You Better Take 'Note'

Psycho Circus

I've been waiting here to be your guide

So come

Reveal the secrets that you keep inside

Step up!

No one leaves 'til the night is done

The amplifier starts to hum

The carnival has just begun

- Cuomo, Stanley (KISS), 1998

Welcome to the Street Show

Equity markets rallied on Monday. Did it matter? Was it real? It certainly was for those who traded, who contributed to price discovery in public markets. With Treasury yields again moving higher, portfolio managers rotated not necessarily out of large caps as all of those indexes were flat or up a bit, but certainly into small caps as the Russell 2000 and S&P 600 gained 1.63% and 1.52% respectively. The S&P Midcap 400 was up 1.01% as well.

What did the large caps do? The S&P 500 still managed to tack on 0.27%, as the Nasdaq Composite added 0.26%, marking an eighth winning session in nine business days for the latter of the two. It was those small caps that carried the Nasdaq Composite to victory on Monday, though as the Nasdaq 100 closed down less than a smidgen (essentially unchanged) going into this week's big events, that is the release of third-quarter earnings by five of the "Magnificent Seven" mega-cap tech names.

The fun starts this evening when Alphabet GOOGL, rather than Aaron Judge steps to the plate. These earnings that in all likelihood could impact the trajectory of our equity marketplace going into the holiday season will remain the latest and newest "big thing" until Friday's October Employment Report, until Election Day (Tuesday) and until next Thursday (FOMC policy decision day).

Selfishly, as far as the Sarge-folio is concerned, Alphabet is not the big deal this evening that SoFi Technologies SOFI is this morning and Advanced Micro Devices AMD will be later on. I am also at risk to a much smaller degree in McDonald's MCD, who will post quarterly performance this morning after last week's fresh onion related e-coli issues.

What is Driving Markets?

Even though last week was a down week for the S&P 500, the major averages remain close enough to their all-time highs where some normal consolidation might be expected. One might think that equities were still pricing in much lower interest rates in the wake of the Fed's less-than-well-thought-out cut of a half-percentage point to the target range for the Fed Funds Rate as the culprit. That has not really played out though.

The Fed did signal a more dovish future on Sept. 18, but the Treasury yield curve, at the long end in particular, has proven to have a mind of its own. I am no longer just one of a few voices talking about a renewed acceleration of consumer-level inflation that may have bottomed in September. This kind of talk has become more mainstream as Wall Street economists have started to catch up to the rest of us.

Not only did the yield for the U.S. Ten Year Note rise to 4.27% on Monday, but both the U.S. Treasury Department held auctions that went less well than one would hope for new Two Year and Five-Year paper. As I work my way through the zero-dark hours on Tuesday morning and through this morning note, I see that the U.S. Ten Year Note pays as much as 4.31%.

Can equities keep on holding on against that? I know that portfolio managers have been holding out for these higher profile corporate earnings that are about to be released or may be trying to price in one electoral outcome vs. another, but let's face it, gang, as our pal Dougie Kass pointed out on Monday, the dividend yield for the S&P 500 is now just 1.3%.

Let's face it, gang, as our pal Dougie Kass pointed out on Monday, the dividend yield for the S&P 500 is now just 1.3%.

Three-month and Six-month U.S. paper yields 4.61% and 4.48% respectively. At some point, investment dollars will be diverted away from equities and into short-term paper. As estimates for third quarter and full-year earnings contract rapidly, and forward-looking multiples become stretched, when does a risk-free rate of return that runs almost 2.5-percentage points above the rate of inflation out-compete an equity risk premium for equities that really highlights the risk?

One More Thing: A Seasonal Look

It may mean nothing, but going back a rough 80 years or so, the period from November through April tends to run positive for the S&P 500 a rough 76% of the time, gaining an average of 7%, while the period from May through October tends to run positive just 66% of the time, gaining just 2%.

Marketplace

Winners beat losers by a rough 2-to-1 margin at the NYSE on Monday and by more than 2 to 1 at the Nasdaq. Advancing volume was strong, taking a 72.3% share of composite NYSE-listed trade and a 72.7% share of composite Nasdaq-listed activity. But aggregate trading volume ebbed somewhat for Nasdaq-listed names, contracting 7.5% on a day over day basis from Friday. Aggregate trade across NYSE-listed names actually gained 5.4% day over day.

Does that mean that the smaller gains across the S&P 500 were more meaningful than was the rotation into small caps? It very well may. Or ... this could just be some spreading of the risk ahead of such huge events this week and next. My guess is that we'll know a whole lot more in the near-term future.

About Those Auctions ...

The Two Year Note: $59 billion worth of new paper, a high-yield award of 4.13%, which tailed the "when issued" by 0.8 bps. Bid to cover was 2.504, down from 2.588. Indirect bidders (foreign accounts) took down just 58.2% of the issuance, while direct bidders (domestic accounts) grabbed an above average 23.8%. The lack of foreign participation stuck dealers with 17.9% of this auction, the highest percentage that this group had to absorb for this series since December.

The Five Year Note: $70 billion worth of new paper. This one was a little weird. High yield of 4.138%, tailing the "when issued" by an ugly 1.6 bps. Bid to cover was 2.39 was up from September, but still unacceptably low. There was some good participation by foreign accounts, though. Indirect bidders took down an impressive 76.4% of the auction. This is the highest percentage to date of any five-year note auction awarded to indirects. Domestic buyers, however, took a hike. Directs only purchased 9.5% of this auction, the smallest slice of the pie for this series for directs since 2018. This left dealers with a rather average looking 14.2% of the issuance, but how they got there should be of concern to all as should that tail.

Speaking of the Treasury Department ...

The Biden administration's Executive Order 14105 was finalized on Monday. The rule prohibits U.S. companies or persons from engaging in "transactions involving a defined set of technologies and products that may contribute to a threat to the national security of the United States." This is seen, from a revenue-producing perspective, as a potential negative for a number of U.S. semiconductor designers and manufacturers, though much of that negativity is already priced in. Impacted companies would include Nvidia NVDA, SMCI, Super Micro Computer SMCI, Micron MU, Broadcom AVGO, Qualcomm QCOM and Intel INTC.

Economics (All Times Eastern)

08:30 a.m. - Goods Trade Balance (Sep-adv): Last $-94.26B.

08:30 - Wholesale Inventories (Sep-adv): Expecting 0.2% m/m, Last 0.1% m/m.

08:55 - Redbook (Weekly): Last 4.6% y/y.

09:00 - Case-Shiller HPI (Aug): Expecting 5.6% y/y, Last 5.9% y/y.

09:00 - FHFA HPI (Aug): Expecting 0.1% m/m, Last 0.1% m/m.

10:00 - CB Consumer Confidence (Oct): Expecting 98.7, Last 98.7.

10:00 - JOLTs Job Openings (Nov): Last 8.04M.

10:00 - JOLTs Job Quits (Nov): Last 3.084M.

4:30 p.m. - API Oil Inventories (Weekly): Last +1.643M.

The Fed (All Times Eastern)

Fed Blackout Period.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: AMT (2.45), HUBB (4.46), LDOS (2.02), MCD (3.20), PYPL (1.07), SOFI (.04)

After the Close: AMD (.92), GOOGL (1.85), CMG (.025), QRVO (1.85, SYK (2.77), V (2.58)

At the time of publication, Guilfoyle was long MCD, SOFI, AMD, NVDA, INTC equity.