U.S. Treasury yields spiked pretty much as soon as they could on Monday night as the holiday weekend wore down in the U.S. and trading in those securities resumed. Pretty much all U.S. paper from six months on out to the long bond took one right in the teeth.
Tuesday morning, or at least what passes for morning on Wall Street, as the rest of North America sleeps, the entire curve remains elevated, though off of its lows (prices) or highs (yields), depending on one's perspective. How does, or will a 2.15% 30-Year, or a 1.83% 10-Year impact equities? U.S. equity index futures are all off to varying degrees at zero dark thirty. Though early, Nasdaq futures are indicating a U.S. opening haircut of almost 2%.
Oh, the shakedown is not just local. European equities traded lower across the board, as sovereign debt yields took off there, too. The German 10-Year Bund now scrapes along just below breaking into nominally positive territory for the first time since the spring of 2019. Asian stocks traded lower as well, after the Bank of Japan cut its growth forecast for the Japanese economy, which came just after China's National Bureau of Statistics had reported that growth for both December Retail Sales and fourth-quarter GDP had decelerated quite dramatically there.
Ease policy? China already did, cutting lending rates over the weekend. That, however, is not where this morning's story starts. This morning's story really starts last week, or back around Thanksgiving when the term "Omicron" entered into language used by everyday people.
Catastrophic Miss
As you rip that greasy melon away from that filthy thing you call a pillow this morning, the Nasdaq Composite appears ready to test correctionary territory, having gone out on Friday night roughly 7% below its late November highs, with nearly 40% of Nasdaq Composite company stocks closing 50% or more below their individual highs. .
Bloomberg News reports that more than 220 U.S. large-caps closed Friday at least 20% off of their individual highs. How does one express the negative impacts of the Omicron variant in numbers? How would one express shortages of both goods and labor? How does one interpret global geo-poitical risk, as Beijing, Moscow, and Pyongyang all simultaneously appear to disrespect U.S. and allied foreign policy?
Without going into great detail on each and every point, one might look at U.S. Retail Sales for December, which can only be seen as nearly catastrophic versus month-over-month expectations for both headline and core performance... or December's surprise contractions in both Industrial Production and capacity utilization. If that wasn't enough, export prices dropped an incredible 1.8% in December for U.S. sellers, while import prices only contracted 0.2% in December for U.S. buyers. In short, Friday was simply an absolute disaster for the U.S. in macroeconomic terms.
The AtlantaFed's GDP Now model snapshot for fourth-quarter economic growth fell on Friday from an impressive 6.8% (q/q SAAR) all the way to 5.0%, which would still be quite impressive if it did not represent such a steep late Q4 near halt to domestic economic activity. The St. Louis Fed reports that the velocity of money in ratio terms has not only never come close to recovering to pre-pandemic levels, but has consistently slowed since Q3 2020, and by Q3 2021 had nearly returned to the pandemic trough of Q2 2020. I can only imagine where Q4 velocity will stand once all current data is in.
So, it appears to have come to pass that the central bank comes under pressure to address inflation not caused through normal economic development. So, it comes that, as economic growth provided really through the magic dust of fiscal and monetary stimulus withers and gasps without a next injection. In just a few days financial markets have gone from pricing in a 50/50 chance at a fourth target increase in the Fed Funds Rate by December to fully pricing in a fourth such rate hike by November.
Did we really think we could watch the FOMC tighten policy and withdraw liquidity from a weakening economy from the cheap seats and not feel any associated pain? "Shall we their fond pageant see? Lord, what fools these (we) mortals be?"
Welcome to Week Three
As I have mentioned often, the third week of January is on average, the softest week of any first month, and typically one of the softest weeks of any first quarter. Only thing is that equity markets are not usually "oh for two" after two weeks.
That said, the S&P 500 was down 0.3% last week and is now down 2.17% year to date. The Nasdaq Composite gave up 0.28% last week, and is now 4.8% lower YTD. The list goes on. The Dow Transports, Nasdaq 100, and Russell 2000 are 3.48%, 4.34%, and 3.69% lower YTD, respectively.
From a sector performance perspective, using SPDR Sector select ETFs for proxies, Energy has roared, up 16.23% already year to date, but energy is underweighted across broader large cap indexes. The Financials ( ( XLF) ) are up 4.56% over two weeks but Friday, with the exception of Wells Fargo ( WFC) , was rough on that group. Materials ( ( XLB) ), Utilities ( ( XLU) ), Discretionaries ( ( XLY) ), Technology ( ( XLK) ), Health Care ( ( XLY) ) and the REITs ( ( XLRE) ) are all somewhere between 2% lower and down almost 7% for 2022.
Knowing all that, over the past 15 years, January week number three has posted nine down weeks for the S&P 500 versus six up weeks. The top week three for the S&P 500 over that time frame has been +2.87%, while the worst, was down 5.41%. Mean performance for the week over the past 15 years is -0.37%, while the median was -0.17%. Those medians and averages may not seem deeply negative, but one must bear in mind that up weeks, on average, significantly outnumber down weeks for the S&P 500 over almost any recent to near recent time frame. Oh, just a heads up. Week five can get kind of rough, too.
The Bat Signal?
The citizens gasped. They felt pressure. They felt intimidated. Then they saw it. With Gotham under siege, it was something, It was hope.
Earnings season, now underway, really starts to hit its stride this week. Unfortunately, the focus will remain on financials, which may not be an early week positive, but the attention does spread out to other sectors as Procter & Gamble ( PG) , UnitedHealth ( UNH) , Alcoa ( AA) , Travelers ( TRV) , Union Pacific ( UNP) , and Netflix ( NFLX) all report as well.
With the S&P 500 trading at a reduced 21.1 times forward earnings, and just a fraction of the S&P 500 already in the books, expectations for fourth-quarter earnings are, according to FactSet, for growth of 21.8% on revenue growth of 12.9%. These numbers if proven out (unlikely) would drag FY 2021 earnings growth down to 45.3% on revenue growth of 15.9%. To be fair, so much is expected from the Industrials and Materials for the fourth quarter that expectations for nine of 11 sectors are for less than 21.9% earnings growth. In fact expectations are for less than 10% earnings growth for five sectors and for outright earnings contraction for two (Financials, Utilities) of them.
As for valuations, keep your eyes on Energy. Even with the robust 16.2% year-to-date performance mentioned above, the sector remains valued at just 12.5 timed forward (12 months) looking earnings. Undervalued and underweight. Almost a stealth rally. If the ESG crowd backs off a bit out of necessity, what is possible here? I really don't know. As readers know, I have been overweight both ConocoPhillips ( COP) and APA Corp. ( APA) as I expect the Permian Basin to really come alive in 2022.
Ballgames & Concerts
Over the weekend, Pfizer ( PFE) CEO Albert Bourla interviewed with Le Figaro. Bourla commented, "We will soon be able to resume a normal life. We are well positioned to get there in the spring thanks to all the tools at our disposal: tests, very effective vaccines and the first treatments that can be taken at home."
It becomes easy from any human perspective to distrust all and anything heard regarding Covid, simply because so much information has either had to be corrected or was just plain wrong since the beginning. Pretty much, except for what we've heard from this fellow. He has been spot on from the beginning, and I have been long Pfizer since we first heard of the SARS-CoV-2 virus, simply because I could follow his thought process and it made sense.
Not only did Pfizer collaborate with BioNTech ( BNTX) to provide the first and still only one of two effective messenger RNA based vaccines against the original strain of the virus, but it is thought to be the closest to providing a variant-inclusive version of their original vaccine the soonest. In addition, it was Pfizer that came up with what is so far, the most effective orally taken, antiviral pill, Paxlovid... that has been shown to significantly reduce hospitalizations and death in clinical trials.
Who?
CNBC reported over the weekend that Walmart ( WMT) has been filing several trademarks and applications to make and sell virtual goods across the "metaverse" as well as possibly to create the firm's own cryptocurrency and/or NFTs (non-fungible tokens).
How big a deal is this? Right now, it's not. I still favor Target ( TGT) and Amazon ( AMZN) for this current earnings season, though I remain long all three. That said, in concept, while Amazon may have passed Walmart for the title of "world's largest retailer" (outside of China) this past year, Walmart remains easily the world's largest retailer with a large physical presence. What it means for the future of cryptocurrencies across the universe, might just be immeasurable.
A Walmart-driven crypto, would have to serve as a medium of exchange, which is where virtually every single existing cryptocurrency fails miserably. A Walmart coin or token would have to serve a transactional function while also retaining some of the qualities, at least in theory, of what would make stablecoins useful. It also would serve Walmart's best interest if somehow, its new (still early, I know) token could also serve as a store of value.
Now, if Walmart had a coin, and other retailers accepted it... that would be a big deal. It would also very likely (my opinion) significantly damage the perceived value of existing coins.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (Jan): Expecting 25.3, Last 31.9.
10:00 - NAHB Housing Market Index (Jan): Expecting 84, Last 84.
16:00 - Net long-Term TIC Flows (Nov): Last 7.1B.
16:30 - API Oil Inventories (Weekly): Last -1.077M.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( BK) (1.01), ( SCHW) (0.88), ( GS) (11.88), ( PNC) (3.62), ( SBNY) (3.96), ( TFC) (1.25)
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