Once upon a time...
We had an old expression in this business. There is no way it would work in this modern market model, where speed is valued far more highly than is price, but there was a time when trades were slower, sometimes much slower, and the quality of execution on behalf of the client base, many times higher. Minutes instead of microseconds. Sounds awful? What if it means more money, sometimes a lot more money? Just for example... let's say... (The mental image in your head blurs in and out, finally focusing in on a bustling trading floor, neck ties and colored jackets on every trader, the floor itself littered with six inches of scrap paper.)
A client has sent us an order to buy or sell a certain amount of a certain stock at a certain price and wanted a report back almost immediately, but we thought we could do a better job for that client, if we took our time. We would offer to "stop" that client at that price. If the client responded in an agreeable way to our effort, we would tell him or her that he or she was guaranteed their limit price, while we went to work on their behalf, even at the risk of having to take the other side of the trade if our effort failed.
Let us illustrate this example so that you might see where I am trying to go with this. The Super Duper Mutual Fund (based in Boston) calls their floor trader (your all-time favorite, legendary badge number 986) at the NYSE, and tells that floor trader's assistant "Sell 25,000 shares of XYZ stock at $25 1/2". The stock is quoted 25 1/2 bid for 10,000 shares, 15,000 shares offered at 25 3/4. Normally, with no risk involved, the trader would hit that bid for 10,000 shares and offer the balance (15,000 shares) at that price. Only this trader had been in the stock earlier that day, and he knows that... oh let's say the trader for Salomon Brothers had already "put a print of 500,000 shares to the tape in that stock at 25 3/4 earlier in the day. We don't know that Salomon Brothers is short the stock, or that their customer has more shares to buy, but we have noticed that this trader, working for Salomon, has responded favorably when shown offers of 25,000 shares or more at 25 3/4.
"Stopped Out"
What we would do, (as long as we were traders ourselves, and not retail brokers) would be to ask our client (Super Duper & Co.) if we could stop them at 25 1/2, while we go to the Salomon trader and offer them our 25,000 shares at 25 7/8, in order to provoke from them a 25 3/4 bid. If it works and Salomon pays us either 25 3/4 or 25 7/8, then we are a hero, and have probably won some future business with the portfolio manager that gave us the order. If Salomon comes back and says "Sorry, I'm all done for today", then we would hit that 25 1/2 bid for what it was worth and have to buy the balance ourselves, going long in this case those extra 15,000 shares if the market had not changed. We would call back the PM and tell him or her that we had to "stop them out."
They understood the term. They got their report, because we had guaranteed them a price, and we now had a small position to work our way out of. Both the portfolio manager and the floor trader understand that if "Super Duper & Co." has more to sell, that they are now competitors, and the big buyer is likely not going to show up again, at least not at this level.
This type of block trading is referred to a "customer facilitation" and comes with an inherent risk. The idea is that over time, even if there are losses (there is no maybe about that), the client is impressed enough to keep making you his or her agent (broker/trader).
In a way, this is what President Trump did last night. No, I don't think he was thinking about doing future business with any client, but he did have a bid in hand, and he did hit that bid before he lost it, because in this case, the risk was too great, and there was no way to take the other side of the trade. There will be no veto, at least not on this bill. The president "stopped out" the public as well as the entire federal government, signing into law the deal he had in hand, rather than risk fighting on for a better deal for fear of losing any agreement at all.
Happy Weekend?
By Saturday, as many of us were still in holiday mode, millions of Americans could not be. As the president had paused in signing the $2.3 billion spending bill that had easily passed in both houses of the legislature into law, roughly 7.3 million individuals saw their PUA (Pandemic Unemployment Assistance) benefits expire. This is the program targeting those eligible for state level unemployment benefits... gig workers, freelancers, and sole proprietors. An additional 4.6 million or so lost PEUC (Pandemic Emergency Unemployment Compensation) benefits as that program aimed at the long-term unemployed expired simultaneously. This adds up to just under 12 million individuals that lost some kind of unemployment benefit on Saturday night. By year's end (this Thursday night), close to another 4 million would lose benefits should the standoff between the president and Congress over the allocation of funding continue.
The issue had been raised on December 22nd, when the president posted a video on Twitter, blasting the negotiated agreement that set aside $900 billion or so for pandemic relief and roughly $1.4 trillion in additional federal funding that would keep the doors open and the lights on in DC through the end of September (the end of the fiscal year). The bill the way it was written would send individual taxpayers making less than 75K per year, $600 each, as well as $600 for each dependent child.
President Trump had raised issues with the size of these individual relief payments, mentioning $2,000 as a better number than $600, and cited a seemingly never ending list of aid to foreign or special interests that one would not think of as a higher priority than the American people. The bill did allocate $55.5 billion to discretionary overseas operations. Some of this is indeed necessary, as included is money spent on deterring terrorism, which certainly serves U.S. interests, but the number comes to $820 million more than allocated in 2020, and $10.8 billion more than the administration had requested. In addition, the bill allocates $26.5 billion toward foreign developmental and humanitarian assistance funding. This number winds up $527 million above what had been allocated in 2020, according to the Wall Street Journal.
Long story short, the majority of Democrats in both houses appear to be onboard with the increased stimulus payments, but in stand alone fashion. Many Republicans (no idea if there is consensus) can only see it if the funds are reallocated and do not increase the size of the overall bill. This, with a federal shutdown looming as soon as Monday (tonight) night.
Bottom Line
The president hit the bid in order to avoid a government shutdown, and stop "the people" out at $600, while referring to the new law as a disgrace, and vowed to fight for increased stimulus money. House Democrats, led by Speaker Pelosi, had planned to vote on a bill today (Monday) increasing that payment from $600 to $2,000. The foreign aid is law now. There will be no conceivable way to claw that back without suffering collateral political damage. Will Senate majority leader Mitch McConnell allow a vote on the measure? I don't see how he does not, with majority control over the Senate itself hanging on two run-off elections in the state of Georgia on Saturday, January 5th.
This news of the president putting pen to paper broke shortly after equity index futures markets opened on Sunday night at 6 pm ET. The reaction was immediately clear. There would be funding, the U.S. Treasury would borrow from in many cases the Federal Reserve and the monetary base will expand. The dollar sold off against the euro, against Gold, and against Bitcoin. Commodities such as crude oil "popped", as did yields on longer dated Treasury securities.
This Week
Not a lot to rely on. There is but little macro to be perused. Nobody is going to the tape with quarterly numbers. The entire Fed is still in their annual holiday hibernation period. Markets appeared to trade sideways to mildly lower last week as trading volumes dwindled into the three and a half day weekend. However, equity markets did perk up just a bit on December 24rd, last Thursday, the first day of the traditional "Santa Claus Rally." With futures trading higher this morning, it could be easy to get carried away just a bit.
Know this. There will be some increased volatility this week, and trading volumes will likely build into Thursday, quite the opposite of last week. Remember my simple rules for trading volatility. You can do whatever it is your little heart desires, but this is how I roll. No home runs. No strikeouts. Don't be greedy. I do believe that a corrective period for stocks could be lurking, and may be ready to strike as soon as early January. The elections in Georgia present as such a market risk. We know the market liked what it got at the polls in early November. Thursday, January 3rd will be the final day of this "Santa Claus" period with those run-offs to produce results on the following Saturday.
Take profits at 20% to 25%. Don't be a punching bag either. Take losses at 7% to 8%. This approach guarantees nothing in the way of winning percentage, but certainly guarantees that one's average winners will be three times the size of one's average losers. This provides a little leeway in your own allocation decision making, taking much of the pressure off. I have never understood folks who don't understand this. Everyone wants to be Harmon Killebrew. When it gets choppy, I'll be Rod Carew every time. Wow, two Minnesota Twins. That was not even on purpose.
Trading Notes
Anyone else notice the rails bouncing off of the 50 day line like a "Super Pinky?" Union Pacific (UNP) and Norfolk Southern (NSC) already have. CSX (CSX) may still need to, but the airlines may carry the transports today delaying that test. I expected the banks to come out swinging early on Monday morning as well. I remain long JP Morgan (JPM) and US Bancorp (USB) . Now, go, in the name of rock and roll, and carry on.
Economics (All Times Eastern)
10:30 - Dallas Fed Manufacturing Index (Dec): Expecting 3, Last 12.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled for release.
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