The day you have been waiting for all week, maybe even longer, has arrived.
The final day of the Republican National Convention?
Uhm, no. Truth be told, over the last two weeks, I have spent zero minutes and zero seconds in aggregate, on either the Democratic or the Republican conventions. Just not my cup of tea. These are pep rallies. Even when done virtually. They do not convince anyone on the other side of anything, and certainly do not, at least to the immediate front, impact my ability to make money. If I watch TV for fun, it's either lectures from history professors on C-Span3 or live baseball.
If financial markets are to be any indication, a lot must be expected from the Fed Chair Jay Powell on Thursday morning, just a bit after 9 a.m. ET, when he dishes out his address, also virtually from the Kansas City Fed's annual economic symposium usually held at Jackson Hole. Just about all Fed watchers expect the Chair to take on labor markets, and medium to long-term inflation expectations. It is also more than likely that Powell discusses the central bank's long-awaited review of monetary policy. This track will get academic in nature, looking at labor markets from the perspective of an economy a lot closer to fuller employment than we are now, and how to tackle the problems that arose under prior Fed leadership when such conditions failed to produce the results promised in the textbooks by the Phillips Curve.
Of course, there must be a relationship between employment and consumer level inflation, but misunderstood at the time were factors that would counter inflationary expectations such as an acceleration in technological progress, as the negative side of globalization. An entire class of employment opportunity had been off-shored, thus hollowing out the domestic middle class, constraining national output, blunting production. This evacuation of middle-class opportunity unfortunately left the nation mired in a greater state of income inequality than it had been in prior years.
How does the Fed tackle this? Can the Fed or even should the Fed tackle this? This strays a long way from price stability and maximum sustainable employment.
On the Menu
My opinion is that this Fed has done a tremendous job in response to the economy shuttering due to the pandemic. Yes, the balance sheet is out of control. This condition will increase further, necessarily. Fiscal policy has been aggressive to this point. The central bank has had to finance this at little cost to the government. Though the two sides cannot agree, more will be required. The Fed will finance that too.
The Fed has also had to grease the plumbing of the entire economy, and keep the pipes clean for the medium-term future. This keeps overnight cash markets operational. This keeps states, municipalities, and businesses that qualify liquid, when otherwise they might not be.
Does this skew the perception of risk? Does this warp what passes in the year 2020 as price discovery? Does this create the potential for bubbles that seem great for those in the right spot at the right time? Yes, to all of the above, but what would you have the central bank do? Sit in the bleachers and watch the economy go into a full depression, or just allow the velocity of money to not just slow, but stop? No. The Fed has been put in the unenviable position of keeping interest rates where they are, of responding to nearly broken labor markets, of adjusting for, and to national output or economic growth.
The Fed must signal an allowance for upward inflation without responding accordingly with what might have been appropriate action on short-term interest rates. Dangerous? Yes. For you and for me.
Still, it is almost universally accepted that Powell, beyond the academic nuts and bolts required through explanation, will target increased tolerance for higher levels of inflation. You have heard of target averaging, which simply means that the central bank will sit on their hands regarding rates as consumer-level inflation rises beyond 2% in order to try to make up for a long period of having undershot that target. Playing with fire? Depends on just who you are.
Are you the federal government, a regional or local government, a highly indebted business? Then this might be just what the doctor ordered. Are you a highly indebted household? You'll be OK, as long as you can earn more. Can you earn more? Probably not with 28 million individuals on the side lines. The time to ask for a raise is not now. Are you living on a fixed income? Or have you spent a lifetime trying to save a little bit of dough every year? Yeah, for you... this is probably bad news. You definitely don't need any inflation, at least not prior to growth.
'I Wanna Rock and Roll All Night and Party Every Day'
-- Gene Simmons and Paul Stanley (KISS), 1975
We had a guy on Wall Street back in the 1980s, let's call him "Chuckie Nightlife." Chuckie went out every night and somehow showed up for work the next day, ready to play, hurt or not.
You may or may not recall that the 1980s were a bit crazy. A decade of excess, especially on Wall Street. I made my name on the Street by not being one of those guys. In fact, I made a ton of dough by covering accounts for guys who were too sick to answer their own phones in the morning. Oh, the guy on the other end of the phone was doing the same thing I was. For the two primaries were probably out together the night before. Us "back-ups" were useful as long as we were dependable. Chuckie never needed help, though. Chuckie somehow rock and rolled all night, and worked hard everyday. I don't know whatever happened to that guy, but I'll never forget how he kept on going.
At least at the headline level, equities absolutely roared on Wednesday. Internet stocks soared, led by Facebook (FB) and Netflix (NFLX) . Software stocks took control. Salesforce (CRM) lit the road, and the road was followed closely by Workday (WDAY) , and Coupa (COUP) and Adobe (ADBE) . FYI, Workday reports tonight.
Oh, you kids see former Sarge fave Zuora (ZUO) on Wednesday? Taking the 50-day and 200-day simple moving averages in one move. Nice job, Tien. Yes, the Nasdaq Composite and S&P 500 both set new all-time record closes -- again. The tech centric Nasdaq 100 outperformed them both.
So, all good on all fronts? Not exactly.
Small-caps and mid-caps took it on the chin. Transports more or less traded sideways to lower, pressured by the airlines. Losers beat winners at both the New York Stock Exchange as well as the Nasdaq Market Site. Trading volume increased at the NYSE on this negative breadth. That could be a flashing yellow light.
Trading volume at the Nasdaq makes for a more complex interpretation. While losers beat winners roughly 4 to 3, advancing volume decisively beat declining volume. What that tells you is that what is hot is trading. What is not hot is not trading. This is a speed-based, algorithmically driven market now. There is no tough guy chomping on an unlit cigar, while looking up at his screens who is trying to make a big decision. He retired twenty years ago.
Oh, did I tell you that the VIX was up almost 6% on Wednesday, ahead of the Fed? Thought you might have missed that one.
Absolutely Nobody Cares
The World Economic Forum in Davos will apparently be delayed for the year 2021 until sometime next summer. Well, lah-dee-dah. How about this? How about... beat it, kid. You are not that important and you never were. We have real problems now, so be quiet... go on your way, and don't bother us.
Tesla (TSLA) popped another 6.4% on Wednesday. Ahead of this weekend's 5-for-1 stock split. That's another $129 for fellow chart watchers. I am not keeping track, but I have a 25-year-old son. Works hard every day. Nothing financial. Works with his hands. The kid only owns one stock: Tesla. I have no idea how much in percentage terms this kid is beating me this year, but it's not close. Of that I am sure. He keeps asking me what he should do with it now. I keep telling him I would have taken my profits long ago, to trust himself. We are different. He is Harmon Killebrew. I am Rod Carew. This is his pitch.
Among a plethora of increased price targets, come rumors of a technological breakthrough to be announced by the company on September 22 on "Battery Day." You've heard the term "million mile" battery? What does that do to affordability, or margin? Could it improve Tesla's financials from a fundamental perspective while increasing consumer level attractiveness? One thing I know, never bet against this guy (Musk) in size. Only for an occasional trade and only for funsies. That guy is the Mark Messier of fundraising.
I don't believe it was lost on anyone how the shares of Tesla reacted last week when Wedbush analyst Dan Ives placed a price target of $1,900 on the stock with a bull case of $2,500, and then moved the bull case up to $3,500 a couple of days later. Well, on Thursday, Ives was at it again. This time, the beneficiary was Apple (AAPL) .
Ives moved his price target for AAPL up to $600 from $515. He moved his bull case up to $700 from $600. Ives, who my son now follows, sees a "once in decade" opportunity for the firm to approach a rough 350 million upgrades over a year and a half as the 5G capable iPhones start to roll out. Tim Cook. There's another guy not to bet against.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 1.106M
08:30 - Continuing Jobless Claims (Weekly): Last 14.844M.
08:30 - GDP Growth Rate (Q2-rev): Flashed -32.9% q/q SAAR.
10:00 - Pending Home Sales (Weekly): Expecting 3.8% m/m, Last 16.6% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +43B cf.
11:00 - Kansas City Fed Manufacturing Index (Aug): Last 7.
The Fed (All Times Eastern)
All Day - Jackson Hole Monetary Policy Symposium.
09:10- Speaker: Federal Reserve Chair Jerome Powell.