Ride a Painted Pony?
Let the spinnin' wheel spin? Maybe you have no choice. Then again, maybe you do. All it takes is some blood, sweat and tears. OK, it takes blood, sweat and tears, but that's not all. It takes cognitive ability, the ability to adjust quickly. Ego? It's OK to have one to a certain extent, as long as it is left hung on the coat rack once the game is afoot.
In between bells, understand that the competition will be faster and have access to more knowledge. This is why all traders must be masters of multiple disciplines. There are no successful traders who are not both fundamental and technical analysts, who are not both strategists and economists, who are not both aggressive and passive at different times in response to different environments. In short, to survive for a long time, and this goes for far more than posting a consistently positive P&L, one must be able to identify and exploit personal strengths while acknowledging and working on areas of personal weakness. Identification is the easy part. The drive to improve will last a lifetime. That said, we have a lot to tackle this morning, so let's wind it up, gang, and get after it.
Equity markets were deceptively strong on Thursday for most of the regular session. I know, the media told you that it was a down day for the Dow Jones Industrials, S&P 500 and Nasdaq Composite, and it was, fractionally. (I really am going to have to return to financial TV because the drivel I see before me -- with notable exception, Hi Liz! -- is maddening.) It was also a rather robust-looking day of basking in the green for most of the Transports, the mid-caps and especially the small-caps.
To be fair, the small caps simply roared. Once again, Energy (XLE) was your leading sector SPDR ETF, followed by the REITs (XLRE) , the Financials (XLF) and the Industrials (XLI) due to the fact that the industrials house the transports. These four sectors closed green on the day. So, small-caps, transports, energy and basically the banks, though certainly not consumer finance. Whoa, Nelly! All as yield spreads once again expanded ahead of President-elect Biden's Thursday night address as well as ahead of the big banks kicking off "the season" on Friday morning.
Those who do not dive deep into the numbers might be surprised to read that market breadth on Thursday was not just good, it was exceptional. Let me say that again... Exceptional. Winners beat losers by more than 2 to 1 at both of New York's primary exchanges. Aggregate trading volume moved sideways at the Nasdaq while moving 13% higher from Wednesday's total at the New York Stock Exchange. Advancing volume simply trounced declining volume at both exchanges as well, by almost 3 to 1 at the NYSE and by almost 2 to 1 at the Nasdaq. Thursday was a good day for equities. Most equities.
Information Technology (XLK) and technology-adjacent industries were weak, and that excludes the semiconductors that as an industry were notably higher, led by Taiwan Semiconductor (TSM) after that firm made clear that demand for semis is going to be red hot moving forward. TSM dragged with it the well-known industry equipment providers such as Lam Research (LRCX) , ASML Holding (ASML) , Applied Materials (AMAT) , Brooks Automation (BRKS) and KLA Corp. (KLAC) . I came in long none of those. Nice goin', Slick.
The Biden Plan
Equity index futures were a little soft overnight. Perhaps this should have been expected. The plan is aggressive, and perhaps (probably) not passable as is, but that should have been expected. Markets are still digesting the proposed $1.9 trillion in new, immediate pandemic relief. Bear in mind that while I may have political opinion, my political opinion is not part of making money.
Adapting to your surrounding environment to include the implementation of policy is part of how one turns a buck. Like your leaders or not, one needs to be as cold as a 4 a.m. blizzard in January when making decisions based on what fiscal and monetary authorities are trying to do.
Once one realizes that the game we play is best played by mercenaries, we can move on. The former vice president suggests additional direct payments to individuals of up to $1,400. This will cost $465 billion. About $350 billion would be pushed out to state and local governments. Emergency federal jobless benefits of $400 a week will be extended. There's more, including $170 billion for schools and $160 billion to expedite the expansion of both vaccination and testing for the virus.
My thoughts? There is no doubt in my military mind that the expansion in demand for labor that got the recovery to where it went has come to a screeching halt and is now contracting as the virus surges through the population. I do not love the thought of additional, massive deficit spending. I also do not love the thought of a potentially extended period of depressed economic potential.
Don't give me the lip about slowing recovery. We don't put this virus down, we don't move forward. You don't want to hear the word "depression," then be aggressive. We're already down the rabbit hole both fiscally and monetarily. The day of reckoning calls. We can face the music right now, with potential receding, or we can extend the debt supercycle out as far as it will go. Both songs end abruptly. One now, with a pandemic raging. One later, with at least a remote possibility that the economy can sustain itself through increased velocity. So, what's it gonna be, Sport?
I don't want to support the Biden plan, but I think we need to support most of it, though. Many cities and states have been badly mismanaged for years, you say? True. Very true in New York. We still want the folks of Gotham immunized, don't we? We still need the few employers who have not already left to stick around, don't we?
I will say this for Joe Biden: He sounds as sharp right now as I have heard him in years. Is he rising to meet the day? He might be. Remember this. Your country is not just great, but great at finding the right person at the right time. Always has been. So, let's see.
Of course, the plan includes throwaways in order to reach some kind of agreement in the middle. A national minimum wage would obviously be a fairly ridiculous ask with small employers already shedding payroll. This is one such item mentioned only to give political opponents an easy victory in negotiations. That's how the ball rolls, and both sides are going to have to play ball now.
I don't think Joe Biden is the greatest thing since sliced bread. I do think he knows how to play ball. I will not judge him ahead of time. I invite all to join me in keeping an open mind. This nation needs all of us right now. So, tape up both fists and let's roll.
Along Those Lines...
Fed Chairman Jerome Powell spoke virtually on Thursday ahead of the president-elect's address. Bear in mind, this may be Economics 101 for most readers, but there may be one among us who is new to this or just does not understand. We are a unit and we move only as fast as the slowest among us, so either skip ahead if you need to or stay with the team.
New kids: The funds Joe Biden asks for do not yet exist. Funds must be borrowed by the U.S. Treasury Department and purchased in great part in the form of debt securities by the Federal Reserve Bank. In doing this, the Fed creates new fiat currency, expanding the monetary base as well as the Fed's balance sheet. In theory, this increased money supply would put upward pressure on consumer-level inflation.
We now know through the tragic failures of the often-mentioned Bernanke (Mr. Courage) Fed that money supply that remains mostly confined to the banking system has close to no impact upon inflation. Only velocity in transaction can do this. The banks will need to increase lending in order to provide for the increased probability for elevated velocity. Expanding yield spreads also expand net interest margins for lenders, so yes, this time it could be different. Lenders may lend more if they can get paid to do it. Common sense. Of course, this may also produce higher long-term interest rates that would counter this inflation.
That's where the Fed and a greater likelihood for a retargeting of Treasury maturities across the current monthly creation of $120 billion per month of currency through asset purchases comes in. The Fed will work with the Treasury to try to keep all these forces that could clash, and that could cause elevated complexity risk, somewhat manageable.
On Thursday, Jerome Powell said this: "Now is not the time to be talking about exit; the lesson of the financial crisis is: be careful not to exit too early, and by the way, don't try to talk about exit all the time... because the markets are listening." Powell was not only speaking out to investors, but he was quite possibly in the most tacit way possible, admonishing several of his subordinates at the central bank who have been flapping their gums just a bit too much of late. As readers know, I feel that Jerome Powell has learned on the job the hard way, and through trial by fire has become one of the all-time great central bankers.
We have been looking forward to this day for long enough. I come in long JPMorgan Chase (JPM) and Wells Fargo (WFC) , both of which report here on Friday morning, and US Bancorp (USB) , which will step to the plate next Wednesday. No, the banks do not set the tone for earnings season. That thought has been dead for many quarters, even years. Could this time be different? Maybe.
There really is a chance that there has been and will be a spawning of real net interest income. While we look at everything, I see this, as well as "Tangible Book Value" and, in this environment, "Loan Loss Provisions," as absolutely key. Heck, this paragraph may be obsolete by the time you read it. On with the show.
What the Heck?
Chegg Inc. (CHGG) does not report for another three weeks. This name has been in and out of our "pandemic portfolio" for most of the past year. I am currently still long but very small. Chegg provides digital materials such as textbooks online to students forced to learn from home. I have noticed something very strange in the chart that I wanted to show you. You don't see "triple tops" all the time, and when you do, most of the time, this is a pattern of reversal that takes place at the top of the chart. The placement is true here, but strangely the stock has come out of the pattern with an upward move.
Why is this not a "double bottom"? Simple: Double bottoms take place at the bottom of the chart, and also signal reversal. Two other anomalies I notice here. One, this name never filled the gap created last May. Two, the action from mid-October through the present taken in isolation looks a lot like a "cup with handle" breakout. That's the only thing here that makes any sense to me. That said, it completely discounts the first cup.
That can happen... a cup without a handle, sans breakout, but it sure looks odd coming just in front of a second cup. You know, 12% of the float as of year's end was held in short positions. I am sure that at least some of that short interest was created based on the triple top. This recent move higher may be based just as much on short covering as it is on demand created by those forced to learn remotely. I would tread real carefully here.
Economics (All Times Eastern)
08:30 - Retail Sales (Dec): Expecting -0.1% m/m, Last -1.1% m/m.
08:30 - Core Retail Sales (Dec): Expecting -0.1% m/m, Last -0.9% m/m.
08:30 - PPI (Dec): Expecting 0.7% y/y, Last 0.8% y/y.
08:30 - Core PPI (Dec): Expecting 1.3% y/y, Last 1.4% y/y.
08:30 - Empire State Manufacturing Index (Jan): Expecting 5.9, Last 4.9.
09:15 - Industrial Production (Dec): Expecting 0.4% m/m, Last 0.4% m/m.
09:15 - Capacity Utilization (Dec): Expecting 73.5%, Last 73.3%.
10:00 - Business Inventories (Nov): Expecting 0.5% m/m, Last 0.7% m/m.
10:00 - U of M Consumer Sentiment (Jan-adv): Expecting 79.8, Last 80.7.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 275.
The Fed (All Times Eastern)
No scheduled public appearances.
Today's Earnings Highlights (Consensus EPS Expectations)