Friday, March 5, 2021

Morning Note: Read Carefully

This morning's jobs number surprised bigly to the upside. Uh oh!!

I'll explain "Uh oh!!" in a sec...

The consensus estimate for this morning's jobs number was 200k, it came in at 379k. Leisure and hospitality (read restaurants and bars), as you might expect, accounted for 355k. Construction gave up 61k, but of course there was that weather last month.

So, again, Uh oh!! -- and I'm thinking stocks. You see, the market screamed off of last March's low while our own economic index continued to careen to a previously unimaginable -83 (-100 is as low as it goes). I.e., the news was utterly horrific and stocks traded utterly wonderfully. 

I.e., stocks were trading on 3 things, and 3 things only; stimulus, stimulus and more stimulus! And as long as the economy suffered, there'd be more and more and more stimulus to come.

Well, as we've been preaching for months on end, there are two things today's stock market simply cannot do for any extended period of time -- higher interest rates and a stronger dollar.

Yes, the economy is absolutely finding its legs -- yeah, I could quip prosthetics right here, but I won't. I.e., the surface fundamentals are clearly improving, but, alas, the fundamentals are not remotely what stocks are trading on these days. As strong fundamentals mean (or should mean) less stimulus, and (do mean) higher interest rates and a stronger dollar.

Traders are not sure quite what to do with the jobs news so far this morning. Immediately, on the announcement, the Dow popped 300 points higher, the S&P jumped 1%, the Nasdaq by nearly that much. Since that initial thrust, however, the S&P dipped into the red, but it's now back up by 0.29%. The Nasdaq turned red as well, and it's still there (-0.32%). The Dow is clinging to a 180 point gain. 

I've got a bit more to say before I get to the usual numbers section, so don't quote me on the above.

Yesterday was yet another rough one for equities, as Fed chairman Powell did not give the market what it was hoping for --  some hint that they'd go the way of Japan and do some magic on the longer-end of the yield curve (buy down those rapidly rising yields). 

Speaking of Japan, they're definitely going the way of Japan. Last night, BOJ governor Kuroda firmly committed to keeping the 10-year JGB (Japanese govt bond) under tight wraps. JGB yields utterly plunged on the news. 

The topic of yield curve control (what I just described) is hot across the latest commentary from the punditry. It's a lot like the inflation debate -- lots of really smart macro thinkers think we simply ain't going there, or at least not anytime soon, while a number of equally smart ones say it's a foregone conclusion.

Yours truly is in the latter camp (feel free to dismiss the "smart" characterization if you like). And it's not about a yield target, it's, plain and simply, about the stock market. 

If the stock market seriously buckles under the weight of rising interest rates, J. Powell and company will, in my humble opinion, absolutely start screaming yield curve control. I mean if they'll literally betray the dictate of the Federal Reserve Act and buy junk bonds (during last year's meltdown), aggressively intervening out the yield curve -- regardless of the longer-term risks (and there are plenty) -- is a virtual no brainer.

Asian equities stuggled overnight, with 10 of the 16 markets we track closing lower.

Europe's mixed at the moment, with 9 of the 19 bourses we follow currently in the red.

U.S. major averages are mixed as well: Dow up 92 points (0.30%), SP500 down 0.03%, SP500 Equal Weight up 0.16%, Nasdaq 100 down 0.71%, Russell 2000 down 0.47%

The VIX (SP500 implied volatility) is down 0.81%. VXN (Nasdaq 100 i.v.) is up 0.03%.

Oil futures are up 2.96%, gold's up 0.23%, silver's down 0.72%, copper futures are up 2.25% and the ag complex is up 0.12%.

The 10-year treasury is down (yield up) and the dollar is up a not-small 0.34%.

Led by AT&T, base metals, energy, Verizon and oil services, or core portfolio is up 0.20% to start the session. Our biggest drags are silver, tech, Eurozone equities, emerging market equities and the yen.

Long closing quote this morning (from an interview with retired hedge fund manager Colm O'shea, featured in J. Schwager's Hedge Fund Market Wizards), but very timely, and worth a careful read:

"If you live in a world where everyone assumes that everything goes up forever, then it is inconceivable that prices might go down. Big price changes occur when market participants are forced to reevaluate their prejudices, not necessarily because the world changes that much. The world really didn’t change that much in 2008. It was just that people finally noticed there was a problem.

Consider the current U.S. debt problem. A lot of people say there is apparently no inflationary threat from the growing U.S. debt because bond yields are low. But that’s not true. Bond yields will only signal that there is a problem when it is too late to fix it. You have to believe in market efficiency to believe that the market will adequately price fiscal risk. Could there be a crisis in five years? Sure. Why? Because people start to care. Currently, it’s not in the price. But one day, it might be. If a major financial catastrophe happens, people will talk about how it was caused by this event or that event. If it happens, though, it will be because there were fundamental reasons that were there all along.

There will always be something that happens at the same time. Calling it a catalyst isn’t very helpful in explaining anything. Did World War I start because the Archduke was assassinated? Well, kind of, but mainly not. I don’t subscribe to the catalyst theory of history. But most people love it, especially in markets, because they can point to that one cause and say, “Who knew that could happen?”"

Have a nice day!

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