The truth is that Thursday felt more awful than it actually was. I know. The more serious beatings were taken across the names that had supported many traders through thick and thin. For months. This is why we have disciplines that we put into practice every day.
Yes, allocations do end up weighted according to both the results of investor homework as well as one's own instinct. That said, this is why one always maintains positions within a variable, pre-set range that produce some exposure to sectors unloved, debt securities, commodities, and cash.
Jim Cramer often speaks and writes of his barbell approach. Great model. Big tech and those firms that win in a restricted economy on one side, balanced by those that will succeed in a fully free, re-opened economy on the other, with a smackerel of exposure to everything in between. That's portfolio hedging even if it does not hedge individual positions.
Does this perhaps lead to underperformance when Wall Street runs one way? (Wall Street has always been a one-way street.) Of course. Does this soften the beatings on days that the "Ugly Stick" pokes around one's portfolio? Just as assuredly, it does.
So, it came to be that equity markets moved sideways early on. As if an ongoing stall in labor market demand coupled with a geopolitical deterioration in the condition of the relationship between the U.S. and China could not, or would not, impact equity valuation. Just thinking, and not too far out of the box, that a labor market that as we expected has started to move sideways (at best) will also slow consumer behavior, and that multinational corporations will continue to struggle as large economies decouple. Defaults are out there.
Am I bearish? Not yet. Am I smart enough to know that maybe I should be? Yes. We still have monetary authorities on our side. We think that there's a good chance that we still have fiscal authorities on our side as well. What then?
How far can markets go on expanded money supply? Can this increase in fiat move through the economy quickly enough to stave off exponentially more awful outcomes, as long as conditions for liquidity as well as artificially priced credit conditions persist? This, we will find out.
For now, the uptrend remains intact. That said, beware that on Thursday the S&P 500 gave back this entire week, and the Nasdaq Composite almost two weeks. One positive: Trading volume was not heavy enough at either of New York's equity exchanges to truly raise eyebrows. The period on Thursday of greatest distribution (approximately 11 a.m. through 2 p.m.) is almost always the quietest part of the trading session. This was true on Thursday, and volume increased substantially as markets stabilized later on. This suggests as much bargain hunting as profit taking. At least that's my take.
Many years ago, I drove an old, beat-up automobile. I will not even identify the manufacturer or model here as that would be unfair to that firm in its modern form. Late one evening, on the way home from the Brendan Byrne Arena in New Jersey (we had been to a Kiss concert.) my car just died. In the Holland Tunnel. Halfway through. People behind me were not happy. I jumped up on that catwalk thing on the side of the tunnel and ran toward the New York side to inform the authorities of my situation.
That was a lousy night. Perhaps if one cannot imagine just what a reverse square root symbol looks like, they can imagine being stuck halfway through a tunnel, preventing forward progress for the many who otherwise had their own functional motor vehicles.
On Thursday, the U.S. Department of Labor reported 1.416 million initial jobless claims, up from 1.307 million the week prior. The report also showed continuing claims of 16.197 million, down from 17.304 million the week before. Initial Claims print about a week behind real time, and continuing claims about two weeks behind, so this is not truly apples to apples. That said, more than 1.4 million new filings for benefits measures up poorly against little more than 1.1 million that were either called back by employers or found new jobs.
Then we tack on those who might be self-employed or work in what became the "gig economy." Those folks don't qualify for state-level benefits (which I always thought,as an entrepreneur, to be unfair.), but can under the new law (Pandemic Unemployment Assistance Program) file for federal benefits. There were approximately 975,000 new filings for help under that program for the latest week reported, and roughly 13 million (?) or so already involved in seeking help under that program. (We have not seen an aggregate number in three weeks.)
The short form of what I am trying to say here is that it appears that the state of U.S. labor markets has likely stopped improving and very well may be starting to deteriorate as several highly populated states go through very serious stages of viral spread that is so hard to slow because up to 40% of those infected do not feel ill, while some of those they infect will fall ill and stay ill. Terrible situation until fully effective and safely administered therapeutics and vaccines are reality.
Them Thar Hills
Just a little while after the lights went on in my office here on Friday morning, I noticed front gold futures trading above $1,896, which would be above the precious metal's all-time high closing price but not yet above the all-time intraday high of $1,923.70 back in 2011. Safe haven? Inflation hedge? Yes. To a degree. While my personal take would be that only actual physical holdings placed in a secure location could be called safe haven, there is a play versus the U.S. dollar here for sure.
While some of the dough you see coming out of such Sarge faves as Amazon (AMZN) and Microsoft (MSFT) this week as well as Apple (AAPL) and Tesla (TSLA) all of the sudden is profit taking, this realized profit is moving toward protection as the U.S. Senate broke for the weekend with "a plan" to counter the already-passed House bill by next Tuesday or Wednesday. In addition, Beijing has announced the closure of the U.S. consulate in Chengdu as a response to the U.S. closure of the Chinese consulate in Houston earlier this week.
The U.S. 10-year note gave up less than 56 basis points at one point overnight. Recent pressure on the longer end of the U.S. Treasury yield curve has compressed the spread between U.S. three-month T-bill yields and that 10-year to a mere 47 basis points. This is about as narrow as this spread has been ever since the Federal Reserve and Treasury Department really went to bat in March. Watch gold, and watch this spread as traders try to work their way into a risk-averse set-up for the weekend. These items will betray either the level or lack of faith in our legislators in D.C., as well as in local leadership in the most troubled virus hotspots.
Notice the meltdown, greater than that of the broader marketplace, that shares of Moderna (MRNA) went through late Thursday, and then on through the night? The deal is this: On Thursday, Moderna argued before the U.S. Patent Trial and Appeal Board against patents covering lipid nanoparticle technology held by Arbutus Biopharma (ABUS) . This technology involves the system messenger RNA that drugs must use for delivery. Moderna's Covid-19 vaccine candidate mRNA-1273 is one such drug.
Is this the end of the discussion for these patents? Moderna, of course, thinks that the ruling is in error. There may be further action taken. Personally, I am long Moderna, and the position even at these reduced prices is still my best performer in percentage terms. Does the potential for the burden of royalty payments damage the margin profile for Moderna's vaccine? Of course it does, if it comes to that. Pfizer (PFE) has long been the vaccine play that I think gets to the finish line either first or close to it, and in decent enough scale to protect a high percentage of the public. I have no problem taking off up to half of my MRNA long and using those funds to beef up my parallel position in PFE.
You kids saw Intel (INTC) Thursday night? Don't look now, it got worse. The company had a good quarter. Earnings growth was better than expected. Revenue was strong. Almost every business unit beat consensus as well. Intel raised guidance for the full year.
The problem? Intel pushed out expectations for its line of 7-nanometer products until late 2022 or early 2023 due to a "defect mode" found in the process.
Traders immediately started moving funds out of Intel upon hearing the news and putting that money elsewhere. Taiwan Semiconductor (TSM) , a foundry already producing chips smaller than 7 nanometers, and that firm's client Advanced Micro Devices (AMD) were the immediate benefactors. That, from my perspective, is not so ugly.
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (July-Flash): Expecting 51.6, Last 49.8.
09:45 - Markit Services PMI (July-Flash): Expecting 50.9, Last 47.9.
10:00 - New Home Sales (June): Expecting 700K, Last 676K SAAR.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 180.
The Fed (All Times Eastern)
Federal Reserve Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)