It has been said that the third or fourth Monday in January can be considered the saddest day of the year. Basically, the people who actually think of these things try to pick the Monday closest to Jan. 21. Why is that? Simple. It's cold, at least in the Northern Hemisphere. For some, depression sets in during the holiday season, then gets worse. For others, this depression actually sets in a few weeks later as the bills roll in.
So, it's cold. There's debt to work off. Baseball and the beach are still a long ways off... and it's Monday. Is that enough?
This January, we will still be dealing with the pandemic, and at least half of the nation will be distressed to some degree. Don't forget that there will be an inauguration that week. We had none of those excuses yesterday. Still, planet Earth decided that Monday this week would be a red Monday. Red as in risk-off red. My least favorite color.
No stars either, for that matter. Just the sounds of the desert. Invisible, yet alive. Coyotes far away sound off, not quite in unison, but letting us know that this is their turf. We are not welcome. Walking slowly. The rattlers do their thing. Shake, shake, shake. But, where?
What do you do when you hear a rattle in the darkness, gang? This is before night vision. You stop in place. Take a deep breath and listen. Upon hearing the rattle, one can then estimate the level of danger. What direction? If I haven't already been bit (I haven't, have I?), then how far away?
The problems really only start when we hear multiple rattles from enough different directions to confuse. The impulse is to run. But where? Do that and we'll be working on you, while trying to get a helicopter on the horn. No panic. Take your time. Your next step is important enough to not screw it up. Got me?
On Monday, there were rattlers doing their thing from every direction. The coronavirus spreads across Europe and the U.S., as hospitalizations rise beyond serious levels in several locations. This overtly negative development forces upon Europe the reality of intentionally suppressing economic activity once again, and puts the U.S. in the on-deck circle.
Since the start of this pandemic, due to the timing of the seasons, Europe has been a month ahead of us on dealing with realities. Why do you think in the U.S. that the Northern Midwest is being hit harder than the Northeast? Because we're lucky on the coast? No.
The East Coast was hit hard early due to international travel. There is no more travel. The Upper Midwest suffers because it is already early winter there, but it is still autumn here. Those folks are already inside more than they are outside. The fact that people travel a lot less than they had pre-2020, while not good for the economy, does help slow the spread from one region of the country to another.
So, the virus spreads, the numbers of those dealing with serious versions of this illness grow. Speaker Pelosi and Secretary Mnuchin "negotiate" every day, and fail... every day. Not casting blame directionally here, but certainly broadly. I am not a political animal. I am about making money regardless of the difficult environment. That is all. When I fail, my family does not eat. I have an opinion. Publicly expressed political opinion, though is a luxury meant for others. I do know lunatics on both sides of the aisle. Of these folks, we are currently oversupplied.
We understand that the political climate is poisonous. It is more than a disagreement on stimulus/support. Obviously, there is the election in a week. Obviously, one side is very happy with the addition of a new Supreme Court justice, the other side less elated. Stimulus before the election would now be out of reach.
How about after the election? During the "lame duck" session? This Senate, this House, and this administration, regardless of electoral outcome, will exist for months yet in their current forms.
On that note, the Senate has adjourned until Nov. 9, apparently prioritizing the campaign trail over support for industries and households already in tough shape. Angry at the Senate? OK, but the House had already been on the campaign trail for weeks, and is not expected back until Nov. 16, a week after the Senate. They're even worse.
Here's an idea for all legislators: show up for work every day, like the rest of us, your constituents. Kooky idea. Oh, and by the way, the federal government faces a Dec. 11 deadline where another temporary funding bill will be needed. Maybe, this could be a focus, I mean if you could, find the time, or something.
Monday got ugly even before Wall Street got wind that our legislators were basically giving up on getting something done ahead of the election on the odd chance that it might make the other side look good. Earnings and guidance from SAP (SAP) were shockingly bad. Europe's largest tech/software company's ADRs took a beating of 23% on the day.
SAP blamed the spread of the virus and suppression of European economies for the poor performance. Yes, this was a shock, because here we see tech and software almost as sanctuary when economies are constricted.
Should the numbers and outlook provided by this one company have surprised as they did? Probably not (in hindsight). As U.S. service sector PMIs (ISMs) have remained well above 50, which is the line between growth and contraction, that is simply not true across the European Monetary Union, or specifically in that union's key economies when isolated.
The Bottom Line
I have warned that though I could not see the cracks in the ice, that I had become more defensive. Markets may roar back this week. That could be very possible. Headlines cut both ways. Algorithms react. Still, this is a major earnings week, electoral risk is real, the virus is already slowing velocity, and the cavalry (fiscal policy) is not coming. Sometimes, circling the wagons is not the worst idea.
All 11 Select Sector SPDR ETFs moved lower on Monday, 10 of them by more than 1%, six of them by more than 2%, Energy (XLE) by 3.6%. WTI Crude took an absolute drubbing. Traders see a lack of demand going forward as economies shutter due to the virus, just as Libya increases production.
Losers beat winners at the NYSE by almost 7 to 1, at the Nasdaq market Site by more than 4 to 1. Declining volume easily clobbered advancing volume on rising total trading volume for names listed at both exchanges. You already know that this means that there was some professional distribution taking place on this "red" Monday.
There was no hiding in small-caps and mid-caps. There was no hiding in transports. The airlines, and the rails, as well as aerospace and defense all took a nasty beating. Only in what is considered "hardware" within the tech sector (XLK) was there really some stability away from utilities (XLU) . The Dow Jones U.S. Computer Hardware Index only surrendered 0.24% on the day, and that was largely because Apple (AAPL) closed up a penny on the day.
There was a flight into the "quality" of the long end of the U.S. Treasury curve. You see, the "quality" of the curve actually improves without increased issuance. Though, this also puts the kibosh on potential economic growth.
Aerospace and Defense
Most traders probably noticed the negative impact upon the defense industry once news broke that China had placed sanctions on Boeing (BA) , Raytheon Technologies (RTX) and Lockheed Martin (LMT) . This came in the wake of the U.S. State Department's approval (last week) of $1.8 billion in sales to the autonomous Chinese "island-nation" of Taiwan, which is not under Beijing's control.
Why these three firms? The sale includes 11 High Mobility Artillery Rocket Systems (Lockheed Martin), 135 Standoff Land Attack Expanded Response Missiles (Boeing), and six MS-110 External Sensor pods (Collins division of Raytheon). This is seperate from last year's approval to sell Taiwan 66 modernized F-16 fighter jets (Lockheed Martin with next-generation Northrup Grumman (NOC) radar on board), and 100 M1A2 Abrams Main Battle Tanks (General Dynamics (GD) ).
One, U.S. defense contractors are not permitted to sell arms to China anyway, so the sanctions at least on paper have no teeth. Both Boeing (which is a recent Sarge add), and Raytheon (also a Sarge long, reporting today) rely upon large commercial aerospace business units that in normal times do enough business in China. Though the sanctions are specific to defense, common sense implies that these are the two names at risk here.
Note: I have not been long LMT in weeks, as the stock had violated my panic point from above. That's why we have price targets and panic points. These levels are not just for show, they are meant to reinforce self discipline.
On the industry in general, I have been reducing my exposure for two reasons. First, not just here in the U.S. but most client states will have severe fiscal pressure to deal with going forward from this pandemic. Nations not under imminent threat will likely not prioritize defense spending through the early 2020s. It happens. I enlisted in the early 1980s. We were still using Vietnam era gear well into President Reagan's second term.
The second reason would be electoral risk. Should there be a change made in residency on Pennsylvania Avenue, I just don't see military spending being focused upon during an early (potential) Biden administration as it has been during the Trump administration. That is all.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (Sep): Expecting 0.6% m/m, Last 0.4% m/m.
08:30 - ex-Transportation (Sep): Expecting 0.4% m/m, Last 0.4% m/m.
08:30 - ex-Defense (Sep): Expecting 0.2% m/m, Last 0.7% m/m.
08:30 - Core Capital Goods (Sep): Expecting 0.5% m/m, Last 1.8% m/m.
08:55 -Redbook (Weekly): Last 2.5% y/y.
09:00 - Case-Shiller HPI (Aug): Expecting 4.1% y/y, Last 3.9% y/y.
09:00 - FHFA HPI (Aug): Expecting 0.7% m/m, Last 1.0% m/m.
10:00 - Consumer Confidence (February): Expecting 102.1, Last 10.1.8.
10:00 - Richmond Fed Manufacturing Index (Oct): Expecting 17, Last 21.
16:30 - API Oil Inventories (Weekly): Last +584K.
The Fed (All Times Eastern)
Fed Blackout Period.