Mid-day Recon

Good Afternoon,

                       The trading session has been completely overshadowed by Director Comey’s testimony before the US House Oversight Committee.  If you were following the proceedings down in DC, you probably missed an early rally that ran into trouble at the technical 2108 level for the S&P 500.  That was about the time that the British Pound headed south against the US Dollar.  About a half hour later, Oil Inventories disappointed severely, and a nasty Crude sell-off ensued…dragging stocks even lower.  There have been many peculiar moves today on what is really sluggish volume.  Let’s take a look at the victims.
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1)  As for the S&P 500, I have 2091 for your nearest level of support at this point.  This is not the strongest signal I’ve ever seen.  Better support is probably at 2084.  If equities turn for the better, there will be traffic at 2096, and 2102.
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2) The Airlines are standing almost alone in the winner’s circle right now, along with some lodging names.  The Ugly stick has been out for Telecom, the Utilities, and Energy names.
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3) The US Dollar is stronger (though not against the Yen).  That may be exacerbating the beat-down for Crude, but as we’ve seen of late with Gold (well off of today’s lows), a stronger dollar is not a good reason to bet against the yellow stuff.  Silver is being hit much harder than is Gold.
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4) The US Treasury yield curve is now rather flat for the day the day after selling off earlier in the session.  There is industry wide speculation that US pension funds that are well off of the pace will be forced to plow into Treasuries.  You probably saw at least a little profit taking in this space today by (if you can believe it) speculators that bought debt recently to get ahead of that trade.  I think our yield starved foreign buyers are still hanging on.

Market Recon Thursday

Good Morning,
                        Bank of Japan Gov. Haruhiko Kuroda spoke this morning from Tokyo.  He made no mention of “Brexit”, which I thought interesting.  He did say that the BOJ stands ready to act if needed, which is what all central bankers say at all times.  He sounded optimistic on the Japanese economy, meaning that the overall vibe that I’m getting must not be unanimous.  My take away here, is that he simply did not sound like someone who is about to launch increased stimulus.  The Yen is far too strong, I think we all understand that, and daily intervention by the BOJ in the currency markets would be akin to holding up an umbrella in a hurricane. Many traders have been calling for an even bigger bazooka to be launched by the Japanese central bank.  Doesn’t sound to me like it’s on the way.  Currency traders don’t seem to think so either.
                      The FOMC Minutes were released yesterday.  No real surprises there.  Some obvious division on interest rate direction.  The June meeting was pre-Brexit, so we can give them a bit of a pass.  There have been a few Fed speakers out and about lately though.  Over the last few days, Stanley Fischer downplayed the impact of “Brexit” on the US economy in relation to other serious global events over the past few years.  I can agree with that.  Fischer appears to me to be one of the more sentient beings at the FOMC.  William Dudley doesn’t see extremely low yields on Treasuries as “all good news”.  No kidding Bill, but at least you’re not wrong.
                      That leaves us with John Williams.  San Francisco does not vote this year, but that does not stop Williams from voicing opinion, and some consider him quite influential.  Williams has been vocal this week, and he has been very hawkish.  He sees bubbles forming, and thinks that the Fed should get back on the path to normalization as quickly as possible.  I’m not going to throw my usual sucker punch here.  I too, am something of a hawk at heart, but I don’t see it in the current environment.  In this globally perverted monetary landscape, can any one of us actually define what a normalized interest rate schedule actually would look like ??  Fed Funds Futures markets are not fully pricing in a next interest rate increase by the Fed until February of 2019.  2019 !!!!!  The most important thing that you can remember about interest rates are that the Fed does not get the final say, the bond market does….and right now, bonds have almost become an instrument of speculation.  Bubble ??  Maybe in the grand scheme, but not taken in context.  Survey says……. No way, John.  Not now.
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Macro
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08:15 ET
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ADP Employment Report (June): Now, this item, which is supposed to be a predictor for the Private Payrolls portion of the NFP print came in at 173K for May, and we all know that May’s NFP number was awful.  Prior to last month, the ADP number had been at least pretty close to the NFP number for 2016.  Maybe that means that we see upward trailing revisions tomorrow when the June NFP number hits the tape.  That said, let’s deal with today, and today we expect to see something close to 154K jobs created.  The range for this one spans all the way from 100K to 210K, so the bottom line is really, these guys just don’t know.  A lousy number here will rattle some cages, at least in the early going.  By tomorrow, this print is forgotten.
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08:30 ET
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Initial Jobless Claims (Weekly):  How’s this for consistency ?  Last week, this data-point printed at 268K.  This week, we expect 269K, and the four week moving average is just under 267K.  The range starts at 255K today, and ends at 272K.  Nobody expects anything unsettling in this space today, and something unsettling is the only chance this one has at gaining any market attention at all today.
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10:30 ET
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Natural Gas Inventories (Weekly):  the number of consecutive weekly inventory builds for Nat Gas has reached eleven.  The amazing thing is that not once in that time have we seen a very large build in any one week.  Last week, supplies grew by 37 billion cubic feet, and we expect something very close to that number today.  Nat Gas futures will most likely react with some violence at the time of this release.
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11:00 ET
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Oil Inventories (Weekly):  in April, US supplies of Crude were at 86 year highs.  we’ve now seen six consecutive weekly drawdowns, including last week’s much larger than expected reduction (-4.1 million barrels).  Today, the pros come in looking for another large draw (-2.5M), which pales in comparison to last night’s API number (that printed at a whopping -6.7 million barrels).  Obviously, last night Crude prices gapped much higher.
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Earnings Highlights
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AM: PEP (1.29)
PM: WDFC (.86)

Lunchtime Recon

Good Afternoon,

                       First, we opened in the hole. then we rallied sharply, sold off again just as hard.  What happened just after that  ??  We rallied sharply again, only hitting resistance at the unchanged mark.  What gives ??  Are these simply Brexit concerns ??  Of course not.  A bout a week ago, the final round of the Fed stress tests for the banking system included an insolvency by a major counter-party.  What it maybe should also include might be a failure by “a few” foreign banks, as that seems to be a more immediate threat.
                       Surely you’ve noticed that the financial sector has been a leader in both directions when the equity market bangs around.  Using rough numbers, it is believed that 17% of Italian bank loans have gone bad.  What’s normal ?? Less than 2%.  During the height of the US financial crisis, about 5% of US bank loans were non-performing.  On top of that, this 17% represents close to 20% of Italian GDP.  Hmmmmm.  Now, let’s take a look at Deutsche Bank’s exposure to the entire financial arena’s derivative space.  From reading several different sources, my guess is that this exposure is somewhere between $50 trillion and $72 trillion.  that’s Trillion, with a “T”.  To put that in perspective, the US national debt, which is considered “out of control” is still less than $20 trillion.
                       Obviously, that entire portfolio will not zero out, but it sure is food for thought.  Do you think Spanish banks, Portuguese banks, or even French banks are in much better shape than the Italian variety.  Actually, they are…. for now.  Still not thinking all that much that I want to own them.
                       Of that late morning pop… surely you know that there is some contention between the Italian Central Bank, and the ECB over the home team’s ability to recapitalize the nation’s banks on their own.  There’s a fellow by the name of Jeroen Dijsselbloem.  You probably can not pronounce his name, but he’s the Dutch Minister of Finance, as well as a big shot within the Eurogroup.  He made a statement today that EU bank failure law allows the Italians to do what they have to to support the banks after existing capital “bleeds out”.  Banks, and the market actually took this as a short term positive.  Gang, this will never get boring.
Sarge out

Market Recon Wednesday

Good Morning,
                        It’s a brand new day.  Really ??  Is it though ??  We’ve seen something like this before, maybe like every day.  Yield compression, British Pound weakness.  Yen strength.  Gold soaring.  US equities, and the US Dollar itself caught between a rock, and a hard place.  Conditions remain uncertain, and that is the very bottom line.  Is this heightened level of confusion permanent ??  Well, no, but it may very likely be long-term.  Q2 earnings season is about to kick off (AA reports this Monday).
                        Now put yourself in the shoes of a corporate risk manager…. or worse, try putting together forward guidance for a multi-national corporation.  Your guidance will rely upon currency exchange rates, projected demand, and accurate pricing in your areas of strength, debt servicing costs, along with outlays for any repurchase programs, and/or dividend payments.  We already expect S&P 500 Q2 profits (Earnings Season begins Monday with AA) to take an approximate 4% y/y hit, and that was without these extreme conditions.  Does that mean the end for stocks?
                         In this era, where global central banks seem to be stuck on permanent, and the Federal Reserve in the very least seems stuck in neutral, it seems reasonable that some of these conditions are not going anywhere anytime soon.  Valuations, will have to stretch.  It won’t be pretty, and there will be sharp moves in either direction that will force doubt, and reduce retail level participation even further, but the general direction will end up being northerly.  It is unfortunate, but anyone using historical norms in order to predict future performance really misunderstands the simple concept that the environment is fundamentally changed.  You may be right in the end, but there’s probably a lot of wood to cut between now, and then.
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Macro
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08:00 ET
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Fed Speaker: New York Fed Pres. William Dudley continues on to Vestal, NY.  He is likely to keep it to local economic development.  Like yesterday, when he stressed below target inflation, and patience regarding policy changes, I would think that he may keep his thoughts on monetary policy in line with that current narrative.
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08:30 ET
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Trade Balance (May):  Expectations for today are that the trade gap expanded back to $-40B or so after spending two straight months in the high  $-30Bs.  What may be more important than the actual size of the deficit in this space might be total exports & imports, and what they say about foreign and domestic cross-border demand.  For April, imports printed at $220.2B, while exports came in at $182.8B.  The numbers that I’m looking at show a possible slight decrease for both.
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08:55 ET
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Redbook (Weekly):  Last week, we barely scraped by with a 0.5% y/y print for growth in this space.  That’s about the least we need to keep this one from hurting the retailers.  A print approaching unchanged on a y/y basis could be used as an excuse to reduce some risk in these names.
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09:00 ET
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Fed Speaker:  Federal Reserve Gov. Daniel Tarullo is set to speak on the intersection of regulation, and monetary policy.  Tarullo often speaks on regulation without going into great detail on policy.  This could be interesting, being policy talk is somewhat unavoidable here, and this speech will press up against the opening bell at 11 Wall Street.
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09:45 ET
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Markit Sevices PMI (June):  This data-point flashed at 51.3 a little over a week ago.  There is some though that the number came in a bit light at that time, and that the final print for June will “pop” up a few tenths of a point.  That all said, this number will be all but forgotten by 10am when the ISM print hits the tape.
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10:00 ET
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ISM Non-Manufacturing Index (June):  The pace of expansion for the service sector in this country has clearly slowed over the past year, ever since peaking at 60.3 in this space last July.  For May, the number printed at 52.9, which though well below forecasts, was still expansionary.  Today, consensus view is that we’ll see a small bounce to 53.3.  Virtually all economists are between 52 and 54 on this one., and it very well may impact the marketplace upon release.
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14:00 ET
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FOMC Minutes:  These FOMC Minutes are from the Fed’s June meeting, which came eight days ahead of the UK’s Brexit referendum.  If you’ll recall, the take on that meeting was a dovish one.  Although the Minutes are edited up to date upon their release, there is no reason to think that these Minutes will hold any surprises, and if there are any, they will be seen as dated, now that we know what we know about global developments.

Market Recon Tuesday

 

Good Morning,
                        Happen to read the page one article in the today’s Wall Street Journal ??  The one about the Italian banks, and their overall health… yeah, that one.  You knew all of that already, but this sort of brings it to the forefront.
                        Ever have a friend that always needs money.  You’re in a tough situation yourself, but this friend always needs something when you’re at the store, or a couple of bucks to get through to payday.  That’s right, we all have that friend.  Well, maybe the UK isn’t that crazy.  After all, when we have a friend like that, we start screening their calls, avoiding being in a small group with them, because we start to resent being used.  The UK, has a few friends like that, and somebody offered them a way out.  Of course you’ll miss your friend, and you hope they do well going forward, but you have to feed your family first.
                        Looks like the pendulum is swinging the other way today, gang.  after last week’s four day run to victory, the move this morning is clearly back into safety.  Global equities, the British Pound, and Crude are quite soft in the early going.  Strength can be found in the US Dollar, the Swiss Franc. Gold, US Treasuries, or really the sovereign debt of any nation perceived to be sound.  In fact, the entire series of Swiss debt went negative this morning all the way out to 50 years.  There’s something special you may want to put away for your newborn.
                       To be honest, I thought that there would be some profit taking on Friday (instead of today), and positioned myself accordingly.  I was out of my Brexit related trades by Thursday afternoon, with the exception of unrelated securities inspired by cheaper prices in the immediate aftermath.  Left a few bucks on the table, but when you hit targets, you stick with your plan.  Worst thing that can happen to a trader is immediate success upon breaking discipline.  “Winging it” won’t work for long, but it will take a long time to rebuild both sharp discipline, and your confidence.  Two targets on everything.  The good one, and the panic point…. so that it’s not a panic at all.  Too easy, right ??  It’s anything but.
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Macro
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10:00 ET
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Factory Orders (May):  We think that Factory Orders contracted by an approximate -0.8% m/m for May, ending what was a healthy tow month run for this item.  This should not come as a shock to the market, as in recent years, May has been a tough month in this space.  This should be the third consecutive monthly contraction that we see for May.
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14:30 ET
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Fed Speaker:  New York Fed Pres. William Dudley will speak on local economic conditions from Binghampton, NY.  While, Dudley is a permanent voting member of the FOMC, this is close to being an “under the radar” event.  What does that mean?  It means that there is potential for a market moving event here, but that Mr. Dudley is probably shrewd enough to steer clear of allowing it to become one.

Market Recon Friday

Good Morning,
                       There was that “pop” on the close last night… on top of that continuous three day run after planet Earth realized that there had been a gross over-reaction to Brexit.  Time to take profits ??  Already there, at least for Brexit related trades.  Time to get short  ??  If Mark Carney is going to react to a severely devalued currency by devaluing his currency, and we already know that the BOJ will be forced to act, while the ECB prepares to buy everything & anything… well, that’s a freight train that I might not step in front of.  Increase one’s allocation to Gold ??  Yeah, we’re behind the curve on that one.  Probably act on the next serious dip.
                      Where does this all leave Janet Yellen, and her band of policy decision makers ??  Consensus among sentient beings seems to be that her hands are tied in this economic environment, True, more concerning the global economic, and political landscape is unknown at this time than we could possibly be comfortable with.  Yet, markets have rebounded far more quickly than anyone anticipated a week ago.  The compression in bond yields is simply fascinating.  What if the manufacturing number comes in fairly strong today, which is more than a remote possibility.  What if the NFP print looks a lot better next Friday, and drags along with it a positive revision to last month’s awful number ??  What if all of this actually creates a significantly higher estimate for Q2 GDP ??  It would be hard to hide behind a weak Core PCE when Core CPI has printed above your stated target for seven consecutive months.  So interesting, don’t you think ??  I guess we’ll just wait til we see that June ISM number, and take it from there.
                     Have a great Independence Day everyone.  Let me just leave you with a line from a little diddy that always makes myself, and a lot of folks I know cry.
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“And the rockets’ red glare, the bombs bursting in air,
Gave proof through the night that our flag was still there”
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It’s still there.  Always.
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Macro
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All Day
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Total Vehicle Sales (June):  This one is not a real time market moving event, simply because it takes hours to develop.  That said, there will be single stock impact as each auto maker releases their numbers individually.  For June, we look for an annualized print of 17.3 million units at the top line, off from May’s 17.45 million.  A severe miss here would have sorry implications for the overall health of the US consumer, and Mr. Market would take notice.
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09:45 ET
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Markit Manufacturing PMI (June):  This one might matter….. for 15 minutes.  the May final came in at 50.7, and the June flash popped to 51.4.  The expectation for today is that the flash number holds.  Markets will look ahead to the ISM print.
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10:00 ET
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ISM Manufacturing Index (June): With the hit that the manufacturing sector has taken in this country, it really is amazing that this ISM number is expected to print above 50 for the fourth month in a row today.  The actual projection is for something close to 51.4, aided by three Fed districts of five that posted manufacturing data in a state of expansion this month.  I have not seen a single economist below 50 on this one.  Could be a market positive if there is much early profit taking off of last night’s close.
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Construction Spending (May):  This data-point printed at a very nasty -1.8% m/m contraction for April.  Does that matter ??  Probably not.  For four consecutive months, the current data has been released along with a significant upward revision to the last month’s print.  If the pattern holds, we’ll see a miss for the expected 0.6% m/m growth for May, and we’ll see April’s release modied to something closer to the flat-line.
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11:00 ET
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Fed Speaker:  Cleveland Fed Pres. Loretta Mester will speak from London on policy.  She is a voting member of the FOMC, and she will open herself up to questions from the audience.  This is one of those sneaky items that not everyone has on their calendars that actually could move markets.
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13:00 ET
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Baker Hughes Rig Count (Weekly):  Strange day for the energy sector yesterday.  WTI Crude plummets 3%, while the sector stayed comfortably in the green….. perhaps due to that big find off of Guyana that’s supposed to lower production costs.  Regardless, particularly the Oil rig count will move the needle for the commodity.  We’re coming off of a 330 tag here, 421 if you include Nat Gas.