Every morning. Every single morning. I am thankful that I can rise yet another day and try to shine. Gratitude. For every opportunity, for every challenge, for the strength to meet every challenge, and for the friendship of a little dog named Mooshi. I pray for a lot of people too. Then I get after it. I don't know if it is possible to express how excited I get, as I draw close to the end of those prayers. Actually, I can not. For those of you who played sports, it's similar to that feeling just before taking the field or the ice. A combination of pure joy and just a bit of nervousness. Then, we're off. The roar of the crowd. The silence of a man in a darkened window. It's all the same. It's all in the thrill of a fight with no safety net. Rise with me today. Rise with me, and challenge whatever it is inside of you that responds to a dare. Dare to be great. Dare to be the child chosen by purpose. Or providence. Just dare. On razor's edge, my fellow spirits. It's time.
Heck of a Week
Domestic equity markets pulled themselves out of correction on Thursday and Friday of last week. The S&P 500 gained 1.6% for the five day period, capturing its own 21 day EMA on Thursday and putting space in between the last sale and its 50 day SMA on Friday. The story for the Nasdaq Composite, which ran 2.2% for the week, was very similar. Both of our major large cap indices left unfilled gaps in their wake on both of those openings, almost ensuring increased volatility moving forward from a technical perspective. Market breadth on Friday finished a lot sloppier than it had on Thursday, perhaps another signal of some give and take in the offing. On Friday, losers beat winners at both the NYSE as well as the Nasdaq, advancing volume beat declining volume in heavier aggregate trading, signaling conviction in perhaps a good fight at these levels.
There were several take-aways that investors and traders could pull away from the action over the week. We found out that inflation at both the consumer and producer levels, while hot, did not appear to be getting even hotter. Inflation also appeared, given where it was centered to be potentially far more transitory after all than many had feared. We found out that the consumer is still far more active than many had projected that they would be in aggregate with five million jobs still left unrecovered. We learned that earnings season, though it was for the most part, just the banks, would get off to a good start. We learned that, though we had known this for a thousand years, that stocks tend to do better when interest rates move lower. Don't look now, but longer term US paper, let's say the two year note through the 10 year note (the 30 year bond is being spared to a greater degree than are the notes, at least through the wee hours.) has taken a Sunday night/Monday morning beating after being softened up a bit on Friday.
We also learned that cryptocurrency traders really, really like the idea of approval for a futures based Bitcoin ETF. In other words, cryptos have run on rumors of imminent approval for a derivative product of a derivative product of a product that largely serves only as an instrument of speculation, capital flight and criminal activity. Wonder if this will be a "sell the news" event.
China
China's National Bureau of Statistics reported third quarter GDP growth of just 4.9% year over year, well off of the 7.9% pace reported for the second quarter. The nation has been left struggling with an energy crisis forcing the rationing of electric power across large regions, putting upward pressure on inflationary forces while also putting China in the position of increasing coal production.
Of course, also leaning on Chinese economic performance (GDP grew 0.2% m/m) was the ongoing pandemic and President Xi's policy of cracking down on successful businesses and successful business people. While the "ambitious" policy of "common prosperity" and forced redistribution of wealth have impacted performance, the nation also grapples with a debt ridden real estate sector poised for anywhere from a controlled to a near complete collapse. Then again, as we have written many times, it does not appear that economic (certainly not corporate) performance is very high on the list of prioritization for this regime. It would appear to the outsider that re-centralization of power is the priority. Prosperity can wait. Both Hong Kong and Taiwan can attest to this. At some point, as Chinese Industrial Production withers due to an inability to pile on more debt, China will try to reassert itself as the exporter of choice to the western world. Maybe, just maybe, western leadership will see the folly of falling easily back into that trap? Shorter supply lines equal better preparation for the next crisis. American based supply lines mean better jobs for the middle class. Ain't rocket science, kids.
Speaking of Rocket Science...
Two weeks ago, I warned that the Russian Navy had fired a hypersonic weapon from a submarine. Over the weekend, the Financial Times reported that in August, the Chinese military launched a rocket that carried a nuclear-capable hypersonic glide vehicle that circles the globe in low space orbit before descending toward its target.
I have warned, and I have warned, and I have warned for years that both the Russian and Chinese militaries were ahead of the United States in developing this technology, which by the way, is currently indefensible. U.S. missile defense systems are designed to destroy incoming ballistic missiles which are far slower, and far less maneuverable than are these hypersonic weapons.
We know that in late September, Raytheon Technologies (RTX) and Northrop Grumman (NOC) had successfully tested a scramjet-powered hypersonic air-breathing weapon for the Department of Defense. We know that Lockheed Martin (LMT) has been working on a hypersonic weapon with limited (we think, this stuff is highly classified) success. We know that less well known firms such as Kratos Defense (KTOS) are also involved in the project, but the fact remains that the United States and Europe are potentially defenseless against such an attack.
Leadership appears to prefer to pretend that this threat does not exist. Make no mistake, a loss of perceived national security versus whom or what we refer to as near-peer adversaries destabilizes everything. Make no mistake... As policy makers battle over fiscal priorities in DC going into the holiday season, there can be no priority higher than developing defensive hypersonic weapons. Offense is one thing. Defense is priceless. I'm not just using an adage. It's been almost 40 years since we as a nation had to fear mutually assured destruction.
Well, somebody else, actually two somebody else's have taken the lead in developing what is the most dangerous new technology in warfare the planet has seen since the advent of nuclear weapons. Can the United States, can NATO afford for the U.S. to be a third place, "near-peer" adversary in someone else's wargaming model? Get on your horse, DC... and get our collective head out of the sand. We can't get out of this one just by showing up.
This Week
I count 13 public appearances by Fed officials in addition to the release of the Fed's Beige Book this Wednesday afternoon. In addition to September Industrial Production this (Monday) morning, there will be more than enough key September housing data released.
As far as corporate events, Apple (AAPL) is expected to launch new Mac and MacBook Pro products as well on Monday afternoon. There is also talk that a next generation "AirPods" product will launch that measures both body temperature as well as posture.
In addition, Ulta Beauty (ULTA) holds the firm's virtual 2021 analyst and investor conference on Tuesday of this week, October 19th, the 34th anniversary of "Black Monday." Some dates just stay in your head forever.
Earnings Season
Sure, earnings season got off to a solid start. According to FactSet, with 8% of the S&P 500 reporting, the blended (reported plus expected) earnings growth rate jumped in one week's time from 27.6% to an even 30%, as the blended rate of revenue growth popped in one week from 14.9% to 15.1%. Of course, that 8% is largely comprised of big banks, so we have not yet heard much on margin pressure. The coming week, earnings will be reported from corporations representative of a good cross-section of industries with plenty of industrials and techs going to the tape with their digits. In other words, this week counts more than last week.
The S&P 500 went into the weekend trading at 20.3 times next 12 months expected earnings. Breaking this down by sector, only Materials at 16.2 times, currently trade at an aggregate discount to the five year average forward looking PE ratio (17.8x) for that sector. Of the other 10 sectors, Health Care's forward looking PE ratio (16.3x) trades at the slimmest premium to its sector five year average (15.8x). This made the feature story at Barron's this weekend on pharmaceuticals ready for, or close to being ready for approval quite interesting.
Drugs
We already know that Merck (MRK) and partner Ridgeback Biotherapeutics have applied to the FDA for an Emergency Use Authorization for the COVID-targeting antiviral "molnupiravir". We know that Pfizer (PFE) with partners Roche and Atea Pharmaceuticals (AVIR) are also working on an anti-viral that stops the SARS-CoV-2 coronavirus from replicating.
I am not going to recite the whole article which borders on lengthy, but the gist is that the FDA is behind in getting its job done. Remember, the FDA is currently headed on an interim basis by Dr. Janet Woodcock, and her term expires in November. The president either has to ask Woodcock to stay on (not likely) or nominate someone who can get through the Senate confirmation process.
At stake are big decisions on the future of JAK inhibitors that are used to treat rheumatoid arthritis, ulcerative colitis, other inflammatory conditions and include both AbbVie's (ABBV) Rinvoq and Pfizer's "abrocitinib" as both await approval for these drugs as treatments for atopic dermatitis. The problem is that in September the FDA announced that JAK inhibitors would be required to carry a warning label that such drugs carry a risk of serious heart related events to death. The deadline for a decision on these JAK inhibitors has already passed.
The FDA has a rather crowded approval/denial related calendar set for the rest of 2021. Somebody has to be responsible for running the agency. The lack of urgency here, as it is in the defense space, is alarming. If only we could get those in the federal government excited about doing their jobs every stinkin' morning.
Economics (All Times Eastern)
09:15 - Industrial Production (Sep): Expecting 0.2% m/m, Last 0.4% m/m.
09:15 - Capacity Utilization (Sep): Expecting 76.5%, Last 76.4%.
10:00 - NAHB Housing Market index (Oct): Expecting 75, Last 76.
16:00 - Net Long-Term TIC Flows (Weekly): Last $2B.
The Fed (All Times Eastern)
05:30 - Speaker: Reserve Board Gov. Randal Quarles.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (ACI) (.45), (STT) (1.92)
After the Close: (STLD) (4.89)
