"This is home
Well, this is Mean Street
It's our home
The only one I know"
- Van Halen/Anthony/Roth/Van Halen (Van Halen), 1981
Silhouette. A shadow against the wall in a poorly lit room. Scratched record. Keeps playing the same last lyric. Barely audible. The subtle rumble of a distant freight train. Over and over and over and... So used to what had become so easy for so long. Remember. It's always been there. Inside. What made us great. Hunger. Yearning. Fire. The trader rises. No nets. No pads. No salary. Just the sun, the wind, the earth... and the mercenary heart. You. Me. Us. A gauntlet thrown. Hunted has turned hunter. Fair warning.
Equity markets, at least at the headline level, rallied off of an almost-deep hole on Thursday morning. Both the S&P 500 and Nasdaq Composite closed just north of unchanged for the day. "Hooray!" they shouted from the cheap seats, failing to notice that the S&P 500 failed to retake its own 21-day exponential moving average (EMA) and that the Nasdaq Composite had failed to take its own 50-day simple moving average (SMA). In other words, neither index accomplished anything on Thursday techncially. Upon further review, the Dow Transports, the Mid-Caps and the Small-Caps all took fairly serious beatings for the day. Indeed, the Russell 2000, now down for six consecutive sessions, managed to lose its 200-day SMA. That's the last line of support for a lot of portfolio managers, depending on their relationships with their respective risk managers. (Oh, how happy am I that I was raised in this business prior to managers having to ask for permission to do everything, and that I was able to strike out on my own, for having grown up precisely when I did.)
While those casually reading or watching business news, who don't necessarily live in the marketplace, may believe that our marketplace was rather quiet on Thursday, we know that it was anything but. We know that breadth was about as awful as breadth gets. Losers beat winners by a rough 5 to 2 for names listed at either of New York's primary exchanges. Declining volume for New York Stock Exchange names annihilated advancing volume by almost 4 to1, while the margin was somewhat narrower (3 to 2) for Nasdaq names. Aggregate trading volume increased significantly across the board, and while not quite reaching the 50-day trading volume SMA for constituent members of any of our major large-cap indices, must now be respected, as professional distribution is taking place. A whole 200 days without a 5% correction? Much of the marketplace already has.
This professional distribution has been selective, however. That's how rotations work. From a sector-performance perspective, managers are moving back into growthy types and have been heading into defensive industry groups all week, and going back deeply into July. On Thursday, the divide was quite stark. Of the 11 sector select SPDR ETFs, Technology (XLK) led the way, led itself by powerhouse moves made by Cisco (CSCO) , Nvidia (NVDA) and Microsoft (MSFT) . Behind tech came the four defensive sectors consecutively. Where were the five cyclical sectors? Those were the bottom five, or the five sectors that closed in the red. Why is that? Managers are nervous. When managers get nervous, they seek lower beta, higher dividend yield names.
Need proof? Have you seen the CBOE Total Put/Call ratio lately?
Or maybe you'd like to see the VIX?
By the way, the VIX is trading above 23 as we grind our way through the wee hours of Friday morning. Rise and shine, you rotten, filthy, wonderful and lovable maggots. We are legion, and there are dragons to slay.
What Do We Know?
We know that we have a virus that has been relentless. We know that our successful vaccines wear off too quickly. We know that we have an entire nation of pre-teens who have not been vaccinated and are headed for the most part back to in-person learning. Children are more social for the most part than are the rest of us. We know that single-earner families and families with second earners have had to withdraw producers from the labor force.
We know that Communist China is economically hostile, not just globally or regionally, but also domestically, as there appears to have been a clear decision made to prioritize power and influence above all else. This exacerbates already pandemically strained conditions for supply lines and amplifies increased headline numbers for consumer inflation globally.
We know that both bond markets and commodities markets have been pricing in subdued economic growth and/or a less structural kind of the already mentioned consumer inflation. We also know that our policy makers here in the U.S. are at a crossroads. Fiscal policy has supported the economy since the onset of this pandemic. That's why you and I are not yet broke. That's why there's so much cash on corporate balance sheets. Fiscal policy has been funded by monetary policy. As we approach late summer/early autumn 2021 our fiscal authorities would like to shift from supporting the economy to stimulating the economy.
However, our monetary authorities are showing signs of fatigue after funding the federal government through the constant creation and lending of new money at basically a fixed cost. In short, the fiscal side is asking for more, while the monetary side wants to pull back. How to solve? Higher taxes? I just told you there are less earners to tax. There are also fewer businesses to tax, and many smaller businesses are far less productive than they were two years ago.
Outcome? You cannot have your cake and eat it too. Either fiscal spending plans have to contract or the central bank must surrender any last hope of pretending independence. The only alternative would be for the U.S. Treasury to pay market prices for mass quantities of credit over at least a decade... probably much longer. Or the Fed could just pour kerosene on the everlasting debt supercycle and see how far it can go. In that case, what year does the U.S. dollar lose reserve currency status?
I know readers had to chuckle this week as Goldman Sachs (GS) finally got around to cutting third-quarter GDP expectations from 9% annualized quarter to-quarter growth to 5.5%. Really? Now. Six weeks after everyone else has been talking about expectations for economic growth being too high. Three weeks after all of us have been talking about increasing cash levels and rotating allocations toward a more defensive stance? You just noticed the Delta variant? This is news? LOL.
The Biden administration announced on Wednesday that plans were being made to make fully vaccinated adults who received either the Moderna (MRNA) or Pfizer (PFE) jabs eligible for a third or "booster" shot eight months after receiving their second shot. Pending authorization, of course.
The Advisory Committee for Immunization Practices, an outside group advising the Centers for Disease Control and Prevention (CDC), has now delayed its meeting on this plan from this coming Tuesday (Aug. 24) to a week later. Is there a problem? Who knows? Normally, the Food and Drug Administration (FDA) and CDC would give their go-aheads prior to the White House making any such announcements. This administration makes announcements and refuses to take live questions. Your guess is as good as mine. Don't even get me started on Afghanistan, where U.S. forces incredibly evacuated their air bases, leaving valuable and possibly classified equipment behind, all prior to evacuating civilians. You can't make this stuff up. I know that no military leader could have advised that. Any that might have needed to be fired yesterday.
Oh, and one other thing. Mr. President, if Dr. Janet Woodcock is not your choice to be more than an "acting" FDA Commissioner, and I understand why she would not be, can you please suggest someone else. Thanks. It's just that we're in a pandemic and all. Hello? Hey, is this thing on?
--Added to Amazon (AMZN) on Thursday at $3,190, will add down to $3,120 as opportunity presents and markets digest the department-store-concept news.
--Shorted some Macy's (M) on strength as a quasi- hedge against AMZN. My gut? Macy's can show a profit, can buy back stock, can bring Toys R Us back from the dead, but Macy's can never truly recover unless tourism to New York City recovers, and that is not happening until the virus and the crime wave both slow down.
--Thinking about Kohl's (KSS) . No position. Amazon has a relationship with Kohl's. Amazon wants to start its physical department store experience with a few stores that measure about 30,000 square feet. The Kohl's chain runs 1,150 physical stores, and of those the average size is 80,000 square feet. However, 300 of those stores are less than 55,000 square feet, and probably less than 20 are sized just about right. Hmm. Just thinking. For now.
Economics (All Times Eastern)
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 397.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)