar weakened despite what appears to be a likely smaller fiscal support package moving forward. I do think Federal Reserve Chairman Jerome Powell did the best he could under the circumstances and probably was successful in conveying positive messaging.
Speaking of positivity, breadth across markets was extremely broad on Thursday. Winners crushed losers at both of New York's primary exchanges, while advancing volume crushed declining volume at both as well. Aggregate trading volume expanded on Thursday from Wednesday at the Nasdaq Market Site, while moving sideways (albeit at elevated levels) at the New York Stock Exchange. If not for growing electoral uncertainty, I would confirm a renewal of the longer-term bull market for equities at this time based on what we have seen this week. I cannot go there just yet, because as Georgia appears to be turning blue, Arizona appears to be incredibly on the verge of turning red.
The weaker dollar took the Materials sector to the top of the daily performance tables. That said, Thursday was a day for tech stocks. The Philadelphia Semiconductor Index (up 4.4%) outperformed the broader Technology Select Sector SPDR ETF (XLK) , up 3.1%. The group was led by Qualcomm (QCOM) and Qorvo (QRVO) on earnings beats, then the entire group of semiconductor equipment providers that I tried to show you in Market Recon 24 hours ago responded. Applied Materials (AMAT) , Lam Research (LRCX) and KLA Corp. (KLAC) all outperformed the group for the day. Even Brooks Automation (BRKS) , which I did not mention on Thursday, ran 5.9%. Impressive.
Bear in mind that while markets have obviously been fine with a Trump administration and are certainly fine with the idea of a President Biden, that much of this week's rally has been the repricing of risk associated with corporate and capital gains taxes as on Tuesday it had appeared that the Senate had remained in Republican hands. Though this still appears likely, those waters have muddied just a bit since Wednesday morning. Should the Senate fall into a 50/50 tie that would essentially hand the Democrats a majority when including a Vice President Harris, and the very markets that have rallied so hard on a repricing of risk would need to unwind those gains. Food for thought.
No surprises here. The fed funds rate remains at or close to zero. The asset purchasing program remains aggressive at $120 billion, with $80 billion in Treasuries and $40 billion in mortgage-backed securities. Fed Chair Jerome Powell did use the word "at least" when mentioning that purchasing program going forward. The official statement remains essentially unchanged. Again, taken from that statement: "The path of the economy will depend on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."
Lastly, and most importantly, from the press conference, the Fed chairman once again called out to Congress for help on the fiscal side, indicating that he would like to see all those that work on policy creation work together. We can only hope.
Oh, What a Night
I know, equity index futures are trading lower early here on Friday morning as are European equities. Did you think we were going parabolic? Some stocks did. Roku (ROKU) , Square (SQ) , Cloudflare (NET) , The Trade Desk (TTD) and T-Mobile (TMUS) all reported amazing quarters, and all of their stocks ran overnight. Corporate America is alive and well. One stock that reported went the other way. Peloton (PTON) gave back overnight all of Thursday's gains, which were substantial.
Peloton reported fiscal first-quarter earnings per share of $0.20, more than doubling expectations. Revenue generation increased 232% to $757.9 million, which was also a beat. Digital subscriptions grew 382% to more than 510,000. Average net monthly connected churn rate dropped to 0.65% from 0.9% a year ago. Adjusted EBITDA hit the tape at $118.9 million versus the consensus view of about $84 million. In other words, in this pandemic-repressed economy, Peloton kept on keeping on. They crushed it.
Why are the shares selling off? Peloton, while still expecting connected fitness subscriptions to grow almost parabolically, also sees a decline in gross margin moving forward due to increased (growth-induced) administrative expenses as well as an increased sales and marketing budget.
Peloton shares are expensive at 630x earnings. I get that, but this is where growth is. You think folks are going to get back to the gym as this virus spreads wildly? Not me. Do you think exercising at home has become much more than a fad? I do. I am not a Peloton customer, but I am a guy who when well enough tries to exercise at home. I have an exercise bike. I subscribe to a cheap service that provides workout videos to stream in a Netflix (NFLX) kind of way.
That said, what I think makes Peloton customers so enthusiastic, is simple. The service, while good for you, provides a social outlet in a time of social deprivation. People simply want interaction outside of the home. I am not sure that I am willing to pay up for the service, but I do think that I will add on this dip because enough others will. Have a nice "Jobs Day," everyone. Carry on.
October Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 600K, Last 661K.
Unemployment Rate: Expecting 7.7%, Last 7.9%.
Underemployment Rate: Last 12.8%.
Participation Rate: Expecting 61.5%, Last 61.4%.
Average Hourly Earnings: Expecting 4.6% y/y, Last 4.7% y/y.
Average Weekly Hours: Expecting 34.7, Last 34.7. .
Other Economics (All Times Eastern)
10:00 - Wholesale Inventories (Sep-rev): Flashed -0.1% m/m.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 221.
15:00 - Consumer Credit (Weekly): Last $-7.22B.
The Fed (All Times Eastern)
No Public Appearances Scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
At the time of publication, Guilfoyle was long CVS and PTON equity.