The Storm At Sea (excerpt)
But clouds and angry tempests,
Rush from their prison cell,
The rocky coast frowns dark and dread,
The wintry surges swell
-Lydia Sigourney (1845)
Not the tale of hominids spreading out over continents, the mastering of resources, driving one species to the brink and beyond. Nothing to do with Charles Darwin, or the survival of the fittest. Though being adaptable does permit one to be fit, or rather to fit into almost any environment. Today will be Wednesday, March 31st. The last day of the month. The last day of the quarter. The day that President Joe Biden is expected to reveal at least Part One of his spending plan as a nation damaged by both pandemic and regional over/under reaction to that pandemic works toward improving the “what is” as it evolves into the “what will be.”
Twenty-four hours ago, I wrote you informing of overnight support for the US Ten Year Note at a yield of 1.78%. That spot had been tested three times, and held on all three attempts. Treasury securities, especially at the long end of the curve rallied throughout Tuesday’s regular session. That same US Ten Year paper paid less than 1.72% at one point. This is the dog, and the dog pulled its helpless tail along with it wherever it went. Remember, there are multiple forces at work here. We know that mandated pension fund capital has to flow into Treasury securities. This impact is probably already well under way. We also know that a certain number of portfolio managers like to go into the end of any quarter with a “safer” (historical) look to their portfolios than they actually run with on a daily basis.
Up against these particular factors that would push prices (not yields) for Treasury securities with longer dated maturities higher, we also have expanded supplies at auction of nearly every single series of Treasuries (to include bills, notes, and bonds). The size of these auctions had already reached levels that make fiscal hawks such as myself quite uncomfortable long before anyone in the Biden administration had taken any oath of office. The spending has only increased as the $1.9 trillion stimulus package had been tacked on to stimulus efforts made by the prior administration. Now today, the first step of at least two expensive but in some ways, necessary investment plans in infrastructure, green energy, employment and eventually social structure are to be laid out.
You may have noticed that I walk a fine line in laying out my own opinion here. This is not politically driven. I think this may be because of my natural tendency to be hawkish, my historical discomfort with dovish policy whether it be monetary or fiscal, and my realization that this is clearly going to be the season of the dove. We can acquire new targets given a new environment, and adjust fire or we can whine about how differently things would be if “we hawks” were in charge. But would they? Really? Far easier is it to be a hawk in theory. Far more difficult when hardships pick off your neighbors, your friends and eventually you and your family. Not choosing a side. My side is whatever is best for my country. Simply admitting that should I be forced to try on another man’s shoes, that put simply… I just don’t know.
While Treasuries out on the longer end of the curve actually rallied during the regular session on Tuesday, equities reacted in kind. All of your favorite indices came off of lower lows and rallied, at least for the “big three” large cap indices to more manageable looking losses. In direct reaction to support for longer dated Treasuries, short to mid cap stocks finally caught a break as some relief money found these corners of the marketplace. The Dow Jones Transportation Average closed at all-time highs, but well off of the day’s highs, as investors put dough into the airlines, truckers, and maritime transport type stocks. Investors did not find the rails very attractive on Tuesday as rising dollar valuations made train bound commodities somewhat less valuable.
Very interestingly, and perhaps something of a polar opposite to what we have seen of late, on a down day for headline measures of market success, breadth was rather strong on Tuesday. Something to be said for how much of a say that smaller cap stocks actually have when we look at breadth? Winners beat losers at the NYSE by roughly 5 to 3, and at the Nasdaq by 4 to 3. Advancing volume beat declining volume by close to 2 to 1 at both of our primary equity exchanges. The caveat that does in part discount that positivity would be that aggregate trading volume across both exchanges declined from Monday’s levels that themselves dropped off from Friday. The same is true across constituent stocks of both the Nasdaq Composite as well as the S&P 500.
Could it be that there are others who do not know? Could it be hesitancy ahead of President Biden‘s address? Could it be Passover? Could it be Holy Week? Short weeks are always long. Could it be that traders are protecting March, and will worry about April in April? All of the above. At least that’s my gut.
We Are Family
President Biden is said to have chosen Pittsburgh for this address not because of his profound love for the late, great Willie Stargell, or his fondness for disco era pop act “Sister Sledge”, but for the transformation that the city of Pittsburgh has made from an industrial powerhouse to an industrial city in decline to a forward looking community now more known for leadership in technology, banking and healthcare than for the production of steel. No, I do not see the town’s NFL franchise changing the nickname to something like the “Bankers” any time soon.
Word is that the president will introduce the first part of two spending plans today, that will likely cost anywhere from $2 trillion to $2.5 trillion over eight years that in theory will be paid for at least in part with a 15 year increase to corporate tax rates (from 21% to 28%) along with a new minimum tax on global corporate earnings. This “part one” will focus on infrastructure and green energy. I know what you’re thinking. Some firms will move out of the country, like they had been doing prior to 2017, and the ones that stay will see reduced earnings even if revenue projections remain unchanged. That much is true. As we know, David Kostin of Goldman Sachs projects a 9% reduction in aggregate S&P 500 earnings over the next 12 months should the corporate tax rate go to 28%. Never mind a new tax on multinationals.
This, one would think, would force equity valuations lower, and harm demand for domestic labor, if this were to happen in a vacuum, which we know it will not. We also have to account for the creation of vast amounts of fiat that will be put to work in support of labor market demand, and should in theory force capital into both debt and equity markets even if supplies of debt securities overwhelm demand at first. That may just be a tightrope that policy makers are willing to walk. Transitory? The creation of some inflation that eases the burden on the indebted, but not to force interest rates higher so as to not make servicing that debt more expensive will be a tough path to follow. Can one have their cake and eat it too? Any economist who knows for sure, is surely one worth reading but probably not one worth banking on. We’re going to have to do this on our own. Always… Understand, Identify, Adapt, Overcome, and carry on with the mission. Your mission is to navigate your family through the unknowable. Gold sure does look cheap in the $1680’s. Just an opinion.
Do you remember that day? The day you stood at the altar (my experience) and waited nervously as the most beautiful creature you had ever seen finally appeared in the “too bright” doorway of the church (again, my experience) and started to move down the aisle with her father? A vision indeed. Yeah, we’re not talking about that kind of commitment.
Federal Reserve Bank Governor Randal Quarles spoke on Tuesday. “I think it is very credible to expect the committee (FOMC) to be comfortable with inflation somewhat over our 2% target.” Quarles added, “Over time we will look to average, and I think that is a very credible commitment from the committee and I’m very supportive of it.” In short, Quarles expects to see consumer level inflation that rises even across our outdated metrics for measuring such things. He expects this inflation to average 2% over the long run. Given the core PCE has run below 2% for literally eons, I guess he is telling us that short of political outcry, the FOMC is going to sit on their hands long-term, even if doing so appears to be overtly inappropriate for the environment.
On short-term interest rates, and perhaps the continual monthly growth of the monetary base, Quarles then said… “We shouldn’t jump the gun. Let’s wait until we see those outcomes.” I took that to mean that the committee will not shoot until they are scared. By that time, the enemy may well have overrun their position. We shall see. I am told the Legion sang fighting songs as the Viet Minh overran their perimeters at Dien Bien Phu in May of 1954, though they knew all was lost.
1) Taiwan-based Foxconn reported lower than expected fourth quarter profits and warned of the impact of a shortage of materials. The problem there is that smartphones account for about 63% of Foxconn’s revenue. Apple (AAPL) fell 1.2% on Tuesday in response to this news. Is Apple the greatest consumer electronics company in world history? Yes. Is Time Cook a “Hall of Fame” caliber CEO? Yes. Has Apple successfully through the transformation of the way it services its captive ecosystem also transformed how equity markets value it’s stock? Yes. Does that mean that shareholders can “set it and forget it?” No.
Readers will quickly see the double top pattern, which is bearish in nature. That said, a lot of air (about 18%) has already been let out of these tires. I see the action around the stock’s 200 day SMA ($117.03) as more important in regards to the future of AAPL as perhaps anything technical we’ve seen in a while. Apple‘s stock price has not tested the 200 day line in about a year. My thoughts? If one is overexposed to AAPL, correct that. If not, at least I will look to add (small) just above that red line. I will be quick, at least to unload this tranche should that line fail. This will be an attempt to trade around a position in decline, not an attempt to add to a core position. We’ll see the same tranche at the 21 day EMA. Never forget. When it comes to trading, we feel neither love nor pity. We show neither gratitude nor mercy, for we are nothing more than business people… mercenaries.
2) Softbank’s (SFTBF) Arm Holdings, currently in the process of being acquired by Nvidia ((NVDA)) on Tuesday revealed its new Armv9 architecture meant to address ever-growing demands for capabilities in machine learning/artificial intelligence, while accommodating corporate needs for substantial improvements in cybersecurity. As Arm innovates, and Samsung almost certainly will counter, just what does this mean for Nvidia? We know that firms such as Alphabet (GOOGL) , Microsoft ((MSFT)) and Qualcomm (QCOM) have been vocal about potential antitrust concerns not just here but globally to regulators, as there is a feeling that Nvidia could once a deal closes, cut off or charge clients considerably higher prices for high-end quality architecture. This is one reason why so many firms not known for designing semiconductors are now going that route. Though I love this deal for Nvidia as a shareholder, I am not at all sure this news for folks like me (us?), that this news is welcome.
Economics (All Times Eastern)
08:15 – ADP Employment Report (Mar): Expecting 527K, Last 117K.
09:45 – Chicago PMI (Mar): Expecting 60.2, Last 59.5.
10:00 – Pending Home Sales (Feb): Expecting -2.6% m/m, Last -2.8% m/m.
10:30 – Oil Inventories (Weekly): Last +1.912M.
10:30 – Gasoline Stocks (Weekly): Last +203K.
The Fed (All Times Eastern)
10:45 – Speaker: Atlanta Fed Pres. Raphael Bostic.
Today’s Earnings Highlights (Consensus EPS Expectations)
After the Close: (MU) (.96)
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