What an overnight! Wow! Asian markets, or at least those that are open, were soft. European equities opened deep in the hole. U.S. Equity indices, already down small, did a swan dive off of the high board around 3 am on the East Coast. Risk off? Sure seems like it. Energy based commodities spiked higher, and then surged lower. Who knows where crude and natural gas will be trading by the time you read this. Treasury securities took an overnight beating. Default risk? Sure, but it was seemingly all sovereign debt that traded lower, from Japan to Germany, across Europe to the UK as well as here in the U.S.
Safe haven? Where is safe haven when U.S. Treasuries aren't really an option? Right now, investors are swarming into the U.S. dollar and not much else. European currency traders are even swapping out of Swiss francs and into U.S. dollars. That had been where they had been hiding. Gold is soft. Even Bitcoin has stopped rallying.
Didn't totally go for Tuesday's rally in the U.S.? I do get that. Didn't like the way the indices closed here in the U.S. on Tuesday? I get that too. This has a little more of a panicked feel to it. At least it did around the European open. Definitely panic-button sell mode based on the Energy/Natural Gas shortages hitting Europe and China ahead of the winter season. Now, add the growing likelihood of what would be a voluntary U.S. default in less than two weeks and we have the recipe here for a lot of chickens running around without their heads.
Oh... Did I happen to mention decelerating global economic growth, surging global consumer level inflation, a general feeling that most of the planet's major central banks want to remove accommodative policy while uncertainty reigns around who will lead the most important central bank of them all? Have I mentioned the likely collapse of Chinese real estate markets, or the very obvious and now quite regular attempts by Beijing to provoke Taipei militarily? Anyone else notice the fact that Russia has this week successfully launched a hypersonic cruise missile from a submarine? Not like I haven't been warning American leadership for years that we were not in the lead in this space, and that these weapons are indefensible.
Good thing this isn't "jobs week" in the U.S. or anything. Oh, wait. Uh oh. I hope you woke up ready to rock today, my loyal band of warriors. For today is a gift from above and you have been chosen for greatness. Let us be glad. Let us rejoice, and let us wade with honor and spirit into the whirlwind of torment before us. For they have no stinkin' idea who woke up ready for a fight this day.
Tuesday sure smelled pretty. Winners beat losers and advancing volume beat declining volume at both of New York's primary equity exchanges. The Nasdaq Composite and S&P 500 took back more than a percentage point each. Transports rocked. Nine of 11 S&P sectors closed higher led by the Financials and "growth" types as yield spreads expanded and traders found respite in beaten down technology/internet names. The reflation trade was back in style, albeit on light aggregate trading volume. That one underlying item that betrays a lack of conviction in any movement in price discovery. The pros weren't committing large swaths of capital. Oh, the pros are playing ball. They are trading. They are not investing. Not here. Not now.
Same chart I showed you 24 hours ago. We got the rebound we expected. Hopefully that was taken advantage of. Here, we illustrate the decrease in activity (also true for the S&P 500). We don't exactly have an "inside day", but we do have an "inside candlestick day" which excludes the wick, and as far as I am concerned remains a two day pattern of continuance, which in this case would be lower.
Levels to watch this morning would be Monday's lows... 14,181 for the Nasdaq Composite, and 4,278 for the S&P 500. Markets may pressure those spots this morning, and holding at or above those lows will be technically key to where stocks go as traders prepare for September Non-Farm Payrolls this Friday.
...That rising energy prices forces global bond traders to price in greater inflation. We all focus on core inflation. Bond traders are more pragmatic. The boogey man here is stagflation more than inflation. You better hope that stagflationary forces are indeed transitory. You get inflation without the necessary increase in economic activity to support a move higher in yields, and central banks will be forced to act quickly and more aggressively than they (or we) would like. Imagine raising short term rate targets ahead of a complete recovery in labor markets. More fun to imagine wading into a melee of medievals seeking eternal glory.
More From Griffin
In Tuesday's Market Recon column, we made mention of Citadel's Ken Griffin and his comments made around "payment for order flow" as Mr. Griffin addressed the Economic Club of Chicago on Monday. Griffin said something else important on Monday that I left for today's column. Griffin indicated that working remotely is hurting the nation and in doing so, things like innovation and competitiveness suffer. On this matter, I have absolutely no doubt in how correct that sentiment is.
Griffin added... "So for our youngest members of our workforce, I'm gravely concerned that the loss of early career development opportunities is going to cost us dearly for decades to come." In my opinion, it's very important for younger workers to be mentored, and for older workers to mentor. That's how culture is built. Culture is also built through collaboration with peers and contact with competitors. How much smarter am I when I can bounce ideas off of other folks that I think are smart, than when I think on my own? Emailing and video conferencing are not the same.
Then there is the very fabric of "Esprit de Corps" that is built within an organization or simple personal pride. Tuesday afternoon, I did live television from a studio. I appeared on Neil Cavuto's show at Fox Business. I had to make sure my shave was close, my hair was groomed, my tie was knotted correctly, my shoes were polished, and my suit looked nice. Oh, and I had to find one decoration that sets me apart from mere mortals and signals all others of my kind... the mighty United States Marine Corps enlisted person's tie clip.
There is something special in actually "going to work" and not working from my home office, which is how many white collar folks have worked for more than a year in this country. Business attire sure beats choosing between the ripped NY Jets tee shirt and the faded "Kiss" shirt anytime.
Did You Know?
That data from Sensor Tower shows that sales growth for the Apple (AAPL) app store appears to have grown 19% for the quarter just ended. Just thinking a little, in a quarter where consensus expectations for S&P 500 revenue growth (14.9%) may have been originally set too high, Apple may be set up for an upside surprise. At least on the higher margin services side. The fact that the stock has been acting weak coming into earnings makes this a "must at least hold, and might add" scenario. I am reiterating my $166 price target for AAPL.
All Hail Palantir
After the bell rang, but before you wore your NY Yankee cap for the last time this baseball season, Sarge fave Palantir (PLTR) announced that the firm had been selected by the U.S. Army Program Manager for Intelligence Systems and Analytics to deliver the Army's Intelligence data fabric and analytics foundation for the Capability Drop 2 program. Goose-bumps, baby.
The firm will move to the next phase of the Army's competitive $823 million indefinite delivery, indefinite quantity contract and will support George Washington's Continentals through final testing and fielding.
The Palantir Gotham Platform will be deployed to support Army intelligence users globally with this intelligence data fabric and analytics based platform spanning multiple security classifications. The job includes fielding modern integration, correlation, fusion and analytics (big data) that will prepare the U.S. Army for the next fight against emerging near peer level threats. Ooh-Rah.
The overnight rally (last sale: $25.46, +9.6%) in this terribly oversold name, will matter more if the stock, in a weaker tape, can retake and hold the stock's 50 day SMA ($24.93), 200 day SMA ($25), and 21 day EMA ($25.57) lines, thus re-energizing what had been a fading ascending triangle. Yes, that would be quite bullish. My target price for PLTR is $32.
Your pal entered a new name on Tuesday afternoon and added during the overnight. In this market? Are you crazy? Well, I may be crazy, but I know I'd prefer lower prices when I pay for something. I think. I have been watching American Eagle Outfitters (AEO) forever since Jim jumped in way back. I have watched it come in and then come in some more. On Tuesday, AEO gave up more than 4% as the action triggered a "death cross", that's the 50 day SMA ($30.12) crossed below the 200 day SMA ($30.04). AEO does not report until late November. For the third quarter, Wall Street is looking for EPS of $0.60 on revenue of $1.22 billion. These numbers would be good for earnings growth of 71% on sales growth of 15.5%.
The stock, trading at 11 times forward looking earnings, and at less than 1.1 times trailing 12 months' sales, while yielding 2.9% appears to be rather cheap. Must be a weak balance sheet, right? Au contraire. As of the most recently reported quarter, current assets (more than 50% in cash & ST investment) are twice current liabilities. Total assets are more than 50% larger than total liabilities less equity. It's even better than it looks. The firm has the ability to completely pay off its long-term debt-load more than twice over out of its cash balance without depleting said cash balance.
The largest entry on the liability side of the ledger is the line labeled "capital leases" which is not the same as long-term debt, and quite understandable for a retailer specializing in apparel. Put it this way, you want a current ratio to be above the "one" level... AEO runs with a current ratio of greater than two. Rock on. American Eagle can pay their bills and so for quite a while, cowpokes... even if the reflation trade hits another hiccup. By the way, levered free cash flow for the past 12 months has been stronger than for any year since 2013. Same for unlevered free cash flow. Your dividend is safe, my friends.
I am currently in for about 3/16 of a full position. Yeah, that's a little weird. My brain still works in Spanish pieces of eight. I intend to add down to the 50% Fibonacci retracement level of the entire pandemic rally at $22 and change. At that point, I would have to consider that I might be wrong. As I do not have a traditional technical pattern to use a crutch, I am kicking this thing off with a $30 target price, which would be a 25% gain if I make no additional purchases.
Bear in mind that in September, five star (TipRanks) analyst Oliver Chen of Cowen reiterated an "outperform" rating with a $40 price target, mentioning the firm's leadership in denim, and continued momentum for the Aerie brand name. Five days later, four star (TipRanks) analyst Jay Sole of UBS maintained his "buy" rating and his $49 price target, also mentioning Aerie as Sole expects Aerie to drive the broader firm toward being an upside earnings surprise story for FY 2022.
Note To Readers
Let's you and me go kick some tail today. Looks like they're waiting for us.
Economics (All Times Eastern)
08:15 - ADP Employment Report (Sep): Expecting 437K, Last 374K.
10:30 - Oil Inventories (Weekly): Last +4.578M.
10:30 - Gasoline Stocks (Weekly): Last +193K.
The Fed (All Times Eastern)
09:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
11:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (LEVI) (.37)