I am going to guess that not a ton of us are up in the middle of the night, checking into global monetary policy. It was the Swiss National Bank that made early news on Thursday ahead of the European Central Bank's policy decision and press conference. Clearly, the SNB does not consider inflation to have been unleashed, and is instead more worried about the franc's appreciation versus the euro and other currencies than anything else, as the Swiss central bank left key interest rates in negative territory.
This can only mean that ultra-loose monetary policy will remain in place for this export-driven economy, at least until that very same ECB takes a first hawkish step on interest rates. I think we all knew that. For me, it was more what SNB President Thomas Jordan said from Bern Thursday morning that should serve to rattle a few cages, if those who need to be paying attention actually are. That's asking a lot, but Jordan was quoted by Bloomberg as saying, "Risks are to the downside, as is the case with the global economy. In particular, a sharp slowdown internationally would quickly spread to Switzerland." Well, if that's not inspiring, at least it is honest.
By the time you read this, the ECB dog and pony show may be under way. For me however, the events are still a few hours in the future. I think it is now broadly understood that the ECB is about to try to put an end to the expansion of that central bank's balance sheet. Without going anywhere near a rate hike, look for Mario Draghi to announce a full stop to the eurozone's era of "quantitative easing." That program is now, at this time, down to EU15 billion per month. The central bank will now move into the reinvestment phase of the cycle. Expect this phase to last years.
I would think that, with several European economies still badly wounded from the financial crisis, there will be no talk, possibly for several years, of kick-starting actual tightened policy -- what we refer to here in the States as "quantitative tightening," or simply a balance sheet roll-off. In my opinion, European economies are in no shape to withstand even the thought of removing liquidity from the system.
As Draghi pulls the rug out from under continued expansion of money supply, he is going to have to sound very dovish in doing so, perhaps offering some vaguely defined alternative refinancing options to the weaker members of this monetary union. The Italian economy comes immediately to mind, and is way too big to ignore. Watch dollar valuations today. Industrial commodities could push deeper into an overnight rally based on just how well the usually silver-tongued Draghi proceeds today.
A very long time ago, I peered out from under the jungle canopy. We had been attached to an old Army Pathfinder unit. Passing by very slowly, very quietly, was a cargo ship. Rusty hull, painted white, with a large red smoke stack. A bright yellow hammer and sickle emblazoned upon that red background. I literally stopped and stared. This moment has forever remained in my mind's eye. The Soviet sailors visible on the deck had no idea that we were even there. I wondered to myself if they have ever watched us in the same way. As Wednesday's news cycle unfolded, we have learned that perhaps our adversaries no longer hide in the jungle to observe, they simply log on.
A few balls in the air. That's how I might describe the current environment. Keep in mind that this current environment, as always, is as headline driven as it is anything fundamental. I want you to think this way. Ever take a long bus trip? My guess is that some of you probably have.
Fundamentals are what tells us the direction in which the bus will travel. Headlines create short-term detours, but only change the destination if they impact fundamentals over the long term. Technicals? Sure, technical analysis is important, as it tells us where the bus stops actually are, and where the bus may veer to the left or to the right. Easy Peasy.
U.S. equities have found some recent support as trade tensions between the U.S. and China seemingly thaws. I won't tell you what to do, but I, myself, will proceed with caution here. Reports are circulating that China will back off of that nation's "Made in China 2025" plan, meant to leave China in a position to dominate the tech world (or maybe just the world).
Why is China publicly backing off at this time? Lowering tariffs on imported vehicles? It could be that the Chinese economy is slowing down so much that they realize the time for compromise has come. It could be that a number of U.S. companies are already well past the planning stage of figuring out newer, cheaper places to manufacture, or run supply routes.
Just don't be naive. One must understand that a struggle over global leadership will not likely diminish with words, or a change in intent that may or may not be genuine. Quantifiable action, and a lot more than just the purchase of the soy that China admittedly needs, is necessary.
The President's next tranche of tariffs still looms at the end of this 90-day trade truce. More headline risk? No doubt. A new cold war, however, might be the kind of risk that impacts destination. I am watching Apple's (AAPL) share price as indicative of the trade condition. Ever been sucker-punched? Few things are able to disorient in such a way. Some of you do know that it's never just one punch, either.
Monday's reversal for the S&P 500 has left us in an odd spot. Many have been looking for a retest of 2018 lows. That reversal fell well short of approaching the intraday lows experienced in both February and April, but "ball park" close to the 2018 closing-bell lows.
Some might see this, as John Murphy of Stockcharts pointed out in Wednesday night's note, as a retest that has been passed, leaving our current market condition in the classification of a bull market correction. Those that expected a retest of those extreme lower lows might see this reversal as disappointing, in that it leaves the marketplace in a state of limbo... and set up for more negativity.
I will tell you what I see. I see the development of a sloppy triple top that coincides with a sloppy triple bottom. The triple top could be seen as bearish in my view, as the triple bottom might be seen as bullish. Will enough algo writers see this for the channel to be able to self perpetuate for a while? My investor side would be frustrated by such a development. My active trader side, however, sees this as a fairy tale of the variety that we can only hope for.
The SPX cash market has become a game of Pong. Support close to 2600, Resistance close to 2800. I will not gamble individual equities on such a pattern. That portfolio remains diversified with a defensive skew in place. But some light futures trading? Perhaps. Just keep in mind that a trailing stop will likely be executed in a matter of minutes (seconds?) in this environment, unless you give it enough room.
One item that I did notice this week was a report released by Lab42 Research which was really a survey of U.S. streaming subscribers' renewal rates. Apparently, Netflix (NFLX) is easily the league leader here, at a 93% renewal rate, while Amazon (AMZN) Prime and Hulu both trail by a wide margin. Hulu is currently 30% owned by Disney (DIS) , but that stake is soon to come to 60%, with the acquisition of Fox's (FOXA) stake in the venture. At some point, it seems possible that both Comcast (CMCSA) and AT&T (T) will sell their respective shares of 30% and 10% to Disney, as well.
Some probably see the dominant position held by Netflix as positive. My thought there is that the perch is precarious. Soon, it will not just be Netflix and Hulu knocking at the door, but Amazon, a Hulu re-energized by Disney, an independent Disney, plus Warner Media (owned by AT&T), Apple and even Walmart (WMT) , which have all either started working on, or mentioned plans to enter this arena.
My thought here is that pricing power cannot be too far off. Netflix is the industry leader, and that may remain so, but I think it inevitable that market share is taken -- perhaps in a significant way.
Operating margin has expanded over the past year for Netflix, from 7% to 12%. The competition will squeeze this margin from that lofty level. Cash and equivalents are higher, but so is total debt, also in a big way. Certain players among these competitors also own plenty of content currently available to Netflix viewers. Think Disney, but not just Disney. As we have seen recently with the hit show "Friends," which is owned by AT&T, Netflix was forced to pay $100 million for one more year of the show, up from $30 million last year.
At that point, one might expect AT&T to pull the show, unless they value the revenue that Netflix provides, or perhaps they just pull exclusivity. Disney can do this, gang, in size. This impact on Netflix programming will squeeze margins from the other direction, whether the firm pays up to keep the content or is forced to create even more of its own. This is going to be a war. I am likely to seek an entry level short on the stock of Netflix, and take it from there. Maybe I'll just go with a bear put spread, so in case I am wrong, my loss is capped. Long Disney? You bet your tail I am.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 227K, Last 231K.
08:30 - Export Prices (Nov): Expecting 0.0% m/m, Last 0.4% m/m.
08:30 - Import Prices (Nov): Expecting -0.5% m/m, Last 0.5% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -63B cf.
13:00 - Thirty Year Bond Auction: $16B.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CIEN) (0.48)