The Super Bowl is always a tough obstacle to circumnavigate for traders and investors. Screws up the whole Sunday night cram session ritual. On the one hand, this is pro (American) football's championship, so there is at least some interest that creeps into one's subconsciousness. Not just the teams, but the commercials and half-time show can garner some attraction, and then there are the family members. They all want to watch the "big game" with their dad, with their spouse. They don't understand that if the provider goofs off on Sunday nights, that they don't eat. In the worlds of business, finance and economics, Sundays are part of the work week. Always have been, always will be. It's just that on Sundays, the pressure to perform is toned down and so are the hours. One blessing. No Super Bowl parties in a pandemic, so no getting home late.
I tried to watch some of the game. Thankfully, the game played was not close. Even to the casual observer, Tampa Bay was clearly better prepared to play on Sunday than were the defending champions from Kansas City. Gee, Sarge... you must be the only guy I know who doesn't care much about the Super Bowl? Oh, two reasons... Yes, I am a statistics driven workhorse, but I am also a New York Jets fan, which for the most part, gives me an excuse to entertain myself through hockey (the sport I played best), basketball, and soon enough baseball (the sport I loved most), more than pro football. This allows my brain to be in the right place as equity index futures and Asian markets open up a new week of price discovery.
You know, looking back at the statistics, Joe Namath's career doesn't look so hot, but in the mind's eye of a little boy growing up in Queens, New York (where the Jets played), who watched him play from the subway platform where you could see about 60 yards of the Shea Stadium playing field with a transistor radio, he was the best. (Subway tokens were about $0.35, tickets to the game were like $8 or $10.) Joe Willie's prime may have been short, as was the Jets' prime, which ended when the team joined the NFL. Those AFL Jets did prove something oh so long ago, that was proven again last night. You just never know. The league had it all set up. A showdown where the league would likely be handed off by the "Greatest of all-time" to the current and future greatest. One crazy thing happened though. In this crucial head to head matchup, the 43 year old great, proved far superior, even if for one last time (perhaps not?) than the 25 year old great. Every old man who watched the game (even if while trying to do chartwork) wanted to stand up and cheer. You did not have to hate Tom Brady anymore. These are not the New England Patriots who went 6-10 without him. The fact is that you really never know. A lesson for all of us in there somewhere. For traders, for investors, for us all.
My best guess is that no one among this morning's readership needs to be told that markets for equities, debt securities, commodities, and currencies all had one heck of a week last week. The S&P 500, Nasdaq Composite and Russell 2000 all had reached brand new all-time highs by week's end. What is driving the markets at this point? Plain as day, we have all at the same time... expectations for large fiscal stimulus, great earnings, labor market conditions weak enough to support that fiscal effort, improving data regarding the pandemic... meaning fewer new cases, hospitalizations, and God willing virus related deaths. These conditions are what has created the steepening yield curve, and that is the dog to the equity market's tail.
Two things to keep in mind... as economists increasingly project hastening economic growth moving toward the middle of the year as well as increased consumer level inflation, the U.S. dollar is not yet playing that game, and perhaps even more importantly, an old market adage comes to mind. Nothing cures elevated valuations like elevated valuations. What that means simply is that if current valuations are indeed unwarranted, then at some point, markets themselves will identify this inefficiency and correct. That said, this (Q1) earnings season is to this point one of the best on record, and estimates are on the rise for both Q2 and Q3. According to FactSet, the S&P 500 now trades 22 times next 12 months' earnings, up from 21.8 a week ago.
With 59% of the S&P 500 having reported, the blended rate (results & expectations) of fourth quarter earnings growth has turned positive... at +1.7%, up from -2.3% last week at this time, when only 37% of the S&P 500 had reported. The Financial sector has been a pleasant surprise. That sector to this point has experienced 17.2% earnings growth this period versus December expectations of -9.4%. The Financials have also experienced revenue growth of +0.7% versus December expectations of -9.3%. Yet the Financials trade at 14.1 times forward looking earnings, just an 8.5% premium to the sector's five year average of 13 times. In comparison, the S&P 500 trades at 25% premium to it's five year average, while the Information Technology sector trades at a 41% premium and the Energy sector... an incredible 83% premium to their respective five year averages.
Markets were ripe for a sell-off on Friday. Wasn't going to happen. Algorithmic support has been found early in the session as the U.S. Senate passed a budget resolution 51-50 along party lines with Vice President Harris breaking the tie, to fast-track most of the president's planned Covid relief/fiscal support package. Later, on Friday evening, the House also voting along party lines, 219-209, also voted to fast-track this package. Part of this budget resolution, and really the big point made here, is that the Senate will not need 60 votes in favor to avoid a filibuster. This legislation can be passed without Republican participation, which is at least a "short-term" positive for equity prices. Finding ways to avoid compromise in what is honestly a very evenly split legislature might be seen as the right thing to do, or might backfire politically. We'll know more about how the public perceives this in two years. For now, however, this is reality.
Where this has led is to a U.S. 30 Year Bond that even if just for a second, kissed the 2% yield level overnight. With this pressure on long end, U.S. sovereign debt securities has come a U.S. 10 Year Note that at last glance, gives up between 1.19% and 1.2%. The spread between the U.S. Two Year Note and that 10 Year paper has actually compressed from the 110 basis points we saw late on Friday to just more than 109 basis points early this morning, as we are seeing some early selling impact Two Year U.S. debt. Why are equity index futures trading higher throughout the wee hours if the 10Yr/2Yr yield spread has actually flattened slightly overnight?
Seems like I have been explaining this since the beginning of time, and even so, the financial media has never caught on. This is 2021. Bond investors have not considered two year debt to be "short-term" since the cows came home. The most impactful spread in terms of predicting future economic performance and therefore... policy is, and has been for years... the 10 Year/Three Month (90 day) yield spread. Even the Fed has explained this in White papers. I mean, read the material from the source. Gee whiz. This spread has expanded overnight from the 116 basis points we saw on Friday afternoon to more than 119 basis points. Yes, while bond traders have been selling two year paper on out to 30 year paper as we pass the night hours, at least some of that money has been moving into T-bills. Front-running the Fed? Duh. For now. They'll buy the long end when they have to. Right now, potential inflation is more valuable to borrowers than are low borrowing costs.
What does that mean? Simple. Bond markets are pricing in medium-term economic growth amid monetary and fiscal conditions that they believe to be conducive to igniting inflation. This has placed greater demand upon cyclical sectors than upon more defensive groups or even the "growth" type names that have ruled Wall Street's trading floors for decades now. $5 bread? Maybe. Ready or not. The real test will be in actual velocity. You can set the stage all you want. Nothing happens unless U.S. consumers, and those who employ them get aggressive.
About That Macro...
Did anyone notice the silver lining? On Friday. Oh, it was ugly. real Ugly. Only 49K jobs created in January. December job creation was revised from -140K to -227K. Unemployment dropping to 6.3% from 6.7%, and Underemployment dropping from 11.7% to 11.1% due really only to a drop in participation from 61.5% to 61.4%. It gets even worse if one backs out of the seasonal adjustment. The "real" data, meaning non-seasonally adjusted numbers show January unemployment at 6.8%, up from December's 6.5%, and January underemployment at 12%, up from December's 11.6%. Hmm, that really stinks, Sarge. Wonder why they just don't tell us the truth. I have long said this, but they never have. They assume us to be morons I guess.
Oh, yeah... I almost forgot. I promised you a silver lining. Check this out. Average Weekly Hours increased from December's 34.7 to 35 even in January. I went back month by month through the archived data at the BLS website as I could not remember a point with a 35 handle for this number. I would copy and paste the data here, except that I am not sure if reprinting BLS data from their website would pose a problem for us. I went back to March of 2006, as I could not find older data. What I discovered was that not only was the 35.0 print for January the highest average workweek over that nearly 15 year period, but that as a nation, we haven't seen a print above 34.8 hours (three times) over that period... and that 34.8 came over September, October, and November 2020, prior to decreasing in December.
Basic conclusion? Demand for labor has been steadily improving since last March, and as hiring has slowed over recent months due to uncertainty around the virus and the economy... demand for labor has not slowed nearly as much as perhaps one might assume based on data solely covering job creation. More is clearly being asked of existing employees by their employers. My guess? Right now, there is a pause in entry level hiring that is currently creating a pent-up demand for increased payrolls. Overtime hours cost more than regular hours. If as part of budgetary negotiations, the concept of a broad national minimum wage is either dropped entirely, delayed, or reduced, these overtime hours currently being worked by existing employees will shift to new hires. I don't think this is too hard to understand. DC, your move. It's pouring. You can either have a better umbrella that protects those who fit underneath, or you can fit more folks under the umbrella. Not both. I'm here if you need me.
Oh, By The Way
The Johns Hopkins University Website shows 88,044 new infections of the SARS-Cov-2 virus for Super Bowl Sunday. This was the first daily print below 100K since Christmas Day, and the lowest daily print since November 2nd. Now, that's good news. Unless you're one of the 88,044. It can happen to anyone.
Out Of Time...
I am past my mental deadline. Got to go... but check out two breakouts. I gave you ServiceNow (NOW) last week. So far so good for that one. Another Sarge name... Southwest Airlines (LUV) is trying to break out of either a Double Bottom or a Triple Top. Take a look. Form your own opinion. Let me know if you like. I think this stock goes to $60.
Economics (All Times Eastern)
No significant domestic macroeconomic data scheduled for release.
The Fed (All Times Eastern)
12:00 - Speaker: Cleveland Fed Pres. Loretta Mester.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (HAS) (1.30)