Deceptive?
One might think. No, nobody is lying to you directly, At least not that I know of. I have been fooled before. This I do know. We all know that there is now this incredible disconnect between the U.S. (global) economy and financial market performance. I have written over and over that the investing/trading public can trust only price and trend, and that they can do this through the use of technical analysis at this time.
Why? Simple. Because that is really the only way to make this all work. True fundamental analysis will still work for some public companies with fortress-like balance sheets, not for most right now, however. An honest, up and down analysis done fundamentally on economic conditions might just frighten the bravest of souls.
"False Face Must Hide What The False Heart Doth Know"
The quote is taken from Shakespeare's "MacBeth." Does this not fit the times? Heck, this quote not only seems to adequately label an equity market rally as federal, corporate, regional and household cash flows are replaced by debt, this quote also labels Thursday quite well. For in reality, the first "down" day of the week, was not at all a truly negative day for equities -- once one bothers to pop the hood and take a look.
At one point, early in Thursday's regular trading session, the Nasdaq 100 became the first (sort of) major U.S. equity index to completely recover from the incredible selloff that began in earnest in late February. That selloff, which as we all know was fast and furious, lasted into a March 23 bottom that many investors did not trust (and some still do not) for weeks. The rally has not been quite so sharp as was the decline, but still more rapid than almost anyone could have expected.
The disconnect from reality is not difficult to understand. Though there are quite a number of reasons why the economy should run into headwinds as the attempt is made to recover paradise lost (Was it really paradise? Whatever it was, it was a lot better than this.). Financial markets have moved as they have as a result of aggressively specific actions taken by policy makers. The macroeconomic data spells "depression". The actions taken by the Federal Reserve Bank and the U.S. Treasury Department have either prevented this result, or delayed the inevitable. We'll know more, once we know more.
The unemployment rate runs around 20%, and we do know that this is still likely an undershoot as not all categories of laborers are eligible for benefits, or maybe worked beneath the radar. Those participating in the "gig economy", and those who maybe worked off of the books for any number of reasons will not recover quickly. The need to socially distance from one another will prevent the hustler from hustling in the same way. The need to socially distance from one another will prevent great numbers from working inside people's homes, in restaurants or in entertainment.
Still, Thursday
Interestingly, as domestic equity indices have either completed their V-shaped recovery or have now come close, one must understand that the realm of publicly traded companies is also the realm of those better able to fund themselves and better able to manage capital expenditure through scale. The pandemic, and now broad social unrest, impact the small business with maybe just one location who is reliant upon a very local public to such a greater degree than the larger firms that readers are more aware of. This is why the "half way back" or "reverse square root symbol" recovery is still a valid model for the economy in general, particularly in urban areas where it is far more difficult for folks to distance themselves from one another.
All this said, equity markets did trade lower on Thursday. As usual, appearances are deceptive. While broad large-cap indices such as the S&P 500 and Nasdaq Composite both moved lower for the day, the transports and the small-caps (S&P 600) both still moved higher. Traders did not move toward the defensive. The Utilities and the REITs finished at the bottom of the sector performance tables as the Financials led the way. You can thank weakness at the long end of the Treasury yield curve for these results. That softness has exacerbated overnight, by the way.
The most interesting take-away, I think, from Thursday's regular session was this: Despite headline-level weakness, the breadth of the equity market was indeed overwhelmingly positive. Trading volume increased significantly at both the New York Stock Exchange as well as the Nasdaq Market Site. Winners beat losers at both exchanges and advancing volume beat declining volume by more than 2 to 1 at both exchanges. In fact, that ratio was more like 2.5 to 1 at the NYSE.
What this means is that the rotation out cash and into value is alive and well as long as there is a belief that economies across the nation can continue to reopen methodically while avoiding a surge in coronavirus infections. The nation limps toward mass availability of the earliest versions of some kind of vaccine. How the social unrest plays out as far as this is concerned, we may not know for weeks.
Love, Sweet Love
What the world (nation) needs now is the next-level fiscal support package. Wish the federal government did not add $600 per week to state jobless benefits? Going to make it tough to get people back to work? I get the concept. I also think this discussion has to wait until there is broad labor market demand for help that goes unmet. In the meantime, remember where we were when the CARES Act was passed. These people fed their families throughout the crisis. That was and is the priority.
The next package does have to deal with moving this household aid to a next model, but there will have to be a level of finesse that I don't know that policy makers are capable of. This next package will surely have to provide for an infrastructure rebuild, as this is the "go to" idea that almost immediately increases demand for labor. The federal government will also have to incentivize U.S.-domiciled corporations looking to bring home or shorten supply chains. This will also give some rise to demand for middle class employment. That's important for a nation not only trying to recover from a public health crisis that revealed the globalized supply chain as a terrible weakness, but also trying to reinvent itself in a socially responsible way.
We can do this. We really have to do this. The obvious impact I think will be witnessed in the Treasury yield curve. We are already seeing this. As the supply side of that market must expand, and as federal tax receipts simply will be downsized, at least for now, one would think that the yield curve will steepen. This in theory will pave the way for growth. And inflation. At a time when consumers will likely be frugal. Talk about finesse. The FOMC will have to manage this.
We Have Liftoff
What a couple of days for Boeing (BA) . Whoa. From word that the Third Point offshore Fund had listed Boeing as one of its winners for the month of May, to word that SMBC Aviation Capital would delay, not cancel, an order for 113 737 Max aircraft, to word that domestic airlines were increasing scheduling ahead of potentially rising demand, the situation that the firm finds itself in seems far different than it had earlier in the week.
Is it even possible? The shares have now increased an incredible 92% in value off of the March lows, but remain down a rough 47% year to date. I remain skeptical and still consider Boeing more speculative than others in the aerospace industry. Until we know that the airline industry will need more aircraft (they do not, in my opinion), and until we know that maybe China makes a large purchase of commercial aircraft in an attempt to live up to the trade deal (who knows?), then we just do not know about Boeing. For now, I'll stick with Lockheed Martin (LMT) , and Raytheon Technologies (RTX) , even with some of the warts apparent.
Given everything, the run by the airlines in general, and American Airlines Group (AAL) in particular, on Thursday was simply stunning. American Airlines made public news that demand had been sharply higher in May from April -- and that the firm would increase its flight schedule for July to 55% of year-ago levels domestically and 20% of year-ago levels internationally.
I still do not like the airlines, just an FYI. I need more. If I did like an airline, and I were to take a speculative position in one, it would be Southwest Airlines (LUV) , given the more domestic nature of the firm's business, as well as the just completed re-engineering of the firm's debt-load.
May Employment Situation (08:30 ET)
Nonfarm Payrolls: Expecting -8.7M, Last -20.5M.
Unemployment Rate: Expecting 19.5%, Last 14.7%.
Underemployment Rate: Last 22.8%.
Participation Rate: Last 60.2%.
Average Hourly Earnings: Last +7.9% y/y.
Average Weekly Hours: Last 34.2 hours.
Other Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 230K, Last 229K.
08:30 - Personal Income (February): Expecting 0.4% m/m, Last 0.4% m/m.
08:30 - Consumer Spending (February): Expecting 0.2% m/m, Last 0.2% m/m.
08:30 - PCE Price Index (February): Expecting 1.7% y/y, Last 1.7% y/y.
08:30 - Core PCE Price Index (February): Expecting 1.6% y/y, Last 1.5% y/y.
09:45 - Chicago PMI (March): Expecting 62.2, Last 61.9.
10:00 - U of M Consumer Sentiment (March-F): Flashed 102.0.
10:30 - Natural Gas Inventories (Weekly): Expecting -73B cf, Last -86B cf.
13:00 - Baker Hughes Oil Rig Count (Weekly): Expecting 806, Last 804.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (TIF) (0.11)
