Every morning you greet me
Small and white
Clean and bright
You look happy to meet me
Blossom of snow
May you bloom and grow
Bloom and grow forever
-- Rodgers, Hammerstein 1959
I know, I know, equity index futures are trading lower as the sun's earliest rays of optimism remain several hours to my east. Why did my mind wander, as I looked over once again, Wednesday's trading landscape, as well as headlines that made their way through the blackish gray of the midnight hours?
Wander to where I thought of a song about a tough little flower that grows only in, and survives only at the higher altitudes of the Swiss Alps? Switzerland. Hmm, that may come up in just a little bit. Tough little flower? Perhaps that's the key, now think with me. We may need more than one brain on this. I beg you.
First thought: Our beautiful, but still pressured rally really seemed to bottom about two weeks ago. This pressure forces a retest a week or so later. Now, this still fragile rally, yes rally, draws nourishment from the cold, rocky, sandy environment caused by melting mountain snow. A rally broadens as does participation. You follow?
Do not look to the Dow Industrials. They are but 30 stocks, and as a group did little more than move sideways on Wednesday. The S&P 500 did just slightly better, but did do better. The Dow Transports popped, up 0.95%. Yes, led by the airlines, but they did bring truckers, the rails, delivery services, and even maritime transport with them.
Remember what I have been saying (on the Real Money Reopening roundtable) and writing with consistency. Not just the manufacture, and production of goods and materials are key, but so is anyone who moves raw materials, as well as both unfinished and finished goods. As sure signs of an increase of private revisions to full year 2021 GDP expectations hasten. (On that note, April data for Durable Goods Orders hit the tape this morning.)
It goes beyond the transports, however.
While the Nasdaq Composite was indeed warm, the S&P MidCap 400 index was indeed hot (+0.96%) on Wednesday, while small-caps were simply boiling as both the Russell 2000 (+2%), and the S&P 600 (+2.13%) took back and held key moving averages (21-day EMA and 50-day SMA). They did this while the U.S. 10-year Note worked its way back to a yield of 1.59%, while the U.S. Dollar Index showed some mild strength, and while Bitcoin stayed relatively quiet.
One oddity of the day that I found fascinating was the investor excitement around Ford Motor's (F) future in electric vehicles. Ford was up a cool 8.6% on the day, while competitors like Tesla (TSLA) and General Motors (GM) , both up 2.4%, rode Ford's coattails for a change.
As the child who sleeps with the lights on to keep the monsters away, market fear, or concern over volatility, continues to dissipate. I pointed out 24 hours ago, that the VIX had dropped to 18, and that the CBOE Total Put/Call ratio had fallen to 0.81. On Wednesday, both fell further -- the VIX to 17.36, and that put/call ratio to 0.76, equalling its lowest level in almost four weeks.
The optimistic change in posture was visible everywhere. Eight of the 11 S&P 500 sectors closed Wednesday in the green. Among those eight were all five "cyclical" sectors. Trading volume soared at both of New York's primary equity exchanges. Read that last sentence again. I have not been able to write that in some time. Let's not get nuts, though. Trading volumes remain below 50-day SMAs.
That said, just a few days ahead of a holiday weekend, trading volume for NYSE-listed names popped 5.6%, while trading volume also increased (+3.1%) for Nasdaq-listed names. Market breadth was simply outstanding as well. Winners beat losers at the NYSE by well more than 2 to 1, while the margin was more like 3 to 1 at the Nasdaq. Advancing volume clobbered declining volume by roughly 7 to 2 at both exchanges as well.
Drums in the Distance...
... grow louder. Perhaps closer. Perhaps more drums.
On Wednesday, fresh off of his drubbing at the hands of Senator Elizabeth Warren on Tuesday, Federal Reserve Gov. (Vice Chair for Supervision) Randal Quarles spoke to the Brookings Institute. Quarles stated, "If my expectations about economic growth, unemployment, and inflation over the coming months are borne out.. and especially if they come in stronger than I expect... it will become important for the (FOMC) to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings." Quarles also allowed that such a tapering could begin in 2021.
You'll recall that just a day ago, we quoted Fed Vice Chair Richard Clarida from his appearance at Yahoo Finance: "There will come a time in upcoming meetings, we'll be at the point where we can begin to discuss scaling back the pace of asset purchases." If you were wondering if maybe the Fed as a unit discusses what kind of narrative they want to put out in the universe, I think the answer there is quite obvious. Later on Wednesday, San Francisco Fed President Mary Daly, on CNBC, said, "We're talking about talking about tapering, and that is what you want out of us." Thank you Mary, for your blunt approach. Much appreciated. Yet, markets seem unfazed.
Oh, on the Warren/Quarles beat-down (from the Senate Banking Committee hearing on Tuesday), I have no way of knowing how good a job Randal Quarles is doing. You know I try to remain as non-political as possible, but my inner economist must speak up. All that said, Warren's attack was sharp: "Your term as (vice) chair is up in five months, and our financial system will be safer when you are gone" led to "I urge President Biden to fill your role with someone who will actually keep our financial system safe." Wow.
I thought this came off as particularly harsh and somewhat ill-informed given that Warren's accusation was based upon the Fed's decision to stop additional supervision of the LISCC (Large Institution Supervision Coordinating Committee).
Warren's point was that this decision came several months ahead of the Archegos Capital collapse in March that led to major losses at Credit Suisse (CS) . Warren either did not know or chose to ignore the fact that Credit Suisse is indeed Swiss (as in... not American), and that the majority of the losses experienced by that bank occurred outside of the U.S. (as in outside U.S. jurisdiction) and could not have been picked up by the LISCC or any regulatory authority in the U.S.
U.S. banks that were involved such as JPMorgan Chase (JPM) and Goldman Sachs (GS) quite obviously managed their part in that collapse far better and far more professionally than what you saw across the pond. Maybe I am just a goon, actually I know I am just a goon, but I don't see a valid point.
Too Much Cash
While the velocity of both M1 and M2 Money Supply continued to slow in the first quarter, I would suspect that second-quarter velocity at least appears to be accelerating. Is it, though? Relative to a monetary base that grows some $120 billion per month?
I have already written on how easily this monthly expansion of the Fed balance sheet could be reduced by a third. No one listens. Knock, knock... Hey Fed dudes, how many times do I have to be ahead of you before you start paying attention? This has become constant, and you try my patience, yet again.
The banks are parking large amounts of dough at the Fed every night. There is no place else for it to go. Demand for the Fed's reverse repo facility has run amok. Last Friday's number, $369 billion, I read at the Financial Times was indeed the highest single day total since 2017. The U.S. Treasury Department has been beefing up issuances of 10, 20 and 30-year paper, but not the short-term stuff. Big banks are not going to stuff large amounts of idle cash in long-term debt securities. They're just not. So, offer them more of the 30 and 90-day stuff, Janet. This ain't rocket science.
What if, just for a second,we thought that potentially large amounts of this dough started seeping out of the banking system. That was the fear throughout the 2009-2016 slow motion recovery. Now, that threat is perhaps more severe. Savings accounts have been topped off. Small businesses have had to become conservative. Folks can't find available homes. All that can change in the blink of an eye. Apparently there is no threat of rising rates in our very short-term future, but all you need is a touch of (perceived) structural inflation, as the Fed "talks about" talking about tapering, as folks reach for new homes and businesses suddenly seek capital.
Just like that kid who sleeps with the light on, you may not have to necessarily fear the monster in the closet. Just know that the monster is there, and what to do (buy gold) if he (or she) should escape.
Software for Sale
Snowflake (SNOW) , Workday (WDAY) and Okta (OKTA) all reported quarterly results Wednesday evening. All three beat expectations for both earnings and revenue generation. All three also increased guidance. All three traded lower overnight.
The problem is that while SNOW and OKTA are growing sales quite nicely, neither is profitable. WDAY is profitable in an adjusted sort of way, but is growing revenue at just a 15% annual rate, which is a deceleration. The stock closed at a forward-looking P/E ratio of 84 times.
All three would appear to be overpriced in a reopening economy, while engaged in highly competitive fields.
Nvidia Is Different
I am running out of time this morning, but I saw nothing last night that would make me sell any of my shares in Nvidia (NVDA) . My price target remains $740. I will go into detail elsewhere.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 444K.
08:30 - Continuing Claims (Weekly): Last 3.751M.
08:30 - Durable Goods Orders (Apr): Expecting 0.7% m/m, Last 0.5% m/m.
08:30 - ex-Transportation (Apr): Expecting 0.7% m/m, Last 1.6% m/m.
08:30 - ex-Defense (Apr): Expecting 0.4% m/m, Last 0.5% m/m.
08:30 - Core Capital Goods (Apr): Expecting 0.8% m/m, Last 0.9% m/m.
08:30 - GDP Growth (Q1-rev): Flashed 6.4% q/q SAAR.
10:00 - Pending Home Sales (Apr): Expecting 1.2% m/m, Last 1.9% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +71B cf.
11:00 - Kansas City Manufacturing Index (May): Last 31.
The Fed (All Times Eastern)
No public events scheduled.