There was a time, so very long ago, that I worked for a trader whom I considered to be one of the sharpest minds in the business. He was highly critical. He expected maximum effort. He expected you in the office (many) hours ahead of heading down to the NYSE trading floor for that day's session. He expected everyone to have a strategy every day and to be able to explain where and why one's thinking had turned throughout the day. He was simply the greatest boss I ever had. He got it. He really understood what we were trying to do. I miss his well thought out, highly intelligent counsel. I really do. One of the saddest days of my career was, very selfishly, the day of his retirement. Almost two decades ago now.
Eight times a year, this former boss of mine would don a ball-cap with the words "Fed Watch" pinned to the crown as reminder to his staff that as afternoon approached on "Fed Days" to get real conservative... to not get caught by our opponents on the trading floor, or our own customers looking to "pick off" the careless at an inopportune time. I am not sure now if my old boss would have left that cap in the drawer on this day, or simply have put that thing on his head last night in anticipation of an FOMC statement that can't look good, and that will likely offer nothing new in the way of traditional monetary policy.
Back in those days, central bankers offered little in the way of explanation. These days are far different, as economic conditions are dire, and this Fed has gone out a long way into the waters of less than traditional policy in an effort to maintain lines of credit and liquidity until the overall picture of solvency on the broadest of levels might start to improve. Today, Jerome Powell will likely have to clarify an awful lot... and show a lot of patience. Oh, I would love to have a conversation with that former manager in this environment. No doubt.
Ahead of Fed Day
For one, there was a mild increase in trading volume at the New York Stock Exchange, while volume remained very close to flat at the Nasdaq Market Site. Obviously, the related indices sold off a bit: The Nasdaq Composite closed down 1.4%, the S&P 500 down just 0.5%. Trading volume in aggregate for both of these indices did increase from the prior day, but also for both, remained well below 50-day simple moving averages.
So, did we finally see an uptick in institutional participation on the sell side? I believe we did, but more with a sense of purpose than in any kind of panicked state. I believe that Tuesday was more of a profit-taking/rotational type of trading session than anything else. Let me explain. Many of our names and sectors that have led markets through this remarkable rebound off of the lows of March were delivered an unwelcome haircut on Tuesday. Health Care was the worst performing sector, while within that group, the biotechs underperformed the sector. Communication Services and Information Technology also finished the day close to the bottom of the sector performance tables. These sectors were underperformed from within by Internet stocks, and by software-type names.
There. We have established the likelihood of some profit taking where profits were, ahead of the Fed, and ahead of most of this week's bulk of expected high-profile quarterly earnings releases. This is where the story gets interesting. Where did this created capital go? Energy, the Industrials, Materials and Financials all had a good day. So did the small-caps. Again. In fact the S&P 600 gained 2% on the day, while the Russell 2000 scored a 1.2% increase. Odd behavior, but nonetheless -- as my old boss used to tell us -- have a strategy and be able to explain what happened.
These "professionals" are either betting on a broader economic recovery or simply thinning out their bets ahead of risk. Just an opinion, but hard to ignore a "down day" where winners beat losers and advancing volume beat declining volume by "extremely decisive" margins at both of New York's primary equity exchanges. Food for thought. That capital did not go into cash. It went into other equities.
This is a tough one. As had been expected throughout the day on Tuesday, the president on Tuesday evening invoked the Defense Production Act, and signed an executive order meant to keep plants that process beef, pork and poultry in operation during this pandemic after holding private conversations with corporate leadership from the major meat-packing companies.
There is no doubt that reduced supplies of meat have become an issue for American communities, and that this concern appears to be on the doorstep of getting that much more serious as farmers are forced to make decisions they never wanted to make in response to the spread of this coronavirus that has forced several high-production plants to close. This, as commercial demand suddenly dropped off of a cliff, leaving an all-consumer market for these products. The warning placed in newspapers over the weekend by Tyson Foods (TSN) drew public attention to the issue. TSN, by the way, ran 5% on Tuesday as rumors of the president's pending action made the rounds on the Wall Street rumor mill.
It's not just Tyson that will be impacted here, and it's not just the companies that we see from 10,000 feet. These are real people who work in these plants and they are probably, at least some of them, afraid to go to work. The virus has spread in these plants that have been shut down, as working conditions can be tight. Of course there will be guidance offered by the Department of Labor as to how to proceed, as well as personal protection equipment.
Does this make the employee feel better? Or does this relieve leadership of liability? Probably, this coming guidance will be meant to do both. Still, as we have kept those on the front lines of this fight, the health care professionals and the first-responders, in our thoughts and prayers, as well as those stocking shelves and delivering packages or cargo, we better save some room in our prayers for these folks, their families and their communities.
On that note, and not limited to those working the food/meat supply chain, there is talk, maybe more than talk of some kind of essential employee walk-out on May 1 (International Workers Day), which is this Friday. If this develops, according to an on-line publication, The Intercept, it would be due to concerns over the health and safety of these types of essential laborers. Public companies that might be impacted, according to the piece, would be Amazon (AMZN) , Walmart (WMT) , Target (TGT) , and FedEx (FDX) .
Questions Moving Forward
As the economy takes the very first baby steps toward climbing up off of the canvas, there are questions that will be asked, which may or may not have already been answered.
1) What has the expansion of working from home, or working remotely, done to the evolution of the workplace? I think it is already obvious that at least for white collar workers, there has been almost a surprising ability to maintain a significant level of productivity away from the traditional workplace. Moving forward, as technologies continue to improve, can employees maintain this productivity? With neighbors to the left and to the right losing their jobs, has this been an impetus? Did the fact that the kids were not in school help or hurt the ability to focus on work? Folks will return to the workplace, but just how many? What does the reduced need for and expected surplus of office space do to the commercial real estate market? Then add the pressure of what will be increased vacancies at malls, strip malls, and Main Street retail locations. Does that, in turn, impact residential real estate, and how severely? If there is no office, then why live in an urban or suburban setting, as long as one has reliable internet service? Who doesn't want to live in the middle of nowhere? I know I do. Heck, all I really want is clean water and a source of heat. Everything else is gravy.
2) While folks will return to shopping in person, because they want to, or they like it, might some just not? The gains made by e-commerce, or no-contact delivery services, may reverse to a degree once the economy opens up, and as long a there are no severe hiccups (That's asking a lot.), but one would have to think that as well as some of these (e-commerce) firms have performed, a great deal of this consumer behavior is irreversible. My guess is that at a minimum, some older folks who may have been resistant to this kind of evolution have probably now embraced it as a way to protect themselves. They are not about to browse the aisle next to you anytime soon at your local seller of day-wear.
3) This is the big one. How does a nation get employment back to anything close to pre-pandemic levels? Probably, it cannot. The best attempt has to come from the necessity of American companies to repatriate supply chains, or at least shorten them significantly. Has to be done. We can never, ever, leave ourselves so blindly exposed as we so stupidly were. This, at least, lays a base for the rebuilding of a domestic middle class. The rest will have to come from fiscal policy. From a necessary tax cut for middle-income types in order to promote job seeking for those now receiving increased benefits that I truly understand that they may not want to risk, especially if they have mouths to feed. To get the ball moving on this, there is going to have to be aid to the states, even if they had been mismanaged prior to this pandemic, and there is going to have to be a large infrastructure build. Maybe the DFA can be used to get the House of Representatives back to work. I mean, if its good for meat-packers...
4) This is a long-term situation, isn't it? What do you think? Bailouts, increased income for the newly unemployed, reduced tax receipts (corporate, household, capital gains, etc.), and easy credit (state, municipal, corporate) all add up to unmentionable deficits at every level. This we will discuss forever, as the shock has made what we used to refer to as deficit spending into what now will eventually become an experiment in the monetization of debt without permanently exploding the economy, or public stability. This, my friends, is not just a domestic issue. This is global, which could allow exchange rates some relative stability of their own. Then again, exchange rates will be far less important than they had been in a globalist model now that most developed economies will need to move toward something far more protectionist just to be able to defend themselves, won't they?
Theme of The Day
After producing first-quarter results that beat expectations, Pfizer (PFE) CEO Albert Bourla appeared on CNBC and indicated that the firm is prepping for the ability to produce millions of doses of a potential vaccine for Covid-19 available later this year, and hundreds of millions of doses next year.
After what we have heard from Johnson & Johnson (JNJ) , after what we have heard from Moderna (MRNA) , after what we have heard out of India and from researchers at Oxford University, I think we all have to be just a little bit encouraged. One or more of these efforts resulting in success changes and enhances answers to each and every question asked above.
Economics (All Times Eastern)
08:30 - GDP Growth Rate (Q1-adv): Expecting -4%, Last 2.1%.
08:30 - Pending Home Sales (Mar): Expecting -10% m/m, Last 2.4% m/m.
10:30 - Gasoline Stocks (Weekly): Last +1.017M.
10:30 - Oil Inventories (Weekly): Last +15.002M.
The Fed (All Times Eastern)
14:00 - FOMC Policy Statement.
14:00 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AMT) (1.97), (ANTM) (6.44), (AZN) (.92), (ADP) (1.90), (BA) (-1.48), (CCL) (-1.66), (GD) (2.59), (GE) (.08), (HUM) (4.64), (MA) (1.75), (NSC) (2.24), (NOC) (5.49), (RCL) (-.35), (SHW) (3.95), (SPOT) (-.46), (YUM) (.68)