You Never Know
It was the morning that I would realize that not everything is always under my control. Make no mistake, the incident would turn out to be nothing really, and I would eventually have much worse mornings. Much worse. I was 16 years old, growing up in Queens, New York. I worked at a bank before school in those days, but I was off from work this day, so I could stroll into school around 8 am. I had time on my hands, so I walked. I came around a corner where a fence taller than my five foot eleven inches ended at a property line.
I saw the police officer before he saw me. Up against a wall, gun drawn, scanning the scene, visibly frightened. I tried not to startle him, but it was too late, he whirled, his revolver aimed right in my face. Fortunately, the officer's training kicked in, his finger remained outside of the trigger well, and he waved me off silently. I simply went to school. I told my parents what happened that night at dinner, and they were very upset. My father said that if the worst had happened that morning that I would have conveniently become whomever that police officer was looking for.
Four decades later, I sometimes think of the look on that police officer's face in that split second before he saw me. That was not the first time that a gun had been shoved in my face, nor would it be the last, but it was the only time ever, that a "good guy" did it by accident. That reality coupled with my father's negative reaction that night really sobered me. The incredible and the unpredictable can happen at any time. There's a life lesson here. You just never know.
First off, we can not discuss markets unless we acknowledge the 800 pound gorilla in the room. Thursday's market place came under early, and fairly intense pressure after the whistleblower complaint lodged against the president had been released going into a congressional hearing centered around the acting director of national intelligence. I read the complaint. I read it several times. Three things stand out to this amateur. One... it's a tough read, and sounds truly awful if true. Two... the whistleblower pretty much tells the reader up front that the report is all hearsay, and that the whistleblower is not in any way a witness. Three... the report appears to have been cleaned up legally prior to release, and had been sent to select membership in Congress as far back as August 12th. That raises many other questions.
My point here is that I don't know. I don't know what happened and neither do you. Neither of us know if more, or better defined information from first hand sources emerges. Yet, if one even dares to venture onto their Facebook (FB) account, the battle of the ignorant is already in full swing. I have people who I consider friends on both sides of the aisle. In fact, some of these friends are way out on the fringe, and really seem to have lost interest in anything away from politics for three years now. The arrogant comments. The stupid memes. The open hatred. Yet, they all have one thing in common. My bet is that close to none of them have even tried reading the material. They get their take from news sources that they have already decided will give them what they want to hear. Both sides. Don't think I call out one or the other. This is going to be rough, people.
Everyone, is going to have to try to be more open to the idea that they just don't know, and that anything can happen. The equity markets did not hold those early losses, and futures markets point higher as late night melts into early morning. Now, you don't have to read me, or listen to me, but I ask you to make a deal. Reach out to someone you disagree with politically today. Take the time to hear them. They have reasons too. You won't agree. That's fine. I think it necessary at this point that time is taken to show respect. There are no inherent morons here, and none of us are brilliant.
Completely Missed By The Media
Markets turned for the better around midday on Thursday, finishing down small on light volume. Energy and media names were beaten up. There was strength in value/safety as Utilities, REITs and Staples led the way. As far as I can tell, I was the only one anywhere on financial television (I may have missed someone else) speaking to the strength of the U.S. Treasury Department's auction of $32 billion worth of 7 Year Notes as a driver for equities through the afternoon.
Here me out because I think this should be as plain as the nose on one's face for any financial pro. $32 billion. A bid to cover at 2.49, well above the six month moving average. Indirect bidders took down $20.8 billion of the $32 billion issuance. What that means for those new to this type of material is that financial institutions (in this case, likely foreign central banks) took down 65% of this auction in the open market, well above recent trend. Why would they get aggressive with longish term U.S paper at this point? There are good reasons.
As everyone seems to now understand, and with current banking regulations restrictive, the Fed had left the balance sheet woefully unprepared for an emergence of a "mini-crisis" regarding liquidity in overnight money markets, and has had to inject large amounts of cash into these markets daily. (If only someone had warned them that they had been too aggressive with their quantitative tightening program. Shaking my head now)
Two Things Happen From here...
One. The European Central Bank begins anew their whole quantitative easing program in November, unless incoming ECB President Christine Lagarde pulls a 360 on outgoing ECB President Mario Draghi's intended direction on policy. This flow of capital is what we caught a whiff of in yesterday's Treasury auction as foreign money looked at 1.633% over seven years like a full rack of St. Louis ribs. This will likely pressure long term interest rates, further damaging the yield curve.
Two. The FOMC will have to act, maybe as soon as October 30th, to address in a more permanent way the near daily overnight lack of liquidity. One way to do this would be through balance sheet expansion. This will be termed something like "permanent open market operations" or POMO, but this will feel, smell, and taste like quantitative easing. If the intent is merely to address short-term liquidity concerns, then the program announced will be aggressive in size, but short in duration. If this announcement turns out to be an undeclared act of self defense versus an expected inflow of foreign capital, then the program will likely have to run longer in duration (perhaps open-ended), and the focus will have to be on the short end of the curve with constant rollover of maturing securities in order to apply pressure where it will be most needed.
Change Of Season
Ever bake up some chicken, and decide upon sampling that maybe you're just not so good at this sort of thing? Great idea. I can save this meal before the kids come tumbling down the stairs. I must have some canned gravy in the cupboard. No? Move the soups around, the canned veggies. Uh oh. No gravy. Wait, what's that? Two yellowing fast food sweet and sour sauce packets. Gross. May have to go with salt, and pepper. Mrs. Dash? You know you've been there.
As my truly great one time mentor who would prefer to remain unnamed once said... "This is the gravy, gang... this is how we get paid." I was but a fly on the wall that day, and he was truly fired up at that moment, but that quote stayed in my head for an entire career. That said, the gravy is missing. Missing from the IPO market. What's that? Oh, you heard me. The last train has left the station, and the ticket window to absurd valuations awarded for sales growth at a substantial loss is now closed. Apparently, the equipment is not the only thing overpriced at Peloton Interactive (PTON) , so was the equity. After somehow having 40 million shares priced at $29 in the primary market, the shares opened at $27 in the secondary market, and never traded above $27.98 for the balance of the session. PTON ultimately closed at $25.76. down more than 11% from that "high end of the range" pricing. Oopsies.
After the close of business for Thursday, after witnessing the bazaar week that left We Company without an imminent public offering, or a chief executive, and after witnessing the less than successful public launch of Peloton, Endeavor Group Holdings, decided to take a hike. For now, the sports and entertainment giant (Owner of the UFC and Miss Universe pageant, as well as agent to the stars) has postponed any IPO after having to reduce in recent days the number of shares offered and the price range those shares were expected to fetch.
Don't look now, but the market has been revaluing a number of issues that had looked to have made it safely out to sea. It's not just Uber (UBER) and Lyft (LYFT) that have struggled, but even IPOs that had been perceived as successful such as Pinterest (PINS) and Zoom Video (ZM) now trade well below their summer highs without a congruent broader market selloff. Change of season.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (Aug): Expecting -1.2% m/m, Last 2.1% m/m.
08:30 - ex-Transportation (Aug): Expecting 0.2% m/m, Last -0.4% m/m.
08:30 - ex-Defense (Aug): Expecting 0.1% m/m, Last 1.4% m/m.
08:30 - Core Capital Goods (Aug): Last 0.4% m/m.
08:30 - Personal Income (Aug): Expecting 0.4% m/m, Last 0.1% m/m.
08:30 - Consumer Spending (Aug): Expecting 0.3% m/m, Last 0.6% m/m.
08:30 - PCE Price Index (Aug): Expecting 1.6% y/y, Last 1.4% y/y.
08:30 - Core PCE Price Index (Aug): Expecting 1.8% y/y, Last 1.6% y/y.
10:00 - U of M Consumer Sentiment (Sep-F): Flashed 92.0.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 719.
The Fed (All Times Eastern)
08:30 - Speaker: Federal Reserve Board Gov. Randal Quarles.
12:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.
Note: There are no significant quarterly earnings releases scheduled for today.