"What we've got here is failure to communicate."
-from 'Cool Hand Luke' (Warner Bros.) 1967
Oh, something in D.C. did get done on Thursday. President Biden did sign a bill extending federal spending through Dec. 3. You thought perhaps that deal was out of the way 24 hours ago? So did I. Instead, what was the easiest bill of those currently under consideration to get through both chambers of the Legislative branch of government took most of the day.
After removing the suspension of the debt ceiling from the funding bill to keep Senate Republicans on board, simply keeping the lights on passed in the House 254 to 175 and in the Senate 65 to 35. You read that right. The only notable attachments were $28.6 billion in disaster relief and $6.3 billion to help resettle Afghan refugees.
I try not to choose sides publicly. You know that, but somehow 210 elected legislators voted against keeping the lights on, even without the attachment of anything impacting the two larger pieces of fiscal policy legislation currently under consideration or negotiation. That's where we are. I can't imagine how or why we don't get more done.
"I'll gladly pay you Tuesday for a hamburger today."
- Wimpy (Popeye the Sailor) 1932 and on
Speaker of the House Nancy Pelosi had promised to hold a vote on the $1.2 trillion ($550 billion in new money) bipartisan infrastructure bill that had already passed in the Senate by this past Monday. On Monday, she stated that she was shooting for Thursday. On Thursday, after negotiating all day, we are left hoping for today (Friday). On one hand, there are House Democrats out on the extreme left. The Progressives (Some in New York are now referring to them as "Regressives") have held the infrastructure bill hostage unless they can be assured that both chambers will pass the much larger ($3.5 billion-ish) tax and spending package that focuses mostly on social and climate issues.
While the infrastructure rebuild is the foundation of President Biden's economic plan to "build back better," the larger framework includes the bulk of the Biden agenda. Politically moderate and fiscally conservative Democrats in both the House and the Senate have balked at the size and scope of the larger package and would rather see both packages considered independently. At least this way, the productive part of the president's plan -- the part that actually creates jobs and business activity -- can get underway.
Sen. Joe Manchin (D-West Virginia), who has been at the center of this stalemate since the beginning, was clear: "We're going to come to an agreement. I'm trying to make sure they understand, I'm at $1.5 trillion. I think $1.5 trillion does exactly the necessary things we need to do to take care of our children and take care of our people at the end of life, our seniors, and we're working hard on that." Manchin has a similarly minded ally in Sen. Kyrsten Sinema (D-Arizona), who has been far less public and has been a focus of White House attention this week.
On the other side of the coin (remember, at least this time, both sides of the coin represent different factions of the Democratic Party, which in reality is more than one party at this point), there is Progressive Caucus Chairwoman Rep. Pramila Jayapal of Washington, who said more than half of her group (believed to be slightly less than 100 lawmakers) planned to vote against the infrastructure bill without also seeing the Senate pass the larger tax and spending package.
The result of this stalemate and a delay in passing the infrastructure bill has been a lapse in authorization for the nation's transportation programs overnight and may have put thousands of Transportation Department employees on furlough overnight. Not sure about that as it is still very early on Friday as I bang out this morning note.
You saw the results. House Democrats turned what looked like a fairly good morning into an ugly midday swoon and ultimately an uglier close. The third quarter is over. We'll start seeing results in less than two weeks. Markets are trying to price in what many think will be a steeper yield curve and corporate margins more pressured than what many projected three months ago. Pricing this market becomes difficult as there is still no agreement on a debt ceiling, and there is plenty of risk around that unpassed $1.2 trillion infrastructure bill that should probably be $2 trillion and the $3.5 trillion socially focused package that in my opinion should be much smaller if that relieves to some extent the increased tax burdens it will place on businesses and individuals.
The most important market forces right now are the outcomes of these fiscal packages, whether or not the northern states experience a COVID surge going into the colder seasons, inflation's impact on both economic activity and monetary policy, and then last but not least, fourth-quarter and full-year 2022 guidance as we work our way through a third-quarter earnings season that is better set up for disappointment than euphoria.
On the last day of September, large-caps and small-caps were punished alike. Growthy stocks did best as bond traders gave yields a break (for now?). Both the Nasdaq Composite and Nasdaq 100 gave up less than half of one percent on the day, while the S&P 500, 400, and 600 gave up anywhere from 1.2% to 1.6%. All 11 S&P sector select SPDR ETFs closed in the red. Communications Services (XLC) , Technology (XLK) and Utilities (XLU) were the only three to surrender less than 1% on Thursday, while the Industrials (XLI) took a 2% smackdown.
For the day, losers beat winners at the New York Stock Exchange by more than 3 to 2, and by a narrow margin at the Nasdaq. This gets interesting now. Declining volume beat advancing volume at the NYSE by more than 2 to 1 on exceedingly heavy trading volume, while up at the Nasdaq advancing volume trounced declining volume by nearly two to one, also on heavy aggregate volume. Then again, on the last day of the month/quarter, how meaningful are volume-based indicators? My experience says not very.
Year to date, Energy (XLE) leads the way, at +42%, with Financials (XLF) (+29%) and the REITs (XLRE) (+24%) in second and third place, respectively. All 11 sectors are green this year to date. Utilities (+4.2%) and Staples (XLP) at +3.9% bring up the rear.
You saw this S&P 500 chart Thursday. Today, we add a third consecutive close at the low end of the daily range on rising volume. I guess that inverted hammer on Wednesday went for naught, outweighed by fiscal uncertainty. The daily moving average convergence divergence (MACD) looks like a pea rolling down a hill, while both the Relative Strength Index (RSI) and the FSO are very close to finding a technically oversold condition.
Readers will note that the index has surrendered more than 3% since suffering a mini or swing trader's death cross (21-day exponential moving average, or EMA, crosses below the 50-day simple moving average, or SMA) earlier this week. Set for a Friday bounce? That's entirely up to House Democrats.
Pretty much the same story for the Nasdaq Composite with two exceptions. One, the Composite has not experienced the 21-day EMA crossing through the 50-day SMA this week. The selloff this week has also been more organized for this index, which is also set up for a technical rebound dependent upon Congress.
Don't Look Now
I told you not to look. The end of the quarter also brought with it record demand for the Fed's overnight RRP (Reverse Repurchase agreement) facility. Ninety-two participants stashed a total of $1.605 trillion at the Fed for the evening on Thursday, smashing the old record of $1.416 trillion that had stood since... Wednesday evening. This number was certainly bloated by the end of the quarter as well as by a drawdown in federal cash balances and imbalances in markets for short-term Treasury securities. So, why do I still feel uncomfortable?
Yes, U.S. markets have been strong performers. Yes, inflation is a problem. Before you go hunting for opportunities around the developed world, I want you to consider this: Here in the U.S., the August Consumer Price Index (CPI) ran at 5.3% growth year over year. The August Producer Price Index (PPI) hit the tape at 8.3%, a gap of three percentage points if you are a goods-producing or goods-retailing business. Surely the imbalance must be absorbed somewhere, probably shouldered in part by consumers, retailers and producers depending on demand impact. Certainly margins will be pressured. This spread is worse elsewhere.
Here on Friday morning, Eurostat put September Flash CPI data to the tape for the eurozone. The number printed at 3.4% year over year. For Europe, September PPI is set for next week, but August PPI printed at 12.1%. That's a really nasty spread for European corporations. Using data for August, China is now experiencing consumer-level inflation of 0.8% versus producer-level inflation of 9.5% and Japan currently runs with a CPI of -0.4% (yes, that's year over year) and a PPI of 5.5%.
So, while we can expect margins to be pressured here at home, one can also expect that this pandemic-inspired storm will also be best weathered right here. Everyone is in a tough spot. The U.S. is best positioned to spread the pain more evenly.
Next Shoe to Drop
According to a report from real estate service Cushman & Wakefield, available office space in New York City is now at an all-time high. We have warned about an eventual collapse in commercial real estate markets (especially urban) for some time now. From the work-remotely trend inspired by a public health crisis but now part of white-collar culture to the evacuation of New York City by the financial industry now undeniably rebuilding a new Wall Street in southern Florida, many corporations are asking themselves why they need to have a large footprint in expensive markets.
The truth is that they don't. The move from expensive markets to less-expensive markets and from high-tax states to low-tax states is only going to accelerate, and that acceleration will only gain momentum as Congress moves to increase corporate tax rates. REITs have not in general been underperformers. My feeling is to stay away from the group unless you know what you are buying. Opaque-looking ETFs would be a no-go for me at this time.
What Has Sarge Been Buying?
I have not yet redeployed all the cash that I created (and told everyone about in print and on TV) in late August. I gave you a four- to six-week window to be cautious. More than four weeks in, I am not all that confident in my initial feeling that the volatility would wrap up by mid-October. I still think we see Santa, BTW, just less sure of my timing.
Nonetheless, I have been redeploying cash in baby steps for almost two weeks now. I have increased my stake in Wells Fargo (WFC) and initiated Bank of America (BAC) in preparation for at least temporarily steeper yield curves. I have bulked up on ConocoPhillips (COP) so I would not miss the entire move in energy. I have been adding to Abbott Labs (ABT) on dips as I only see increased demand for COVID testing, while reinitiating Merck (MRK) as it appears to be developing an effective oral antiviral. I have been adding to Lockheed Martin (LMT) , Raytheon Technologies (RTX) and Kratos Defense (KTOS) as I don't like the way things feel in and over the Pacific. I have also initiated Matson (MATX) just in case Pacific Ocean maritime transport ever unscrews itself.
Economics (All Times Eastern)
08:30 - Personal Income (Aug): Expecting 0.3% m/m, Last 1.1% m/m.
08:30 - Consumer Spending (Aug): Expecting 0.6% m/m, Last 0.6% m/m.
08:30 - PCE Price Index (Aug): Expecting 4.2% y/y, Last 4.2% y/y.
08:30 - Core PCE Price Index (Aug): Expecting 3.5% y/y, Last 3.6% y/y.
09:45 - Markit Manufacturing PMI (Sep-rev): Flashed 60.5.
10:00 - ISM Manufacturing Index (Sep): Expecting 59.7, Last 61.1.
10:00 - Construction Spending (Aug): Expecting 0.3% m/m, Last 0.3% m/m.
10:00 - U of M Consumer Sentiment (Sep-F): Flashed 71.0.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 421.
The Fed (All Times Eastern)
13:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.
Today's Earnings Highlights (Consensus EPS Expectations)
There are no significant quarterly earnings scheduled for release.