TalkMarkets Tuesday Talk: A New Month

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“May is green and pink and red” ― Richard L. Ratliff

So says the poet. At the start of the third trading day in May red, pink and green have surely characterized the colors of the charts thus far. Yesterday started off red and ended with just a touch of green. With the markets looking for good news in the face of bad, it is not easy to see where any of this is going. As one would expect TalkMarkets contributors have a multitude of views.

Marc Chandler writing in "New Month, New Trends" gives us some sober comments about FX rates, commodities, US interest rates and the S&P: On oil, "The (50%) retracement of the decline from the April high ($33.15) is found near $19.80. The next retracement (61.8%) is around $23.30. Ahead of that, resistance may be encountered in the $21.60-$22.00 band. The momentum indicators support continued recovery." On US interest rates, "The Eurodollar curve is inverted. The June 2020 contract implies a yield of about 36 bp. The next contract that implies a higher yield is not until December 2022. Even, then the first contract to be above 50 bp is December 2023. This gives a sense of how long investors expect the Fed to sit on the zero-bound."

And with regards to the S&P 500, "Unless the gap created by the sharply lower opening on May 1 is filled early next week, the bearish implications will dominate. The gap is found between roughly 2869 and 2892.50. The gap is also technically important because it was through a near-term trend line. The momentum indicators lend more credence to this bearish view. The MACD appears to set to turn lower and the Slow Stochastic did not confirm last week's high. Initial support is seen near 2815 and then 2790, but a conservative corrective target is near 2660." Well, the S&P 500 certainly is trying, yesterday it closed at 2,842.74.

Norman Mogil in an exclusive for TalkMarkets "No Longer Are Negative Interest Rates Considered A Rogue Policy" , puts forth the argument that this is what the U.S. economy may need post Covid-19 and notes that some traders in the market are already on the lookout for the same. "When central bankers say they have more tools at their disposal to ward off a worsening recession, one tool is negative interest rates. We have seen negative rates in Japan and Europe for the better part of a decade in the hope of reaching inflation targets. But it has yet to be tried in North America. Fed Chairman Powell and other FOMC members have dismissed suggestions that negative rates are on the table."

Mogil says that until now common wisdom among economists has been that negative interest rates are harmful and further argues that though bankers may hate negative rates, they don't necessarily mean the destruction of bank profits. As a point of fact forward trades have factored them in, "Trading in interest rate futures has already anticipated negative nominal rates. The market-implied probabilities of 3-month LIBOR rates are trading below minus 0.25% to 2021." 

On a "higher" note, Lorrimer Wilson who writes daily exclusives for TalkMarkets on cannabis stocks, notes that despite a period that has seen lots of profits "going up in smoke", some green is starting to stick to the charts. In today's column "Cannabis Central: Pot Stock Sector Up 1.7% On Monday; NPSI Up 3.0%" he cites Acreage Holdings Inc. (ACRGF) +9.1%, Corbus Pharmaceuticals Holdings Inc. (CRBP) +8.0%, and Village Farms International Inc. (VFF) +6.0% as Monday's leaders across industry categories.

Contributor New Deal Democrat writes that May economic data which comes out in June will be the first since January to give us an idea of how mired in the muck we are, as February, March and April data are too Covid-19 dependent to be considered reflective of anything but the virus. In "A Note About The Weekly And Monthly Economic Data" he writes that "With the exception of finding out what happened to wages during April (because of all of the reports of wage cuts), even this Friday’s employment report, while surely catastrophic, won’t be that important looking forward." He notes that while personnel incomes appear to have fallen by 2.1%, personal spending has fallen further, by 7.5%, resulting in an increase in personal savings of over 60%. He says that this is, "Keynes’s “paradox of thrift” in action. Wanting to insulate oneself from economic harm makes sense. But when everyone does it at once, it necessarily means a downturn in consumer demand."

Consumer demand drives most of the economy and the May data which will reflect the partial re-opening of the economy state by state is not expected to show much of an increase in consumer spending, according to Mr. New Deal Democrat. "Waist deep in the big muddy" as the song goes.

If you have funds to invest, but are unsure of where to invest, you are in good company. According to Lipper Alpha Insight, Warren Buffet is in a similar conundrum. While arguing that Berkshire Hathaway's much reported Q1 loss of $55 billion may only be a "flesh wound", in their article "Warren Buffett May Have Met His Match: The Fed" they voice concern that sitting on a big pile of cash as inflation fears rise does not bode well for Berkshire (nor for Jill and Joe investor, one might add), "A glut of money sloshing around also diminishes the relative power of Buffett’s roughly $130 billion war chest. The longer he sits on it, even with mild inflation, the less valuable it gets."

Lipper further states, that distressed companies may have less incentive to cut a deal with Buffet, now that the Fed has got their backs. This of course remains to be seen.

Lipper ends the article capturing nicely both a longstanding Buffet adage and the downside of too much central bank intervention, "His guiding philosophy, which he repeated on Saturday (at Berkshire's online shareholders meeting), is to bet on America. The country’s own central bankers have made it all the harder for him to do so."

"All things seem possible in May", wrote American naturalist, Edwin Way Teale. I'm hoping for more green. Have a good week.