You Can't Stop Rock and Roll
Here it comes, you're never gonna top it
On a run, no way you can stop it
Total style, perfection in decay
Running wild, flat out all the way
--Dee Snider (Twisted Sister), 1983
The Running of the Bull
The broadest of equity market indices closed Thursday at all-time highs. As did the far more elite and narrow. The S&P 500, the Nasdaq Composite, the Dow Jones Industrial Average -- hard chargers, all. How about the small-caps? Both the Russell 2000 and the S&P 600 closed at 16-month highs. Same for the Transports. Pick a measure for equity market performance. Any measure. Throw a dart if you have to. Good chance that wherever that "dart" sticks, you've won a prize. A prize that rallied hard into the close, at the top of its charts.
The yield spread (3mo/10yr) that I constantly mention did manage to ease back a few basis points. This allowed growth stocks to regain their position at the top of our daily performance standings after a few days of market support having been drawn from more defensive sectors. So, it was that semiconductor stocks and software names led the Information Technology sector, hand in hand, to the top of that leader-board. Industrials, however were right behind tech for the day, which makes perfect sense. Just a day after the U.S. and China had agreed to their Phase One trade deal, the U.S. Senate passed the USMCA trade pact that will replace NAFTA, restoring and perhaps improving conditions of trade with Mexico (our largest trading partner) and Canada.
Those two deals, if executed by all parties to the letter of what has been agreed to, would (could?) add more than a percent to U.S. GDP over two years, depending on what economic opinion you read. The only thing they do agree on is that both deals are positive if properly executed.
So, where does that leave us? A market that is now in something well beyond what I would call a confirmed upward trend. Alphabet (GOOGL) joined the $1 trillion market-cap club on Thursday. Any dents in the armor? Any at all? On an intra-day basis, trading volume ebbed just a bit. That said, winners trounced losers at both of New York's exchanges, and advancing volume beat declining volume at those exchanges by nearly an aggregate 3 to 1. Given the way stocks closed, lower volume may have simply been the result of lesser supply than lack of interest. The appetite was there.
Valuation is now at 19x forward-looking earnings. Will earnings catch up to valuation? Do they even need to? The answer is yes, they do. But maybe not today, or even this quarter. We already know, at least I think we know, that Q4 earnings are not going to bring home the roses. I also think that we know that in this era of compressed prices for credit over time -- married to loose fiscal policy and then mixed with an aggressive plan to add liquidity by the central bank -- the environment for elevated valuation metrics is indeed justified.
It really is all about adapting to, and excelling in, the environment provided. I think we all agree that the Fed cannot add liquidity to the mix forever, or at least not at the pace in place since the September cash market mini-crisis. In a perfect world, the deals now in place and in the works with U.S. trading partners not only maintain, but accelerate economic growth to the point where large-cap corporate earnings growth turns positive for the year after what will be four consecutive quarters of contraction.
Can this fairy tale ending play out the way we all would like to see? Oh, it can. I learned a long time ago to never fully discard any possibility. That said, even if the porridge is just right and everything ends up working out perfectly for Goldilocks, this is an election year and there remains what appears to be permanently elevated levels of both political and geopolitical risk.
At a minimum, there will be heightened headline risk to equity valuations. Beyond that? The risk that the central bank becomes uncomfortable with the current balance sheet expansion before the economy -- and by extension equity valuations -- are ready to hold their gains based on fundamental support. No, you can't stop Rock & Roll, but Rock & Roll can stop. With or without you.
Long-time readers know that I have been an advocate in the past of having the Treasury Department create more vehicles for long-term investment (aka long-term borrowing). I mean, we all get the whole "issue a ton of short-term paper and have the Fed gobble it up at artificially created price points" thing. It makes sense in this environment. It would make sense forever, if the rapid and reckless expansion of the monetary base just to allow the federal government broad access to funding while anchoring the short end of the curve forever, came with no strings attached and no risk.
That said, when the Fed picks up its football and goes home, Treasury is going to have to issue debt securities -- and a whole lot of them -- at distant maturities, if only to keep the wolves at bay. On Thursday, Treasury announced that at some point in the first half of 2020, it will start issuing 20-year paper. Details will follow at Treasury's quarterly refunding announcement on February 5 (which in unrelated news, also happens to be the day of the Macy's (M) investor event at the New York Stock Exchange)
To that news, I say that it's about time. I add that Treasury needs to push out 40- and 50-year paper as well, as I seriously doubt that anyone in Washington is ever going to try to tackle the federal government's budget deficit until the day we wake up and the problem has moved beyond what is considered addressable through the normal application of policy.
Like It or Not
Don't get me wrong, I have always been invested in energy, or you might say "big oil." Despite fluctuations in sector valuation, there is nothing like knowing one can count both strong cash flow and, by extension, a robust return to shareholders. All one needs is the minimum in risk management adaptability to keep these names performing if not with the broader market, at least in positive territory.
Green, or ESG-based (Environmental, Social and Governance) investing is here to stay, and those of us who pull our living from the financial marketplace better recognize this change in both investment trends and trends in capital spending. Like it or not. Understand. Identify. Adapt. Overcome. Younger investors will read that and think, "well, no kidding." For those of us a little older, we have cut our teeth on learning how to get the information we need from balance sheets. For us, fundamental analysis has traditionally told us which way the bus was moving, while technical analysis told us where the bus stops were located.
See Jim Cramer on Mad Money on Thursday evening? See the interview with Microsoft (MSFT) CEO Satya Nadella? If there's a smarter dude on the planet, I'm not really sure. Maybe Jim himself. Maybe Peter Tchir -- but we're talking about an elite level here.
Well, to catch those of you up who missed it, Microsoft has pledged to not just clean up the firm's carbon footprint, but to become "carbon negative" by 2030. What? Microsoft will eliminate carbon emissions and invest $1 billion toward toward climate-based commitments. Carbon negativity is the reduction of the firm's footprint to less than neutral. In net, removing carbon dioxide from the atmosphere. Kind of like negative interest rates, except it's a good thing. By 2050, get this... Microsoft believes that it can eliminate all emissions that the firm has produced since 1975. The year of the Big Red Machine. That's a long time. The firm claims to have been carbon neutral since 2012. That's impressive in itself.
Hey, earlier this week, we heard from BlackRock (BLK) CEO Larry Fink, who runs a mere $7.43 billion in assets. He is telling you that climate considerations are a priority for future investment. The belief is that climate change is a factor in determining the longer-term prospects for corporate success. Do we need more than this?
Listen, I don't care whether or not you blame mankind for climate change. Regardless of fault, the world's leading asset manager believes this is an issue, and one of the world's leading tech CEOs believes this is an issue. The money is going to go where it is going to go, and who are we really on Wall Street, if we do not follow our mercenary little hearts, um I mean capital flows. Um, no, I mean what's now accepted as ethically correct. Yeah, that's the ticket.
Taiwan Semiconductor (AAPL) reported on Thursday morning. More important than the impressive earnings beat, was the guidance for the current quarter, as well as the expressed confidence regarding the ongoing roll-out of 5G technology. TSM's key customers include Apple (AAPL) , Advanced Micro Devices (TSM) , Nividia (NVDA) , Qualcomm (QCOM) , and Broadcom (AVGO) .
How about Kratos Defense (KTOS) ?... The firm announced on Thursday that it will participate in a multiple-award, indefinite-delivery/indefinite-quantity contract for U.S. Army advanced communications systems. Participating companies will compete for up to $5.1 billion in awards over a 10-year period as the U.S. Army seeks to rapidly develop technology to support networked battle command communications solutions. Ending in January 2030, this program will run with a five-year base period and five-year option.
Economics (All Times Eastern)
08:30 - Housing Starts (Dec): Expecting 1.374M, Last 1.365M SAAR.
08:30 - Building Permits (Dec): Expecting 1.465M, Last 1.474M SAAR.
09:15 - Industrial Production (Dec): Expecting -0.1% m/m, Last 1.1% m/m.
09:15 - Capacity Utilization (Dec): Expecting 77.2%, Last 77.3%.
10:00 - U of M Consumer Sentiment (Jan-adv): Expecting 99.4, Last 99.3.
10:00 - JOLTs Job Openings (Nov): Last 7.267M.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 659.
The Fed (All Times Eastern)
09:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.
12:45 - Speaker: Reserve Board Gov. Randal Quarles.
12:45 - Speaker: Reserve Board Gov. Michelle Bowman.