Wild Things
The machine in need of some energy this morning might be you. Would be me. Would also be that handsome fellow that I can see in the window, working on his daily column at zero dark thirty on Monday morning.
The weekends pass quickly. Always have. Nothing changes that. Not even the slowed-down social life that the era of Covid has forced upon communities everywhere.. The week behind? Messy. Inconsistent. Difficult to assess as a whole. Heck, even the individual days last week were difficult to label.
The week ahead? Quiet start. Then, at least by Tuesday, the environment will start to look like something out of Maurice Sendak's children's story "Where The Wild Things Are." Just remember (those of you who can remember the book) that once Max (the kid in the pajamas) was named "King" of the Wild Things, that he still missed his bedroom and his Mom's home cooking. Bizarre point that your silly author is trying to make? You may think you know what you want. You may think yourself well-prepared. You just don't know, though, how "it" really is until you are "there."
The toughest kid in high school isn't so tough anymore once he sees the yellow footprints. Always remain flexible. Why? Because there really are wild things. Where they are is right here.
Big News!!
I had fallen asleep. The president's tax story in The New York Times? That was published early enough. No. I have no idea there. By the way, neither do you. I'm talking about TikTok. Judge Carl Nichols of the U.S. District Court of the District of Columbia halted the U.S. ban shortly before it was to go into effect, which would have been at midnight on the East Coast. If the ban had gone through uninterrupted, TikTok apps would have been removed from mobile device app stores, denying new users from downloading the software and those already using the app from downloading updates. Judge Nichols has also denied the request to extend a Nov. 12 deadline for ByteDance to sell its U.S. operations to an American entity such as Oracle (ORCL) , Walmart (WMT) or even Microsoft (MSFT) .
For TikTok, this means business in the U.S. will proceed as usual uninterrupted until there is a full-court hearing. I have not yet seen Judge Nichols' opinion in support of this decision; I would expect that work to be released sometime on Monday. The Trump administration will continue with the legal fight, but for now one might think that there are bigger fish to fry as September grinds down and there is still so much up in the air regarding so many important issues. Your sixth graders can sing and dance their little hearts out on their favorite app for the time being.
Rear View Mirror
Equity markets rallied on Friday. You already know that. Ten of 11 sectors closed higher. Eight of 11 sector select SPDR ETFs scored gains on the day of at least a full percent. The reversed rotation that we addressed here at Market Recon late last week was clearly evident, for the day and for the week.
While the S&P 500 gave up just 0.6% for the five days, the period encompassed was for our broadest measure of large-cap performance the fourth consecutive red weekly candlestick. Ditto for the far less important than people think Dow Jones Industrial Average (-1.75%). Just an FYI, it was a really bad (I mean really, really bad) week for smaller-cap equities. The Russell 2000 and S&P 600 both surrendered more than 4% for the week despite rallying on both Thursday and Friday.
It was the Nasdaq 100 and Nasdaq Composite that rallied hard enough into the weekend to close higher for the week. The Nasdaq Composite posted a 1.11% gain for the week, while the Nasdaq 100, not weighed down by financial stocks, picked up just less than 2%.
Are we climbing out of a hole here? Or is there at least a trail of breadcrumbs that we might follow? That's not so clear. I'm sorry. Wish I had a better answer. As the rally in equities picked up momentum last last week, trading volume ebbed a bit. While this is not necessarily a glaring negative, it is not quite supportive of the move higher. In other words, there is at least some number of managers who have taken profits and have not yet put that money back to work, at least not in equities.
The Range
To explain this in detail to the untrained eye, the S&P 500 in particular has found almost constant support at roughly 10% off the Sept, 2 high. This is technical, and we all know that algorithms tend to be more responsive to technical levels than humans used to be. That said, you knock on a door enough times, sometimes it opens. Going the other way, the Nasdaq Composite did break through that spot (10% off the high) last week, and upon the attempted rally kept on hitting resistance at the 50-day simple moving average (SMA) for that index. Again, likely algorithmic behavior around a technical level. Again, knock on a door a few times, sometimes it opens.
The thing investors need to see is a breakout move to the upside on robust trading volume. Ideally, we would love to see this across the entire equity landscape. That said, even if the market only gives us one path (such as large-cap tech) then at least we will understand the environment, which is all that we can really ask.
Apple (AAPL) added 5.1% last week to lead hardware, while Coupa Software (COUP) , Okta (OKTA) , DocuSign (DOCU) and Slack Technologies (WORK) all led software. The semis? Old fave Lam Research (LRCX) and forever fave Nvidia (NVDA) were both hotter than heck. Among FANG names, Amazon (AMZN) easily lit the path.
Keep an eye on credit from here. We all saw the outflows at the more speculative end of credit markets over the past week or so. Spreads between high and not-so-high quality could become an issue.
We have all read of banks pulling back on consumer credit as the consumer becomes less creditworthy and as the prospects for net interest income are greatly reduced. These are the kinds of problems that hum along quietly in the background until the problem becomes too large to ignore. Real Money's Peter Tchir is the best there is in this space. Maybe the best there ever was. I suggest reading everything he writes. I always have.
Ups and Downs
What put the markets in a position of weakness to begin with, other than the calendar month? I think it obvious that the spread of this pandemic virus across Europe and parts of the U.S. has picked up momentum again as cooler weather pushed a majority of people on both continents back indoors. I think that there is also no doubt that children heading back into school buildings as well as college-age kids heading from all over the country back to their campuses overtly forced the slope of confirmed new cases out of its downward (which hit a nadir in early September) trend.
This glaring negative, even though medical professionals do appear more able to treat the sick than they were capable of doing back in the spring, exacerbated tensions over elevated asset valuation and a rapidly slowing economic recovery requiring fiscal support that must be provided by a group that had become unwilling. The central bank alone cannot keep the economy from weakening through very low interest rates and expanding money supply. Oh, and of course, there is the 800-pound gorilla in the room... electoral risk.
Back to fiscal support. This is the why. Why markets recovered some lost ground late last week, and why equity index futures are stronger overnight. We had reported in this column last week that Speaker Pelosi had led House Democrats toward compromise and that President Trump was already ahead of Senate Republicans in moving toward that elusive center on this issue. That is not news.
What is news is that both Speaker Pelosi and Treasury Secretary Steven Mnuchin have confirmed that they have agreed to reopen negotiations on getting stimulus/support where it's needed -- to small to midsize businesses and households. The political threat that I think both Speaker Pelosi and Majority Leader McConnell might fear the most could be defection among junior legislators who understand that their own constituents have a problem and will vote them out. There is no public tolerance left for the blame game that both sides tried to play.
Left, Right, Left Foot, Right.....
Moving forward, the coming week brings little in the way of earnings or even conferences. The week ahead, however, will be enormously consequential. Just my opinion here, but I do believe the first presidential debate between President Trump and former Vice President Biden that will be held on Tuesday night could be epic. As if there was not enough fodder to provide for an entertaining evening, the nomination of Amy Coney Barrett to the Supreme Court and now this tax story in The New York Times have ensured not just a fiery night, but perhaps a night capable of moving polls one way or the other.
As if we could forget, after that, this is Jobs Week, and Friday is Jobs Day. While both job creation and participation are expected to cool somewhat, this could result in a reduced unemployment rate. I can already hear the spin.
I also need to mention earnings, as I have not mentioned third-quarter reporting season in a bit. Still two weeks until that season really gets under way. That said, according to FactSet, which is my go-to source on these matters, S&P 500 earnings estimates for the quarter have improved to -21.2% from -22.4% just a few weeks back, and -25.3% as recently as the end of the second quarter. S&P 500 revenues? Same story, kind of. Sales are now looking -3.6%. Consensus had been -4.1% a few weeks ago, and -5.4% as of the end of the first half.
Interesting? It is indeed. As stocks have traded lower and estimates are now higher, the S&P 500 now trades at 20.9x forward-looking earnings as opposed to the 22.5x that we experienced near the market top. Still overvalued? Only in historical terms. There is no time in history where we have seen such monetary and fiscal accommodation. Even if there is no more support coming. Now, if there is.... that's a whole new ballgame, and these current valuations might even be light.
Economics (All Times Eastern)
10:30 - Dallas Fed Manufacturing Index (Sep): Expecting 7.0, Last 8.0.
The Fed (All Times Eastern)
14:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (THO) (1.40)
