Ride of the Valkyries
Lost in a maze. A wilderness of sorts. Maybe this is the funhouse.
Where to turn? It all looks alike. Too similar. It all looks different. Too different. Distorted. From the start. How do we know? What is real? What is "truth"? Not your truth, or my truth, but truth or Truth as a pronoun. Hmm.
The bond market spoke first. "I'll set you up nice for some slower growth and perhaps some disinflation -- sounds good?" The Delta variant spoke next. Delta said, "I'll take you, and you, and you. The rest of you, get in line until my friends get here." Japan was adamant. "OK, we're going to do this, so we can say we did this, and then it will be over. Finally."
What a mess. Everyone here. All speaking. Noise. As if each conversation were nothing more than a conversation in isolation.
Listen. What's that? They're here. Who's here? China. What do they want? Well, what do you have? Not much. Well, they want it. I don't think they'll say much, but don't get too close. Maybe they'll just stay there and dominate that corner of the room. Maybe.
It was then that the Federal Open Market Committee (FOMC) showed their faces, as if but one, but masked. The host acknowledged the Fed. "May I show you to a table?" The Fed waited 30 seconds (maybe more) before answering. "Yes, I think," and then added, "We'd like a seat in the back, away from everyone else, but we'd like to move through the room very slowly, maybe slower than very slowly, in case we change our mind on the way."
Suddenly, beautiful music erupted from every corner, from every direction. Wagner's "Ride of the Valkyries" filled the room. Too loud, so loud. It was then that a crazed gang of motorcycle-riding orangutans tore through the room wearing bells and waving flags. The music stopped. It was as if nobody noticed. There were two well-dressed folks now talking quietly in the corner. There was also a group of ruffians in another corner. The ruffians were figuring out how to hack major corporations and then hold their information for ransom. They only said, "Pay us in crypto. No cash." China finally spoke. "Information is what we want. Knowledge is power."
Back in that other corner, the two well-dressed folks were talking politics. The woman spoke as if in charge, the man kept referring to her as some kind of "speaker." Maybe it was some kind of title. I thought it odd. First: "You know if the data overall keeps coming in a little weaker, we can up the excessive, mind-blowing number that we're asking for." Then, in eerie delight, the man spoke: "Exactly, then on our side, we can up the ridiculous, mind-blowing low-ball number that we are proposing." "Excellent," the two said at almost exactly the same time, exhausted from putting in a solid 20 minutes (or so) of hard work on behalf of the people.
I awoke. Sweating, though the house felt cold. The rain pounded on my bedroom window. "Thank goodness," I said to myself. It was but a dream. "Mom..."
Markets: PBOC Cuts the RRR
It was ugly. Not really ugly, but on the ugly side. Capital poured into the longer end of the U.S. Treasury yield curve, seemingly drawn from equity trading accounts. However, as the day wore on, the flow of investment funds reversed mildly. Then more so, overnight. What felt like the "big one" early in the morning on Thursday turned out to be little more than a warning. A warning that all is but a house of cards built upon no foundation. A warning that unless protected, this amazing economic rebound and dramatic victory founded on the public and private sectors working hand in hand could be lost. Quickly.
All the major and even minor equity indices traded lower on Thursday. All 11 S&P sectors traded lower, with defensives generally outperforming cyclicals, while sandwiching growth. It should come as no surprise that (using SPDR ETFs as proxies) the REITs (XLRE) and Utilities (XLU) out-performed as the yield curve flattened. That same curve has been steepening overnight.. The U.S. 10-year note pays more than 1.33% as I type this piece as opposed to a low yield below 1.25% on Thursday. That simply means that those two sectors will likely under-perform on Friday.
It remains quite notable that the weakest equity indices on Thursday were those most highly dependent upon economic growth. The S&P 400 Mid-Caps gave up 1.28% as the small-caps were slapped around yet again. The S&P 600 backed up 1.24%. Then there are the Dow Transports. That got real ugly, down 3.3%, but there's more to that story. The rails and maritime transport came under attack from the Biden administration. More on that in a bit. Hey, at least Amazon (AMZN) had another nice day, even as Alphabet (GOOGL) came under increased regulatory scrutiny and the rest of FANG, or FAANG, sold off.
As you rise, you will see equity index futures trading higher. Minutes ago (I write this column at zero-dark thirty), The People's Bank of China (PBOC), which is China's central bank, announced on its website that it would cut the Reserve Ratio Requirement for all banks by 50 basis points effective 15 July. This is the first cut since April 2020, but it does not come unexpected as recent Chinese macroeconomic data has not been very strong.
Say it ain't so, Joe. You likely noticed on Thursday (I saw it in The Wall Street Journal) that the four worst performers among S&P 500 constituents were Kansas City Southern (KSU) (down 7.95%), Norfolk Southern (NSC) (down 7.12%), CSX Corp. (CSX) (down 6.19%) and Union Pacific (UNP) (down 4.43%). The Dow Jones US Railroad Index, which despite its name does include the two major Canadian railroads, backpedaled 5.67% for the day.
News broke on Thursday that the Biden administration in an executive order will ask the Federal Maritime Commission and the Surface Transportation Board to take on what is termed as "a pattern of consolidation and aggressive pricing that has made it ominously expensive for American companies to transport goods to market." The quote is taken directly from the WSJ piece.
So the rails have a monopoly? I guess they do regionally. That's why I'm long UNP. That's why I am often long Berkshire Hathaway (BRK.B) , operator of the BNSF Railway, which is the old Burlington Northern Santa Fe. Perhaps the administration wants to break up the now even more complicated planned acquisition of Kansas City Southern by Canadian National (CNI) that would have created the only rail business servicing all three North American nations. Should that deal fail to complete, there are breakup fees and reverse breakup fees to the tune of $1.7 billion plus expenses that also include Canadian Pacific Railway (CP) , who KSU left at the altar before going with CNI.
Have the rails been quick to take advantage of rising commodity prices and a scarcity of cargo space during a V-shaped economic recovery? Some might say, "That's business." Some (including the administration) might have a bone to pick.
I don't create the environment, I adapt to it. I'll tell you this. If that V shape is already extending to the right at a more flattened slope, and if commodity prices are indeed past-peak, with Washington getting involved the rails will be no place to be. I probably will allow myself to see which way the wind blows, but I am leaning toward exiting my UNP long and not replacing it with a different rail. (BTW, UNP also is a holding of Jim Cramer's Action Alerts PLUS charitable trust.)
I saw a lot of negative comments on social media. I, for one, felt relieved. I cannot claim to understand the anti-vaxxer crowd. Perhaps they just haven't had a close personal experience with this virus, and I hope they never do. That said, news also broke on Thursday that Pfizer (PFE) and BioNTech (BNTX) will be soon publishing some definitive data on the benefits of a third (booster) shot of their initial vaccine as a case might be made that the reduced efficacy of the Pfizer jabs reported by the recent study in Israel against the Delta could be due to waning antibody counts over time. Israel started jabbing people in January. Pfizer expects to apply to the U.S. Food and Drug Administration for an EUA (Emergency Use Authorization) for a third shot at some point next month.
In addition, Pfizer is also expected to start clinical trials next month for a new COVID vaccine designed using the lineage of this Delta variant. Just speaking as a guy who had a long and tough fight with COVID and its long-term aftereffects: I would stand in line overnight every six months for the rest of my life if it means I never feel like that again. The ignorant point to a survival rate greater than 99%, somehow still unaware that the full recovery rate is believed to be down around 75%. Wake up.
The large banks report next week. A new earnings season. Finally. I am really so bored in between seasons. On Thursday. Wells Fargo (WFC) announced it would be shutting down all existing personal lines of credit and will no longer offer the product to its customers. The stock sold off 2.49%. while the broader Financials SPDR ETF (XLF) gave up an even 2% and the KBW Bank Index 1.95% thanks to compressing yield spreads. That will reverse a bit this morning.
WFC underperformed the group on Thursday because this move obviously closes an avenue toward potential loan growth. Hey, Charles Scharf is no dummy. He has been streamlining this business and trying to untangle the mess that Wells Fargo had been in since he got here. Last year, he sold a $10 billion private student loan book, and earlier this year he agreed to sell the asset management and corporate trust units.
Do I have a crystal ball? No. Do I like Charles Scharf? Yes, and you know how I bet on CEOs I like. I bought more Wells Fargo on Thursday and intend to continue adding on dips going forward. Do we really want the old Wells Fargo?
Economics (All Times Eastern)
10:00 - Wholesale Inventories (May-F): Flashed 1.1% m/m.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 376.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)