I got to my desk here on Friday morning at 03:30. Not early. Not late. Usual time.
For the first half hour or so, I try not to even look at social media or anything like that. For 30 minutes I just absorb as much data, read as much opinion, think about what I am trying to do, and drain my first cup of coffee. By 4 a.m. all my trading systems are up, my emails read, and I am pretty much ready to rock.
You want to fight? I am right here. This is my ritual. There are many like it, but this one is mine. Since long before the pandemic. Remember, it's always the middle of the day somewhere. Somebody, somewhere is always trying to find a way to beat you.
The competition has evolved over time, from fellow homo sapiens into complex algorithms that are sometimes smarter and always faster than are we. Going the extra mile and doing the extra work has never been more important. It becomes more difficult to recognize and reverse-engineer these algorithms as they themselves have learned how to think. Artificial intelligence quickly becomes the enemy. "They" spot you and figure out what you are trying to do these days, often before you spot "them" and figure them out. Doing the work has never been more important. As we are slow, we must rely upon surprise.
As we step into the arena, one cannot just be good or have sharp instincts. We must know defense, we must know offense, we must know the opposition, we must know the terrain. We must know our weapons as we know ourselves. Our weapons are the tools available. Know thy way around the materials provided by public corporations. Not just balance sheets, but statements of operations, of cash flows. Know the difference between quality and camouflage. Learn at least the basics of technical analysis. It's not hard. Be cognizant not just of the macroeconomic environment, but the entire circle. How does that environment impact decisions made by those who mold policy, and how does that policy provoke human response, which is the goal here of all involved -- to best interpret and anticipate human response to conditions of surplus and scarcity, both real and perceived.
These are mere words. It is you, and it is I, who must dig deep, who must sacrifice for those dependent upon our success. The tale that someday will be told by our descendants long after that last tear has been shed. Long after the death song has been sung. Long after we have either been accepted or rejected by our friends at the great hall of Valhalla. Lord, let us do our best today for all who love us. For all who cannot. Let us take this field and hold our ground. Let us plant our banner and honor those who came before. Last, but certainly not least, we are grateful. We are grateful for the opportunity to prove ourselves once again, on this most glorious morning. Oh, how lucky we are. We are faithful not until death, but forever. For there is no honor or responsibility greater, brothers and sisters.... for today, we rock.
Just what did you want the man to say? Federal Reserve Chairman Jerome Powell, who I have come to like over time, was not at his best on Thursday. Maybe he does not quite have the silver tongue of a Mario Draghi, but has he not already demonstrated to us an ability to evolve according to the situation? Did he not learn on the job back in 2018? Did he not, along with former Treasury Secretary Steven Mnuchin, move in real-time to address issues of liquidity back in late 2019, and then move to avert outright economic calamity as elected leaders reacted to the realities of a pandemic economy in different ways?
Powell can and will make mistakes. So will you. Powell said the Federal Open Market Committee (FOMC) would remain "patient" at least until labor markets recover. Powell also said the following, and he stuttered a little when he said it, so I think (not traders, but) keyword-reading algorithms reacted negatively and in response to each other to the comment: "As it relates to the bond market, I'd be concerned by disorderly conditions in markets or by a persistent tightening in financial conditions broadly that threatens the achievement of our goals."
Let's take that at face value. Have bond markets behaved disorderly? They move quickly, I agree. That's because price discovery is no longer a human activity, but disorderly? No, market structure and function is nowhere close to breaking. Have monetary conditions tightened? Of course. Are they still liquid? Yes. The bond market itself does get a vote here. Are these changes persistent? Do they threaten price stability or maximum sustainable employment? Not yet, and we really don't know. All who currently knock this Fed for dragging its feet would also knock this Fed for bending to the will of the marketplace at the first sign of trouble.
I have said from the beginning that equity market valuations were not even close to being absurd over recent years considering the impacts of both the monetary and fiscal conditions of the times, nor for the disinflationary impacts of technological progress that coexisted with a simultaneous decline in labor productivity and pure velocity.
I have always taught traders not to consider historical metrics for valuation because there was no historical context. It really is different this time, nearly every time. My friends, we thought that the federal government had been fiscally irresponsible pretty much since the late 1990s. Now, due to pandemic conditions, deficit spending will reach fairly unimaginable levels because the nation and the planet refused to suffer any short-term pain prior to a new era of necessity. Perhaps reaping what we sow is, in the end, a net positive.
Here's a crazy idea. Given that the honest U.S. debt to GDP ratio is about to and will rise above 400% in short order when all debt is considered (yes, all debt), and given that central banks globally must be slow to act because inflation favors those most heavily indebted, there will at least upon stimulus be a bout with inflation. (You may not, but sovereign governments around the globe including ours not only crave but need more than a little bit of inflation. They must try to foster it.)
It may be permanent. Then again, like with all past stimulus, the impacts may prove transitory. Should Powell go full Paul Volcker on the economy? Is that what you want? I doubt it. That's not what our fiscal authorities want, either. Remember, they hated Volcker at the time, and President Reagan caught a lot of flak for sticking with Volcker, who was really President Carter's guy. Now the late, great (and truly impressive man) Paul Volcker is seen as a hero of the past. (I'll tell you this, when you met Paul Volcker, you did not do much of the talking.) Very few celebrities leave me star-struck. Paul Volcker was one of the few.
So, Let Me Ask...
Are we so weak that we cry out at the first instance of pain?
Do we really need our hands held every time we get hit in the teeth? Fight back, maggots?
Should not markets react to significant changes in fiscal policy?
Should not credit over time have a fair, and in real terms, a positive price? C'mon, man.
Should you and I not relish in the challenge that we have been granted? I know you do.
How can we ever be great if what we do never becomes difficult? Greatness awaits.
(I am so fired up right now, I cannot wait for the February jobs report. Ring the bell now. The sun soon rises, and my friends, and so shall we.)
In short, 10 of 11 sectors sold off. Breadth was really negative at the New York Stock Exchange (NYSE) and worse than that at the Nasdaq Market Site. Aggregate trading volume increased dramatically. What does that mean? That means exactly what I wrote to you 24 hours ago.
It means that the 50-day simple moving average (SMA) for the S&P 500 broke and that professional portfolio managers ran for the hills in numbers. There was broad professional distribution. As you were warned ahead of time, the small-caps caught the worst of it. Only the energy sector SPDR ETF (XLE) shaded green for the day, as OPEC and friends decided to stand still on production for another month. Oil prices soared despite a U.S. dollar that showed strength against nearly every single peer currency as well as against bitcoin.
What Did I Do on Thursday?
You know me. I was a net buyer. I added to long positions in the most beaten-up parts of our marketplace. I bought Apple (AAPL) , Zscaler (ZS) , Nvidia (NVDA) , Amazon (AMZN) and Advanced Micro Devices (AMD) ... yes, the very same AMD that I sold live on that Yahoo Finance Premium webinar on Wednesday. That was a nearly $5-per-share capital extraction, by the way.
How markets respond to this morning's data for labor market demand I do not know. I am fairly certain, however, that should the market overreact in a negative way to optimistic-looking numbers that I will add to these positions yet again. I am also fairly certain that should the markets for some reason rally that I will just as quickly sell what I bought Thursday. I am not here to be right or wrong, through being right helps. I am here for one reason. To support my family, and they only eat if I hunt and kill. Carry on.
February Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 148K, Last 49K.
Unemployment Rate: Expecting 6.4%, Last 6.3%.
Underemployment Rate: Last 11.1%.
Participation Rate: Expecting 61.5%, Last 61.4%.
Average Weekly Hours: Expecting 34.9, Last 35.0.
Average Hourly Earnings: Expecting 5.2% y/y, Last 5.4% y/y.
Other Economics (All Times Eastern)
08:30 - Balance of Trade (Jan): Expecting $-67.5B, Last $-66.6B.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 309.
15:00 - Consumer Credit (Jan): Expecting $12.5B, Last $9.73B.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)