Lonely Is The Night...
...When there's no one left to call. You feel the time is right, say the writing's on the wall.
- William (Billy) H. Squire (1981)
Writing On The Wall?
Did you miss me? I know that I missed you, though I did need a little break and four days did fit just about right. By the way, in case you forgot, the annual "economic" clown show from Davos, Switzerland kicks off this morning and runs its course throughout the week. Perhaps this is the year that the World Economic Forum, now virtual in nature thanks to the pandemic, suddenly becomes less of an automatic "TV on Mute" broadcast as issues such as social and workplace justice as well as global trust in Covid-19 vaccines are the hot topics, pushing those with something to sell us (that we do not need because we are warriors) a notch or two below headline level attention. Perhaps the "Forum" will be less of a paid vacation this year for those involved and more "work". Those of us watching from home and/or office would appreciate that.
You kids had a heck of a time without me, didn't you? From the looks of things, the Nasdaq Composite had a special holiday shortened week (+4.2%), only to be outperformed by its more tech-centric, non-financial cousin, the Nasdaq 100 (+4.4%). All while the S&P 400, 500, and 600 covering everything from small to mid to large caps returned between 1.5% and 2%. Rock and roll? Trading volumes remained elevated where the action was, at the Nasdaq, but did back off of what had been increased trading over the first couple of weeks of the year almost everywhere else. Equity markets moved higher as investors gained more confidence moving toward a more open economy? Into a new era of leadership in Washington? As economic activity and velocity of money are set to improve? No, No, and No.
What happened last week was clear. The Transports sold off. Industries within what we refer to as the transports such as Delivery Services, Trucking, Airlines, Railroads, Marine Transport, and Transportation Services all sold off with the group. No, last week was not a growth story despite what the housing numbers say, and despite what the Philly Fed told you. Plain and simple, bond traders stopped selling the long end of the US Treasury spectrum. US 10 year yields moved sideways to lower.
This, in turn... compressed short-term/long-term yield spreads. As the Fed had anchored the short end of the curve, displays of such spreads (such as the 3 month/10 year) merely mirror the 10 year itself.
While there are an unlimited number of stories that are taking financial markets where they are going, this is the one technical reason why the Communication Services and Information Technology sectors woke up last week, and this (not earnings) is also why the banks specifically, and the Financial sector more broadly, were put back in their cage. The consumer remains frightened. That gets us to Monday morning.
Really what now? How much higher can equity markets go on bullish sentiment based on expectations of increased stimulus as an economy reopens? As the calendar moves toward what has been, at least in recent years, the market's most dangerous month? To our immediate front, fourth quarter earnings season dishes out a monster week this week. While the simplistic will see a week where 120 S&P 500 constituent corporations are set to report, which is 24% of the total, this 24% by market-cap represents almost 40% of the index total. As Monday (today) will really be rather quiet on the earnings front, as will Friday, this kind of fun will be compressed into three days of intense action. So many important names will report, it becomes difficult to list them in a sort of pecking order, but I think traders, or at least this trader will have to focus on Johnson & Johnson (JNJ) this Tuesday evening (more due to what might be said around getting a third vaccine to market than for financial performance) and Apple (AAPL) on Wednesday afternoon due to that stocks broad impact on just about every single fund holder in the nation whether they know it or not.
For the season, the numbers released at FactSet for the quarter have been steadily improving. For Q4, with 13% of the S&P having reported, the blended (reported & expected) earnings decline for the entire index is now -4.7%, up from -8.8% just a few weeks ago. Expectations for blended revenue generation are now up to +0.7%, from +0.4% over the same period. By the way, I will not bore you with more numbers, but expectations for the next reporting season (Q1, 2021) are improving just as rapidly.
What I Think
I think that moving forward, almost everything can be placed in the four boxes of market impact...
1) Covid-19. Yes, you have heard it all before. The virus is still in charge, and will be until it is not. While everyone knows somebody who travelled recently, everyone also knows 15 people who will not step inside a grocery store, or any kind of retail outlet. On the vaccine rollout, obviously we can do better, and the race is on for the vaccines versus a mutating virus. Everyone heard President Biden mention 100 million vaccinations in 100 days. Sounds good. Until you realize that close to one million Americans were being vaccinated per day before President Trump left office. I doubt very much that President Biden meant to give the impression that he would do nothing to improve the rollout that had begun under the prior administration, but that is exactly what 100 million vaccinations in 100 days tells us. We were told that the military would lead the roll-out. Well, where is the Army? Is this not a priority? Hello?
2) Stimulus/Support. This Wednesday, we'll hear from the FOMC, and there will be some damage control. I would not expect any mention made of tapering the Fed's asset purchase program as the economy improves. I would expect some kind of insinuation made in regards to how well Fed Chair Jerome Powell, and incoming Treasury Secretary Janet Yellen can and will work together. The danger to the marketplace short-term will be the politicization of President Biden's $1.9 trillion fiscal rescue proposal that comes on top of the $900 billion package passed late in President Trump's term and ahead (maybe) of an even larger infrastructure rebuild package that will bring management of the economy dangerously close to Modern Monetary Theory, which in my opinion would eventually result in a complete loss of confidence in fiat currency.
3) Tax Rates. Increased corporate, income, and capital gains taxes, not to mention their negative impacts on share repurchase programs, investment and velocity of money are not priced in as of yet. At some point, there will be a realization that with rapidly increasing emergency deficit spending will come a concern on how to pay for it all at least in part. Equity markets will sell off, and potentially sell-off hard on that day. I had thought that we might have seen some corrective behavior in January. The clock is running out on that call, but we will see a correction when markets are ready. Stay nimble. Stay diversified across asset classes as much as across sectors.
4) Growth/Inflation. Growth is the goal. Inflation is sort of a goal, but one that nearly all but the foolhardy know enough to fear. Basically, deficit spending relies upon the idea that a dollar spent creates more than a dollar of growth. Thus the "Keynesian Multiplier" which was introduced in 1931 when the debt to GDP ratio was roughly 22%. I think it is common sense that in a low debt environment a dollar borrowed and spent might return more than a dollar in ensuing consumption, savings and investment in aggregate. Now, incorporating this theory into a fiscal/monetary era that it was not created for becomes dangerous. Understand that a dollar borrowed and spent must increase velocity. That is what this really is. Can that borrowed and spent dollar still create more than a dollar in consumption, savings and investment after accounting for the servicing of debt as well as increased taxes? What happens when this multiplier drops well below one, or even closes in on zero. You still need sustained, not legislated demand. Without demand, you'll either end up mired in a disinflationary environment or heaven forbid, hyper-inflation should the currency lose faith. Scary stuff.
What Can Be Done?
Well for one, we are going to have to be creative. Jay, and Janet, I need you both paying attention here. Forget the academic nonsense, we are already way outside of the box, not to mention the textbooks. Instead of hurtling down the most likely death spiral currently referred to as Modern Monetary Theory, let us consider an alternative. With the next large fiscal support package, let's have the federal government consider the creation of large scale strategic reserves, not just for crude, but for nearly all industrial commodities as well as precious metals. In fact, if someone more creative than I can get involved, let's find a way to stockpile a wide variety of finished and unfinished goods and maybe even services.
What does this do? Quite simply, this idea would create demand whether or not demand was there for real. This requires a large investment up front fiscally, which will have a withering effect on the US dollar, creating inflation at the wholesale/producer level without going to war on other currencies and without touching monetary policy. Once sufficient supplies are established, should upside consumer level inflation become problematic, the supply side of these markets could then be used to tamp down the rebellion rather quickly without relying heavily on increased short term interest rates or premature depletion of the Fed's balance sheet. Oh, you may have just read the most important economics based paragraph that you'll read today. I know, next year, this will be a book written by an elite level university professor and be someone else's idea.
On that, I don't care, let's just get the ball rolling. Understand that this idea associates the value of the US dollar with hard assets, which should help reinforce confidence in fiat without reliance on gold backing. That is to me, at least, key as we head down a potentially volatile road.
Keep in mind that the fun never stops. On Saturday, Beijing flew eight bomber aircraft escorted by four fighter aircraft into Taiwanese airspace. We knew that mainland China would test the new administration's resolve to defend the autonomous island of Formosa. U.S. naval forces moved a carrier group into the South China Sea before the weekend was out, thus in my opinion passing the first of what will be several tests. The question is... does the mainland really want to play these games, or is there interest in forcing the U.S. to divert more borrowed funds that could be spent on other priorities, on defense instead? This I do not know.
Economics (All Times Eastern)
10:30 - Dallas Fed Manufacturing Index (Jan): Expecting 4.5, Last 9.7.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)