Tech Trade Tumbles, Crude Climbs, Main Street Turns Mean

The Tempest

Mariners: All lost! to prayers, to prayers! all lost!

Boatswain: What, must our mouths be cold?

GONZALO: The king and prince at prayers! let’s assist them,
For our case is as theirs.

SEBASTIAN: I’m out of patience.

ANTONIO: We are merely cheated of our lives by drunkards:
This wide-chapp’d rascal–would thou mightst lie drowning
The washing of ten tides!

GONZALO: He’ll be hang’d yet,
Though every drop of water swear against it
And gape at widest to glut him.

[ A confused noise within: ‘Mercy on us!’– ‘We split, we split!’–‘Farewell, my wife and children!’– ‘Farewell, brother!’–‘We split, we split, we split!’ ]

ANTONIO: Let’s all sink with the king.
SEBASTIAN: Let’s take leave of him.

GONZALO: Now would I give a thousand furlongs of sea for an
acre of barren ground, ling, heath, brown furze, any thing. The wills above be done! but I would
fain die a dry death.

– William Shakespeare (1611)

The Ugly Stick

The seas have been rough for certain types of traders and investors. The major U.S. equity indexes have hung in there fairly well close enough to the tops of their respective charts. That said, there has been quite the shift. On Thursday evening, the S&P 500 closed just 1.1% below its all-time high in early June. The Philadelphia Semiconductor Index peaked three weeks later, in late June. That specialized index, however, closed last night an ugly 19.1% below that peak and Friday morning ain’t looking so hot

Tech traders, or those who have best benefited from the growth or AI-focused trades, have hit some heavy turbulence as other trades have returned to prominence. The intensification of the war between the U.S. and Iran has renewed certain uncertainties regarding the scarcity of crude oil and the potential for rekindled producer and consumer level inflation. Yes, despite the better-than-expected numbers published covering that space for the month of June.

As the tech trade has faltered, the AI-trade has stumbled as doubts arise directly tied to the sustainability of the broad increase in capex spending that had run through the U.S. economy. This has crushed the free cash flow once regularly enjoyed by tech giants while creating possibly unrealistic projections for futures revenues and net income for those names that supply the necessary infrastructure to this trade.
It happens every once in a while. I don’t like it. It never feels good. Every now and then, after a string of great victories have allowed egos to grow and arrogance to develop, all traders, myself included, must be purified through a trial by fire that forces us to manage risk and rely upon our core set of disciplines. Like professional athletes, traders have periods where they are probably not as good as the numbers say they are. Then there are periods where traders are tested. Their numbers thin during these periods and they must dig deep.

I manage only one-third of my available investable funds. I have two other managers that, under my strategic guidance, manage on a tactical level, one-third each. We all operate with different mission statements, so it’s not an apples-to-apples comparison. One of us primarily trades and invests in debt securities, while I am the most aggressive in the equity space. Often, I look at our monthly performance and think, “Why am I paying these guys?” Right now, I am thinking… “Thank goodness I kept these guys around.”

On top of that, more stocks, large stocks have entered the marketplace from the realms of both the private and foreign spheres. This has drawn capital that might have gone elsewhere. That’s not the root cause of the issue, but is surely a symptom of what had been a runaway market and exacerbates the condition that we now see before us.

How do you stop a runaway machine gun? I know that we have some infantry folks out there. The only way to get it done without allowing the barrel to melt is to break the ammo belt. That is what we now see across U.S. markets. The market had become a runaway machine gun, and the assistant gunner had to break the belt. The gun has run out of ammo and now we see the smoke rising from the weapon, but said weapon remains too hot to touch. Enter the “ugly stick.” Enter the tempest. For the barrel must be removed and laid upon the grass to cool if it is ever to be useful again. In the meantime, said grass flames out, dies and turns black. Ugly.

Friday, Fri-Yay?

U.S. equity index futures are trading deep in the hole through the zero-dark hours of Friday morning. I see Nasdaq futures trading more than 2% below fair value. Overseas, the KOSPI Index (South Korea) was down 6.4%, the Nikkei 225 (Japan) was down 4% and the Shanghai Composite (China) gave up 3.1%. European markets were just opening as I wrote this note but appeared to be under pressure as well.

The tech trade, at least as the snakes, coyotes and bobcats rule the night in my neighborhood, is still being hit with the ugly stick. This is despite the fact that U.S. Treasury yields have moved lower. I see the U.S. Ten-Year Note paying 4.52%, down from 4.57% on Thursday afternoon. I see the U.S. Two-Year Note yielding 4.12% after yielding 4.16% on Thursday afternoon.

Perhaps there is some flight to safety in response to the increased pace of the bombing of targets inside Iran. Crude oil prices continue to rise. I needed gas last night and paid $4 a gallon for the first time in a few weeks. I don’t want to call what I saw at that station a sign of the times. This happened just off an interstate highway on a busy street. There were homeless folks camped out in some woods next to the gas station. There was also a prostitute working the filling area. We better wake the heck up, gang. It’s getting really rough for a growing number of people.

The Economics, Though…

At least those numbers that we have seen of late do appear to be reflective of an economy in recovery. At least it looks better than it did. While June numbers for inflation showed significant improvement, so did June retail sales, in a way. While the headline print landed at growth of just 0.2% month over month, ex-gasoline that growth shows up at 0.7%, which is strong. Gas Stations showed June fell, yes, fell 5.3% from May, not because folks bought less gas, but because gas prices were lower.

I found it encouraging for the month that auto sales were up 1.9%, electronics purchases were up 0.8% and internet sales were up 1.9%. I found it extremely encouraging that what I call the “fun index” was up 1.3% from May. The fun index includes sporting goods, hobbies, music and books. The category consists of discretionary items that consumers want but do not need. If this category is hot then at least some consumers are feeling okay with their situation.

Mixed Signals?

Definitely. On the one hand, I see the homeless out in the woods and streetwalkers working a gas station. On the other hand, folks are spending more money on basketballs and hobbies. Does that mean that we are at a turning point that could go either way? Or does this mean that our economy has become further bifurcated?

At least we do know that the manufacturing sector does seem to be showing some conditional improvement. Manufacturers have traditionally driven a decent share of middle-class job creation. In the present day, it is difficult to measure how much automation, machine learning and artificial intelligence are impacting this overall improvement and what the impact will be on those underlying jobs.

Both the New York and Philadelphia Feds have released the results of their monthly regional manufacturing-focused surveys for July this week. Both of these districts reported a very strong month. New orders are up sharply across both regions as are shipments. There has been an improvement in Inventory building and at least in New York, a deceleration in the growth of both prices paid and prices received.

Perhaps most importantly, would be these two lines. The number of employees increased across both regions as did the average workweek. For now, I guess that’s all we can ask.

Economics (All Times Eastern)

08:30 – Housing Starts (June): Expecting 1.32M, Last 1.177M SAAR.
08:30 – Building Permits (June): Expecting 1.41M, Last 1.41M SAAR.

08:30 – Export Prices (June): Expecting 0.9% m/m, Last 1.3% m/m.
08:30 – Import Prices (June): Expecting -0.4% m/m, Last 1.9% m/m.

08:30 – Industrial Production (June): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 – Capacity Utilization (June): Expecting 76.2%, Last 76.2%.

10:00 – U of M Consumer Sentiment (July-adv): Expecting 51.3, Last 49.5.
10:00 – U of M 1 Yr Inflation Expectations (July-adv): Expecting 4.2%, Last 4.6%.
10:00 – U of M 5 Yr Inflation Expectations (July-adv): Expecting 3.1%, Last 3.3%.

1:00 p.m. – Baker Hughes Total Rig Count (Weekly): Last 581.
1:00 – Baker Hughes Oil Rig Count (Weekly): Last 445.

The Fed (All Times Eastern)

No public appearances scheduled.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: FITB (0.98), TRV (5.33)

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