The Set Up
Sunday night melts into Monday morning. Hard to tell the difference with so many foreign equity markets closed for the fourth day of what is an extended holiday weekend in many nations. Asian markets did show some weakness, as have domestic equity index futures, even if there has been a reduction in global oil production primarily agreed to by Saudi Arabia and Russia, but involving the U.S., Mexico and a host of other nations as well. The point is that what has been agreed to is either woefully inadequate, or simply already priced in. In fact, a whole lot is priced into these markets at this point, even if there is so much that can not be. We should explore.
Last week, after seeing some mildly supportive action (at least technically) for the S&P 500 the week prior, we did see a technical confirmation (remember, these can fail) for the Nasdaq Composite of a change in trend, or at least we saw what I look for. On Thursday, we saw an "inside day", which sends a message of trend continuance. This was certainly the case on Friday, but is that all we get? One day. Hard to tell.
The problem is this. The virus is still in control. Sure, this Federal Reserve has been aggressive, as well as proactive, like no Fed prior. We went over what the U.S. central bank has done for Real Money on Friday. In quick review, the Fed has taken action to reduce Federal borrowing costs, tamp down mortgage rates, relieve pressure in markets for corporate paper, money market mutual funds, for primary bond dealers, sure up markets for corporate debt and then broadened the scope of that effort to include some junk, sort of rescue the national effort to support small business employment, keep municipal governments going, purchase short term notes from states, counties, and cities, oh, and the Fed has been injecting cash into overnight and short-term markets since last year, while ramping up that effort where and when required. Other than that, they've been quiet.
This is all positive. This is all priced in. There will be no credit crunch. There will be no lack of liquidity. The Fed has tried quite overtly to make the public understand this. They are on our side. There can be no comparison between the last financial crisis. Twelve years ago, the crisis was one born of either abused or misunderstood leverage, and then exacerbated by a Federal Reserve that was slow themselves to interpret the situation, and then again even slower to react. This nearly full-stop that has been placed on the global economy is of course far more severe than that last financial crisis. There has been no behavioral business practice that can be called on as irresponsible, but at least monetary and fiscal authorities have set the landscape so that upon a resumption of business, the U.S. economy might walk, might run, and then finally, might sprint. All they can do, is set the table. Cash has to flow organically at some point.
So what holds back the economy, and by extension, the financial markets? Easy. The length of, as well as the severity of this ongoing economic shut-down. This, I alluded to on Friday in that piece for RM, as I do think the key to reopening this economy is one of greatly expanded testing for Covid-19, once a reliable treatment has made it past clinical testing, and into mass production. Sure, Gilead's (GILD) Remdesivir has shown some promise of efficacy, and there are a host of drug makers including Mylan (MYL) here in the U.S., ramping up production of the generic, and very inexpensive, but meant for other illnesses Hyrdoxycholoroquine.
Still, until we know more about these drugs or others under development that require testing for antibodies so we know who has recovered, are we really just waiting for a vaccine? According the the WHO (World Health Organization), there are now 70 coronavirus vaccines under development worldwide, with three already at the point of human testing. I know, it seems hard at this point to trust the WHO. That said, according to Bloomberg News, the three firms that have gotten that far are CanSino Biologics (Hong Kong), and two U.S. companies... Moderna (MRNA) , and Inovio (INO) . We all know that Johnson & Johnson (JNJ) expects to start Phase One testing for that firm's leading candidate in September.
Even if all goes swimmingly, this puts a vaccine into early 2021 at the very best, and probably not that early. That's going to be far too long to keep the economy (global and domestic) in a bottle if you want somebody to hire all of these suddenly unemployed folks.
This is why I have been suggesting that a "Vee" shaped economic recovery is not that realistic. There will have to be a controlled roll-out that may have to halted as the need to control localized outbreaks will likely occur, even if businesses are imposed upon to track real-time health conditions for every laborer. This is what I wrote on Friday. Minneapolis Fed Pres. Neel Kashkari appeared to be thinking along those same lines in his Sunday morning interview on CBS News when he spoke of an 18 month strategy of rolling shutdowns, and "waves of flareups."
Then, once businesses reopen, will demand even reopen with them? Evidence from the recently reopened city of Wuhan, China suggests probably not right away. I mean, who's going to attend a movie, dine in a restaurant, step on a cruise ship, or get on a jet plane before they see others do so for a little while and not get sick?
Ready or not, here they come. What might be the least meaningful, yet most closely watched earnings season of my professional life is now upon us. This week, as usual the large banks will for the most part, bat lead-off...we hear from the likes of JP Morgan (JPM) and Wells Fargo (WFC) on Tuesday morning, but we will also see numbers posted by such diverse businesses as the already mentioned Johnson & Johnson and road transport operation JB Hunt JBHT. A read on the trucking industry should be of interest.
What nearly every large cap firm in the S&P 500 will report will be a first quarter that will not reflect for the entire period just how poor business conditions actually got by March, and then got even worse in April.
This makes the Q1 data for most businesses quite useless as these numbers, especially for those firms with less than pristine balance sheets, can not be understood by investors as any kind of proxy for fundamental financial health. That brings us to guidance, but how can any CEO guide toward any future performance while this virus is still in charge, and while the expectation has to be for a national economic restart that will be stutter-stepped at best, and dangerous at worst.
Know this. Analysts tracked by FactSet, taken as consensus view now look for Q1 earnings "growth" of -10%, the largest year over year contraction for this metric since 2009. However, that record should not stand for long. FactSet looks for Q2 earnings "growth" of -20%. In fact, according to FactSet, even as conditions improve later in the year, earnings will remain negative. This contraction in earnings expectations coupled with a stock market rebound have taken the S&P 500 in aggregate back up to a level where the index is trading at 17.3 times forward looking earnings (even though this is now not predictable), up from 13 times at the nadir of the late March selloff, which was down from more than 19 times at the late February highs.
As for sectors, the value, if there is any, is still in the financials as well as in healthcare, while Energy has even with the beat-down become even more expensive. Information technology (my opinion) only becomes more important in this futuristic, troubled world. This is how the virus is tracked, and understood. This is how those fortunate enough to remain employed will either work form anywhere, or be cleared to work where they have to.
Semiconductors. As traders will note...
The Philadelphia Semiconductor Index tried and to take its own 50 day SMA on Friday, and once failing, actually also failed to hold the 200 day SMA for the index as well. Same for the Dow Jones US Semiconductor Index...
Yet, the two Sarge faves... Advanced Micro Devices (AMD) and Nvidia (NVDA) , did break through and hold their respective 50 day lines. This recent "success" will come under pressure on Monday morning.
How I think or trade regarding these two names amid a weaker tape on Monday morning will rely specifically how the two perform as their 50 day SMAs are approached from above. I have something to protect in both names. I see a crack at the level, I think I probably take some partial profits and hope to add the portions back on later as skillfully as I can. Conversely, we see support at that line? I think about adding small.
Wait, Sarge... you're thing about adding at a higher price than you are thinking about selling these names. Precisely. The algorithms always try to play us, right? Why not play them? We understand how many of them are programmed. We know how they read charts. We know how they behave around highly followed trading levels? Why not pick them off for a change. Sure, they're faster than us. We can't beat that. What we can do is ambush them by planning around their group behavior. Smarter than them? We can be. More highly motivated, and willing to fight than they are? All day. Every day.
When I was a kid, all of my sergeants were Vietnam Veterans. The toughest, quickest of mind, most squared away people I have ever known. They used to say "Everyone has a plan until they make contact." Except for one Staff Sergeant who I thought was excellent. He used to add... "Unless it is you who forces that contact." Know what he meant? I have never forgotten.
Economics (All Times Eastern)
There are no significant domestic macro-economic events scheduled for today.
The Fed (All Times Eastern)
No public events scheduled for today.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (WTFC) (1.18)