Fed Chair Powell's Plea To Investors

Yesterday was one of those sessions where major indices ground it out in very narrow trading ranges. There was never a real effort to rally the market. While the market was waiting to hear from President-elect Biden, and assess the conviction of Federal Reserve Chairman Jerome Powell, it occurred to me that there is a real quandary.

Would-be buyers are looking for new reasons to buy the market beyond the potential avalanche of cash, while sellers need a little more convincing before banking profits for fear of missing the next leg higher.

The biggest winner was Energy, which continues to amaze, and it now has me thinking this could be the start of a move that takes crude oil and other commodities much higher (see Powell’s Plea).

Financials were higher, ahead of four big banks reporting earnings this morning. With the Street looking for a big year-over-year decline this earnings season; it could pick up the rally baton: 

• Citigroup (C): $1.34
• JPMorgan (JPM): $2.62
• Wells Fargo (WFC): $0.59
• PNC Bank (PNC) :$2.61

Powell’s Plea

Yesterday in a virtual address to Princeton University, Federal Reserve Chairman Jerome Powell did his best to convince investors that rates will stay right where they are for the foreseeable future. In other words, forever.  This happened after several Fed officials entertained the topic of tapering. Powell had quite a few words for them as well.

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First, the message to investors:

“We’ll let the world know”

“We will communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual tapering of asset purchases”

“Far from our goals”

“Shortage of demand around the world”

“Need to see troubling inflation”

His message to fellow Federal Open Market Committee (FOMC) voting members:

“Be careful not to exit too early”

“And by the way, try not to talk about exit if you’re sending that signal, because markets are listening”

The stock market didn’t embrace the effort, but commodities picked up speed. The CRB Commodity Index continues to march higher and still has a lot of upside room on the charts.

To see the chart, click here.

Biden’s Benefits

Press coverage of the Biden rescue plan will make it even more difficult for Republicans to push back:

• Bigger stimulus
• More aid
• Increased funding

Last night, President-elect Joe Biden laid out what he is calling the “American Rescue Plan,” which includes a litany of plans to address the current crisis of Covid-19 and associated economic fallout from clumsy lockdowns.

The total price tag of $1.9 trillion was at the high end of the anticipated range.

The key parts of the plan include:

• $1,400 to households, topping off the $600 approved in December
• Increased federal unemployment benefits to $400 a week from $300, extending to the end of September
• $25.0 billion for rental assistance for low-and moderate-income, and households who lost jobs during the pandemic; $5.0 billion for rent and utilities; $5.0 billion for people at risk of homelessness
• $416 billion for an assortment of medical responses, including vaccinations, diagnostic testing, and more protective equipment

Political Wish List

Parts of the plan are a political wish list that will try to use the cover of the crisis to make it onto the books. Even the actions that are proposed as temporary plans have a great chance of becoming permanent if approved. Even a wounded and divided GOP will push back on some of these items: 

• More money for childcare and child tax credits
• A temporarily increase of tax credits
• Subsidies for health insurance premiums
• Restoration of emergency paid leave
• More assistance for small businesses
• Aid for states and schools
• Increased support for vaccines and testing
• A $15 hourly minimum wage

President-elect Biden also used the plan to call for unity, saying it is “not a pie-in-the-sky dream.” I’m not sure this will be the elixir that makes that happen. However, American households need the extra funding, and it’s really nuts Mitch McConnell didn’t allow it to happen.

Broad Market Message

One thing that’s happening is winners are attracting new buyers, which in turn attracts more buyers.  We see this playing out in new 52-week highs versus new 52-week lows. 

Yesterday, there was a net 601 new highs on the NASDAQ.

To put that in perspective, the history of the NASDAQ goes back to May 1984 or 9,235 trading days, there have only been 15 days with a higher net of new 52-week highs.

Portfolio Approach

We took profits in Technology yesterday in the Hotline Model Portfolio. While we typically hold stocks longer on the Hotline,  how could we not take a 32.9% profit in one day?  This morning we took profits in Consumer Discretionary.

Today’s Session

The futures are pointing to a lower open.  Economic data this morning has been disappointing.  Retail sales fell 0.7% in December, and November was revised lower to a decline of 1.4%.  January Empire Manufacturing ticked down to 3.5 versus consensus of 6. New orders were up along with work hours, but employment fell along with shipments. December PPI was slightly softer, +0.3% m/m; +0.4% consensus.

On the bank earnings front, several banks reported this morning, with mixed results.  JPMorgan Chase (JPM) and PNC Financial (PNC) reported better-than-expected revenue and earnings for Q4, while Citigroup (C) and Wells Fargo (WFC) results came below expectations. 

Citigroup (C)

-Earnings $2.08; consensus $1.31

-Revenues -10.2% $16.5B; consensus $16.71B

-Loan loss provision $1.47B; $1.92B in Q3.

JPMorgan (JPM)

-Earnings $3.79; consensus $2.62

-Revenues +3.4% $30.2B; consensus $28.6B

-Loan loss provision -$1.89B; vs $611M in Q3

Wells Fargo (WFC)

-Earnings $0.64; consensus $0.63

-Revenues -9.9% $17.9B; consensus $18.09B

-Loan loss provision -$179M; vs $769M in Q3

PNC Bank (PNC)

-Earnings $3.26; consensus $2.58

-Revenues -2.6% $4.2B; consensus $4.1B

-Credit provision -$254M

-Provision recapture $254M vs loss provision of 52M in Q3