Speaking of narratives, I did venture back to my local Costco (COST) location on Tuesday evening at the prodding of my beloved. I know the national narrative on this, and kind of saw it in action to a minor degree over the weekend and at other stores, but last night... the parking lot was close to empty, the shelves were very well stocked, and the aisles were close to empty. Panic? Not on Tuesday night anyway.
There are three sharply edged stories that financial markets are reacting to right now, and to be honest, I believe that there is a fair amount of cynicism regarding actions taken by policy leaders. The lead story has been, and will continue to be the spread of the Covid-19 virus itself. As I pass the zero-dark hours working on my portfolios as well as this morning note, I see that there are now 127 confirmed cases in the U.S. Of those, 127, eight folks have fully recovered, while nine have passed. The numbers are low, and we know that because widespread and necessary testing has not been done.
The second story is the response to the potential negative impacts of this virus in terms of monetary policy. Yes, I called for an emergency 50 basis point rate cut, and yes I was indeed surprised when I had seen that central bank thinking had been aligned with my own, and nearly in real-time. I had only made that call last week. The broad based, domestic equity market selloff is being used by many opponents of the rate cut as an example of policy failure. I believe quite differently, and I will get into that in just a bit.
The third narrative is of a political theme, and this one is a positive. Super Tuesday turned out very well for former Vice President Joe Biden. Though it does look like Senator Bernie Sanders of Vermont has taken California, the night's crown jewel in terms of size (and delegates), Biden won big and won often, in the south, in New England, and in the heartland. Biden now must be considered the front-runner to lead the Democratic ticket in November and as an old-school "moderate" is seen as far less economically disruptive than the far more "progressive" Sanders. It might also be time to admit that there is no other candidate still in the race beyond these two that would have a realistic chance at taking the nomination barring a brokered convention at the end of this trail.
On Tuesday morning, as every reader must know by now, the FOMC announced an emergency 50 basis point reduction made to the Fed Funds Rate target (in between scheduled policy meetings). Markets reacted very negatively, and those who do consider markets first, and the economy later, called out the move as policy failure.
Not only am I on board with this cut, this cut is exactly what I had proposed last week. I also encouraged the FOMC to position itself for further cuts and I believe they are. Let me explain. Yes, I could call for a "wait and see" posture. Data dependency as you all know, means to simply wait until public misery is both widespread and clearly visible. The call that I made last week was made as an economist, not as a trader. To think of my own portfolios before the welfare of my nation and of my people would be an unforgivable sin. May I never go that route. Never.
The virus, as I see it, has put the global, and by extension, U.S. economies in the position of having to prepare for simultaneous shocks to both demand and supply. Should the crisis pass without widespread suffering, I will be elated to backtrack on this posture. Understand that as supply lines are shifted, margins will shrink. Understand that should laborers become ill, they will stay home or be quarantined. Understand that as the supply side of the labor market is compressed, so will consumer sentiment, and so will consumer demand.
There will be a likely negative impact to household spending. Even if one is well, will there be not only ample supplies of goods, but supplies of services? Will that service provider be at work the day he or she is needed? The Fed move is seen by some as a "panic" move. Okay, maybe they do know something we don't know. Imagine not taking action to make commerce as liquid as possible ahead of a pending national crisis, because one was afraid to be perceived as panicked? The Fed was far from cowardly on Tuesday. They were bold.
Obviously, economies are going to contract. Otherwise, the People's Bank of China, Bank of Japan, Reserve Bank of Australia, and Federal Reserve would not have shown varied levels of aggression. Economists also expect the Bank of England, Bank of Canada and a reluctant European Central Bank to take action of some kind. This is before even getting into what will likely be a rushed fiscal response across the G-7 and beyond.
Did the Fed scare the marketplace on Tuesday? Probably. One day does not make a trend. Should this virus spread broadly, we will have worse days. Far worse days. No, a change in monetary policy will not improve durable goods orders, or provoke a family to eat out on Saturday night. That said, greasing the wheels of velocity will (no maybe about it) preserve payrolls (maybe even yours) in the event of a shock to credit or labor markets that seizes up liquidity. For now, posture has to be dovish. For those still putting their portfolios first, how bad do you think Tuesday would have been if the FOMC had cut just 25 basis points? Or worse, had Chair Powell come out to address the media and said that they were going to remain data dependent?
We still have several hours to go before they ring that bell at 11 Wall Street. As traders can clearly see, equity index futures are trading well above fair value. Think about this carefully. Are futures higher because investors have stopped panicking, and suddenly realize that short-term money will be more liquid going forward than it was 24 hours ago? Well, that doesn't hurt.
Are futures trading higher because a less economically disruptive candidate appears to have done well in Tuesday's Democratic primaries? That certainly does not hurt either. Remember my first reason for calling for a 50 basis point rate cut last week? It was to un-invert the Treasury yield curve. Even with the collapsing yield paid for the U.S. 10 year note on Tuesday, the pressure on what the 3 month T-Bill pays was exactly what the doctor ordered. Equity markets did not follow in real-time but take a look for yourselves.
The 3 month/10 year spread (the one that matters) un-inverted for the first time in weeks and went out at +7 basis points on Tuesday afternoon. In fact, the moves made by the Fed pulled the point of successive inversions to in between the One year and the Two year. Last week, that point was in between the Three year and the Five Year. What does this suggest? Hard to say given the uncertainty around Covid-19 and all ancillary impacts, but in normal times, this could imply that a coming period of no or "barely there at all" growth has been significantly shortened. But go ahead, complain because markets led by high-speed algorithms could smell fear (probably yours) and forced (as they always do in both directions) overshoot.
Interestingly, the CBOE Total Put/Call ratio showed a complete lack of fear on Tuesday. Check this out....
That's right. There was far less demand for put options on Tuesday than there had been on any single day in more than two weeks. Why? Funny you ask. While there was some demand for single stock puts, there was a complete collapse in demand for index based puts...
Note... both the 50 day and 200 day SMA for this series run at 1.23/1.24. Obviously, folks did pay for haven on Tuesday. They bought Treasuries. They bought Gold. They did not buy the VIX back up to last week's levels, and absolutely nobody bought downside protection directly related to market indices on Tuesday. Take 'em? I did pile back into Amazon (AMZN) on Tuesday's close after taking a hike in the morning. That was a play on an equity market reaction to the un-inverted 3 month/10 year spread. We'll see. By the way, I have found Amazon to simply be an outstanding vehicle for day-trading the market this week and last. There is almost always enough volatility in that name to at least mildly soften blows landed elsewhere on my portfolios.
Oh, while the Fed Funds Rate gets the press, I believe it imperative that the Fed adjust its stance regarding both short-term (repo) cash markets, as well as the balance sheet expansion program. The Fed has indicated a preference to gradually extract itself from both of these behaviors and that was the right idea at the time.
However, demand has been higher for overnight cash reserves in recent days, and the rates paid for overnight dough have been on the volatile side. Does demand for liquidity by bankers increase as the impact of this virus moves from possible to probable? Do these bankers prepare? As the nations goes into tax season? Folks have already run on clean water, hand sanitizer, and toilet paper on a regional basis. What if they start to run on cash? Think it can't happen? Two months ago, half of you never heard of the city of Wuhan, even though a ton of the stuff you were buying had been manufactured there.
A Stock To Own
I don't own any shares in, nor do I have any derivative positions in Veeva Systems (VEEV) . I think maybe that's about to change. Veeva is a cloud based software developer focused primarily on tracking data provided by clinical studies for the life sciences industry. (Hmm... wonder if there's a market for that kind of big data right now.)
On Tuesday afternoon, Veeva reported Q4 earnings and revenue that beat consensus view. In fact, sales increased 34.1% year over year, which is more robust growth than the firm has seen since Q1 2016, though the firm has never experienced growth of less than 22% at any point over that time frame. Very interestingly, if you know how I think... subscription (recurring) based revenue for the quarter landed at $254.1 milliion (+33%) or 81.6% of the whole pie.
Veeva now guides both earnings and revenue above consensus for both the first quarter and the entire year. The only negative I see is in adjusted gross margin, which missed expectations. Still, at 72.4%, this number is quite enviable. It just has to watched going forward for signs of compression.
Traders will note that this name has for six months now gone through a period of basing consolidation after a dramatic run through H1 2019. Incredibly staunch support has formed at the 38.2% Fibonacci retracement level of that entire move. Resistance has formed at the $170 spot.
The shares have been strong overnight, and I now see them last at $146.50, which is too close to the 50 day SMA ($147.74) for me to take an overnight flyer on the name. Personally, I would rather buy the name on momentum on a break of that level, than get involved that close to short-term traffic. There is more traffic at $153 by the way. All that said, I believe that this is a name that I can add to my book, and will watch closely on Wednesday to either add in the way just stated, or at a discount to overnight prices should such a discount develop.
Economics (All Times Eastern)
08:15 -ADP Employment Report (Feb): Expecting 175K, Last 291K.
09:45 - Markit Services PMI (Feb-F): Flashed 49.4.
10:00 - ISM Non-Manufacturing Index (Feb): Expecting 55.0, Last 55.5.
10:30 - Oil Inventories (Weekly): Last +452K.
10:30 - Gasoline Stocks (Weekly): Last -2.691M.
The Fed (All Times Eastern)
14:00 - Beige Book
17:00 - Speaker: St. Louis Fed Pres. James Bullard.
Today's Earnings Highlights (Consensus EPS Expectations)