The commute. Welcome traveling companion? No, not at all. One might think seeing a recognizable face headed in the same direction to be a welcome sight. One thinking such thoughts would be mistaken. After spending nearly four decades making use of mass transit in my daily commutes between where it was that I was living at the time and the friendly confines of 11 Wall Street, the way people commute has evolved significantly. Way back, when I was a younger man, prior to the invention of the internet, your commute was your time. Sure you had to be well informed, so you probably read the Wall Street Journal and the Financial Times on the way in, but the pressure was off until you hit the ground running at the other end. Then, once in Manhattan, the people all spoke and moved quickly. Nobody wasted a second. The way home was left to read something recreational, for me that was always U.S. military history.
The invention of the internet changed everything, and not for the better. Your commute no longer belonged to you. You would work on the way in, and on the way out, at night, on weekends and probably at least half-days on vacation. Recreational reading had gone the way of the dinosaurs. In addition, the hustle and bustle of New York City had changed quite drastically as well. People who once spoke or moved with purpose would all turn into very slow moving, non-thinking zombies almost as soon as they hit the subway steps as their cell phones started receiving emails and texts from employers. Two distinctly different eras, and just about everyone my age can identify. That said, there has always been a negative commonality across eras. That unwelcome "guy" who latches on, going the same way. Won't let you get the work done that you need to do. A drag heavier than an anchor on personal productivity. Hmm. Let's go.
There is little doubt that the U.S. economy has been headed in a direction that appears to be better than from where it has come. Data for May improved to a greater degree and far more quickly than any economist had even dreamed of for job creation, as well as for Retail Sales. Industrial Production for May, even in disappointment, did at least grow from where it was. Early June manufacturing surveys released by both the New York and Philadelphia Federal Reserve district banks printed at far better levels than had been expected. It would appear at a glance that kick-starting this economy that had been shut down across the board by regional mandate, and put on life support by monetary and fiscal authorities, would be as easy as reopening said economy as long as people could be smart (and safe) about doing so.
The week past was a good one for equity markets. The Nasdaq Composite scored a gain of 3.7% for the five day period, despite closing up just fractionally on Friday. The S&P 500 increased by 1.9% for the week, even as our broadest large cap equity index backed up more than half of one percent on Friday. The growth reliant small cap Russell 2000 told a similar tale. Not the just as economically sensitive Dow Transportation Average though. The transports not only gave up ground on Friday, but also posted a second consecutive negative week, despite overall strength in some industrial commodities such as WTI Crude and even more importantly, in copper. So, what gives? Apple (AAPL) . I don't understand, Sarge. Please explain.
Unwelcome Travelling Companion
This is the story that may have made Friday important. Forget the huge trading volume on Friday. That increased volume created by the "quadruple expiration" event in addition to a broad semi-annual re-weighting of indices was indeed a trade-able event. Irrelevant it was however to the longer term performance of our domestic equity indices or to longer term, broad based investment.
Markets were rattled on Friday, as Apple reported that the greatest consumer electronics company in world history would be reclosing 11 retail locations in four states (Florida, Arizona, North Carolina, South Carolina) due to spiking rises in newly confirmed cases of the coronavirus that causes Covid-19 in those areas. Oh, Apple was just the one news story. What this story tells us is something we already know, but perhaps would choose to ignore if possible. The incremental reopening of the U.S. economy will not, can not, move smoothly as both the economy and the virus itself are indeed travelling companions.
The more the states open up, the more exposure there will be. The more exposure, the greater the spread, especially as there is incredibly some broad public resistance to wearing a mask, or socially distancing from one another. This to me, given that the mask for the most part protects other people, is simply inexplicable. I hear folks say things like they can't breathe with a surgical mask on their face. Well, let me tell you, it ain't exactly like climbing a mountain hauling hundreds of pounds of mortar gear and ammo while wearing a complete NBC (Nuclear, Biological, Chemical) warfare suit. Give that one a shot. You can wear a thin surgical mask, and over your nose and mouth. Not much of a sacrifice.
Interestingly, as the virus appears to spread across states that were largely spared in the early days of the pandemic, the average age of those infected seems to be in deep decline, which may to some extent explain the declining mortality rate. Several professional and college sports teams are now testing and, according to reports, the rate of results positive for the virus is running rather higher for some of these teams than it is for the public in general. Do some of these folks just not get it? Let's hope they do get that they have to stay away from the folks that raised them. Sports are big business, with a huge multiplier effect across many slices of Americana. If Apple is closing stores, other retailers will as well. If major sports leagues can not get seasons underway, then neither will others. Economic growth may look okay at times later this year on a quarter over quarter basis, then annualized. That said, this economy is clearly and substantially smaller than it was, and will be until the public trusts in a vaccine or two. That is not happening tomorrow, nor next week, or month. The road we travel. More crowded than we would prefer. As if there were a choice.
Markets even after a down day, and even after unsettling news related to the spread of the virus are unlikely in my opinion to collapse to a degree greater than the kind of correction experienced the Thursday prior to last Thursday. At least not for the time being. The Nasdaq Composite failed once again at 10K. That's actually good in my opinion. The gap between the Composite and its own 50 day SMA is down to 9%. That same gap for the S&P 500 is down to 5.5%. These gaps were 12% and 8%, respectively, last time we mentioned them here at Market Recon about a month ago. We prefer base-building over parabolic gains. Every time.
What we as investors must be cognizant of most all is trend. In other words, You have all heard the adage, "The trend is your friend." Well, is it? Are you in sync with the market? My purpose is to make money. If I fail, my family does not eat. It really is that simple. Being right is nice but overrated. Show me a pundit in the financial media who always seems confident, and I'll show you a talking head with a base salary. Probably little skin in the game. Nice to not have to step to the plate everyday and try to get on base. Show me someone who understands that they do not always understand, but whose primary concern is simply excelling in the environment provided. No more. Show me this, and I'll show you a trader, an investor.
What To Watch?
Not sports. That's for sure. Somehow, the English Premier League is playing soccer (in front of no crowds) even though the UK was also hit rather hard by the virus. The EPL has something like 1100 active players. If I recall correctly, when they went back to work, there were very few positive cases. Whatever it is we are doing, we're doing it wrong.
That said, we watch industrial commodities. WTI Crude markets trade with their own fundamentals and sometimes on no fundamentals at all. Take a look at a one year chart tracking continuous Copper futures contracts.
Readers will see copper not quite recovered to January levels, but at the levels of last summer (Though those weren't seen as good at the time.). The cautionary tale here is the sideways movement seen this month as new cases of coronavirus rise, and as equity markets also show signs of basing. We also look at spreads between short-term and long-term Treasury yields. This is at this point, not a positive for the banks, but certainly a positive in underlying stability.
Folks will easily see that the spread between yields for U.S. three month T-Bills and U.S. 10 Year Notes, easily the most important spread in the bond universe (once again accurate in predicting recession, not like we didn't warn right here) has been put under control by the actions taken by the Federal Reserve Bank. Yes, there is that wiggle that was also seen in equities earlier in June. This is the most important single item that equity investors can be watching. Even more important that the VIX or Put/Call ratios.
Keep in mind, because the list is long, that the Fed is creating currency (even though the balance sheet actually declined last week and nobody covered that) and with this magic money has committed to purchasing Treasuries, Mortgage-backed securities, Corporate bond ETFs, and corporate bonds themselves. There will be support, even if unnatural. The central bank is even providing loans to mid-sized businesses. Does this create pullbacks that are shorter in duration, and shallower in depth than they would otherwise be? Of course. All in? Of course not.
Is Cash Still King?
Hard to say for sure. Do investors need to be diversified? Yes. Some sector related bias is acceptable in my opinion. Does one need to be exposed to precious metals? Always. Again, this is my opinion. Cash may lose value over time. True. Cash also creates flexibility. Does this late first wave of viral infection across those states that suffered less in the early going slow economic recovery? Of course. Does this possibly drive infection back toward the states that were the original epicenters as those states just now try to reopen their economies? Possibly. Does that kick off a second wave, by autumn? Again, possibly. How does one know when the scientists have shown time and again they don't quite know either?
What we do know is that firms like PepsiCo (PEP) , Intel (INTC) , and McDonald's (MCD) have been doing what they can to preserve or even in some cases, raise cash levels. With borrowing costs so low, a number of firms have taken on new debt just to bolster current cash levels. Not even taking action with the new dough, just ensuring flexibility. The list is far longer. What this tells me though is that corporate America is in the game, but not with both feet. If they are playing both sides, well then, so am I, cowboy. Oh, one more thing.
Former Vice President Joe Biden is now well ahead of President Trump in just about every poll, even those perceived as more friendly to the right. Biden has run a smart campaign. Just being as quiet and out of the way as possible. At what point do markets start to price in election related risk, and just what is that risk? We don't know. This president, prior to the pandemic was perceived as pro-business, and good for the markets. Former President Obama, Bidens former senior... was not seen as pro-business, but was also certainly seen as good for the markets. The Fed was on his side, yes, but the Fed is on this president's side too. How to discount the election? It is too early for sure. That said, as we close in on November, if markets believe that higher corporate taxes and increased regulation are on the way, there will be a broad reevaluation of just where we are.
In other words, I still like my "higher than what used to be normal" cash position. I am also still invested enough to earn a living. This has been and will remain a balancing act.
Economics (All Times Eastern)
10:00 - Existing Home Sales (May): Expecting 4.22M, Last 4.33M SAAR.
The Fed (All Times Eastern)
18:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
There are no significant earnings releases scheduled.