OCT 19 – MONDAY MARKET COMMENTS

It is just now occurring to the Fed. “Asset bubbles are possible with low interest rates?” “Who’da thunk it?”

Indicators 1, 2 & 5 are risk on. Lumber is 6-9 month recession indicator. Along with XLU, it is risk off.

VIX is relatively calm at a higher than usual level when viewed multi-year.

GLD is trading pre-open above the 8/6 to 9/16 trend consistent with lower UUP this morning.

Retail sales reported on Friday were stronger than expected both before and after seasonal adjustments. The good news was ignored by the market which closed nearly flat.

Industrial production and capacity did not follow with positive data. Production reported a -0.6% instead of the expected +0.6% and utilization came in at 71.5% which has only been worse since 1965 during the 2008 GFC and one month in the ‘80s.

Friday did not follow through on Thursday’s momentum. The S&P remains in a trading ranges above the 20 and 50-SMAs which are close to a bullish crossover.

My EOD stock scans reveal a lack of broad based up-trend and momentum price movement. The majority of action Friday was in very cheap stocks. Otherwise, trading ranges are the rule. WSJ reports the Robinhood type apps have created a boom in retail investor volume in stocks $5 and lower. A stimulus check in the mailbox and the election resolved will likely create another retail investor surge as in the April-July period.

Hedge funds have reversed the tech bet from short to long.

With the DJI near all time highs, it remains a mixed bag of news. UPS and FDX are 25% of the index and prospering from Covid related business demand. The drag on the index is airlines and other transportation.

Trucking and rail are the bulk of the index where demand for services has been insufficient to cause pricing to rise back to pre-recession levels.

This week has many companies scheduled to report earnings.

Headlines of progress on the next stimulus are creating optimism in today’s market. Overnight foreign market gains along with positive GDP and retail sales data in China are supporting a gap at the open on the NYSE. Though China’s GDP grew from 3.2% to 4.9% Q2 to Q3, it remains lower than estimates with imports stronger than exports. IMF forecasts are for China to be the only major economy to advance this year increasing its moves to replace USA influence where ever possible.

Russia and the Saudis are still hashing out who and when will get production increases. They must first agree on the global demand needing oil.

With new cases rising again in Europe, lockdowns are not easing but being re-imposed. Seasonality is part of dealing with any flu. Covid cases are increasing in the USA and notably so in rural areas that were not significantly impacted in the spring.

Regards,

Don Creech
2323 Alaska Ave. E.
Port Orchard, WA 98366
360-620-8635

OCT 16 – FRIDAY MARKET COMMENTS

After the indices gapped down, intraday trading moved upward to end with a dirty gap on all three majors. The non-index stock universe is largely range bound. The last tax cut intercepted a bear market start in 2018 due to the business cycle. Market extension has been, as you know, focused on FANMAG issues rather than broad based advanced.

The September 2 high remains resistance with the 20 & 50-SMAs providing support for portfolios with differing levels of risk tolerance.

Employment rebound is slowing and while half the unemployed have returned to work, the remaining half will take an extended time for economic growth to reach a level that can absorb them. Vice Chair Clarida, also, stated that reliable home Covid tests would help general conditions, its development and accessibility remain unknown. Weekly jobless claims were higher than expected and did not include CA which did not report which would like cause the report to be worse.

Some positive news lifted European markets overnight. Europe reported the first month of rising new car sales this year.

On the longer view of adjusting to global shut down, World Bank Chief Economist Carmen Reinhart defines the situation as a war with all governments involved in massive debt financing. However, “the scenario we are in right now is not a sustainable one.” The economic crisis is morphing into a financial one. She should know. She co-authored with Rogoff the research in to the GFC and published as “This Time is Different: Eight Centuries of Financial Folly.”

BA has some good news in that the Max has been cleared to fly in Europe by year-end as reviews are finalized.

Investment bankers have posted decent earnings but not from lending activity – the intent of QE funding. Traders received big bonuses based on last quarter’s performance. Currently, it is much more difficult to attract new money with the stimulus money gone so a HFT driven trading range persists. Earnings improved in part due to smaller loan loss reserves apparently believing Clarida’s comments that the recession is nearly over. Without another stimulus, the reserves may need ramping up in coming quarters.

Stocks in the financial sector are tightly tied to yields which remain suppressed by the Fed. The Fed’s plan for low rates and weak unemployment expectations will keep lending restricted as repayment risk remains high. Compliance is more difficult as traders WFH on laptops. Bankers are using keystroke tracking software for traders to watch for illegal activity.

WFH will soon have a double meaning as hotels work to repurpose facilities to Work From Hotel packages.

Regards,

Don Creech
2323 Alaska Ave. E.
Port Orchard, WA 98366
360-620-8635

OCTOBER 15 – THURSDAY MARKET COMMENTS

OUCH!

Delta reported passenger revenue collapsed 83% in Q3. It is burning $18 million/day = $1+ billion/month with $21B cash on hand. UAL has $19.4B in cash burning through a mere $25M/month which is improved from $40M three months ago. All the share repurchases of recent years isn’t worth much as reserves.

Europe & the USA are reporting new cases which should happen with increased testing. That most are or nearly asymptomatic is an untold story which keeps fear up within the population. “The easier to control you with, my dear” paraphrasing the wolf to Little Red Riding Hood. Without a compromised immune system, the death rate is minimal but that gets no press coverage. An important distinction between deaths from or with Covid is rarely made or reported. Europe’s largest cities are facing more drastic lockdowns with rising infection rates. Herd immunity is impossible if there is no herd.

Risk off day. Without another stimulus funding in the household checkbook, retail market speculation has dropped off. Reduced demand is causing ETF developers to reduce shares. DPs still rotating out as money flow remains negative for equity investment funds.

To move back to all time highs and beyond, good fundamentals are required and hard to come by. Per data from Arbor Research, of companies larger than $300 million, almost 15% do not have enough in earnings (EBIT) to cover interest expense. Without low rates and bond buyers to refinance existing debt plus obtain operating capital, the zombies would be in Chapter 11, if not 7.

So far, the week’s return for S&P remains positive with the rising risk of a double top developing. Earnings and the election will take a few more weeks to resolve. Expect more choppiness within the trading range. As long as the 50-SMA remains inviolate, long-term commitments will likely hold. Election seasonality suggest a bottoming by month’s end. By then, the conflict between the Biden-favoring media polls and the massive attendance of Trump rallies will be close to resolution.

One must be careful about what is wished for because it might happen. Apparently, that is the case with the Fed once thinking it could temporarily intervene in the Treasury market as a “facilitator on call.” With the market growing from $13T to $20 in five years, it is much like the adage of “having a cat by the tail.” The Fed can’t sit this one out, maybe ever.

Fed Vice Chair Clarida spoke Wednesday announcing the recession may already be over making it one of the deepest and shortest in history. GDP, however, will not reach pre-Covid levels this year nor will employment. The IMF forecast is for a loss of $28T of global output over the next five years.

In Wednesday’s webinar, Jack asked about XLU’s advance. My explanation is that it reveals increasing investor trepidation about market conditions. It is a risk-off indicator. This AM, Chaikin Analytics highlighted it.

Key Chart – Utilities Select Sector SPDR Fund (XLU)
“ The Utilities Select Sector SPDR ETF (XLU) has seen the intensity of its relative weakness improve over the past two weeks. This prompts the question, are equity investors rotating into this group for its defensive properties or are fixed income investors rotating into this group due to paltry yields in the treasury market…If support is tested and Utilities are strong, a defensive stance may be in order.” 

Regards,

Don Creech
2323 Alaska Ave. E.
Port Orchard, WA 98366
360-620-8635

OCT 14 – WEDNESDAY MARKET COMMENTS & REPLAY LINK

REPLAY LINK: https://attendee.gotowebinar.com/recording/6375849536929780751

One more on the list of “market hopes” is a Blue Wave turning the Senate back to Democrat control. Republican control is considered a negative for the market as the probability decreases for more Federal “largess out the wazoo.”

When sellers are dominant, prices can’t rise. Yesterday, my DP block SPY trade scan in Schwab’s StreetSmart software was full. Massive sell trades at $352.47 which were reported after Monday’s close on ATPs and posted Tuesday.

Futures are mixed.

A reminder of a comment I made in Tuesday’s webinar. The market (and most sectors) are trading at or near 3 STD which is easily seen in the BBands on your chart. If you need help adjusting a BBand overlay, call me. At 3 STD, correction is a natural part of a return to the mean.

The primary risk seems to be in the put-call situation mentioned yesterday. I do not have strong options background. What I have read is that the market is again (as in late August) in the grips of an options gamma squeeze. Essentially speculators are buying large amounts of short-dated call options, which forces dealers to buy the underlying stocks to hedge. This creates a circular buying spree. The surge is broken when options speculators sell and dealers must in turn sell stock to remove the hedges. This created last month’s decline.

The gap up above trend and SMAs for GLD was reversed on Tuesday with a gap down at the open below chart lines. If there is a developing inflation trade which some analysts are proposing, green vol stops suggest a better entry is available for the metal.

JPM & C expect losses and unemployment to be worse in 2nd half of next year. However, current loan losses were smaller than expected. GS this AM is responsible for futures turning green. The prop desks generated significant gains.

There is no resolution on a stimulus bill even with the Administration raising the amount to $1.8T. Speaker Pelosi accused Wolf Blitzer and CNN of being a Trump mouthpiece with no understanding of how a bill to help the American people works.

Inflation conditions require high demand and limited supply forcing prices up. Conditions are lacking as deflationary pressures persist. “Western technology and cheap Asian labor” generates surplus especially since other societies are not as heavily consumption driven as in the USA. China’s population spending only drives 39% of GDP. They are big savers which is not economically stimulative. Gobal trends are bigger than the Fed’s power. That unemployment is still rising at a rate greater than prior to the GFC is not helping the Fed’s effort to create inflation.

M&A is underway in the oil patch. Soft oil prices will drive more frackers to find a sugar daddy.

SEC’s Consolidated Audit Trail (CAT) is now active and able to quickly identify manipulators. Major banks fought this but lost the battle.

Regards,

Don Creech
2323 Alaska Ave. E.
Port Orchard, WA 98366
360-620-8635

OCT 13 – TUESDAY MARKET COMMENTS

“Happy days are here again” as the bank manipulation pushed tech higher with AAPL, AMZN & TWTR leading. Apparently, the goal is to have a higher market before the election. Perhaps, Trump isn’t as bad as getting Harris after hearing Biden ask his audience to vote for him for the Senate. Bankers are not looking forward to a Biden tax hike which would result in lower margins, lower lending, lower staffing and less investment.

There has been a shift in market breadth as the Buy:Sell ratio has recently been stronger. Much of this is HFTs moving mostly illiquid cheap stocks of companies at risk of bankruptcy. The DPs quit selling yesterday which gave room for a run up. This remains a narrow, tech led rally to support the appearance of healthy market. Fund flows are still negative for equities.

Whipsaw risk rises as the price move is partially driven by increased options trading requiring portfolio risk adjustments. Options focused on “low liquidity, over-bought markets, especially…tech & momentum” can create rapid reversal. The S&P closed at 2-STD above the BBand 20-SMA and pushed higher intra-day increasing pull-back risk.

Q3 reports start today before the open with JPM, C & JNJ. Tomorrow, with WFC, BAC & GS. Thursday is MS with SLB on Friday. These are all pre-open releases.

BOE is preparing CEOs for negative interest rates.

Hopes for a stimulus bill remain just that – hopes. Even the Senate does not like the Administration’s hiking the size. How much stimulus affect will impact economic growth is unknown as American’s have saved a third of prior largess for debt reduction or a “rainy day.” Savings and lower debt does generate potential future spending. Date unknown. More stimulus will create greater problems for banks possibly offsetting the consumer benefits.

Hemingway’s “For Whom the Bell Tolls” could be rewritten for Mall owners as the decision by Disney to shift movie production to streaming away from theaters is being replicated by other streamers. With theaters’ attempts to re-open failing, restructuring mall to entertainment and residential centers is done as collapsing ticket sales and rents seal their fate. Restructuring entertainment is confirmed with the scrapping of cruise ships. Not all have streaming revenue to offset the write downs.

WFH is a new unexpected societal change that is here to stay. Nearly 25% of surveyed workers expect to WFH 50% of their time. The shift damages the service businesses catering to people in office work due to reduced demand – restaurants, bars, dry cleaners, transit, car maintenance, etc.

Economic “gotcha” can take a long time. OPEC+ is reaping the downside of a nearly dying industry after its “gloating” days of the Embargo. IEA expects the oil market to suffer for a decade without a quick defeat of Covid.

Capitalism generates creativity. Singapore Airlines has opened up “restaurant” dining on two Airbus 380s to raise cash. Within 30 minutes of opening, they were booked up.

Regards,

Don Creech
2323 Alaska Ave. E.
Port Orchard, WA 98366
360-620-8635