Well into earnings season, the numbers reported continue to outperform, and at a better pace than we usually see at that. Just look at what Tesla (TSLA) , Microsoft (MSFT) or Chipotle Mexican Grill (CMG) put to the tape on Wednesday evening. Did you see Unilever (UL) this morning?
Is this what supports equity markets at these levels now? Can't be. Right? I mean stocks worked their way out of a deep hole, and literally made quick work of climbing a mountain, and then exceeded, at least at the mega-cap level, prices experienced before we ever thought of wearing masks or social distancing. Before there was an inkling of anyone outperforming anything. We all know who came to the rescue as the U.S. and global economies hit the skids. Hard. It was the policy makers who literally saved the many from suffering any more than circumstance demanded. This remains so.
As the spread of the SARS-CoV-2 virus that causes Covid-19 rages in some highly populated areas, takes a bit of a breather in others, and leaves a few others wondering when this ugliest of ailments will hunt their friends and neighborhoods, economies remain constricted. Human interaction remains unnatural, and continues on at only minimal levels. If economies are unable to function at anything close to potential, how then can markets march on? Tricky question.
While all appears well in an overview, six of the S&P 500's 11 sectors remain down year to date. Even within those sectors that are outperforming broader markets since New Year's Eve, multiple industry groups are not.
Among Select Sector SPDR ETFs, Information Technology (XLK) has run 20% year to date, Consumer Discretionary (XLY) 10%, and Communications Services (XLC) 8%. Health Care (XLV) ? Up less than 6%, and that's with Biotech up 17%-ish. Same is true for the already mentioned three.
I need not describe the gaps between the haves and have nots even within Tech, or Discretionary names where I think the disparity is quite overt. Peer for a second into Communications Services where the Internet group has run more than 22% this year. Publishing is up 2%, while four other industry groups are down for the year anywhere between 4% and almost 23%.
This market posturing is more in line with current norms than many realize. This is also with many leaving still high cash levels on the sidelines. Does that cash eventually chase, and where will it?
What to Make of This
Trading volumes returned to quieter levels on Wednesday, after a semi-dangerous looking Tuesday afternoon that itself came after a suspect Monday. There was indeed a significant increase in demand late in the day, putting to rest, at least short-term, the stalling seen across more economically sensitive industry groups a day earlier.
For now, regardless of what you read, Wall Street continues to believe that there will be a deal agreed to on Capitol Hill, and that fiscal hawks will give more ground than do the doves. There is little belief that the $600 federal stipend paid out on a weekly basis to those receiving state-level jobless benefits will come to a screeching halt. The belief is that this number will likely be tapered into year's end.
Even as our legislators appear miles apart on some key issues, the perception is that one side is in more trouble come November than is the other, and thus will give more ground in order to not just avoid the pointed finger, but to get out of town and attempt to energize campaigns where the votes they need are cast.
Do U.S./China relations even matter right now? Does trade even matter right now? It would be nice with the U.S. dollar finally showing a significantly weaker side. Unfortunately, the answer is ... no, not right now. That day will come. Just not now.
Next week, attention will split between news made on the fiscal side, and the two-day FOMC monetary policy decision culminating next Wednesday. Of course there are no changes in headline-level policy expected. There will be plenty of discussion, however. Discussion over the composition of and average maturity of the balance sheet. Discussion over "yield curve control," how to create inflation, and then how to control it once the bonfire created on the fiscal side catches on.
For now? For us? I speak only for myself. I think while doing one's best to be diversified, maintain some cash, and some exposure to selected commodities, faith has to be placed in growth where growth is perceived as iron-clad. What does that mean? For me, this means the focus right now has to be on the ability to grow and sustain cash flows. More so than earnings? I think so.
Earnings remain important, just less so, in my opinion, than levered free cash flow. In other words, EBITDA minus the change in net working capital, minus capital expenditures, minus mandatory debt payment. You still see a fat number after that, and think you survive? No, earnings are how you survive. You see a fat number there, I think you thrive.
Thriving is what we go for here, regardless of fluctuation in macroeconomic performance, regardless of failures in policy, and regardless of electoral outcome. Do we have preferences? Everyone does. The trick is to adapt. The trick is to be truly mercenary in financial decision making.
She's Done It Again
Who's that? Lisa Su, CEO of Advanced Micro Devices (AMD) . That's who.
See the stock on Wednesday? Up 8.4%. Not on quarterly numbers. AMD announced the launch of a new line of microprocessors and Wall Street went for it. Did they ever. Trading volume in AMD soared to 147% of the stock's own 50-day simple moving average for volume. In other words. portfolio managers needed to say by day's end that AMD was in their book, and price was no object.
I am no tech wiz, but the new "accelerated processing units" integrate capabilities for graphics and central processing into one chip, a job for computers that has always been performed by two separate chips. This is why if you look at your computer right now, you might see two stickers, one bearing the Intel (INTC) logo, and the other perhaps, representing Nvidia (NVDA) . Both Lenovo Group (LNVGF) and HP Inc. (HPQ) have signed on to include these new chips in the manufacture of their respective products as soon as the third quarter.
Hey, it's the third quarter right now. Bingo.
1) Short Tesla (TSLA) up here? The shares are trading at $1,676 overnight? Maybe for an intraday trade. Certainly not willing to hold a position like that after the closing bell. If so, this trade will come after publication of this note, and in small size, so I can't hurt myself.
2) Buy more Microsoft (MSFT) on weakness? No. My target price remains $215, and the shares just missed that spot on Monday. I will not add this close to a target after such a successful run for the name. That said, should the shares reverse higher, I will still take off some house money at that target.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 1.3M.
08:30 - Continuing Jobless Claims (Weekly): Last 17.338M.
10:00 - CB Leading Indicators (June): Expecting 2.3% m/m, Last 2.8% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +45B cf.
11:00 - Kansas City Fed Manufacturing Index (July): Expecting 5, Last 2.
The Fed (All Times Eastern)
Federal Reserve Blackout Period.