Live Or Memorex?
A popular television ad series. I want to say 40-ish years ago. Glory days, the cassette era of classic rock.
Memorex, for the young ones, was a leading brand of cassette tape that, at least according to the commercials, produced such a superior audio experience that listeners might believe they were hearing their music played live, right in front of them. The tapes became very popular with my generation.
Memorex, for those now strolling down Memory Lane, was founded in 1961 and went public in 1965. The successor brand, after merging and trying to evolve along with the changing technologies of the times, finally filed for bankruptcy in 1996. So, was it live or was it Memorex?
More importantly, and specifically to the point: Was Thursday's late rally real, or simply an algorithmic spasm that ran stocks considerably higher over the final hour of the regular session?
To be honest, that rally was really nice to see -- price is always fact. But there was not a lot beneath the surface to hang one's hat on.
The problems with Thursday's action are multiple. Immediately, traders will focus upon internals and trading volume. This volume, by the way, was on Thursday considerably reduced from Wednesday (which was a sharply negative day) at both of New York's primary equity exchanges. Winners beat losers by a rough two to one at both exchanges, while at the New York Stock Exchange advancing volume clobbered declining volume by more than three to one.
Seems just dandy, doesn't it? Until we pop the hood and take a look at where the action was and what caused it. So, let's just do that.
Sideways is good. Especially after the run that equity markets have been on since bottoming back in March. For most of Thursday's session, managers walked as if on eggshells. The numbers circling these markets in the form of headlines related to Covid-19 are not good. Indeed, these numbers, as well as the actions that the numbers have provoked, are only getting worse.
As caseloads and hospitalizations directly related to the pandemic have increased across a number of U.S. states, Texas Gov. Greg Abbott has had to throw the brakes on the economic reopening in that state, including requiring several counties to halt non-essential surgeries in order to preserve hospital capacity. In addition, Florida Gov. Ron DeSantis indicated that the state would not further relax economic restrictions at this time. At the same time, California Gov. Gavin Newsome took emergency financial measures in order to free up additional funds to fight the spread of this infection.
Equity markets likely would have sold off on such news, especially when considering that Apple (AAPL) will close additional stores that already had been reopened, and Walt Disney Co. (DIS) will delay reopening Disneyland in Anaheim, California. Apple and Disney are both Dow stocks.
The fact is that the Financial sector led the marketplace on Thursday, and that the banks led the financials. The Fed giveth. The Fed taketh away? Sort of, but not just the Fed.
On Thursday, regulators including the Federal Reserve Bank, the Federal Deposit Insurance Corp. (FDIC) and the Comptroller of the Currency finalized some changes to the Volcker Rule, which was part of the Dodd-Frank Act in 2010. Banks will now be permitted to more easily invest in venture capital type funds and/or reduce margin requirements for derivative trades. These moves potentially free up to $40 billion in additional capital for U.S. banks.
More good news? News from the Fed stress tests hit the tape late Thursday. U.S. banks are generally well enough capitalized to withstand even the worst that this public health crisis can dish out. We hope. That is good. Why then did those very same bank stocks that rallied on Thursday turn in a southerly direction after the closing bell? The reasons are simple.
To put it bluntly, the Federal Reserve feels that in a prolonged downturn U.S. large banks could lose up to $700 billion in non-performing loans. The Fed has now ordered these banks to cap dividends at current levels and suspend share repurchase programs. Just an FYI, for those who may have missed it, the nation's eight largest banks had already suspended their own buyback programs until at least July as the economy shuttered earlier this year.
Banks were not generally singled out by the Fed on Thursday night, and that was smart. I think the last thing the economy might need at this time would be particular questions being raised about the individual health of the largest banks. They are all at this point, with the U.S. in the middle of an extremely severe but not yet lengthy recession, systemically important. That said, you already know that the term "large banks" includes JPMorgan Chase (JPM) , Citigroup (C) , Bank of America (BAC) , Wells Fargo (WFC) , Morgan Stanley (MS) and Goldman Sachs (GS) .
Spill in Aisle Six
Albertsons Companies (ACI) will debut as a publicly traded company later here on Friday at the New York Stock Exchange. This is the third attempt to take this grocer public in just the past five years.
Third time's the charm? Majority owner Cerberus Capital sure hopes so, as the Boise, Idaho-based chain of more than 2,250 stores nationwide enters the public arena for the first time since 2006.
The deal, led by Bank of America, J.P. Morgan, Citigroup and Goldman Sachs, had to be downsized on Thursday evening. In the end, the firm sold 50 million shares at $16 apiece. Just a day earlier the street had still been looking for more than 65 million shares in a range from $18 to $20.
There is no doubt that same-store sales have improved across the chain's brands, which include Safeway, Acme and Vons, as the pandemic has worn on. This begs the question: Why would the seller accept a reduced price for fewer shares just to get the deal on the tape?
Kroger (KR) competes directly. Amazon (AMZN) , Walmart (WMT) and Costco (COST) have all changed the way the consumer shops for both groceries as well as essentials. You can do what you want. With my money, I vote no, at least not at this time.
You probably did notice that as the spread of the virus has worsened that the stocks of both big pharma and biotech type names working toward solutions have performed for the most part well, especially on days like these. You also may have noticed that the almost always volatile Moderna (MRNA) finished Thursday toward the bottom of the industrywide standings for the day. MRNA gave up 4.38% during the regular session and another 1.6% overnight at last glance. This, with indices that cover the group up about a percent.
Apparently, according to documents cited by Axios that I read up on at Investor's Business Daily, Moderna may not own all the intellectual property that has been used to develop its RNA messenger candidate for a Covid-19 vaccine that was the first to enter human trials. According to Axios, the National Institutes of Health and Moderna signed a contract back in December where the two jointly would own coronavirus vaccines that came out of any collaboration. The contract may have been general, and not specific to SARS-CoV-2, the virus that causes Covid-19. There are a number of coronaviruses that infect human beings.
What do we really know as investors? Not much, except half of something potentially fantastic is better than no share at all. The algos just need to price this in. Reduce exposure? If one is already up a lot (you should be) or if one is over-exposed. Run for the hills? Not me.
Economics (All Times Eastern)
08:30 - Personal Income (May): Expecting -6.0% m/m, Last 10.5% m/m.
08:30 - Consumer Spending (May): Expecting 8.8% m/m, Last 13.6% m/m.
08:30 - PCE Price Index (May): Expecting 0.4% y/y, Last 0.5% y/y.
08:30 - Core PCE Price Index (May): Expecting 0.9% y/y, Last 1.0% y/y.
10:00 - U of M Consumer Sentiment (June-F): Flashed 78.9.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 189.
The Fed (All Times Eastern)
No public events scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (APOG) (.19)