They say that once is a fluke and that twice is a coincidence. Does thrice make a trend? I hope not to find out, but in the age of Murder Hornets, anything is possible. In the age of a global pandemic that has created a planet-wide financial crisis, pricing anything has become the result of educated guesswork crossed with technical analysis more than the outcome of forward-looking number crunching. I think.
Wednesday afternoon. Roughly thirty to forty minutes ahead of the close, sell programs hit domestic equity markets. Just as they had the day prior, with the slight difference that the pressure started a few minutes later, and did not stabilize going into the closing bell.
The day, from the vantage point of overview, appeared as two separate markets, which has become normalized. Information Technology easily led the intra-day sector performance tables, as the sector itself benefited from nearly equal outperformance across the software and semiconductor industries. Beyond that, internet type stocks also had a nice day though that group now resides with the Communications Services sector.
Basically, if an investor had just taken the tech sector, and then cherry-picked these internet stocks, while also pulling the biotechs from the Health Care sector, that investor would have a decent enough few months going.
So, What's Going On?
Are sellers starting to take control? Good question. I have mentioned several times in recent weeks, the reverse square root symbol recovery for an economy that will be necessity re-open smaller than it was when it closed. Not to mention the medium-term, but not likely immediate pressure to repatriate supply chains. The S&P 500 is starting to look a little like that, is it not?
Obviously, the S&P 500 is much heavier in exposure to the industrial, financial, discretionary types for which, while there is some reason optimism upon reopening the economy, there has to be some room for risk factored into any assessment for these groups. They have more exposure than where we feel demand might be less susceptible to broad levels of societal damage.
Readers will note that for the Nasdaq Composite, the trend has certainly bent somewhat, as the current rally has aged, but the slope is still northbound. For now.
The S&P 500 has been going sideways since mid to late April. Readers will also notice the Nasdaq Composite trading well above both its 50-day and 200-day simple moving averages, while the S&P 500 appears trapped between the two. The algorithms that move markets see this too, and that could mean that the index cannot work its way higher again until the 50-day SMA starts to curl upward, thus providing technical support.
Could All Be For Naught?
Is it all for naught? Why the late selloffs? Why the lower trading volumes at both the New York Stock Exchange as well as the Nasdaq Market Site? Why the lower trading volumes across the large-cap equity indices, regardless of sector weightings? Have stock stocks gone as far as they can go on policy implementation, without fundamentals? Without macroeconomic support.
I'll give you my thoughts. These are in no way fact, just the thoughts of a middle-aged man who gets up in the middle of the night and thinks about these things. I think the trading volume has softened for a few reasons.
- The cash that fled the markets in March does not trust the market. Traders are in the market. Investors.. not so much.
- Friday's April numbers for unemployment. The numbers will be awful, yet still incomplete, as the BLS surveys are conducted mid-month. Traders may or may not know how to price in numbers like what we'll see. Can algorithms? Maybe. Then, we'll wait a month for the same data points for May, in early June, that will include data compiled over the second half of April and the first half of May. An imperfect system, we have. You think?
The Late Selloffs
Or, at least Wednesday's version. There is no doubt that over recent weeks, and especially recent days, relations between Washington and Beijing appear to be in a state of deterioration. The Trump administration, with the U.S. an epicenter of this pandemic, has expressed dissatisfaction with the way the Chinese government handled the aftermath of the viral breakout in Wuhan in late 2019 that has spread across the globe, shuttering economies on every continent. There are also questions every day about whether or not China has started to implement the Phase One trade agreement signed in January.
What does this mean, economically? Does the current condition lead to a cancelled trade agreement? Has that agreement been, in effect, cancelled without notification? Do any of these issues lead to actions taken, as mentioned earlier in the week by Treasury Secretary Steven Mnuchin. This is the short-term threat to the marketplace.
For that reason, a call has been scheduled for next week between U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He, the first such call since January. This would be why the president indicated on Wednesday that he would report his level of satisfaction with trade agreement related progress by next week. As for the pandemic, that's another issue, and one that still has a long ways to play out.
They had to go massive. They'll probably have to go massive again. Then again? Maybe. The Treasury Department has already informed us of the need to borrow a rough $3 trillion for the quarter, and about $4.5 trillion for the fiscal year. That is the way it stands now. Obviously, the way it stands now is not the way it will stand.
Treasury will shift from financing the economy largely through offering T-Bills (short-term paper) toward larger issuance of longer-dated maturities. You have all seen U.S. 10-year note yields drift higher this week. Not only will the department intentionally push out its maturity profile, there will also be a need to run with an elevated balance of cash in order to maintain liquidity.
It is kind of like what you and I are doing on an individual level right now. The agency will also launch, or relaunch, the 20-year bond, at an issuance of $20 billion a month, which is more than the $12 billion to $14 billion that Treasury had planned on prior to this burst of forced deficit spending necessary to battle the pandemic as well as its related financial impacts. Planned issuance for the 10-year note will now bump up to a whopping $32 billion per month, while the 30-year note goes up to $22 billion.
Daunting? Yes, of course. I speak to you from the position of having been a lifelong fiscal hawk. However, I understand that I cannot weep over what was not done when it could have been. I also understand that more has to be done now, so these numbers are actually smaller than they are going to be.
I know that some fiscal conservatives would like to hit the pause button. So would I, if it made sense. The oddity of this situation will be that the majority of fiscal conservatives are also political conservatives, and though the president and congressional democrats will have differing opinions on what needs to be included in the next fiscal package -- because make no mistake, there will be a next package, and it will be large -- the president and his long-term opponents are going to be allied against some of the president's traditional support.
What do I think? I think we should forget the 20-year, as there is reason to believe that this issuance could soften demand for the 10-year and the 30-year, and instead issue 50-year paper ... in size.
Short-squeeze? A market that simply misjudged? Peloton (PTON) , Twilio (TWLO) , PayPal (PYPL) and Beyond Meat (BYND) are all on the run. Okay, Beyond Meat is benefiting from the positive side of headline risk. The other three all reported. PayPal missed on both earnings and revenue. Peloton and Twilio both, if adjustments are removed, lost money.
Mistakes? I've made a few. You'll recall that Peloton was an original name when I divided several stocks into different groups in response to the pandemic and orders to "shelter in place." Yes, I lost patience with the name, and got out once I had my investment back. All I could see was just how expensive those machines were, and how they might not sell with folks losing their jobs in massive numbers. What I did not see was the incredible potential for growth in the subscription streaming service, whether or not one goes out and buys a bike or a treadmill.
Subscription-based revenue for the firm accounted for $98.2 million, or growth of 92%, and now 19% of the whole pie. Is it sticky? Yes, it certainly might be. You have all seen the news of various gym chains that are in serious trouble right now. Will folks return? Right away?
Peloton has guided (fiscal) Q4 revenue toward $500 million to $520 million versus consensus of roughly $380 million. The firm now sees Q4 EBITDA of $55 million to $65 million versus consensus of $-25 million. Yeah, that was a mistake.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 3.839M.
08:30 - Unit Labor Costs (Q1-adv): Expecting 4.6% q/q, Last 0.9% q/q.
08:30 - Non-Farm Productivity (Q1-adv): Expecting -5.3% q/q, Last 1.2% q/q.
10:30 - Natural Gas Inventories (Weekly): Last +70B cf.
15:00 - Consumer Credit (Mar): Last $22.33B.
The Fed (All Times Eastern)
16:00 - Fed Speaker: Philadelphia Fed Pres. Patrick Harker.