Betting on the Economy
What a week. Really? What a week !! What a market !! Almost all who trade or invest professionally feel it... an unwelcome lack of ease that perhaps (there is no "perhaps" about it) financial markets are ahead of the real economy. Our large-cap indices all scored gains of between 3.2% to 3.4% for the week past, stretching aggregate 12-month forward looking P/E ratios for the S&P 500 all the way to 21x. These large-cap indices, at least for the week past, were decisively outperformed by more "growth reliant" or cyclical slices of the equity market. The Dow Jones Transportation Average gained an impressive 9.1% over five days, while measures of small-cap market success also moved to the upside with some gusto. The Russell 2000 ran 7.8%, while the S&P 600, at 8.8%, nearly hung in there with the transports.
Does a broadening of the equity market rebound in U.S. equities (which is what this was) make sense? Even if the large-cap indices do move sideways just a bit, and the Nasdaq Composite really has not as of yet? Why does capital flow into market segments that just cannot perform very well, from a corporate perspective for at least some time still to come? Yes, we see the Composite trading 12.4% above it's own 50-day SMA. We see that "laggard", the S&P 500, trading just 8% above it's own 50-day SMA. (The S&P 500 really has indeed been moving sideways, more or less for almost a month.) We see gaps left unfilled on daily charts that give those of us who stare at charts for hours on end just more reason for caution. Still, we march.
Don't investors see the coming cycle of defaults? There is no alternative. Doesn't anyone else wonder just how much prosperity has been brought forward through policy implementation? From how far out into the future? I know, I know, there is no alternative. Does this not create "stagflation"? What I had to learn the hard way a long time ago was that if I waited for the market to do what I, in my intellectual brilliance, knew it should do, I would probably, at worst, wash out of the business at a very young age, or at best, always have to work for someone else.
Respect price. Realize that while it would be nice to see into the future, adequately "working" the marketplace is truly more dependent on interpreting what others are trying to do, while they are still in the earlier stages of getting there. In other words, correctly calling large market moves may work out.. when large moves happen, but also might cost the investor more than they were worth over the long term. Respect price? Yes, because price matters. Understanding the environment provided is where the daily, weekly and monthly opportunities are born. Bluntly put, nothing in this game is more important to the trader than the interpretation of trend.
On That Note...
Though I write these missives at a time of day that most "normal" folk consider the middle of the night, there is no doubt, once one glances at U.S. equity index futures pricing, that there is a "risk-on" feel pervasive across planet earth as the wee hours pass. Are not tensions mounting between the planet's two largest economies? The list of Chinese companies facing new restrictions in dealing with U.S. companies grows. The U.S. legislature has moved toward holding U.S.-listing Chinese companies to the same accounting standards that publicly traded domestic companies are held to. Multinational corporations, in the wake of what humans have gone through, will almost certainly have to move toward shortening supply chains, even if the trade-off created is one of margin for reliability.
Yes, U.S. relations with China are a headwind. This may be partially factored in at this point, as the reopening of other key economies in Europe, as well as the steps being taken in Japan, have caught the attention of global investors early this week. It becomes difficult to not get excited when a nation such as Japan gets to a point where the government can cancel a "state of emergency" related to Covid-19, talk about additional policy implementation, and... wait for it... set an "Opening Day" for their professional baseball league. Think that doesn't matter? For baseball fans, it does. For non-fans, it's a return to normalcy. For those stuck at home staring at the television, it's something for the news to cover besides the coronavirus and politics. My two least favorite subjects.
Fork in the Road
Now, in regards to China, Beijing seeks to reassure global investors, as protesters return to the streets of Hong Kong, that the proposed national security law would improve economic stability of the "semi-autonomous" region. The U.S. has threatened sanctions in response, and it remains very possible that the proposed law pushes leadership in Taiwan further from Beijing, as well. This story plays out over time.
Ever hear of the "Competitive Exclusion Principle", or what is also known as "Gause's Law" (named for Georgy Gause)? This is at least one theory, another being climate change, used to explain the extinction of Homo Neanderthalensis around the same time (give or take) as the arrival in regions of Eurasia of Homo Sapiens. Basically, the theory would be that two species competing for finite resources over a limited range would be unable to maintain constant levels of population. The group with the profound advantage ultimately dominates, while then other either disappears or evolves.
Forget about extinction, but overlay this theory onto the current condition of U.S.-China relations. Finite resources over a limited range? That's global economic balance. Will one group evolve in some way toward the model espoused by the other? Not likely. Then there will be a need at some point to find a place of co-existence. but we are a long way from there for now.
The New York Stock Exchange reopens its legendary trading floor to human traders on Tuesday morning. Things will be different, but a start is a start. The floor population will at first be limited to a small percentage of where it stood prior to the pandemic, and perhaps be brought up to full strength incrementally over time. Designated market makers (formerly known as specialists) will not return at first, as this job can be done more easily from remote locations than can some other floor trader positions that are better executed with a physical presence.
Returning traders will be required to wear masks, avoid mass transit, allow for temperature checks, sign waivers stating that they understand the inherent risk and go about their daily tasks in socially distanced way. This mean no physical contact, installed Plexiglas around the floor, a ban on visitors that I believe extends to the media for now, as well as daily deep-cleaning procedures.
Just my opinion, but this is important. Symbolic? Yes, as I mentioned above how opening the Japanese baseball season is a return to normalcy for that nation, this is perhaps the first, very visible, sign of a return to normalcy for both New York City and the nation. For as everyone knows, the business of the United States is well ... "business." May those returning to the trading floor today do so safely, and may we see those colored jackets scurrying around that trading floor for another fifty years, uninterrupted. At least.
More Good News
No, it's not just Moderna (MRNA) , nor Johnson & Johnson (JNJ) , Sanofi (SNY) or Pfizer (PFE) , but it is one of the 120 or so Covid-19 vaccines currently in development somewhere on the planet. This time, on Monday, it was Novavax (NVAX) announcing that the firm had initiated human studies of it's NVX-CoV2373 candidate. Phase one studies kick off with 130 healthy volunteers between the ages of 18 and 59 in Australia, and should show some kind of results as soon as July. That's when, if the news is positive, that the firm plans to move to the second stage of testing across multiple locations. The positive news is this. The firm is already scaling up for mass production, similar to what the manufacturers of several other vaccine candidates are doing. Ahead of time.
Novavax plans to be able to produce a possible 100M doses of this candidate this year, and perhaps one billion doses in 2021. Is the market up on Tuesday morning because of Novavax? No. The market is up because regional and global economies are reopening, and because across the community of science, there is such a profound sense of urgency to get this done, to get this done rapidly and to get this done in unprecedented scale. Are we pricing in a "Gause's Law" between two species? No. There is a chance, however, that we are pricing in a greater sense of community across nations as the need to cooperate globally has almost never been more important. At least not in my lifetime.
While my investment focus remains more on information technology and health care than any other groups, I maintain lower but not non-existent levels of exposure to more cyclical sectors, such as financials, industrials and energy. While markets are nowhere near anyplace that might be considered "out of the woods," a flattening of performance in what got us here would probably have to be expected. Might actually be a good thing. Bulls look forward to increased broadening of performance. Bears use cash to tamp down expected volatility. Be both. For now.
Ever participate in a small team insertion by means of rubber raft? A few readers probably have. Helicopters make a lot of noise. Slowly moving up a muddy stream still draws attention, but not so much. Hot, humid, disgusting, wild animals galore. Still safer. Move slowly up that jungle stream. In the water, hanging onto the boat to reduce profile (Piranha? It does cross the mind.), no engine. Just get there. Amphibious. Be amphibious.
Economics (All Times Eastern)
09:00 - Case-Shiller HPI (Mar): Expecting 3.4% y/y, Last 3.5% y/y.
09:00 - FHFA HPI (Mar): Expecting 0.6% m/m, Last 0.7% m/m.
10:00 - Consumer Confidence (May): Expecting 87.8, Last 86.9.
10:00 - New Home Sales (Apr): Expecting 492K, Last 627K.
10:30 - Dallas Fed Manufacturing Index (May): Expecting -57, Last -73.7.
The Fed (All Times Eastern)
13:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AZO) (13.19), (BAH) (0.71)
After the Close: (KEYS) (1.03)