Virus Vaccines Not Close Enough, Record Nasdaq, Tariff Talk, Fed's Rosengren

Good and bad. Out the window. The blackened window. Silence in response to questions left lingering between the here and now. The here and there. There is enough positivity visible across financial markets. That much is obvious. The macro that we do see, for the most part supports the idea that at least economically, things are getting better, as in "off the lows." Is it real? With a virus that still haunts, and still hunts? Support for the percentage of consumer activity driven by those who comprise the lower rungs of income distribution models can not be relied upon moving forward. Nor can those forced onto the sidelines (some of the same folks) be counted on to spend as they have. Demand for labor remains well below what might be considered optimal.

These individuals spend what they earn, and they spend it on what they need. Can the support that has come in the form of some helicopter money from the U.S. Treasury Department, as well as the federal stipend tacked on to weekly state level jobless benefits (in most cases larger than that state benefit itself), outlast the spread of the virus that forced these folks out of work in the first place? Not likely. There may be a second round of helicopter dough. The federal add-on to weekly jobless payments expires at the end of July. Extend it? Sure. That's the ticket. How to pay for it? In a smaller economy that drives smaller tax revenue? Raising taxes will only slow down any organic recovery. The problem is that the problems are real, and the only answer we have is increased deficit spending. While this stops or slows the bleeding in the heat of the moment, we all know that this answer will not heal the patient.

That brings us to the virus. While there is certainly a real optimism that effective vaccines and treatments are much closer, they are not close enough economically... or for the next person who becomes infected.

Markets

On Tuesday, the Nasdaq Composite scored an eighth consecutive positive close. The index even hit a new record. Huzzah. The big tech public favorites all led the way... from Apple (AAPL) to Microsoft (MSFT) to Amazon (AMZN) to Facebook FB . Markets reversed sharply though a couple of hours ahead of that closing bell. This will need to be watched this morning for any follow through. Oddly, for me... my best single trade of the day was an Apple short initiated shortly after the stock's high of the day and covered after the close. FYI, the bear put spread discussed at Real Money on Tuesday morning is still in place.

There are a couple of forces at work on Wednesday morning that could drive portfolio managers towards a more "risk-off" posture, at least for now. Could last about a week. Stretched valuations, though a reality are not really a consideration for now, but headlines and expected capital flows are. Global investors are grappling in real time this morning with an unwelcome increase in new coronavirus infections in some countries thought to, or at least hoped to be, past the worst of the spread. Not only are a number of U.S. states now setting daily records for new infections, but nations such as Germany, Japan, and South Korea are now witnessing unwelcome increases. Is there a correlation between more open economies and spread of the disease? I am no scientist, but it would appear so. If going back into economic hibernation is not a possibility, we all know that as a people, we can be smarter about exposure than we have been. Think wearing a mask is somehow an infringement of your rights? Consider not wearing a mask to be an infringement on your neighbor's rights, because that is exactly what this sort of behavior certainly is.

Moving Forward

For those keeping score, and my guess would be that this is all of you, trading volume remains heavier relative to trend for Nasdaq names than for NYSE names. Breadth is better up in midtown than it is downtown as well. Equities, devastated in Q1 2020, have roared in Q2. The S&P 500 now stands 21.1% above end of March levels. The Nasdaq Composite? 31.6%. Best headline quarterly performance in decades. Next Tuesday marks the final day of the quarter. You and I both know what this means. There are many funds, including pension funds that operate under monthly, but more often quarterly allocation mandates. These funds will be forced to reduce equity holdings in order to increase debt security holdings between now and then.

Most sell side firms will have their research teams working on projecting just how severe this reallocation of capital will be. The smallest estimate that I have seen so far would be $35 billion, for the U.S. (which is a very large number), and the largest up above $75 billion. Globally, the number could rise above $170 billion. Now, where do you think the real profits are right now? Right, technology, the internet, but also some areas just coming off of the canvas, such as Energy, Discretionary names, and Industrials. The trick for investors who do believe in the recovery, and are not likely to try to trade the daily flow will be in not being shaken out when the equity indices wobble, and not chasing debt as yields shrink in response.

Now, understand that in a vacuum, these flows should be temporary, even if sharp. That said, there is no vacuum. This morning, tariff talk has reentered the conversation between the U.S., the EU and the UK. Not China? No, not this time. Oh, and the virus still has veto power over everything until it does not. That sunny day is out there. It may even be visible, out on the horizon. Between here and there though is danger. Perhaps plenty of danger. What's the first rule when accidentally disturbing a nest of killer bees out on patrol? Everyone runs in a different direction, so they only get one of you. Common sense. Same with the virus. Wear the mask. Joggers run well around people in the way, not right past them. This is science. Not rocket science.

By The Way

National Institutes of Health Director Dr. Francis Collins has advised Americans to carefully analyze the risk when making summer travel plans this year. He mentioned in a piece in USA Today that he had cancelled his own travel plans. I am not telling you what to do. I do not have that authority. I do know that forests, big rocks and outdoor historical sites sound a lot more interesting to me than do cities and/or typical resort type vacations. Burnt out? All a matter of perspective.

Eye On Rosengren

Keep an eye out for, and an ear out for Boston Fed President Eric Rosengren. I have not always agreed with Rosengren over the years, but he does change his mind. Not truly a hawk, nor a dove over time. Does that mean he has a clue? I don't know. This may mean that he does express honest opinion. Rosengren is less optimistic than most of his peers when making estimates for forward looking unemployment or second half economic growth. He sees improved macro as possibly "masking" emerging problems related to new infections across highly populated states.

Many point toward lower rates of mortality in these states, even as caseloads grow. This is difficult to model as the age of those newly infected has trended lower as these groups have been the most social, as well as the least responsible in protecting themselves and others. In addition, spikes in mortality have trended well behind spikes in confirmed infection. To put it bluntly, hospitalization rates trail infection and the rate of attributable death trails the rate of hospitalization. What that means simply is that we just do not know as of yet, the severity of impact associated with both the reopening of economies and the social unrest experienced over the past month or so.

Economics (All Times Eastern)

09:00 - FHFA HPI (Apr):Expecting 0.0% m/m, Last .1% m/m.

10:30 - Oil Inventories (Weekly):Last +1.215M.

10:30 - Gasoline Stocks (Weekly):Last -1.667M.

The Fed (All Times Eastern)

12:30 - Speaker:Chicago Fed Pres. Charles Evans.

15:00 - Speaker:St. LouisFed Pres. James Bullard.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (WGO) (-.37)

After the Close: (BB) (-.01), (FUL) (.55), (KBH) (.58), (FIZZ) (.60)

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At the time of publication, Stephen Guilfoyle was Long AMZN, MSFT equity, Long AAPL puts, Short AAPL puts.