A Downed Copter, Sinking Sentiment, and a Giant IPO Called SpaceX

The Rainy Day

My life is cold, and dark, and dreary;
It rains, and the wind is never weary;
My thoughts still cling to the mouldering Past,
But the hopes of youth fall thick in the blast,
And the days are dark and dreary.
Be still, sad heart! and cease repining;
Behind the clouds is the sun still shining;
Thy fate is the common fate of all,
Into each life some rain must fall,
Some days must be dark and dreary.

– Henry Wadsworth Longfellow (1841)

Negative Sentiment Grows

Days … it had been days since the sun had appeared. Toes frozen. Snow on the ground. Still … no sign of the sun. Sharp wind. Packs stowed and camouflaged a few miles away. It starts to rain. A cold rain on a cold day. Rain gear? With the packs. Stowed a few miles from here. Now drenched. Did I mention the cold? Getting dark. No fire. No coffee. Still raining. Now pouring. Just super.

On Tuesday, news broke that a U.S. Army AH-64 Apache attack helicopter assigned to the 82nd Airborne Division, which is a Boeing (BA) product, was shot down by an Iranian unmanned aircraft (drone) off of the coast of Oman. The pilot and co-pilot were both successfully rescued by a U.S. Navy Corsair unmanned surface vessel (drone) operated by the 5th Fleet’s Task Force 59. The Corsair is manufactured by Saronic Technologies, which is not publicly traded.

Task Force 59 was created in 2021 and is the U.S. Navy’s first unit primarily dedicated to the use of unmanned systems. The Corsair is a 24-foot seagoing drone. Saronic’s portfolio includes a 52-foot model and a 180-foot model. Of all of the IPO talk of late, Saronic may be the company to keep in the back of one’s mind as defense spending is likely to only increase going forward as geopolitical risks expand and naval powers look to reduce human risk.

U.S. equity markets had been trading higher when this news did hit the tape. The news had a profound real-time negative impact, especially on the tech space, despite that WTI Crude continued to sell off and despite that bond traders moved into Treasury debt securities (forcing yields lower). Markets found temporary relief mid-afternoon as Pres. Trump said that a deal with Iran could be reached in “two or three days,” while also acknowledging that U.S. forces would have to respond to Iran having downed that helicopter.

The Response

U.S. forces did indeed respond to Iranian forces downing a U.S. Army helicopter. CENTCOM announced, “The operation was a proportional response to recent attacks on U.S. forces and international commercial ships transiting regional waters.” U.S. forces conducted three waves of attacks. These strikes targeted air defense and radar sites near the Strait of Hormuz. U.S. Air Force and U.S. Navy jet fighters launched precision munitions against these targets, which also included ground control stations.

Iran’s Islamic Revolutionary Guard Corps launched several strikes while under attack. All are believed to have failed. The IRGC targeted the U.S. 5th Fleet in Bahrain, while the Kuwaiti army reported that it was intercepting incoming fire. Jordanian forces also reported having to shoot down five Iranian missiles.

More Than Iran

Financial market sentiment has been on thin ice for days now, for multiple reasons. Not just has the ceasefire with Iran been anything but a ceasefire, SpaceX is expected to go public this Friday and supply U.S. equity markets with as much as $86 billion worth of common stock. Well, where do you think those buying those shares will raise that capital? Cash? Bonds? OK, maybe to some degree. These institutional investors, more so than smaller, retail investors will reallocate capital from existing positions (sell stock) to apply to their new position.

We did warn readers that SpaceX would probably have a negative impact on the rest of the market. This seems to happen whenever a large, high-profile private company goes public, and this will be the largest such deal to date. There will be more to come as Anthropic and OpenAI will also go public as 2026 rolls on. In addition, with May consumer price index due this morning and May producer price index due tomorrow morning, there was increased impetus for investors with profits to take those profits.

Simple Question

We have a simple question. We also have a simple answer. First, understand that Friday presented as a “Day One” bearish reversal of trend and Monday presented as the necessary pause that must come after a reversal and ahead of a confirmation. So, did Tuesday present as a “Confirmation Day” reinforcing the new bearish trend? Not exactly. That confirmation may or may not come on Wednesday depending on the consumer price index data, but it did not come on Tuesday

But, Sarge, markets traded lower at the headline level as trading volumes increased. That much is true, my young padawan. Tuesday, however, really wasn’t negative in a broad sense. It just felt that way, because most of us have significant exposure to the tech sector. Check this out: The Nasdaq Composite gave up 0.97% on Tuesday, but the S&P 500 only lost 0.26%. Looking into that Nasdaq-centric action, the Nasdaq 100 gave back 1.12% as The State Street Technology Select Sector SPDR ETF (XLK) lost 1.85%, the Philadelphia Semiconductor Index lost 1.93% and the Dow Jones U.S. Software Index surrendered 2.49%.

There was some joy in Mudville. The Dow Transports gained 1.33% as oil prices fell counterintuitively. The KBW Banks added 0.83% as well as all of the small-to-mid-cap indexes gained between 0.41% and 0.99%. How about breadth? Breadth must have been awful. Not really.

Breadth

Nine of the 11 S&P sector SPDR ETFs closed out the Tuesday session in the green, led by the REITs (XLRE). It is true that defensives outperformed cyclicals, which is not a market nor an economic positive, but the story was really the underperformance of the growth type sectors.

Winners beat losers (that’s right, winners beat losers) by nearly a two-to-one margin at the NYSE and even by a very narrow margin at the Nasdaq where most tech stocks are domiciled. Advancing volume took a majority share of both composite NYSE-listed and composite Nasdaq-listed activity on Tuesday. This rendered the fact that aggregate trading volume increased sharply across both exchanges moot from the perspective of confirming a bearish trend.

Nasty Reality

A new estimate from the Social Security Administration’s Trustees now projects that the Trust Fund will run out of reserves, if nothing changes, by the end of 2032, which is one quarter earlier than last year’s estimate. Will Social Security be unable to pay benefits at that time. Given the political football that social security is, I highly doubt that. Let’s discuss.

Under current federal law, Social Security is self-financed and can only pay benefits from the 12.4% payroll tax, the income tax paid on Social Security benefits, interest earned on the fund’s bonds and reserves. Those reserves are what is running dry. Should those reserves be allowed to run out, recipients would face a 22% “pay” cut. Current law does not allow the government to make up the difference from other sources. That, by 2032, will, in my opinion, change.

Economics

(All Times Eastern)

07:00 – MBA 30 Year Mortgage Rate (Weekly): Last 6.57%.
07:00 – MBA Mortgage Applications (Weekly): Last -2.5% w/w.

08:30 – CPI (May): Expecting 0.4% m/m, Last 0.6% m/m.
08:30 – Core CPI (May): Expecting 0.4% m/m, Last 0.4% m/m.
08:30 – CPI (May): Expecting 4.1% y/y, Last 3.8% y/y.
08:30 – Core CPI (May): Expecting 2.9% y/y, Last 2.8% y/y.

10:30 – Oil Inventories (Weekly): Last -7.947M.
10:30 – Gasoline Stocks (Weekly): Last +3.364M.

1:00 p.m. – Ten-Year Note Auction: $39B.

2:00 – Federal Budget Statement (Weekly): Last $215B.

The Fed (All Times Eastern)

Fed Blackout Period.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: CHWY (.43)
After the Close: ORCL (1.96)

At the time of publication, Guilfoyle had no position in any security mentioned.