Ten Thousand Fleeting Moments.
Ten Thousand Tiny Fractures.
Equities opened higher on Tuesday, struggled just a bit, and then hit their stride as Treasury yield spreads expanded just enough to allow for some breathing room. Most interestingly, by just about 12:30 ET, three hours into the regular session, three and a half hours to go, the rally just plumb stopped where it was... for the rest of the day. The gap created by the lower open on Monday morning had indeed been filled. You can explain this as much as you want, and there some good reasons, some macro-economic in nature for the sudden increase in optimism, but the fact remains that gaps almost always fill, maybe not in a single day, but they do fill, trust me (for I am a chart monkey)... and the action stopped cold in its tracks once this gap filled.
Trading volume tailed off substantially on Tuesday. Is that meaningful? Volume is usually lighter ahead of the Fed, so I am not really sure, but a 19% decline from one day to the next at the Nasdaq Market site? That's dramatic. NYSE listed names saw a 10% day over day decline. You'll recall that only yesterday I had made mention that trading volume in aggregate for Nasdaq Composite constituent firms had not experienced daily volume below its own 50 day SMA since December 30th? No longer true. This happened on Tuesday. Not surprisingly, capital flowed back into the Information Technology sector as well as the Financials. Perceived safe haven investments took a back seat.
Dead Cat Bounce?
I have probably told you this before. I don't like that term. Hear it on TV? That pundit is really saying, "I don't know, and haven't done my homework, trying to figure it out." There is always a reason for a change in demand and supply, even if this has become more difficult to determine at times in the high-speed, algorithmic era. Though this devolution in the function of price discovery has obviously blurred the lines of authenticity, and created an environment I think prone to exacerbate momentum, my opinion is that changes in direction happen for good, or for not so good reasons. The underlying fact is that there are always catalysts that create reaction. Shrugging one's shoulders is not one of them.
I know that at times, given that I come from a macro-trading background, that I sometimes see underlying risk from a somewhat different perspective than other traders. I do not downplay the significance of either fundamental, nor technical analysis at all, what I try to do is incorporate the whole ball of wax into a forward looking mosaic... a stained glass window if you will. This would be why I focus on understanding the impacts of monetary policy upon the Treasury yield curve, as well as conditions of liquidity, and then project that impact on the financial markets. Despite the fact that, I often publicize risk when I see it, I haven't been net short since... actually, I've never been net short. That's just a fact.
In front of the other... Tuesday morning, the numbers came pouring in, and got off quickly to a questionable start. December Orders for Durable Goods printed at aggressive looking headline growth. The truth was that the 2.4% m/m print was highly dependent upon defense spending precisely on aircraft. While that's fantastic for kids like me, who pound the table regularly for names like Lockheed Martin (LMT) , it's not good for an economy that needs to see increased capital expenditures. Orders for core capital goods showed a month over month decline... again.
It got better from there though. Much better. Case-Shiller home prices surprised to the upside. Okay, that data-point comes with a significant lag. This growth came in November. Got anything not past the expiration date, Sarge? Sure do. The Conference Board's January survey for Consumer Confidence did not just beat expectations. This survey simply erupted with optimism based on current business and labor market conditions. I mentioned consumer confidence in the Tuesday Recon, and how the coronavirus spreading in Hubei Province, China could dampen this picture. More on that in a second.
Next came the Richmond Fed (Often referred to by economists as the second most important regional Fed manufacturing survey, depending on how hot or not the energy sector is impacting the Dallas district.) behind Philadelphia. Now, sometimes these surveys get a little funky. The headline print, in this case a very robust looking +20, coming off of successive negative months, can be skewed by less important internals that sway that headline. Not this time. Strength was where it needed to be. New Orders, Backlog of Orders, and Shipments all moved from a state of contraction into a state of profound growth. In fact, the most glaring negative in this report came in the area of Availability of Skills Needed, which for labor markets suggests future increased wage growth for middle class earners in that region. Huzzah.
The macro was generally supportive of improved conditions for financial markets, but not the catalyst. The catalyst, for Tuesday's rally, was as it was for Monday's beatdown, coronavirus related.
Who? Health and Human Services Secretary Alex Azar, that's who. The man served to ease at least somewhat public concern in the U.S. over the spread of the coronavirus causing so much anguish in China. For now. Azar claimed that there would be no hesitation to declare a national health emergency if need be, but also stated that there were just five confirmed cases in the U.S. This morning by the way, there are still just five cases in the U.S., all contracted in China. Azar said, "This is potentially a very serious health issue." He also said, "At this point, Americans should not worry for their safety." While that probably doesn't mean that you should start sharing lollipops with strangers, it does mean that staying inside 100% of the time, or anything humans might do (that slows the velocity of money) is probably an overreaction. For now.
As for China, the scope of this illness continues to expand. When I started writing this piece, a total of 6,057 earthlings had been confirmed as having contracted this virus. Of those, 5,970 are in Mainland China. The ailment has now caused 132 deaths, and there have been 110 full recoveries, so the mortality rate is still higher than the "I think I'll go for a jog today" rate.
Should this virus somehow be contained prior to its becoming a global issue, beyond screening at points of national entry, the impact to U.S. business will still be quite significant for corporations more reliant upon Chinese production, Chinese demand, or both. This will impact forward guidance being made in post-earnings conference calls, and we saw that condition develop into some uncertainty in the Apple (AAPL) call that at the headline looked strong.
Congressional Budget Office
Just an aside. I am the math kid. Just ask Sister Mary Anne who always believed that I was cheating, and made me take trigonometry exams in isolation. The CBO made a ridiculous estimate in my opinion on Tuesday, showing that total U.S. debt could stand at 98% of GDP by the year 2030. Frightening? No. I would take that outcome in a New York minute. Know why? Because, my dear friends, we are already there, and have long since passed that threshold. The debt clock never stops.
For the year 2019, U.S. GDP stood at an estimated $21.44 trillion. U.S. National Debt now stands at $23.2 trillion. U.S. Total Debt? You don't even want to know. Include the debt, not just of the Federal government, but also state & local governments, businesses, households, and anyone else who might borrow funds and this number balloons to... wait for it... more than $75.5 trillion. Why count all debt? Simple, cowboy... because the many layers of government, corporate America, as well as John & Jane Doe... they all contribute to composite economic activity, do they not? They are all in the GDP print. Then why the heck would anything at all be excluded from debt related data?
The fact is that this issue has not overtly impacted daily life, at least not in a noticeable way, just yet. There is no political will on either side of the aisle to address ever expanding deficits. Corporations, mostly seem not to care. At the family level, there has been some positive effort, but that's about it. This remains tomorrow's story. Just know that we benefit from tomorrow's consumption today. Know that all future consumption is not only finite, but will likely contract as the service of ongoing debt becomes an ever heavier weight to bear. Fractional banking can only push the envelope so far. I think. Next year? 2030? Your lifetime? Mine? Surely, at a minimum, someone bearing your last name will have to deal with what has been created. Enjoy your day.
Tuesday Night Earnings (Trading Thoughts)
Apple (AAPL)... Know what? I sold my Apple long after the close last night? Smart? I'll tell you later. Uncertainty in China. The miss in services related revenue. Don't get me wrong, I like Apple... a lot. You are supposed to "Own Apple, don't trade it." That said, I am a trader, I will buy back these shares. I know that already. I am simply trying to extract some capital. Win or lose, we'll see. I thought the challenge might be fun. That was really my reason. No kidding. Right now, out just above $125, the trade looks like a wash.
Advanced Micro Devices (AMD) ... Performance? Check. Margin? Check. Q1 guidance? Meh. The shares are trading lower, dragging with them the shares of key competitors. Sell? I'm not. Add? Not up here. Betting that CEO Lisa Su shows up in the media and works some magic? I am.
Starbucks (SBUX) .... The story here is the guidance, or lack of expected confidence based on what is transpiring in China. Like the stock? More than the coffee. Definitely a maybe if they sell it hard enough.
Xilinx (XLNX) ... light on revenue, light on guidance. Uh oh. Taking a pass.
Mercury (MRCY) ... a Sarge name. String performance, Iffy guidance. My thought? As long as Lockheed has no problem selling F-35's, I like Mercury. Growth in Cash from Operating Activities outperforms Net Income. The order backlog is huge. I think the overnight selling was overdone. We'll see.
Economics (All Times Eastern)
08:30 - Goods Trade Balance (Dec-adv): Expecting $-67.2B, Last $-62.99B.
08:30 - Wholesale Inventories (Dec-adv): Expecting 0.0% m/m, Last -0.1% m/m.
10:00 - Pending Home Sales (Dec): Expecting 0.4% m/m, Last 1.2% m/m.
10:30 - Oil Inventories (Weekly): Last -405K.
10:30 - Gasoline Stocks (Weekly): Last +1.745M.
The Fed (All Times Eastern)
14:00 - FOMC Policy Statement.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
(Apple, Starbucks, Mastercard, Facebook, Lam Research and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)