On this date in 1775, the shot heard around the world was fired at Lexington, Massachusetts. Outnumbered militiamen then fell back to Concord, where they were joined by reinforcements numbering an approximate 400 men who then turned the tables on about 100 British regulars who had been in pursuit. The British survivors fell back to join their main force of about 1700 troops, and then retreated to the garrison at Boston, being harassed by Massachusetts militia throughout the day. The rest, as they say, is history.
Seven Weeks Later ...
We've seen a mild unwind of some recent market trends throughout the dark hours this morning. Although nothing has moved that dramatically, the U.S. dollar has firmed against the pound, the euro and the yen. U.S. 10-year paper again yields more than 2.2%, and there does seem to be some early profit-taking in the gold space that would pair up nicely with that dollar support. Still, that dollar, and those yields remain in far different trading ranges than they were, even a week ago.
That brings us to Wall Street's re-positioning of itself toward a bearish stance on the U.S. currency. Just yesterday, Goldman Sachs was the latest to make that leap, almost seven weeks after Douglas Borthwick told you the same thing right here at TheStreet in our early March roundtable of experts, "Trading Strategies". Douglas has made a career of being ahead of the pack. His consistency in such matters often leaves me in awe. Even without an official change in a "strong dollar policy", the president has made clear his preference for a currency position that would improve the U.S. manufacturing base, and ultimately close the large deficit now suffered by the U.S. vs. several international trading partners.
The president may be somewhat stealthily moving in that direction by making nice with the Fed Chair, who may or may not like to keep her job, and by controlling the filling of several openings at the Federal Reserve Board. The administration also appears stalled in its stated agenda of kick-starting growth though tax cuts and fiscal spending. At some point, you would think it likely that we do see these items come to fruition, though possibly with a muted level of gusto.
The forward-looking trajectory of monetary policy is currently doubted in the marketplace, as fed funds futures are no longer pricing in a "sure thing" rate hike in June. The spate of recent weakness seen in auto sales and consumer levels inflation will certainly have decision makers watching to see if these reports are outliers, or the start of some negative trends. On top of this, economic growth globally seems to be accelerating to a greater degree than growth in the U.S. We shall see, my friends.
Bank on This?
As some of you know, I like to like the banks. When markets are strong, they tend to be stronger when the banks lead. When the banks lead, the economy itself seems stronger. Like the rest of the public, I got myself very long the space in the wake of the election. Like many, I've been lightening my load for a couple of months now. In fact, I'm down to tags' ends in Citigroup (C) , and JP Morgan (JPM) . I may even completely close those trades shortly. The only name in the space that I think I want to stay long is Key Bank (KEY) , and not because it is slaying dragons. I just simply think it is well run, has not fully realized synergies from the Niagara takeover, and are attractively priced from a risk perspective. I won't leave this trade unhedged, either. This whole rough spot, despite some nice first-quarter earnings across the space, will become a yield curve thing, gang. It really is that simple.
The spread between yields on U.S. three-month bills and 10-year notes yesterday reached its lowest level since early October. That's prior to the election. What this means to me, is that Mr. and Ms. Market no longer trust the outlook for domestic economic growth. The FOMC have not changed their projections for monetary policy. That's true, but let's keep in mind that the Fed is often incorrect in its predictions, and that all of its models are reliant on data that make the Fed itself a lagging indicator. The spread between yields has probably gone as far as it can go on confidence and optimism. There will likely have to be actual evidence of progress made regarding the U.S. administration's pro-growth, pro-business, pro-inflation agenda. Without such evidence, the banks may have already shown you the best they've got. Sure thing? Heck no. I'm just a guy with an opinion, but I do bet on my opinions.
Ran across a fun little article in the Financial Times last night. The U.S. Treasury has apparently asked primary dealers to respond, in the Treasury's quarterly survey, to questions regarding bonds with maturities of up to 100 years. Meetings are scheduled for late April that will clue the Treasury's leadership in the potential for how products like this would be received by the marketplace. The U.S. Treasury makes its next refunding announcement in early May, and hopefully we'll have something to read on this matter.
We all know that this administration has been looking for a way to ramp up fiscal spending. Rebuilding the military and the nation's infrastructure have been mentioned specifically, over and over again. This would be one potential way to pay for this, and kick the can down the road ... way down the road. Jim Cramer has spoken on this matter many times this year. You could sell them to the public. You could sell them in small lots, maturing in 40, 50, or 100 years. Century bonds. Stupid? Maybe. If your great-great grandpa, whom you never met, left you a bunch of money, would you call him stupid? Didn't think so. From a consumer point of view, I believe this kind of debt is saleable. From the government's point of view, after a couple of economic resets and six or seven calamities, these rates would likely appear darned attractive. Again, just a kid from the neighborhood thinking out loud.
10:30 - Oil Inventories (Weekly): API -840,000 , Last week -2.2 million barrels.
10:30 - Gasoline Stocks (Weekly): API +1.4 million, Last Week -3.0 million barrels. Last night's API data did not help crude prices much. The Tuesday night numbers that some look at as a prelude to the EIA data released on Wednesday mornings showed a smaller-than-expected draw at the headline, and a surprise build in the gasoline space. In after-hours trading, WTI crude re-tested the lows from Tuesday's regular session.
12:30 - Fed Speaker: Boston Fed Pres. Eric Rosengren speaks this afternoon from Annandale on the Hudson. Rosengren, who does note vote on policy this year, was quite active in media circles throughout March. At that time, he was looking to put four rate hikes to the tape this year. I would be interested to see if the March macro has softened that stance at all.
14:00 - Beige Book: Always interesting, this edition of the Fed's Beige Book could gather more attention than usual. Now that the economy has shown some overt weakness, and with an FOMC policy decision just two weeks out, the markets will watch closely for anecdotal economic evidence of current conditions from across the twelve districts. This item, not the oil inventories print, will likely be your macro market event of the day.
Sarge's Trading Level
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: 2362, 2351, 2344, 2336, 2327, 2320
RUT: 1380, 1374, 1367, 1361, 1351, 1341
Wednesday's Earnings Highlights (Consensus EPS Expectations)