How to assess market conditions? How to interpret price discovery in the year 2020? There are questions that beg asking. For investors who ultimately decide trend, even if algorithms determine day to day pricing, these questions must develop into probabilities. Probabilities are best interpreted by those with access to statistical data. Statistical data has become far less certain. Thus price discovery is being done only at the surface level... these algorithms react to keywords, and nothing done at this level is the result of thoughtful development of probable outcome. Hence, your days of thousand point moves in the Dow, or 4% moves across large cap indices will persist. Bottom line? Become comfortable with being uncomfortable. Learn this, and you will be able to adjust to anything. Anything. I promise.
First Things First
Oh no. That was my honest feeling. Late Wednesday afternoon. All good, no? No. U.S. equity markets had roared. A Friday afternoon reversal melted into aggression on Monday that was lost on Tuesday, and then retaken on Wednesday. What happened Wednesday?
One... the emergency cut made by the FOMC on Tuesday did what we had hoped. Pressured the short end of the Treasury yield curve enough so that the 3 month/10 year spread actually un-inverted. In the long run, nothing is more important than this, as this is how the economy tells us that something is very wrong going forward.
Two... Joe Biden's better than expected Super Tuesday performance, or should I say, Bernie Sanders' under-performing expectations have given new life to the Healthcare sector. The Select Sector SPDR ETF (XLV) for that group ran 5.76% to the upside, led by the Providers.
Three... The already "up big" for the day indices simply accelerated that momentum after the House of Representatives passed an $8.3 billiion emergency spending package in attempt to treat and/or contain the spread of the Covid-19 coronavirus through fiscal means. The Senate is expected to take up the bill shortly. One would think that there will be broad support for this allocation of funds.
So, Why Oh No?
Simple. Immediately upon first glance one could see that trading volume had not been there on Wednesday. It's not even close. Trading volume on Wednesday's pop landed far below levels seen 24 hours earlier during Tuesday's selloff. Yes, the breadth was solid on Wednesday. Winners drubbed losers. Advancing volume crushed declining volume. These stats are positive, but there was less conviction in support of Wednesday's market direction than there was on Tuesday. We'll have to accept this.
While equities have seemed to reunite with the 3 month/10 year spread, at least in terms of direction for a day, the CBOE Put/Call ratio returned to elevated levels (1.25) on Wednesday's move. The implication there would be less trust in equity prices at higher prices as concern for indices (more than single stocks) returned to levels more in line with moving averages.
The deal is this. The virus will continue to cause disruption, to supplies of goods, and then services. Ultimately, this ends in both reduced demand and supply in labor markets. That's the Holy Grail. That is what the FOMC is trying to defend. That's why many governments and central banks have become aggressive and will likely continue along that path, even beyond what we have already seen. It's not about avoiding a negative shock to the economy, it has become about buffering that shock to the best of our ability. Futures markets trading in Chicago are pricing in an additional 75 basis points in reductions made to the Fed Funds Rate by July, including 25 basis points at the scheduled meeting in two weeks.
Your Questions? My Answers
These are a few things that I have been asked in recent days. I thought them interesting enough to share.
What happens to "gig economy" workers? This is tough to answer. These folks can not afford to get sick. They will try to work through anything. No work? No income. No employer? Maybe no health insurance. This may be the epicenter of human misery going forward at least on multi-regional levels.
Will governments outlaw cash? Good question. Excellent question actually. Beijing has expressed concern that this virus is being passed through the exchange of cash. I was in a store this weekend where the cashier was rounding down the cost of every purchase just to avoid making change having to use coins. This was at the direction of her manager. I will tell you this. Digital cash will at some point replace actual cash. This will happen before nominal consumer level interest rates go negative. Why? So that all transaction can be traced and taxed. So that savings can in effect, be taxed through those negative interest rates. So that there is no way to avoid these unwelcome outcomes.
Am I Buying Discounted Stocks? Not aggressively. I day-trade. I rotate, meaning that if I take on new exposure, I reduce elsewhere. I am still at an elevated cash level and the trading I am doing is done with the intellectual cognizance of making all transactions "dollar neutral." Not that there aren't great stocks trading below where they should, there are.
Investors must understand that both economically and in regards to markets... that all data is nothing more than historical context. All projections are now little more than educated guesses, and all sentiment is subject to change. Think of it this way. I used to play hockey. I scored a lot of goals. Don't remember any of them. I dislocated shoulders (many times) and broke ribs. Those games, I remember. That's how sentiment works. Sentiment is fickle.
When Does It All End? Honestly, the day you end up on the other side of the dirt. There will always be something you don't quite understand. There will always be both danger and opportunity that require work toward identification. You will have to adapt, eternally. There is no "same-o, same-o." There never was and never will be. You will either overcome the obstacles presented by the environment provided, or you will not. Let me correct that. You will continually overcome all obstacles presented until the day that you do not. You will maintain the right frame of mind. You will stay highly motivated. You will believe that you can find a way to win. You know you can win. I know you can. Fight like it matters.
Over the weekend, Russian President Vladimir Putin expressed his opinion that current oil prices were indeed "acceptable." On Wednesday. Russia opposed an aggressive plan put forth by the Saudis to drastically curb production by OPEC and OPEC aligned producers. There are 23 members in the larger group.
Also, on Wednesday... IHS Markit projected estimates that global demand for oil for the current quarter would land 3.8 million barrels per day (bpd) lower than last year's first quarter, or 4.5 million bpd lower than their previous projection. On Tuesday, OPEC's Joint Technical Committee called for a production cut of 600K to 1 million bpd for the second quarter, and then get more aggressive after that, perhaps reaching as much as 1.7 million fewer bpd by the end of this year.
As OPEC and allies meet this day (Thursday) and tomorrow (Friday) in Vienna, we think we know that there will be a reduction in production in response to this virus inspired reduction in demand. We are pretty sure that Russia will drag its feet until the last second. We also think that the Saudis will voluntarily curb production more than necessarily agreed to.
The monthly BLS (Bureau of Labor Statistics) surveys are among the most important macro-economic data-points that we have in this nation. Oh, these numbers will get a ton of coverage, but this data is for the most part, pre-coronavirus.
I don't think going forward that one can expect to witness economic growth aided by job creation, or wage growth. These metrics that we have followed so closely for so long will now become sideshows. What matters going forward will be average workweek, and even if the U-3 rate (headline unemployment) remains at first unchanged, the U-6 rate (underemployment) may take on elevated focus, as economists scan for data useful in the determination of size and scale in the deterioration of labor markets.
I think you already know that if not this month, than some month soon, there will be a contraction in demand for labor in the travel/lodging, entertainment, and transportation industries, and then education will take a hit as kids stay home, which in turn will force one parent in some two parent homes to do so as well. Household logistics are going to be a mess, gang. Need I get into the multiplier effect? Works in both ways. You get the picture.
- Splunk (SPLK) is likely set to give back all of Wednesday gains and perhaps more. The firm missed on EPS on solid revenue growth that beat consensus. Guidance? The firm's revenue outlook for the quarter and also the year is now for far less than Wall Street had in their minds. Do I add? Depends on how ugly it gets. The shares did find support at $142 last Friday, which was the old pivot. Not above that spot. If the shares somehow seem to stick well above that spot, I may sell something out of inventory.
- Zoom Video (ZM) is trading lower overnight. These guys are humming. This is profit taking in a stock trading at an absurd multiple. These are however, absurd times. Miss the coronavirus inspired run in this stock? Believe that corporate America will continue to meet remotely? Then maybe this is a chance to add this name to a virus related group within one's portfolio. The break-out for this name accelerated at the $107 level. I think that if I can get something close to that price, I probably initiate.
- Marvell Technology (MRVL) is popping overnight, as guidance presented as not just not disastrous, but better than consensus. The key here will be the 200 day SMA, which stands at $24.94. Failure at this level would not surprise, but the 50 day SMA is only another half dollar to the upside. It will not take much if there should be a take and hold of the 200 for portfolio managers to take the 50 day as well. that said... first things first.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 230K, Last 229K.
08:30 - Unit Labor Costs (Q4-rev): Flashed 1.4% q/q SAAR.
08:30 - Non-Farm Productivity (Q4-rev): Flashed 1.4% q/q SAAR.
10:00 - Factory Orders (Jan): Expecting -0.3% m/m, Last 1.8% m/m.
The Fed (All Times Eastern)
18:30 - Speaker: Dallas Fed Pres. Robert Kaplan.
20:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
20:45 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)