Appearances
By all appearances, equity markets continue to move higher. Treasury securities remain stable. The U.S. dollar has weakened a little, but is not weak. Oil trades higher than it did last week. All this while every night, peaceful protests give way to violence. All this while the geopolitical condition between the U.S. and China worsens. All this as the nation struggles to reopen an economy shuttered by a public health crisis.
Why wouldn't equities continue their march higher. After all, money supply has been flooded with no alternative choices as to where some of this dough might land. Liquidity concerns, at least to the immediate front, have been taken care of. Cash flow, the life blood of solvency, can be replaced by debt.
For how long? This I don't know. We do know that it just was not safe to reopen the economy all at once, in some uncontrolled way. We know that many businesses in many cities will now either have to delay further any reopening, or not reopen at all in the wake of current events. We also suspect that the events of the past week could end up exacerbating the spread of the coronavirus that many had hoped might take a seasonal break over the warmer months of summer.
Now, the president threatens to use the military. Not just the National Guard -- a force that bears a dual function as both state militia and as a reserve component of the U.S. Army -- but Regulars, to control what has become out of control. A sad day for a nation already saddened. This is a development no one ever wants to see. No one.
"Maybe, it's not too late, to learn how to love, and forget how to hate."
--Ozzy Osbourne, 1981
Monday
In this column on Monday morning, I tried to illustrate a picture in your mind of equity markets walking on eggshells. This was because, for all of the reasons mentioned above, I felt that at some point algorithms that control the point of sale would turn on the marketplace at elevated valuations, with so much positivity priced in and not so much of the negative factored. Even after what on the surface was a solid day for the market, and even as equity index futures trade considerably higher overnight, I still think I see the fragility.
Sure, the broader large-cap indices all closed to the upside on Monday. That said, the "stay at home" economy stocks resumed their places at the top. Sort of. Internet stocks did well. Information Technology? Health Care? Not so much. The truth is that safety was sought in more defensive-type sectors, such as Utilities and REITs, though I don't know how defensive that group might be going forward at this juncture.
Trading volume trailed off badly on Monday. Overall breadth, in terms of winners versus losers as well as advancing volume versus declining volume, was overwhelmingly positive. Yet, at the headline level, trading volume was so light at New York's two primary exchanges as to nearly disqualify the day's results from my analysis.
With one huge exception. Price still matters. If you bought them or you sold them on Monday, the trade still counts. The uptrend, as I have mentioned over and over, remains this market's driving force, and it will until it does not. You can't change that. I can't change that. You and I, if we are smart enough, or agile enough, can benefit from trend. Whether we trust it or not.
Just Take A Look
Once again, the CBOE Options Index Put/Call ratio lands closer to the higher end of its recent range...
Readers might think that traders are indeed hedging their bets just a bit, and might certainly be a bit less confident than they were in mid-May. That said, you need to see this...
As far as the CBOE Options Equity Put/Call Ratio is concerned, investors are purchasing less downside protection for individual stocks than at any point since February. Crazy? Contrary? We will find out.
Got Your Attention?
Probably not. On Monday, the Atlanta Fed added data from the ISM Manufacturing Index for May, as well as April Construction Spending to its closely followed GDPNow model. The result was one of pure ugliness. The model, which is not considered a projection, but more of a real-time snapshot of annualized quarterly economic growth, reduced current values for Q2 real personal consumption expenditures and Q2 real gross private domestic investment growth.
The result is that the Atlanta Fed's GDPNow model for the second quarter is now showing economic growth for the current period of -52.8%. It won't be just horrific economic performance at the headline level, but also the fact that state and local governments are now being forced to respond to social unrest in the streets, exacerbating already broken local budgets. Add to this expectations that any economic recovery now takes longer -- and the fact that, for the beefed-up jobless benefits that so many are currently reliant upon, there will have to be an agreement at the legislative level to pass across both houses in a next fiscal support package sometime prior to the annual August recess period for congress.
Trading Notes
--I did notice the mixed shelf registration on Monday. Didn't take long. Amazon (AMZN) was able to raise $10B in corporate debt across three, seven, ten, thirty and forty-year maturities. Borrowing costs were minimal. Just 0.4% for the three-year paper. Coupons of just 1.2% and 1.5% for the seven-year and ten-year notes, respectively. Those were record-low costs for corporate paper of those two maturities by the way, beating a record already set in 2020 by Costco (COST) .
Amazon plans to use the funds raised for general corporate purposes. Readers will recall that though revenue has surged for the firm's e-commerce business this year, making that business safe for both employees and customers has been, and is expected to continue to be, expensive, perhaps putting to use the firm's entire expectation for what would have been operating profit over the next year or so. I maintain a long position in this name with a "loose" $2625 target price.
--Pfizer (PFE) sold off hard on Monday after reporting disappointing results from tests involving a regimen of the firm's "Ibrance" and standard endocrine therapy for patents suffering from Stage 2-3 breast cancer. Ibrance accounts for more than half of Pfizer's total oncology sales. There is no way to paint this as anything other than a setback.
In response, I doubled my long position in this name on Monday from 1/8 of a full position to 1/4. Why would I do such a thing? First, I am in the red on this one, so there is some self defense involved. Secondly, among large pharmaceutical firms, I believe Pfizer to be possibly ahead of the pack in producing a messenger-RNA-based vaccine for Covid-19. Ahead of the pack in terms of time and ability to mass produce. I have no idea of such key concerns as safety and efficacy.
--Zoom Video (ZM) reports this evening. The Street is looking for earnings growth of more than 200% on revenue of almost 70%, but the range of expectations across the 27 analysts that cover the stock is so wide, you could probably drive a truck through them using night vision.
I went out short this name on Monday night at an even $205 ( I only sold the initial tranche.). That looked okay as the bell rang, and a bit less okay as day turned into night. Yes, I made (less than I should have) money on the long side in ZM during the economic shutdown. This position is something of a gamble versus a terrific run over the past few days from the high-$140s last Wednesday to this morning's pre-opening last sale of $208.80. Will I add today? Probably not. Will I cover prior to the close? If the position is killing my P/L. That's the most honest answer I can give.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last -5.5% y/y.
16:30 - API Oil Inventories (Weekly): Last +8.7M.
The Fed (All Times Eastern)
Fed Blackout Period.
