How 'Bout That?
I thought that maybe something malfunctioned on my screen. The Nasdaq Composite looked OK. S&P 500, ditto. Narrower indices? Check. The Dow Jones Industrial Average? Unchanged. Right down to a couple decimals. Honestly, I had no idea this was still possible in the electronic age. Stunning.
The fact is that all the major indices came off of elevated levels on Tuesday afternoon as a very organized retreat developed. A mild retreat into a few traditionally defensive vehicles. The U.S. 10-year note bottomed. Gold futures bottomed. The U.S. dollar regained upside momentum in what now looks like a month-to-date rally off the lows versus a number of peers.
These twists and turns have picked up some momentum as trading in global equity markets fades into a focus on U.S. equity index futures markets. In other words, there is some pressure on our marketplace here on Wednesday morning.
Remember what I wrote to you on Tuesday. We are cresting. Trading volume rebounded from holiday levels, but (and this is a big but) remained notably lower than recent averages. Indeed, volume attributable to S&P 500 constituent stocks has not kissed its own 50-day (volume) simple moving average (SMA) since Thursday. Breadth has turned quite mixed as well. Declining volume trounced advancing volume on Tuesday for companies listed on the New York Stock Exchange (NYSE) despite a lack of headline-level declines for the averages.
Nothing to See Here?
I listened to President Trump's speech before the Economic Club of New York. The delivery was fine. The president cracked a number of quite humorous jokes. However, the cold fact is that the markets appear to have expected too much. Perhaps markets had priced in more than maybe they should have. We have discussed this often.
When you train (you do train, right?), you train for both endurance and speed. The first allows the athlete to compete at a higher level, to keep up with better, younger athletes for longer than they expect. The latter provides for the athlete an ability to go to a higher level at that precise moment when that better, younger athlete begins to doubt him or herself.
Monetary policy appropriate for the current environment provides the economic stamina. Loose fiscal policy can provide a surge, but in my opinion is or should be less sustainable in the long run as compared to properly applied monetary policy. Well-positioned trade policy can add the market access and scale necessary for an economy to compete on a longer time line, but more so at this time due to already slower trade conditions, we are talking speed. We are talking "fuel for the fire." It's early, but the Atlanta Fed's fourth-quarter GDPNow model currently reads out at 1.0%. This snapshot of economic growth in real-time will change this Friday when October Retail Sales and Industrial Production are added to the database.
Markets should crest. This should not alarm anyone. I have been reducing some of my better-performing longs in recent days. That's what traders do. You eat what you kill. Once sated, one does not think that a better meal might have been had. The hunt merely resumes.
The president in his speech reiterated what has been said before. A deal with China remains close. China wants to make a deal very badly. Got it. The president took it a little further, and he is not wrong to say that tariffs on Chinese goods would be "raised very substantially" if no lasting truce on trade is reached, but this is not helpful for equities that again may have priced in more.
Let's be clear. This is not a partisan issue. You and I are here to make money. We have political views. So be it. Interfere with our pursuit of profit, they shall not. Politics, we view as either headwinds, tailwinds, or not in our path. We adapt.
We do not take shots here for the sake of these politics. I did not like the Affordable Care Act (ACA), but President Obama was right to try to take on healthcare. Healthcare remains broken, but it was broken well before President Obama got hold of it. The right time to try to fix healthcare was at a time when so many Americans were out of work or working for far less compensation.
President Trump was right to take on trade with China and trade in general. We may not like the tariffs, but trade was broken well before President Trump got hold of it. How long might a nation borrow productivity? The right time to try to fix trade was at a time where economic growth due to a manufactured reduction in corporate taxes could provide some room for error as trade slowed, meaning the economy still grows. It should not be too hard for opponents of either policy effort to see the positive intention put forth.
That Was Quick
I found it mildly surprising. I mean, it was obvious that a number of global equity-based funds had experienced recent net inflows. Still, the magnitude of the shift in cash positions revealed by the most recent Bank of America survey was notable. The survey covers 230 managers running more than $700 billion in total assets. In just one month's time, their aggregate cash balance has dropped from 5% to 4.2%.
Just like that, this cash balance moved from managers being a bit behind the market's recent moves to the lowest cash balance since 2013. I just told you that I have been taking profits. I am either ahead of the crowd, or wrong, I guess. Then again, I can move a lot more quickly in percentage terms than larger managers beholden to their customers possibly can.
The most interesting part of this survey? The aggregate allocation to global equities moved 20 percentage points to the upside in just a month, landing the group at 21% overweight the equity space.
This means there is less firewood piled up out in the yard. It is far easier to enter into a new long position when the cash is waiting than it is when opening new positions requires rotation. Have I mentioned that U.S. equity markets have started to crest?
For the folks who love hearing from those in positions of leadership during regular business hours, Federal Reserve Chairman Jerome Powell will appear before the Joint Economic Committee here on Wednesday morning for the first time. What do I expect? Powell will be as careful as he possibly can be. Powell has become very good in recent appearances at speaking without saying anything.... as it should be.
I also expect to be aghast at the lack of preparation and the sheer economic ignorance put on display by those asking the questions. Pretty sure that few in Congress understand that the Fed has allowed Treasury yield spreads to expand and that this "unannounced" posture not only has been supportive of recent moves made within the financial marketplace, but also provides a backdrop that acts to deter economic contraction. This is fundamental.
You think a lot of those kids get the whole "anchoring the short end, while allowing the long end to trade freely" thing? (Heck, half the pundits interviewed in the financial media every day don't even get this.) Or will they just ignorantly think that the Fed has been "lowering rates"? Prepare for frustration.
--President Trump meets President Erdogan of Turkey in Washington later today (Wednesday). What's on tap? Syria, of course. What also may be on tap? Getting Turkey to turn away from its recently announced purchase of the Russian-made S-400 missile defense system and to purchase Patriot missile defense systems made by Raytheon (RTN) instead. Progress made here could get Turkey back into the Lockheed Martin (LMT) F-35 fighter aircraft program after Turkey had been dismissed in the wake of that nation's deal with Russia.
-- AbbVie (ABBV) went deep into the well on Tuesday. The firm sold $30 billion (fourth-largest investment-grade bond sale ever) in senior unsecured notes with maturities ranging from 18 months through 30 years in order to fund the planned acquisition of Allergan (AGN) . The long-range plan for AbbVie is diversification ahead the expected loss of patent protection for top-selling drug Humira in 2023. Ever hear of Botox? That's Allergan. This borrowing pushes AbbVie's debt-to-EBITDA ratio up to 3.4x, though the firm expects to tackle the balance sheet aggressively through the use of its free cash flow. Even with an annual dividend of $4.72 (yielding 5.46%).
-- Anyone else notice the level of cooperation announced between Adobe (ADBE) and Microsoft (MSFT) on Tuesday? Now, the Adobe Experience Cloud, and the Adobe Document Cloud will integrate with Microsoft's Dynamics 365, Office 365, LinkedIn and Azure. This new deal allows Microsoft to better compete against both Amazon.com's (AMZN) Amazon Web Services and Alphabet's (GOOGL) Google Cloud moving forward. In turn, Microsoft selects Adobe Sign as the firm's preferred e-signature across software products, providing answers involving workflows to business clientele.
- You kids notice that within the NFIB's Small Business Optimism Survey for October that eight of 10 sub-components improved from September? These would include Plans to Increase Employment, Plans to Make Capital Outlays, and Plans to Increase Inventories, but... and once again, this is a big but.... not, Earnings Trends. Earnings Trends was the single worst-performing sub-component month over month. Things that make you go hmm. (AbbVie, Microsoft, Amazon and Alphabet are holdings of Jim Cramer's Action Alerts PLUS charitable trust.)
Economics (All Times Eastern)
08:30 - CPI (Oct): Expecting 1.7% y/y, Last 1.7% y/y.
08:30 - Core CPI (Oct): Expecting 2.4% y/y, Last 2.4% y/y.
14:00 - Federal Budget Statement (Oct): Expecting $-130.1B, Last $82.8B.
16:30 - API Oil Inventories (Weekly): Last +4.26M.
The Fed (All Times Eastern)
11:00 - Testimony: Federal Reserve Chair Jerome Powell.
13:30 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
Today's Earnings Highlights (Consensus EPS Expectations)