Every athlete knows the feeling. Every runner, every swimmer, every cyclist. Quads on fire, breath short.
Just maybe, somehow, I can run the next 250 yards faster than the last 250. Just maybe, I can maintain an "almost" race pace in recovery as I set up the next interval. Just maybe I can lift five more pounds or add one more rep to the set.
It does not matter how long the clock says that last mile took, it's how fast it felt. The clock does not respect past injuries or Father Time, but the heart knows if the effort was honest. The heart knows if one is improving or just mailing it in. It's all about the heart. Always has been.
Markets are different.
Markets show fatigue as well. Markets are driven by capital flows that drive the bus in a given direction. Algorithms capable of reading keywords as well as they do charts decide where the bus stops are.
I feel as if the marketplace showed a little fatigue on Wednesday. Markets don't have heart. Markets can be as cold as ice, when a change in momentum is detected. Sure, the rotation out of defensive sectors and back into cyclicals continued in earnest for a third consecutive day, thus delivering what was a fifth consecutive day of upward mobility for the major large-caps, as well as the not so major, and not so large-cap indices.
There was only one sector select SPDR ETF that stood out, the Financials ( (XLF) ), up 1.18% for the session. Getting more precise, the KBW Bank Index soared 1.8%. Small wonder.
Investors pummeled U.S. Treasuries from the middle of the yield curve on out to the deep end of the pool. The U.S. 10-Year Note paid more than 1.35% by day's end, and still does as night melts into day. The level for the 30-Year Bond seems to be 1.96%.
In response, equity trading volumes that had started to build earlier in the week, tailed off significantly. Oh, the breadth still leaned toward impressive, but there was much less action than there had been just a day earlier. Portfolio managers were/are being careful.
So, given that the action was in Treasury markets on Wednesday, and that action was largely negative, we must ask why? I see only three possibilities.
One, the market is finally believing in sustained economic growth. Problem there? While housing numbers have been pretty good for July, the Richmond Manufacturing Index (the nation's second most important regional manufacturing survey behind only Philly) badly disappointed for August. On Tuesday, the Census Bureau put July Durable Goods Orders to the tape. At first, they seem kind of lousy... -0.1% m/m at the headline, but +0.7% m/m at the core. Then you dig in a bit. Ex-defense... durable goods orders contracted deeply... -1.2% m/m. That's awful. July was the first month since April 2020 (lockdown) where durable goods orders on the civilian side contracted from the month prior.
Long story short, the steepening of the yield curve is not likely due to some renewal of faith in the economy.
How about inflation? Do bond traders now believe that inflation is about to get hotter, or remain as hot as it has been? As we go into September, even with supply chains still bottlenecked, oodles of labor supply will start to return to labor market participation as the weekly federal stipend meant to cushion the blow of unemployment at the household level expires. This will suppress upward pressure on wages. I don't think there is much debate about that. There will be real competition on the supply side of labor markets for the first time in a year and a half.
Jerome Powell? Market participants have largely held to the belief that Jerome Powell would use the spread of the Delta variant of Covid as cover in order to keep the central bank's options wide open for as long as possible. In other words, talk of tapering, but in a gentle, nurturing, parental kind of way.
Most of us believe that December is potentially the first month for subtle tapering. Keep in mind that any asset purchases at all are easing. Only actual removal of balance sheet expansion coupled with measured increases in short-term interest rates would amount to any quantitative tightening.
Readers will note that the yield for the 10-Year Note has suddenly retaken its 21-day exponential moving average (EMA), 200-day simple moving average (SMA), and 50-day SMA in short order. That said, the 50-day SMA (1.34%) is rapidly closing in on the 200-day SMA (1.33%) setting up a potential "death cross":
Readers will also note that the yield spread between the 3-Month T-Bill and 10-Year Note (The most important spread for Fed/Economy watchers) is just as close to creating that death cross, while not quite there on re-taking the 50-day SMA just yet. However, now check this out:
The yield spread between the 2-Year Note and 10-Year Note (our second most important spread), while still failing to reach its 200-day SMA, has already experienced that death cross I'm talking about.
My thoughts? The sudden movement in these yields, and I could be wrong, but as far as I can tell, nobody else is telling this story. Then again, on the tube they are asking economists about yields, not traders. Lucky for you, or maybe unlucky for you, I happen to be an economist who trades. (Or am I a trader with a knack for economic analysis? I would rather be baseball player.) I think traders have been taking profits ahead of the virtual Jackson Hole event.
I don't know that I am right, but should yields and spreads recede as quickly as they expanded over several days in response to our fearless Fed head, that would indeed make that death cross, as well as the other (possibly) imminent death crosses from a technical perspective, quite prescient. Don't you think?
The Wall Street Journal reported on Wednesday evening that federal regulators would be likely to approve booster shots for vaccinated adults beginning at six months after what had been at the time considered "fully" vaccinated. This would be an adjustment from the eight months that the Biden administration had previously announced ahead of regulators.
According to the Journal, data from vaccine manufacturers and other nations is under review at the FDA and is primarily based on boosters given at six months. The plan, as far as we can tell, is still set to begin around Sept. 20. The FDA had already granted full approval to the Pfizer (PFE) /BioNTech (BNTX) vaccine on Monday. Pfizer has already applied for approval for a booster shot.
Moderna (MRNA) announced on Wednesday that the company had completed its filing for full approval of its messenger RNA based vaccine. Depending on who you read, Moderna is anywhere from one month to three months behind Pfizer in that process. Johnson & Johnson (JNJ) has still not filed for full approval, but did report promising data on Wednesday regarding the potential for a booster (second) jab of their adenovirus based vaccine.
Bailey Lipschultz wrote an interesting piece at Bloomberg on Wednesday night. You all saw the "meme stocks" run on Tuesday. In the piece, the author cites sources at Vanda Research, a firm tracking retail level investment flows, and it appears that while yes, AMC Entertainment (AMC) enjoyed $56 million in net retail buying on Tuesday when the stock ran 20.3%, most of the "pin action" in other meme-type names was merely professionals trying to provoke something or game the retail investor crowd.
All other meme stocks combined (Vanda tracks 37 of them) attracted just $4 million in net retail buying on Tuesday. Yes, GameStop (GME) ran 27.5% on Tuesday. Not so much on the backs of retail investors, however. Somebody else got tagged at the top this time.
The Good Guys Are Out There
Also on Wednesday evening, the Wall Street Journal reports that the CIA is launching clandestine operations in and outside of Kabul in recent days using U.S. military helicopters to rescue and evacuate Americans trapped in and around the city as the Biden administration races against what should be a completely arbitrary Aug. 31 deadline.
There are also reports that U.S. troops are operating in Kabul in conjunction with both British and French forces to gather up foreign nationals at designated locations in the city and move them to the airport. Godspeed glorious warriors, Godspeed.
Estimates that may or may not be accurate are that there are probably 1,500 Americans still in Afghanistan. How many will be left behind? How many Afghans who believed in us will be left behind? Who knows? The very real threat of terrorism against Americans at the airport gates only complicates matters. I won't rant today, I promise.
It's About Time
Sarge's least often spoken of semiconductor long position is Taiwan Semiconductor (TSM) . The whole premise of this long is one of pricing power amid a chip shortage. Taiwan Semi is foundry to the world, turf that Pat Gelsinger at Intel (INTC) is trying to move in on. TSM provides chips to the likes of Advanced Micro Devices (AMD) , Apple (AAPL) , Nvidia (NVDA) and Qualcomm (QCOM) .
Taiwan Semi plans to increase prices of mature-technology chips processed using 16 nm class and thicker nodes by 20%, Chips with circuits smaller than 16 nm will experience price hikes of 10%. Bear in mind that TSM has already cancelled all discounts for 2022.
My target price is $151.
Oh, What a Night
You name 'em. The busiest, and now probably most successful earnings release night of the week came on Wednesday. There were few base hits. Everyone was busy hitting triples and home runs.
Salesforce (CRM) , Snowflake (SNOW) , Splunk (SPLK) , Ulta Beauty (ULTA) and Williams-Sonoma (WSM) all beat on both the top and bottom lines, and there were dividend hikes and increased guidance passed around.
The real interesting (they are all interesting) story had to be Williams-Sonoma, though. These guys sell pot and pans, right? I thought maybe they were now selling golden widgets. WSM crushed expectations, and increased their dividend. Then the company increased guidance for revenue growth AND operating margin. Apparently, WSM has this home furnishings brand "West Elm" that is just experiencing incredible sales growth (51.1%).
I am not in the name. But we all sleep in beds (except the infantry, the infantry sleeps in the rain, the swamps, the snow, and the ice... all hail the mighty, mighty infantry) and we all boil water. Sometimes.
I see WSM trading at $195 overnight, up more than 14%. For those in the name, the $194 level is your pivot, you get a take and hold at or above that level, you could see $232. That's my opinion. For what it's worth.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 340K, Last 348K.
08:30 - Continuing Claims (Weekly): Last 2.82M.
08:30 - GDP Economic Growth (Q2-rev): Flashed 6.5% q/q SAAR.
10:30 - Natural Gas Inventories (Weekly): Last +46B cf.
11:00 - Kansas City Manufacturing Index (Aug): Last 30.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 804.
The Fed (All Times Eastern)
20:00 - Jackson Hole (virtual) Economic Symposium agenda released.
Today's Earnings Highlights (Consensus EPS Expectations)
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