From a Distance
From the sunny shore of Peppermint Bay, all seemed well. Taking a more discerning look, one finds dings and dents here or there. Focus brings with it a less sanguine picture of the current situation than perhaps the lemonade stands one expected to see lining the streets as they traversed toward that candy store in the distance.
Overnight, as we crawl toward Friday morning, it would appear that equity markets are green across Europe as are U.S. equity index futures. Well, earnings have generally been good. Let's not kid ourselves. Earnings have been great so far. Is that not why equity markets were higher for a third consecutive day on Thursday? Yes, that was really a headline at a respected financial news website. Some third day. Oh, sure, the Nasdaq Composite scored a "massive" gain of 0.4% while the S&P 500 worked up a 0.2% increase. That favored large-cap index of those least informed, the Dow Jones Industrial Average, just soared 0.1% for the day. Hmmm.
Hardly a mention that the Russel 2000 gave up 1.6% while the S&P 600 surrendered 1.8% and the S&P 400 backed up 0.9%. Hardly a mention that the Dow Transports closed down 0.2% despite a 1.6% surge for the Dow Jones US Railroad Index. Yes, and hardly a mention that losers beat (absolutely clobbered) winners at the New York Stock Exchange by 5 to 2 and at the Nasdaq by almost 2 to 1. Declining volume notably trounced advancing volume, especially at the NYSE, where the ratio hit a rough 7 to 2.
Where did capital flow? Mainly into Tech and Health Care. Mainly out of Energy and the Financials, primarily Banks. That's not exactly healthy. Individually, we saw stocks such as Microsoft (MSFT) , Amazon (AMZN) , Alphabet (GOOGL) and even Apple (AAPL) attract investment as breadth narrowed. We also saw Crowdstrike (CRWD) lead cybersecurity stocks higher after an Akamai DNS failure took down as many as 30,000 websites, even though headline makers have made clear that there was nothing nefarious going on.
Basically, you and I, who are the ones with capital at risk, not those talking heads we see on the tube, more than half of whom I bet have never made a capital decision, and another quarter or so probably haven't done so in years, and certainly not those who speak in sectors and concept, must decide what the dramatic decrease in aggregate trading volume over the past two days means. They can opine, but your family and mine depend on what we do each and every day. Working hard does not guarantee positive income. Does this volume signal less support for the market's three-day winning streak? Or maybe less conviction behind what was really a negative day for equities if we are to be honest?
My thoughts? My answer is complex, because I am not sure. I see an unbroken uptrend (though possibly rounding) that appears more healthy for the Nasdaq 100 than for the S&P 500 and Nasdaq Composite. This at least tells us that the broader market will remain pressured to a greater degree than we are used to. Traders, I think, have proven that they are prone to buy significant dips in more cyclical parts of our marketplace while taking profits where those profits are. In other words, it appears that traders are funding their losers with their winners. We know through past experience that this strategy is less than successful more often than not. All await some catalyst that will provide clarity. Such anticipation in the end shall provide only some non-committal conclusion.
My answer is that the Fed will leave us grasping for more information this coming Wednesday, because they don't know, either. The legislature eventually will agree to something that will be seen as either too small or too aggressive by all with a political axe to grind. Equity markets will find disappointment there. Treasury markets will be grateful for the European Central Bank (ECB) regardless. Even should there not be the immense supplies of U.S. sovereign debt (there still may be) going forward, the money-printing machine in Europe (and elsewhere) continues, as does the bond buying and the commitment to interest rates that live on the wrong side of the tracks.
Hence, U.S. Treasuries with their gaudy 1.3% to 1.9% positive nominal yields over 10 to 30 years will remain globally popular. That, my friends, is deflationary, as is tech dominance over time. I become more and more convinced as the days pass, and I pay higher prices for everything (just like you), that consumer inflation here in the U.S. is indeed transitory. Understand that should the pace of inflation level off well above 2% on the other side of this night trip aboard the good ship that such inflation will still have been transitory even if it leaves you and I less well off. Unless one has pricing power over their own value to whomever it is that pays for their services.
Why Growth Will Stall
Plain and simple. The virus. When you pay more for goods and services due to bottlenecks in supply chains. The virus. Folks are afraid to go back to work, or back to the office. The virus. Don't blame the change in national leadership (and you know that I am no southpaw) for inflation, or tougher times. Blame the virus. Blame the ability of this virus to mutate. Blame the reality that it is nearly impossible to get vaccines to many corners of the planet, and blame the dingbat next to you who still calls this pandemic a hoax.
You all saw weekly initial jobless claims spike on Thursday. The increase in newly unemployed persons primarily came from the states of Michigan and Kentucky, where they make cars but do not have the semiconductors needed to complete the product for shipping. This more than offset a reduction of 29,000 in continuing claims. We see that through July 3 the total number of folks on all kinds of unemployment benefits (including Pandemic Unemployment Assistance, or PUA) dropped by 1.3 million individuals. That is outstanding news and left 12.6 million people still receiving some public unemployment assistance at the time. That was also three weeks ago, and three weeks ago was well before the obvious and ominous truth of the Delta mutation of the SARS-CoV-2 coronavirus was fully understood by a public needing to wish the past year and a half away.
Now, Sydney, Australia, reports record numbers of cases. New Zealand shuts down travel between the two nations. Italy requires proof of health before going inside restaurants, theaters and museums. And the U.S. extends border shutdowns with both Canada and Mexico. The later variants of the virus are wreaking havoc across Asia, where they make the stuff you buy, where they make the stuff that goes into the stuff you buy. The virus now wreaks havoc across highly vaccinated countries such as the UK and Israel. The virus wreaks havoc at home.
The Centers for Disease Control and Prevention now projects a weekly total of new infections for the week of Aug. 14 (three weeks out) of almost 307,000. The University of Washington, which has been more accurate than most, projects another 50,000 U.S. COVID-related deaths by Nov. 1.
Why do I beat you over the head with this information? Because I had this virus, and I had a pretty rough go of it. It's not influenza. The worst flu you ever had is a nice walk in the park compared to this thing. I would rather walk half way through the Kodiak Bear exhibit at the Bronx Zoo, sit down and eat a sandwich than take an elevator with an unvaccinated person. At least I know what the bears are going to do. No telling what the person in the elevator will leave me with. You don't recover from COVID the same way you recover from other ailments you may have experienced. You will be sick for months, maybe a year plus. Or you can protect the ones you love and get a jab. Are they not worth your love?
What Climate Change?
We know that Chinese-Australian relations are becoming more and more strained. We know that Beijing has placed sanctions on Australian coal. Perusing the Bloomberg website Thursday night, I learned that a vessel left Newport News, Virginia, in late June bound for Chinese steelmakers with a 136,400-ton cargo full of U.S. coal. Now, economically, I know it's good business to take advantage of opportunities. Folks must understand two things.
One, it does not matter on a planetary level if you buy an electric lawn mower if the second-largest (and probably largest industrial) economy on the globe is not working on correcting climate change.
Two, for as long as I have been alive, wherever it is that U.S. boots have tread, Australian boots have tread alongside. These guys might be the best friends we have ever had when we get ourselves into a fight. Maybe, just maybe, we hear them out before jumping in.
Snap (SNAP) reported blowout numbers for the second quarter on Thursday evening. Well, as "blowout" as numbers can be when a business continues to lose money. That said, SNAP lost a dime a share GAAP style, but made a dime a share including adjustments. Revenue growth has been undeniably fantastic. Snap generated $982 million for the quarter, up 116% year over year and about $135 million above projections. Globally, daily active users increased to 293 million, up 23% and above consensus as well. Snap also guided third-quarter revenue to a range of $1.07 billion to $1.085 billion, above the $1.01 billion Wall Street expects.
Know that operating cash flow and free cash flow both printed more deeply negative for Snap for this quarter than for the comparable quarter one year ago. The stock is up 16% overnight, trading at $73+. I would be inclined to fade if long or even short this rally for a short-term trade than I would be to hop on board. Just my opinion.
That brings us to Boston Beer (SAM) . Buy some for a trade? Only with fun money. This thing may be a falling knife. Rarely have I seen a revision to guidance like that. Know what? I feel like maybe having some Domino's Pizza (DPZ) for lunch today. Still blown away by that one. Cumulative two-year same-store sales up 19.6% in the U.S. and 15.2% internationally. My model says take profits today if long. Only I'm not long.
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI Flash (July): Expecting 62.0, Last 62.1.
09:45 - Markit Services PMI Flash (July): Expecting 64.7, Last 64.6.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 380.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)