Amazing. A little bit of support, and I stress the word "little" and suddenly all of the talk is about a "trade-able" bottom.
"They" all seem to ask: "Is this it?" How can anyone answer anything like that without purely speculating? That's my question.
On Monday, the screen was green as far as the eye could see. The S&P 500 gained 1.86%, building on Friday's late reversal and closing above the highs of both Thursday and Friday. The Nasdaq Composite gained 1.59%, and while not closing above the highs of the past two sessions, at least closed in line with those two highs.
Beneath the equity index level, all 11 S&P sector-select SPDR ETFs closed in the green, led by the Financial ( XLF) sector and Energy ( XLE) , which were up 3.25% and 2.64%, respectively. Consumer Discretionaries ( XLY) spent another day in last place, but this time managed an increase of 0.75%.
Breadth, if not overwhelmingly positive, was at least solid -- winners beat losers at the NYSE by more than 2 to 1, and at the Nasdaq market site by roughly 3 to 2. Advancing volume captured a 72% share of composite NYSE-listed trade, and a 62% share of that metric for Nasdaq-listed stocks. That's where the fun stops. Then one focuses on trading volume. There wasn't much of it.
Aggregate trading volume for NYSE-listed names dropped 14.4% on Monday from Friday, while aggregate trading volume dropped 17.5% for Nasdaq names session over session. In fact, aggregate trading volume across S&P 500 constituents on Monday landed 10% below the 50 day trading volume simple moving average (SMA) for that index while aggregate trading volume for Nasdaq Composite constituent stocks printed 14% below their 50-day trading volume SMA.
Yes, Friday was a monthly options expiration event, but still, trading was thin. What that means in short is that professional or institutional participation was missing on Monday. There was the "momentum play" on Monday and not much else as portfolio managers resisted temptation to increase risk exposure, and were largely content to maintain cash levels.
Didn't It Matter...
...That President Biden signaled that tariffs on Chinese goods imposed by his predecessor could be under consideration for adjustment?
Didn't It Matter...
... That ECB President Christine Lagarde said that higher interest rates are likely in the cards for Europe by July?
Didn't It Matter...
... That JPMorgan Chase's ( JPM) Jamie Dimon said that "storm clouds" over the U.S. economy could dissipate?
Of course it did.
You saw the U.S. dollar come in versus its reserve currency peers. You saw bond traders selling U.S. Treasuries. The yield for the U.S. 10-Year Note moved all the way up to 2.86% by late Monday. However, I see it trading at 2.79% as the wee hours pass on Tuesday morning. The U.S. 2-Year Note paid 2.62% late Monday. I see that yield down to 2.57% in very early Tuesday trade.
There is some good reason for the overnight surge into U.S. Treasuries that we'll get into in a minute.
Overnight Blood
I am sure by now that most readers have noticed that Asian and European equity markets as well as U.S. equity index futures have been weak overnight. There are a couple of reasons for this. On Monday, JP Morgan downgraded the firm's full-year economic growth forecast for mainland China to 3.7% from 4.3%, factoring in a locked-down environment for Q2. Earlier this morning, UBS joined the chorus, taking that firm's Chinese 2022 GDP growth forecast down to 3.0% from 4.2%, citing Covid-zero policy lockdowns, and China's lack of clarity in executing an exit strategy from such conditions.
This came after U.S. social media company Snap ( SNAP) warned that Q2 revenue and EBITDA would fall below the low end of previous guidance issued just about one month ago. CEO Evan Spiegel wrote to employees and filed part of that letter with the SEC: "Today we filed an 8-K, sharing that the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month. As a result, while our revenue continues to grow year over year, it is growing more slowly than we expected at this time." Spiegel also announced that Snap would slow down on hiring plans. I see SNAP trading 28% lower through the wee hours.
While it was SNAP that put the overnight whammy on Nasdaq futures and tech stocks broadly, it was digital advertising stocks and those businesses such as other social media companies reliant upon digital advertising that took the brunt of the pressure upfront. Reduced projections for Chinese growth, however, are why Treasuries are showing Tuesday morning strength and why industrial commodities, including crude have shown increased volatility after trading deep in the hole as you slept.
Thing That Made Me Go Hmmm
Going back over the past year, I see exactly zero shares of SNAP purchased by insiders. I do, however, see sales made as recently as May 16 and 11 instances just in 2022 alone (totaling 2.84M shares), as well as 34 instances of insider selling going back to May 2021 (totaling 14.35M shares).
There's nothing wrong with insiders selling stock properly. My "Hmmm" has nothing to do with anything potentially improper. My "Hmmm" stems from the fact that insiders, including the CEO, sold more than 14M shares over a year's time and not once did any of them have enough confidence in or optimism concerning their own business to invest in it above and beyond the likes of stock gifts and stock option awards. Certainly, this does not inspire the public.
The Great and Powerful Oz
Money market funds and banks stashed a quick $2.04T at the Federal Reserve overnight on Monday. The number, which was revealed by the New York Fed on Monday, is a new record for the central bank's overnight reverse repo facility.
Barely a whisper out of the financial media. Why is this? Simply because enlarged use of this facility does not raise the concerns that it has in the past. Not driven in desperation by a lack of liquidity, but instead, driven by demand for overnight safe haven as markets remain volatile and Treasury Bills in aggregate, which is where some or a lot of this dough might have otherwise been parked, are in short supply. The federal government just is not spending, and thus not borrowing in the kind of size that it had been.
In fact, the Treasury Department had issued $4.3T worth of T-Bills through the end of April, down $660B from the same four-month mark in 2021. This upward trend in overnight RRP usage is simply due to a lack of alternative supply, which by the way is expected to persist. The Treasury is expected to borrow as much as 15% less short-term this year from March through September than last year.
Trading Banks and Zoom
JPMorgan Chase ( JPM) popped as the firm held its first investor day since 2020. On Monday, JPM suggested that rising interest rate expectations may provide a nice boost to performance. The bank stated that net interest income for 2022 could exceed $56B, which is well above the $50B estimate provided by the firm earlier this year. JPM popped 6.2% on Monday, followed by Citigroup ( C) , Bank of America ( BAC) and Wells Fargo ( WFC) , which were up 6.1%, 5.9%, and 5.2%, respectively.
My thoughts? I remain long BAC and WFC, with Wells Fargo a favorite. Not that these firms don't all provide good value on tangible basis, but Citigroup's business is too international for my interests (Yes, I saw Warren), and JPMorgan, while probably best in class, is well-diversified and a number of those businesses are likely facing tough quarters. Bank of America is in all of those businesses, but is probably more focused on net interest margin as a driver. That said, Wells Fargo, is a meat and potatoes traditional banker, and one that for good reason has faced more regulatory pressure (including the Fed's asset cap) than its peers.
While improved margin is an upside catalyst for all four of these banks, a less diversified business model could provide sanctuary at this time for the likes of Wells Fargo (and to a lesser degree BAC). All three of the U.S.-centric banks trade at about 10/11 times forward-looking earnings. (Citi trades at just 7 times.) What do you think happens should the regulators finally let up on WFC? In addition, we are probably about a month out from the Fed releasing their CCAR stress test results for 2022. This is usually a trade-able event.
Zoom Video ( ZM) reported Q1 financial results on Monday night. ZM posted adjusted EPS of $1.03 on revenue of $1.07B. The top-line result met expectations, while being good enough for 11.9% y/y growth. The adjusted bottom line result beat Wall Street expectations. That was not really the news. The news was in the guidance.
For the current quarter, Zoom sees revenue at $1.115B to $1.12B versus consensus of $1.11B, and adjusted EPS at $0.90 to $0.92. Wall Street had been at $0.87 for that number.
For the full year, Zoom sees revenue of $4.53B to $4.55B versus consensus of $4.54B, so in line. The company sees adjusted FY EPS at $3.70 to $3.77 versus consensus of $3.57. That's huge.
The stock popped in response and traded as high as $106 and change overnight. Readers will note that in the disclosure, I am short this stock. That is in no way a reflection of my thoughts regarding ZM. That's just a leftover position from trading the name post-earnings. This is a well-run business, and the stock is not insanely valued, at least not anymore. ZM went out trading 25 times last night, and the balance sheet is a masterpiece.
Check this out:
Net cash balance of $5.725B. Current ratio of 3.62. Total assets of $7.956B with no abusive use of "goodwill." Total liabilities less equity of $2.008B. No entry made on the balance sheet for long-term debt or debt of any kind. This balance sheet is a beauty.
I expect to be long this name once it finds its level (and once I cover this short). Zoom Video may have been a pandemic darling, but we do now know that white collar work is never going completely back to the office. Heck, corporations don't need the real estate footprint. A profitable business with a fortress-like balance sheet. I could fall in love.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 12.7% y/y.
09:45 - S&P Global (Markit) Manufacturing PMI (May-flash): Expecting 58.2, Last 59.2.
09:45 - S &P Global (Markit) Services PMI (May-flash) : Expecting 55.4, Last 55.6.
10:00 - New Home Sales (February): Expecting 750K, Last 763K SAAR.
10:00 - Richmond fed Manufacturing Index (May): Expecting 13, Last 14.
16:30 - API Oil Inventories (Weekly): Last -2.445M.
The Fed (All Times Eastern)
12:20 - Speaker: Federal Reserve Chair Jerome Powell.
