"Winning isn't everything; it's the only thing." -- Vince Lombardi
Interestingly, on a very strong day for equities, the majority of e-mails that I fielded yesterday involved bonds. From sell-side sales traders, and from retail traders alike, either to ask what I thought, or to offer their own opinion, there seemed to be a theme. Traders want to know: "At what point do rising yields become a headwind for equities?" The answer is relatively complex. To this point, the rise in interest rates has been a market tailwind. The financial sector led the post-election "Trump Bump", and then led equity markets sideways to slightly lower for a month. There is no doubt that higher rates are a good thing if you are invested in banks and consumer finance stocks.
Where Pleasure Becomes Pain
The U.S. 10-year took it in the mush yesterday. That particular yield is considered the benchmark (and the one that most non-professional bond traders quote as representative of that entire marketplace). It moved up to 2.5% by the close of business, and has moved closer to 2.55% overnight. It stands to reason that more expensive credit will slow borrowing somewhere. That impacts everything, from corporate repurchases to bond market liquidity to household formation. What we do know is that the point where pleasure becomes pain has not yet figured into equity market price discovery.
Hot to Trot
Some of those e-mails that I received yesterday almost expressed disbelief that these higher borrowing costs had not impacted the rally as yet. With concurrent growth and inflation, the economy, and thus the market, can handle anything. That's theory. In the real world, there have been many calls in the media marking 3% or 3.25% as dangerous levels, including DoubleLine Capital's Jeffrey Gundlach's famous call a month ago. It was then that Gundlach not only cited 3% as dangerous, but indicated that he felt that this administration's policies could end up taking the 10-year to yields as high as 6% in four to five years' time. Then, let's not forget that the FOMC is probably a little hotter to trot than maybe they should be.
What does the two-fisted home-gamer do? If one controls their own bond portfolio, I think this may be a good time to resist the tempting yields of lower-quality paper. Sticking to Treasuries, Municipals that aren't fighting off bankruptcy, and corporates that you have at least heard of are good places to start. Beyond that, professional consultation would likely be wise. As for equities, I won't tell you what to do. I will tell you what I'm doing, and I'm not taking profits in my banking longs just yet. In fact, I have open bids at levels I hope to see on any pullback for many names, including JP Morgan (JPM) , Citigroup (C) , Bank of America (BAC) , and Goldman Sachs (GS) . I also like American Express (AXP) , but only at a discount, and Discover Financial Services (DFS) . That last one is facing some challenges; how it behaves around the 50-day SMA will tell you a lot.
The President did something very interesting when signing off on his plethora of executive orders this week. He required the completion projects of the Keystone XL, and Dakota Access oil pipelines to be constructed using American steel. This seems like a no-brainer to this guy, but was somehow seen as shocking in the media. America First. He means it. This administration also clearly favors bilateral trade deals to the multi-lateral variety. This also seems like common sense, though many are up in arms. How did most of us not see something so simple before? Just stop. Think. Who do multilateral trade agreements benefit the most? The smaller entity trying to gain access to the larger market, or the larger market that gains access to a lesser entity? Then, why, oh why, would the larger market ever negotiate on equal terms? You want to play in the U.S. market, well, you better come prepared to play ball first.
08:30 - Initial Jobless Claims (Weekly): Expecting 247,000, Last Week 234,000. This ever-dwindling data-point is no longer a threat to the marketplace, and has not been for quite some time. Low unemployment and traditionally high underemployment have robbed this number of its ability to impact equity index futures at the time of its release. The four-week moving average, which is how economists view this print, is currently 246,750.
08:30 - Goods Trade Balance (December): Expecting $-64.8 billion, November $-66.6 billion. In November, the U.S. trade balance in goods dropped to its most lopsided deficit since August of 2015. We do expect that to ease somewhat in December. There are two things that you might want to keep in mind when thinking about this item. One would be that this component of the official trade balance actually will dwarf the headline number, because the U.S. is a net exporter of services. The second is that this release will have an impact on estimates for fourth-quarter GDP, which the Bureau of Economic Analysis will go the tape with a preliminary estimate for tomorrow. It also means that we will likely hear from the Atlanta Fed today.
08:30 - Wholesale inventories (December-pre): Expecting 0.9%, November 1.0% m/m. This is another print that may not have all that much of an impact on the marketplace today. What this item will impact is business inventories, and like the goods trade balance, fourth-quarter GDP. We expect to see strong month-over-month growth in this space for the second month in row, after not seeing much inventory-building over the last few years. That in itself would be an indicator of improved confidence at the wholesale level for increased demand, and ultimately economic expansion.
10:00 - Markit Services PMI Flash (January): Expecting 54.4, December 53.9. After dipping into contraction way back in February, this measure of the U.S. service sector has remained firmly entrenched in expansionary territory. The more important number in this realm as far as the markets are concerned is the ISM print, which we'll get a glance at next Friday.
10:00 - New Home Sales (December): Expecting 589,000, November 592,000 SAAR. For November, this item printed at its second best number of the year. Actually, that was also the second best month since early 2008. We do not expect to see much of a drop-off for December, which could be another sign of growing confidence given that interest rates surged for the month. Of all of today's macro-economic data-points, this one has the highest probability to impact the marketplace. That's because this is a jobs creator, and on top of that, this item is an economic multiplier, as it implies a long list of ancillary expenditures for the purchaser.
10:00 - Leading Indicators (December): Expecting 0.4%, November 0.0% m/m. In theory, this should be an important item for traders. As it turns out, though, nobody on Wall Street trades off of this thing, so you do not have to focus upon it. This is an index of 10 sub-components that the market place has already reacted to, and priced in. A nice way for economists to generalize trend, but that's about it.
10:30 - Natural Gas Inventories (Weekly): Expecting -125 billion, Last Week -243 billion cubic feet. This should be the tenth consecutive weekly contraction in U.S. Natural Gas supplies. Nat Gas has been in recovery mode this week, and this number should directly impact that chart.
11:00 - Kansas City Fed Manufacturing Index (January): December 11. Kansas City attempts to go for their fifth consecutive month spent in headline expansion today. If KC can do so, they will join New York, Philadelphia, and Richmond, who have all already shown such expansion this month. Dallas goes to the tape on Monday to round out the manufacturing surveys of the regional Fed districts for the month.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2324, 2313, 2305, 2294, 2282, 2272
RUT: 1394, 1388, 1383, 1377, 1370, 1365
Thursday's Earnings Highlights
Before the Open: (BHI) (-$0.13), (BX) ($0.66), (BMY) ($0.66), (CAT) ($0.67), (CELG) ($1.59), (DLX) ($1.35), (DOW) ($0.88), (F) ($0.32), (HP) (-$0.37), (NOC) ($2.49), (POT) ($0.09), (RTN) ($1.86), (SHW) ($2.21), (LUV) ($0.69), (SWK) ($1.68), (WHR) ($4.40)