Republic Risk: Powell’s Puttering, Insider Intel, and Earnings Updates

Equity Storm Warning Is GREEN on the S&P 500 and the Russell 2000.

Nasdaq futures are under pressure due to earnings reports from Alphabet (GOOG) and Microsoft (MSFT) yesterday. I would say that it’s better to hedge now - ahead of the Fed - than to wait. No one ever got upset taking profits.

The Nasdaq 100 (QQQ) is overbought on its 14-day Relative Strength Index and nearly overbought on the Money Flow Index. Keep a close eye on the MACD - another momentum oscillator that can foreshadow a selloff. For a refresher, see this article from Sunday on those indicators.

Look for lower volumes heading into 2 pm. This can turn into a rather tricky day, as we usually see the markets move higher after the Fed announcement but then sell-off in the final hour as institutions take profits. We’ll see if that pattern continues today. 

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Tamiami Tip Line

• Keep an eye on the job market; we’ll get the January report on Friday. Today’s ADP report showed that job growth cooled to just 107,000 new positions this month. That figure was below expectations, raising questions about when we might see a negative print. A negative print will likely align with a spike in expectations that the Fed will cut interest rates at the following meeting. Friday’s jobs report calls for a 185,000 increase in new positions (how many will be temporary or government jobs?)

• Microsoft (MSFT) reported 18% revenue growth, driven by a surge in its cloud services. Despite this, the stock suffered a downturn in extended trading thanks to concerns over future guidance. In an environment where the Fed provides ample Quantitative Support (Michael Howell’s term), there’s no real reason to fret about MSFT unless our signals go negative. We’d want to pounce on a few shares if MSFT gets oversold.

• Alphabet (GOOGL) also saw its stock dip after hours, even though overall revenue beat forecasts. This was attributed mainly to its advertising revenue falling short of expectations, particularly from YouTube, overshadowing its gains in cloud and AI. The same goes with GOOGL. This can climb much further in a world where fundamentals don’t matter at the top of the food chain.

• UPS (UPS) announced the layoff of 12,000 employees amidst a disappointing fourth quarter, marked by reduced shipping volumes and revenues. This move is part of a $1 billion cost-saving plan and comes on the heels of the company negotiating a new contract with the union.

• A Delaware judge voided Elon Musk's $56 billion Tesla (TSLA) compensation package, deeming it unfairly large and not aligned with shareholder interests, causing a slight decline in Tesla's stock. That seems like a lot of money, right?

• Walmart (WMT) declared a three-for-one stock split, with additional shares distributed after February 23, to broaden stock accessibility, especially for its employees. This decision comes as the company's stock approaches its record peak. I can’t believe that Walmart is trading at 27 times earnings, but then again, we’re in an Alice in Wonderland market. I might pick up some shares after a split.

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Dear Fellow Expat: 

We’re now moving into the next phase of our Federal Reserve drama.

From “How high” is the Fed funds rate… to “How Long” will the rate remain above 5%?

Fed Chair Jerome Powell and his merry band of central bankers have the wind at their back - primarily from positive media reports - into this January meeting. 

A year ago, economists like myself expected a much darker economic outcome. But - and I’ll say this just from the Keynesian education I received - the numbers look good.

From the fishbowl theory that academic economists operate, economic growth is holding, unemployment (how they calculate it) is low, and consumer spending is robust. This is why you have a group of people like Paul Krugman in New York or White House Yale Lawyers telling America how good we have it…

It ignores reality.

Let’s take a step back and eye it through the Austrian lens.

The government is borrowing and spending through the nose, we have massive misallocations of capital across the economy, government deficits are enormous, Federal debt is at $34.1 trillion, new jobs are largely either in government or second jobs to pay the rent, and the recent cost of living spiral permanently damages Americans - one that has seen them take on record levels of debt as well. 

After all, it is an election year, so the plan is to deal with the fiscal hangover later.

The financial markets have enjoyed ample fiscal and monetary support, and markets are cheering China’s latest efforts to stave off a Lehman Brothers moment. It wouldn’t be shocking to see an ample drop in the value of the Yuan to the dollar in the future. It will be interesting to see how much transparency we get out of China’s debt deflation debacle with the forced bankruptcy of real estate Evergrande pending…

Are you paying attention?