I was so young. Really did not know anything. Thought I was a tough guy. So did everyone else. I was more experienced than I had been just a few months earlier. That I knew, but that was really all I knew. North Carolina. Infantry school. Out in the forest, walking left flank security for a platoon moving in column. I heard it. Heard what? I don't know. Don't see anything. Can hear the leaves rustling, as if someone is close. Real close, and moving closer.
I get low, so as to not be seen. If the instructors have placed opposing forces out here, I don't want to be the first guy they take. That would be embarrassing. Still hearing that noise, though. So close now. Whoa. There it is. By getting down in the brush, I had placed myself face to face with some plain looking, all-black snake, probably four to five feet in length.
Startled? You bet. I grew up in Queens. My only encounters with wild animals were with stray dogs and rats. We had no ammo that day, not even blanks. We were true rookies. I know that in reflex, I pulled the trigger of my M-16A1 assault rifle in fear. No one else knew, thank goodness. Scared. Of what was a harmless creature that was only guilty of being where it belonged. Lesson learned. Listen to the environment. Why? Because the environment knows more than we do. It has its own agenda, and is going to do what it has to do. Your opinion is only just that.
We have lift-off. Where to? Outer space, it may seem. Friday. The BLS report on the U.S. employment situation for May simply beat all and every expectation that had been made by professional economists. The stock market had surely sniffed this out well ahead of the broad community of economists. As someone who truly has one foot on both of those camps, I was indeed left a little stunned. Oh, don't get me wrong. I would rather be wrong about what I expect to see, and have my P/L do well than the opposite. Every day, all day. Still, one must wonder. How did the market know what economists as a group, simply missed by not a mile, but many miles?
The Nasdaq Composite did not close at an all-time record on Friday, but did complete, intra-day, the March 23-to-the-present round trip. The index scored a 2% increase for the day, as did the S&P 500. Trading volumes that were heavy, but on less-than-convincing breadth on Thursday's down day, were in fact much heavier throughout Friday's "risk-on" effort. On overtly positive breadth.
Both of these broader equity market indices were easily outperformed by the blue chips (thanks to Boeing (BA) , the transports (thanks to the airlines) and the industrials. In fact, with the exception of Thursday, equities were hot, and the heat came from those sectors most exposed to either economic growth, or weakness at the longer end of the U.S. Treasury curve.
Think that doesn't matter? Then you have not been watching the financials. Bank stocks were dead. You thought. This is what the spread between what the three month T-Bill yields and what the 10-year note pays looks like since the Fed established control over that market in the wake of the pandemic-induced March meltdown. Take a look at this.
Interesting. At the same time, the U.S. dollar shows weakness, which is a good thing, only if Washington can establish the U.S. as a net exporter. Otherwise, weakness -- well too much weakness (not even close yet) -- causes capital flight. That said, less strength will attract less cross-border investment. Not to mention, broad civil unrest.
The Wild Side
Some economists have pointed out the fact that Friday's employment numbers were not quite as positive as advertised, due to a possible miscalculation of the status of some laborers that, if included, would increase the stated headline unemployment rate from 13.3% to more than 16%. This is true, but May is still an improvement over April -- if April is also measured in that same way. Nothing close to improvement was supposed to be in the cards, especially with many of the nation's largest cities still not open for business. (New York City goes into a first stage economic reopening just today, June 8.)
So, what do I look for now? I will tell you this. I expect volatility in the macroeconomic data. We'll see May CPI this Wednesday, but more importantly, next week, on Tuesday, May data for both Retail Sales, and Industrial Production will be revealed. These two key data-points have been in a state of collapse. Should there be improvement there similar to the numbers for job creation, this could be taken very well by the marketplace... Just in case readers thought that all positives were now priced in.
That said, never forget that macroeconomic views, right or wrong, do not pay, unless one is salaried to express opinion. Market calls, again right or wrong, do not pay either, except for the salaried. Those who actually swim in the waters must figure out what works. Many of those we see expressing public opinion do not swim in these waters with us. Those who swim in the murky waters must understand, weigh, and make allowance for risk. That's where diversification, risk hedging strategies, and just plain learning to walk a tightrope come in. It's okay to walk when it seems everyone else is running.
Now we must ask ourselves some questions. If the economy is improving more rapidly than previously thought, how does this impact future policy decisions to be made by both fiscal and monetary authorities. Think that maybe you'll hear a few "market pros" call the top this week? If you do, this will surely be what is behind those thoughts. The House of Representatives has already passed a very aggressive next phase fiscal support bill. The president seems more in line with his political opponents in the House than his allies in the Senate on this issue. The president seems like he might be okay with aiding beleaguered state and local budgets as long as a large infrastructure rebuild is part of the deal.
We hear from the FOMC this week, on Wednesday afternoon. At the height of the pandemic, the Fed went "unlimited" in the central bank's quantitative easing program. That was the right call at that moment. Purchases hit $75B per day. The yield curve was, as a result, controlled. The Fed, without much fanfare, has steadily reduced these purchases down to daily totals in the low single digits (in the billions of dollars). The Fed is expected to eventually get to the point of using yield curve control as a determinant in what and how much, or what duration of federal debt to purchase. This was more forward looking, as in maybe later this year or next. Given the rapid steepening of the curve last week, I would expect that at least in the press conference on Wednesday, this concept will have to be addressed directly.
Now, just a few more questions. The ones everyone is asking. What if we have a second wave of this awful coronavirus this Autumn? What if the civil rights protests that have broken out across the country bring that negative result forward more quickly as a result?
Now -- and this is perhaps just hopeful -- what if there is no second wave? What if this virus burns down to a simmer and stays there, or continues to dwindle? What then? Hmm, then the entire economy will be reliant upon the realization of business to this reality, and subsequently renewed demand for labor. Interesting. We can only hope.
On That Note...
Perhaps that last thought is just a bit too hopeful, or unrealistic. There are pockets of population across this nation where the spread of the virus is still visible. Former hotspots are seeing recovery, but there are states that have appeared to level off or even go the wrong way in a few cases. While early stages of reopening local economies have largely gone well, the market results are just staggering. The Russell 2000 is now 52.8% off of its March 2020 low. The Dow Transports? A cool 52.3%. The S&P 500 stands 45.7% above that awful low, with the Nasdaq Composite and Dow Jones Industrials in the high 40%'s.
In order to understand just where markets are on this virus, globally we watch crude prices -- though this is imperfect as there are a number of inputs well beyond simplistic demand, such as production cuts and U.S. dollar valuations.
Domestically, one can use the airlines as a proxy. It was the airlines that led the way, by a mile, last week. American Airlines (AAL) led the industry at a gain of 77% just for the one week, still off 39.6% from the stock's 2020 high. Incredible. Following AAL, for the week, but just barely was Spirit Airlines (SAVE) at 75%. Distantly behind, but all still up more than 30% for the week were Delta Air Lines (DAL) , Hawaiian Holdings (HA) , and SkyWest (SKYW) .
My favorite in the group remains Southwest Airlines (LUV) . That name remains an industry underperformer, for now. They are largely domestic, which is something I prefer right now, and the firm just restructured $1.8B in debt, which I like.
Economics (All Times Eastern)
No significant domestic macroeconomic data scheduled for release.
The Fed (All Times Eastern)
Fed blackout period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (THO) (-0.10)