Eye of the Tiger
"So many times it happens too fast
You change your passion for glory
Don't lose your grip on the dreams of the past
You must fight just to keep them alive"
- James, Michael (Survivor), 1982
Down Deep
Friday morning. Short week. Jobs Day.
You've made it this far. You have shown great resilience, as has this market. There had not been much to build a rally upon just three weeks ago. Still, you made a stand. You do know that they come for you. You do understand that they may come for you this morning. You must be as agile as a cat. You must be as sharp as a cold wind. You must be as vigilant as the warrior who knows that there is still much to lose, while retaining the ability to become whatever is necessary, whenever it is necessary. Now, load 'em up. Full battle rattle. Gas masks on the hip. Two sources of water. Unsheath that terrible swift sword. For this morning, we move.
Resiliency
On Wednesday, equity markets faced off against a weak April construction spending report, hawkish-sounding talk from a number of Federal Reserve Bank officials, an almost panic-stricken Jamie Dimon, CEO of JPMorgan Chase (JPM) (or at least that's how it came off), a Beige Book that showed four Federal Reserve regional districts struggling to grow, and a Russian economy that had moved one step closer to default. Equity markets sold off, but held the line.
On Thursday, equity markets hurdled a foreign exchange-related reduction in guidance for the current quarter brought forth by tech giant Microsoft MSFT, a dismal report for April private sector job creation, more hawkish Fed speak, this time from No. 2, and more upsetting talk from financial leaders. Yet equity markets surged. The more the negativity piled on, the more the algos thirsted for equity exposure. We already knew that a trade-able bottom had been put in on May 12 and confirmed on both May 20 and May 24, but this was more.
Of course, bear market rallies can cause great heartbreak, because they do lure you in because they do offer hope before they try once again to break you. There can be no doubt that the US economy is either in recession or coming too close for comfort in the present tense. Save the cheery economic talk for someone who can't read the data. Tough times for equities will come with a tough economy. That said, the market had clearly gotten ahead of the economy. This three-week run that has taken the Nasdaq Composite 11.6% and the S&P 500 9.6% off their May lows has perhaps placed these markets where they probably should have been at this stage of the game.
May Day
May's Jobs Day will be an almost perfect test coming off an almost unearned surge in prices. Will a strong report cause a severe bout of profit taking ahead of the weekend for fear that the Fed will need to stay tough on inflation longer? Or is the opposite true? Is tougher monetary policy seen, at least for those corporations not in need of available credit refinancing in order to maintain operations, as not just the enemy of consumer inflation, but on a B-to-B level the patron saint of margin preservation?
We know that the Non-Farm payrolls print published as part of the Bureau of Labor Statistics' Establishment Survey only moves in lock-step with the ADP Private Employment Report some of the time. Heck, the NFP print only moves in step with the BLS's Household Survey some of the time. That said, how unnerving is it that the ADP print for May showed significant weakness in job creation for the month?
ADP estimates private-sector job creation of just 128,000 positions for May, which would be the lowest number for that line since the "before" times (pre-pandemic). ADP also revised April down to 202,000 from 247,000. The numbers within for May showed outright job destruction or contraction for small business. All at a time when the BLS Job Openings and Labor Turnover Survey (JOLTS) report (which does run a month behind the employment situation data) shows almost record job openings.
What to focus on this morning? I think the key data may be on the demand side... average workweek, and on the supply side... participation, more so than any print for job creation (which has become akin to a blindfolded orangutan playing "pin the tail on the donkey") or month-to- month wage growth.
One would think that any slack in hours worked or increase in participation could signal management's struggle to preserve margin as well as the common individual's struggle to cope with inflation. That would put September back in play for the Federal Open Market Committee.
They Said...
"Right now it's very hard to see the case for a pause (in rate hikes). We've still got a lot of work to do to get inflation down to our 2% target"
- Federal Reserve Vice Chairman Lael Brainard (on CNBC)
"This is among, if not the most...complex, dynamic environments I've ever seen in my career. The confluence of the number of shocks to the system is unprecedented."
- Goldman Sachs (GS) President John Waldron
"We expect there's going to be tougher economic times ahead. No question we are seeing a tougher capital markets environment."
- Goldman Sachs President John Waldron
"There's greater recognition that inflation is not transitory, it is probably with us for a number of years, and it's the type of inflation I don't believe the Federal Reserve has the policy or the tools to do much with it right now."
- BlackRock (BLK) CEO Larry Fink (on Bloomberg TV)
Marketplace
Incredible. The S&P 500 tacked on 1.84% on Thursday and has now gained at least that much in three of the past five sessions and at least 0.95% in four of the past six. The index has taken and so far held its 21-day exponential moving average (EMA) this week....
Even more incredibly, the Nasdaq Composite gained 2.69% on Thursday and has now scored gains of 2.68% or greater in three of the past five sessions and 1.5% or greater for five of the past eight. The Nasdaq Composite has also found support at its 21-day EMA this week...
It goes on. The Russell 2000 has gained 1.95% or more in four of six trading days. The Philadelphia Semiconductor Index popped for 3.57% on Thursday, led by On Semiconductor (ON) , Advanced Micro Devices (AMD) and Nvidia (NVDA) . Those three names were up 7.29%, 7.28% and 6.94%, respectively, just for the one session. The only news? AMD announced an investor day set for June 9. The Philadelphia Semiconductor Index has now taken back that 3.57% or more on three of the past five trading sessions.
Nvidia's chart looks more or less like the two above. Developing what could be a cup or cup with handle pattern moving forward, but having retaken and now resting upon the 21-day EMA.
Now, take a look at the chart above. AMD has not only retaken its 21-day EMA, but also its 50-day simple moving average (SMA). That has brought at least some PMs back over the line. AMD also closed just $8.42 short of the stock's 200-day SMA. You can bet your tail that every PM managing his or her exposure to this name is watching that red line above with all kinds of bells and whistles attached.
For comparison, I want you to see ON over the same time frame. ON has already taken on and defeated its 21-day EMA, 50-day SMA and 200-day SMA. At the same time, ON has benefitted from a "swing traders' golden cross" as the 21-day EMA crossed above the 50-day SMA. Just look at the lift in this stock over the past few sessions as both PMs and algorithms frenzied on this stock. Oh, AMD is getting darned close to the same bullish crossover. Perhaps by its investor day. Maybe sooner.
Breadth
Thursday was all good, except... you know. What always seems to spoil a good party? That's right. Trading volume was light. Blame it on Jobs Day if you like, but still... market participation did not confirm the day's price discovery. Let's take a look.
Winners beat losers by a rough 3 to 1 at both of New York's primary equity exchanges. Advancing volume took an 81.2% share of composite New York Stock Exchange-listed trade, and an 82.6% of that metric for Nasdaq listings. Ten of the 11 S&P sector-select SPDR ETFs shaded green for the day, led by Consumer Discretionaries (XLY) , Materials (XLB) , Communication Services (XLC) and Technology (XLK) , all of which were up at least 2.42%. Only Energy (XLE) painted its black door red, down just 0.32%.
However, aggregate trading volume contracted day over day for NYSE-listed securities and Nasdaq-listed securities, as well as across the constituencies of both the S&P 500 and Nasdaq Composite. In short, managers were a bit skittish ahead of the employment data. Depending on how that data prints, there will either be a rush to take profits or a rush to catch up due to yesterday's under-participation. Either way, there will be a rush. Buckle those chinstraps.
Many Hands
On the one hand, RH (RH) , the old Restoration Hardware, absolutely crushed adjusted earnings expectations for the first quarter on revenue growth of 11.2% that also beat the street.
On the other hand, RH warned of softening demand trends that started in late February and have further slowed. RH sees second-quarter revenue declining by 1% to 3%, and full-year revenue growth of 0% to 2%. RH grew sales 32% last year.
On the third hand, RH announced a $2 billion increase to its share repurchase authorization that left $450 million remaining.
On the fourth hand, RH expects to fund the repurchases through a combination of existing cash flow, borrowings under existing credit facilities and proceeds from incremental borrowing arrangements. Huh? Really? Cash, I can see, but borrowing to buy back stock in this environment? I'd be careful about that.
Fifth hand? RH sees adjusted operating margin of 23% to 23.5% for the second quarter and 23% to 24% for the full year. This would be down from 26.6% for second quarter of 2021 and 25.6% for fiscal year 2021.
Maybe now we know why the stock has been trading at just 11x forward earnings. RH does have a strong balance sheet, with a current ratio of 2.49. On the asset side, cash on hand totals $2.243 billion and the company is wearing inventories of $817 million. On the other side, term loans total $1.949 billion, with another $100 million in convertible senior notes due in 2023 and 2024. RH also has $1.127 billion in operating lease and finance lease liabilities.
Hey, RH can do what it wants to do with its money and its available liquidity. I am just thinking maybe you don't want to bloat that debt load at a time where the economy is going into a period of uncertainty and your own corporate projections are not so hot. Maybe bloat the debt load to support operations, but to buy back more stock with some existing flexibility left in the previous authorization? If you want to spend some cash, initiate a dividend, but right now the cash balance is competitive with the long-term debt load. Just may want to preserve that balance.
May Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 323K, Last 428K.
Unemployment Rate: Expecting 3.5%, Last 3.6%.
Underemployment Rate: Last 7.0%.
Participation Rate: Expecting 62.3%, Last 62.2%.
Average Hourly Earnings: Expecting 5.2% y/y, Last 5.5% y/y.
Average Weekly Hours: Expecting 34.6, Last 34.6 hours.
Other Economics (All Times Eastern)
09:45 - S&P Global US Services PMI (May-F): Flashed 53.5.
10:00 - ISM Non-Manufacturing Index (May): Expecting 56.4, Last 57.1.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 727.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 574.
The Fed (All Times Eastern)
14:00 - Speaker: Reserve Board Gov. Lael Brainard.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings schedules for release.
