Sticks and Stones
They say words can never hurt you. We all know that sometimes indeed they can.
This is not a tale of schoolyard bullying. On Tuesday afternoon, words certainly hurt financial markets. The marketplace was hot. For a number of reasons, first and foremost the belief that members of Congress would not leave the American people dangling (they have), and second, the positivity created around the vaccine news out of Russia that surprised not one soul who pays attention, but the financial media for some reason pretended to be shocked. The latter was a positive even though that vaccine is so far ahead of the pack chronologically only because it has not been put through the stringent clinical trials that test for both efficacy and safety considered to be "standard operating procedure" by most other nations.
Still, the air was permeated with a bit of optimism. We must be close, close to something that allows not just economies to function closer to potential, but for human beings to interact as both instinct and intellect require. More on that in just a bit.
The words I speak of now were spoken by Senate Majority Leader Mitch McConnell on Tuesday. Equities had been treading water already for a couple hours, then the floor fell out, and the last two hours got downright ugly. Large-caps, precious metals, Treasury securities all took it in the teeth. Not the dollar, though. Oh, they bought the U.S. dollar on Tuesday afternoon, for good reason.
McConnell said, "As far as I know, the Secretary of the Treasury and the chief of staff have not spoken to the speaker and the Democratic leader today. And so another day has gone by with an impasse and they need to get together."
It reminded me of an awesome sight I witnessed firsthand as a young man. Ever hide just inside the edge of a rainforest (keeping an eye on adversarial maritime commerce) and watch a severe storm roll in from the sea? Just tremendous. I know some of you believe in God, some of you in science, others in both. You witness that kind of storm and you'll believe in something, for the only thing one is sure of after that is just how small we really are. Well, that kind of storm hit the markets over the last 90 minutes of the session.
There is just so much to unpack here. The FAANG+M stocks all took a turn on the wrong end of the ugly stick, leaving both Microsoft (MSFT) and Alphabet (GOOGL) in the position of being forced to defend their respective 50-day simple moving averages (SMAs). Netflix (NFLX) failed to even put up a fight as the share price went through that line like a hot knife through butter.
How quickly our largest and broadest of major market indices go from thinking all-time highs to outright professional distribution. That, my friends, is the result of what passes for price discovery in this modern era. We have gone from managers making decisions that they know will be second-guessed based upon their cognitive abilities under pressure after looking at fundamentals, technicals, and news to "Oh, look at what my algos are doing, I better see if something happened." Such a shame. From functioning on the razor's edge to all of the sharpness of a rubber ball. You know at least a few of you reading this see this in yourselves, in your employees.
There are still a few of us who run our businesses based on what we have learned over a lifetime as well as what we picked up from the professionals 10 to 15 years our senior. The facts are simple when boiled down. Traders sold the long end of the Treasury curve on Tuesday. This gave a boost to the spread between short-term and long-term yields. This is why the Financials led the market and why the banks led the Financials. This is also why the Utility sector finished a distant last place, with the REITs in 10th place of the 11 sectors.
They are going to sell bonds? Then, they are going to sell the bond proxies as well. The banks can find a thousand ways to make money. Valuation will always be driven by net interest margin.
Oh, anyone else notice the only medium to major equity index that closed in the green on Tuesday? Hint: We featured that index in Market Recon 24 hours ago. Yup, the Dow Transports. Ten-day winning streak now even if the index did close at the (UNP) of the day's range. That index was for the most part led by the rails, and the rails were led by Union Pacific (UNP) . Yup, we covered that name for Real Money on Tuesday, too.
I feel so clairvoyant (only kidding; I am well aware that I am half an idiot. Lifelong N.Y. Mets fan). No, I did not yet enter, not above the Monday/Tuesday overnight gap.
What You Need to Know
It's not that bad. Really. Market conditions did get a little sloppy up at the Nasdaq Market Site. So be it. I still love many of those names, but am long a lot less shares of several of my faves than I was last week. That's just the way the game is played. So, losers beat winners and declining volume clobbered advancing volume up at Times Square. Those names, I believe, will be fine, but it could take a little bit as things even out.
Now, for the value-based, or old, economy. Yes, the S&P 500 saw the winning streak come to an end. Yes, the Dow Industrials experienced a nasty reversal. Still, winners beat losers, and advancing volume did beat declining volume at the New York Stock Exchange. Trading volume did increase from one day to the next, but remained below average at both exchanges.
What does this all mean to me? It means there were some who took profits, a few more who rotated allocation, and even more who sat on their hands.
Why would they do nothing? Because Congress is doing nothing. The administration through questionable moves is at least making moves that to some degree will protect those up against the wall in their time of strife while Congress does whatever it is it does when it gets nothing done.
It is beyond me why our two legislative bodies would not go ahead and pass piecemeal bills that at least get something done for people in need, especially where it is that they already agree. Don't give me that "hardball politics" nonsense. These folks work for the people, no? There is no excuse for not talking. All day every day if necessary. There is no excuse for recess. You were elected? Congratulations. Now, do your stinking job.
Actually, yes, glad you asked. Three stories merit mention before I move on this morning.
1) Former vice president and presumptive Democratic presidential nominee Joe Biden has selected Sen. Kamala Harris of California as his running mate this November. This is probably a string selection on his behalf. Not that I will agree with her on policy, but Harris represents a thoughtful and far less progressive choice than maybe some of the other possible choices. This will not scare off "middle of the road" voters and may have helped put a bid under equity index futures overnight.
2) There is some new vaccine news and from a lot closer to home than Russia. First, after reporting less-than-stellar earnings on Tuesday morning, German concern BioNtech (BNTX) , which has partnered up with U.S. pharmaceutical giant Pfizer (PFE) to work on a vaccine in this fight against Covid-19, announced that it could seek U.S. approval for such a vaccine as soon as this October. Phase 2/3 clinical trials for this messenger RNA-based vaccine began in parallel back in late July.
2a) Meanwhile. Moderna (MRNA) , also in Phase 3 trials concerning a messenger RNA-based vaccine, announced that an agreement had been reached to sell 100 million doses of this potential vaccine to the U.S. government for more than $1.5 billion. The stock is trading higher here on Wedneday morning.
3) Tesla (TSLA) announced that its board had approved a five-for-one stock split in order to make the shares more accessible to both employees and investors. The change takes effect on Aug. 31. This one kind of ticks me off. I had been carrying a medium-size short position in this stock since mid-July and had something close to a major victory on hands. The shares are trading close to $1,458 overnight, up 6%. At that level, I will still turn a profit, but I am going to have to cover and give back a lot of what could have been. At least I'm still a Mets fan. Never mind.
Economics (All Times Eastern)
08:30 - CPI (July): Expecting 0.8% y/y, Last 0.6% y/y.
08:30 - Core CPI (July): Expecting 1.1% y/y, Last 1.2% y/y.
10:30 - Oil Inventories (Weekly): Last -7.373M.
10:30 - Gasoline Stocks (Weekly): Last +419K.
13:00 - Ten Year Note Auction: $38B.
14:00 - Federal Budget Statement (July): Last -$864B.
The Fed (All Times Eastern)
10:00 - Speaker: Boston Fed Pres. Eric Rosengren.
11:00 - Speaker: Dallas Fed Pres. Robert Kaplan.
15:00 - Speaker: San Francisco Fed Pres. Mary Daly.
Today's Earnings Highlights (Consensus EPS Expectations)