Equity markets had simply roared for most of the day on Tuesday. Trading volume had been elevated for a third consecutive session. The dust then appeared to settle. For a little while. European equities, as well as U.S. equity index futures trended sideways to moderately lower as the zero dark thirty hours (here in New York) passed. Then. Pow. Shazam. Suddenly, those foreign markets and futures here in the States erupted (around 02:30 am EST). As night melted into early morning, the mood shifted back to "risk-on" mode.
More Chinese liquidity? That was my first thought. The president's "State of the Union" address? Of course not. Though some readers probably did enjoy seeing President Trump snub Speaker Pelosi's offer of a handshake, and other readers probably enjoyed seeing her make a show of ripping up her copy of his speech... nobody was up in the middle of the night, buying futures contracts because of it.
What mattered to pajama traders disguised as algorithms was coronavirus-related. Yet, again. As the number of those infected has continued to grow both in China and elsewhere, the pace of those recovering has clearly accelerated while the pace of those poor souls succumbing to this illness has slowed. The timing of this morning's rally? Almost simultaneously, it seemed from my office, news broke from both China and the UK.
China Global Television Network reported that researchers at Zhejiang University (which is a highly acclaimed academic institution) had narrowed their focus down to two drugs in their battle versus this virus. (These two drugs would be Abidol and Darunavir, the story link to CGTN's website can be found here.)
Across the Atlantic Ocean, Sky News reported that the team working on creating a vaccine for this virus at Imperial College London had made a significant breakthrough. That link can be found here.
More fun. Than a barrel of monkeys? Then again, as a kid, I always wondered just how much fun a barrel of monkeys actually might be. The only monkeys I ever ran into in the wild, were either completely outraged that we were on their turf, or seemed to know that the funny looking guys in the camouflage clothing usually have crackers in a tin can somewhere in their gear. Some of them are even intelligent enough to be polite about it.
On Tuesday, 10 of 11 sectors ended the day higher. The one sector mired in red, for a change, was the Utilities as the spread between 3 month T-Bills and 10 year Notes gave all of us a break. The "risk on" action was led by the Information Technology sector, as both semiconductors and software participated equally in the euphoria. Seven SPDR Sector Select ETFs closed the day at least 1% higher, and an eighth, the Financials (XLF) just missed by a smidge.
Completely made up for Friday's carnage? Oh, indeed. The Nasdaq Composite rallied to a whopping 2.1% gain, closing at an all-time high. (While coronavirus continues to spread, slowing expected Chinese and global economic growth, a month after the U.S. and Iran came to the brink of actual kinetic warfare.) The S&P 500, our broadest large cap equity index tacked on 1.5%, closing less than 1% away from setting a record close of its own. Away from large caps, and this may be important... the small caps have rallied for two straight days, allowing the Russell 2000 to recaptures its own 50 day SMA after failing at that line last Thursday. Recapturing that level is not yet true for the S&P 600, but should this overnight rally hold, this technical positive will be in play.
As for travel related stocks, there has been considerably more pain. One will note that even as the Dow Jones Transports remain nearly 100 points below that 50 day SMA...
That the weakness has been airline-centric, and even that group has started to see relief. Isolating U.S. airlines as a group, one can see that the 200 day SMA has been retaken, and the 50 day line is now in sight.
By the way, advancing volume beat declining volume by more than 7 to 2 at both of New York's primary stock exchanges.
It didn't take a genius to see this one coming. On Tuesday, and almost under the radar with all that was going on, White House Economic Council Director Larry Kudlow did mention the impact of the spread of the Wuhan coronavirus on China's ability to live up the Phase One trade agreement between that nation and the United States.
What Kudlow said in an appearance on Fox News was, "The export boom from the trade deal will take longer because of the Chinese virus." We have warned on this likelihood here at Market Recon since the initial emergence of this virus, as China had committed to significantly increase purchases of U.S. energy, manufactured, and agricultural goods as well as technological services over the next two years to levels that may have been difficult to get to, even if economic activity in China had not come to a screeching Q1 halt.
The positive? Kudlow expects this negative impact to be short term in nature, as China gets back to work. Better late than never, I guess. First people have to stop getting sick. Hmm.
Once upon a time, yours truly was indeed a member of the New York Stock Exchange. In the year 2006, the exchange moved to a "for profit" model, and went "public." From 1792 until 2006, the exchange had been private, non-profit, and owned by the membership who for the price of their "seat" acquired the right to buy and sell equities on the trading floor on behalf of their customers. I was never an owner of the NYSE, I leased my seat from someone else who had opted not to work his seat. In essence both of us would be considered members, but I had purchased the right to trade on the floor, and he retained the voting rights that go hand in hand with ownership. Such arrangements were commonplace.
It was with stunned but sentient understanding that I read the news that Intercontinental Exchange (ICE) , current owner of the New York Stock Exchange, had approached eBay (EBAY) in the past regarding the prospect of acquiring that firm's core marketplace product. eBay has been in a "sell the assets" mode as there are plans to close on a more than $4 billion deal to sell StubHub to Viagogo sometime in the current quarter.
I mean, on a basic level, given ICE's technological expertise in connecting demand with supply in the modern era, this is something that from a distance, makes some sense. No word as of yet on whether or not there will be more talk. The Wall Street Journal mentions that the two sides are not in formal discussion. One thing is certain. Time does not stand still. Not ever. Never will. Some readers may have noticed that I do almost all of may trading in mental eighths, or sixteenths. Okay, some things...
Today is the day. February 5th, 2020. 8 am EST. Where? The same New York Stock Exchange mentioned above. What? The Macy's (M) Investor Day event that had been the basis for the long position laid out for you when the shares were trading at their horrific lows. Well, the investor day, and that fat 9.17% dividend yield. Readers know that we took half of that trade off at the onset of the coronavirus, which was a nice sale in hindsight.
So, what now? The firm released news on Tuesday evening ahead of the event. Apparently, Macy's will close 125 stores over the next three years, out of an existing 870 (680 department stores, 190 specialty stores) locations bearing the names Macy's, Bloomingdale's, Bluemercury, Bloomingdale's The Outlet, and Macy's Backstage. It is expected that 2,000 jobs will be cut as part of this restructuring.
Macy's will also close the Cincinnati office and move all headquarters roles to New York. All of this comes as part of the firm's new three year plan, a plan that I wanted to get excited about. The firm now guides fiscal year 2021 revenue to a range spanning $23.6 billion to $23.9 billion. Wall Street had been at $24.3 billion.
What I had wanted to hear was a creative way to draw capital out of the firm's rather large real estate holdings. I will let them present today, and hear CEO Jeffrey Gennette out. What I am reading at this point is positive, but less aggressive than I had hoped. The firm is talking about making use of excess square footage in parking lots, while I am thinking they should be building up from the massive 34th Street location in midtown New York City. They speak of redeveloping those unused parking spaces into fast food joints or banks. I am thinking of perhaps the most desirable luxury apartments, or office space in the most desirable city for business in the world. For that reason, I am out.
Like I said, I'll hear Macy's out today, but the song and dance ends at lunchtime. At the moment, I remain long... tick tick tick tick.
Economics (All Times Eastern)
08:15 - ADP Employment Report (Jan): Expecting 154K, Last 202K.
08:30 - Balance of Trade (Dec): Expecting -$47.1B, Last -$43.1B.
09:45 - Markit Services PMI (Jan-F): Flashed 53.2.
10:00 - ISM Non-Manufacturing Index (Jan): Expecting 55.2, Last 55.0.
10:30 - Oil Inventories (Weekly): Last +3.548M.
10:30 - Gasoline Stocks (Weekly): Last +1.203M.
The Fed (All Times Eastern)
16:10 - Speaker: Reserve Board Gov. Lael Brainard.
Today's Earnings Highlights (Consensus EPS Expectations)