One might not have thought it likely. That markets could be stunned, in late 2021, after all we as a people, as a society.. have been through. Friday was the first shot, not across the bow, but a direct hit, right at the waterline. Since then, markets have struggled to price in a new reality. This new environment, at least for now, is one where a variant of the SARS-CoV-2 coronavirus unheard of until last Thursday, a U.S. holiday, suddenly forces views of global and domestic economic activity to be seen through the prism of potential downside risk. As if that were not enough, not that the Federal Reserve was not already implementing their plan to reduce the monthly balance sheet expansion program, but just as suddenly appears to pivot from a strategy focusing on labor market performance over controlling inflation to just the opposite.
So, stunned is the word. Domestic financial markets were stunned on Tuesday. Losers beat winners at the NYSE by almost four to one, and at the Nasdaq Market Site by about five to two. Aggregate trading volume increased 55.8% for NYSE-listed names on Tuesday over Monday, while such action increased an even 40% for Nasdaq-listed names. All 11 S&P sector select SPDR ETFs closed in the red with 10 of the 11 giving up at least one full percentage point for the session, and eight of the 11 surrendering at least 2%. Advancing volume composed 10.6% of NYSE composite trading volume, and a whopping 30.3% of the Nasdaq composite. In other words, there was not just an apparent wave of professional selling on Tuesday, there were waves of such selling, as program after program hit bids across various points of sale for hours.
The U.S. Treasury Curve flattened (to January 2021 levels) just as severely as equities were sold on Tuesday. Bond traders sold the short end of the curve, while buying up the extreme long end. I think this chart of the Two Year/Ten Year spread illustrates Tuesday’s action best…
Asian traders have been busy selling U.S. Treasury securities up and down the curve overnight (which makes more sense), while also buying up U.S. equity index futures from the nearly technically oversold levels where they went out last night. The above spread now stands at 88 basis points as the U.S. Two Year pays 0.615% and U.S. Ten Year paper pays 1.496%. I am sure that no one reading this note needs to be told about the relationship between flattening yield curves and the prospects for economic growth. If you do, it ain’t purty.
Bright Spot
Apple (AAPL) easily led the Dow 30 for the day, up 3.13% on very heavy trading volume. News broke that Chinese November sales data made Apple the top smartphone seller in that nation, while separately there was talk of Apple preparing to unveil a third generation iPhone SE at some point during Q1 2022, establishing for Apple, the most widely held stock across the U.S. equity marketplace, a toehold in the mid-range 5G smartphone market. Just think, the S&P 500 and Dow Industrials lost 1.9%, while the Nasdaq Composite and Nasdaq 100 both gave up 1.6%… with Apple providing tremendous upside support.
Powell
The quotes speak for themselves. On the central bank’s “transitory” view of consumer level inflation, Powell said, “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.” On policy, Powell said… “The economy is very strong and inflationary pressures are high. It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases… perhaps a few months sooner.” Powell added that the committee (FOMC) will have to discuss such a change in trajectory at its next meeting, December 14th and 15th.
Why what Powell said on Tuesday is so important is this. Most economists and most Fed watchers had expected that a dovish Fed might slow the taper until more is understood in regards to the transmissibility and potential severity of the new Omicron variant of Covid-19. As the U.S. and other nations have imposed travel bans on southern African nations, or in the case of both Israel and Japan.. all foreign travelers, it stands to reason that economic activity will slow. In the U.S., CDC Director Rochelle Walensky told the media on Tuesday that the agency was considering the narrowing of the testing window for all inbound travelers, while expanding surveillance programs at selected U.S. airports.
We all know, or at least I think that in his heart, Powell leans hawkish. We have known that since 2018, when the Fed’s move toward tightening monetary policy not only slowed the economy, which was felt across financial markets, but put him at odds with then-President Donald Trump. I understand the shift toward combating inflation over prioritizing economic performance. This is why Powell led off with a reminder of just how strong he sees the economy as being.
My take-away from all of this, as I do see reason to believe that the currently very hot pace of consumer level inflation is/was indeed unsustainable, unless something significant were to alter that course, is that Powell must be very worried about Omicron, not so much the new variant’s ability to slow economic activity, which may or may not be inevitable, but the variant’s ability to prolong inflation where it might have started to ebb. In short, I think Powell sees supply lines that were starting to un-kink, possibly re-kinking up as social distancing and proper precautions become more widely practiced than they have been in reality for quite some time now.
The bottom line is that Powell feels a need to be flexible sooner. He needs to be able to raise short-term interest rate targets and in order to express that kind of monetary agility, the central bank can not still be actively expanding its holdings. On that note, the OECD on Wednesday morning published that group’s economic projections that cut 2022 projections for GDP across the U.S., Eurozone, the UK, and China, while increasing the group’s inflationary expectations for the U.S., the UK, and the Eurozone.
Trading Story Number One
On Tuesday evening, Salesforce (CRM) reported third quarter results that crushed expectations for both the top and bottom lines. The stock sold off hard after hours. The problem had nothing to do with current performance, nor with the promotion of Bret Taylor from President and COO to Vice Chair and CEO. The problem was in the guidance for both the current quarter and the next fiscal year. For the fourth quarter, the firm sees adjusted EPS of $0.72 to $0.73 versus consensus of $0.82, and revenue generation of $7.22B to $7.23B, which was slightly below the $7.24B that Wall Street was looking for. Salesforce also guided fiscal first quarter revenue slightly below Wall Street’s, while guiding revenues for the next fiscal full year right in line with consensus opinion.
Five star (at TipRanks) analyst Brent Thill is already out on Wednesday morning, defending his “Buy” rating and $360 price target, while fellow five star analyst Patrick Walravens of JMP Securities who already rated Salesforce at “outperform” increased his price target from $325 to $350. Do I think Salesforce is a buy on this dip? Indeed, I do. I was active after hours on Tuesday night, adding to my long position on that discount, but still increasing my net basis. As I wrote to you earlier in the week, I added down to $268. (I told you I would add down to $269, I missed my price and saved almost a buck.)
The problem with CRM is that an unfilled gap from late September exists from $260 to $266. My feeling is that if the gap starts to fill, that it might very well fill completely. An agile trader who bails at $265 could probably buy the shares back at $260 or lower. That is my plan if my late night purchase goes awry. I would trade around the core, not exit the name completely. My target price long-term remains $373, but that requires action at a $311 pivot which is not realistic for now. Closing on Wednesday above $269 (38.2% retracement of the March through November rally) is key.
Trading Story Number Two
Zscaler (ZS) also reported (fiscal first quarter) results last night. ZS ripped the cover off of the ball as we had expected. Beats on the top and bottom lines. Revenue growth that is only accelerating (+62%), Calculated billings +71%, Deferred revenue +74%. The firm also significantly increased current quarter as well as full year guidance for revenue generation to levels well above what Wall Street was looking for.
Four “five stars” have already opined on the name this morning. Needham’s Alex Henderson and Erik Suppiger of JMP Securities (both “buys”) increased their target prices to $390 and $400, respectively. In addition two “holds” sort of threw in the towel. Morgan Stanley’s Keith Weiss took his price target up to $330 from $275, while Piper Sandler’s Rob Owens increased his target from $285 to $365. Unless I have missed someone, I believe that my $450 price target is still the highest on Wall Street.
While I did not add to my existing long position in Zscaler on Tuesday night, I did initiate a long position in CrowdStrike (CRWD) after hours. While that position is up small overnight, the reason for my move is that CrowdStrike reports tonight. We have already seen Palo Alto (PANW) and Zscaler hit quarterly home runs. Now, both of those names were able to draw support from constructive looking charts, as neither had given up the 21 day EMA.
CrowdStrike has a much uglier looking chart, and will start the day still a long way from its 200 day SMA. There is some risk involved here. For me, this is probably more of a trade than an investment. We’ll see how the day proceeds.
Trading Story Number Three
Because someone asked… I also paid discount prices to add to Sarge dogs ViacomCBS (VIAC) , and the Walt Disney Company (DIS) close enough to their daily lows on Tuesday. Yes, I am down on both of those names. No, neither has violated my 8% rule.
Economics (All Times Eastern)
08:15 – ADP Employment Report (Nov): Expecting 525K, Last 571K.
09:45 – Markit Manufacturing PMI (Nov-rev): Flashed 59.1.
10:00 – ISM Manufacturing Index (Nov): Expecting 60.7, Last 60.8.
10:00 – Construction Spending (Oct): Expecting 0.5% m/m, Last -0.5% m/m.
10:30 – Oil Inventories (Weekly): Last +1.017M.
10:30 – Gasoline Stocks (Weekly): Last -603K.
The Fed & The Treasury (All Times Eastern)
10:00 – Speaker: Treasury Secretary Janet Yellen.
10:00 – Speaker: Federal Reserve Chair Jerome Powell.
14:00 – Beige Book.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: (WEBR) (-.18)
After the Close: (CRWD) (.10), (FIVE) (.29), (SNOW) (-.06), (SPLK) (-.53), (SNPS) (1.79), (VEEV) (.88)
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