Microsoft vows to fight the Feds

Stocks made solid gains yesterday as investors braced for the last bit of inflation data to be released, today and Tuesday, before the Fed makes its final stand for the rough 2022. Microsoft and feds are locking horns as the FTC moved to block its $69 billion mega merger with Activision Blizzard.

Hurry down my chimney, Santa. Have you heard about the Santa Claus Rally? If you have been a regular reader for all these past years, you have. If you happened to miss some of my installments, shame on you, but I understand, life happens. Even if life happened to you and you haven’t read my missives on the topic, you probably experienced a bit of that holiday spirit in the markets. In other words, you undoubtedly suspected that something was going on. The old yarn about the Santa Claus Rally in which stocks rally hard during the Christmas Season, aka the time between Thanksgiving and New Year’s, isn’t an old tale, after all. December is actually the winningest month of the year, on average. “On average” is code for: it doesn't always happen, just most of the time. I have been writing on this blog, daily, WHILE YOU SLEPT, for more than 5 years now, and our Decembers together looked as follows: +0.98%, -9.18%, +2.86%, +3.71%, and +4.36% from 2017 through 2021 respectively. Not bad. One loser out of 5, that’s an 80% success rate, but as you see, that one outlier was, indeed a bad one in magnitude. If we calculated the mean return for those years, we would have a +0.55% gain. Not great considering that the average return for December, since 1928, has been +1.4%. Now to clarify for you numbers-people out there, when I said winningest, I meant the number of years December was in the green relative to other months. According to research by Ed Yardeni, whose numbers I have trusted for 30-some years now, December has been up 69 times since 1928. Second place goes to April at 61 times. For you worst-case-scenario folks out there, September is the loser with only 42 winning occurrences and 52 losers. So, December has a good chance, if you trust in that sort of stuff, of being positive. By, the way the winningest month by return goes to July with a +1.7% average gain. December gets second place.

So, we’ve got that going for us… I suppose. There is a slight problem, however. Even with yesterday's rally, the S&P500 is down by -2.86% month to date. Hang on while I grab my high-powered binoculars and scan the roof tops for some signs of that jolly bringer of joy. How can this month be down when Chairman Powell had such kind words recently. He implied that there was a good chance that the FOMC would only raise rates by +50 basis points next week. That is still huge by long historic standards, but small based on recent standards. His words also implied that the Fed might be nearing the end of its tightening cycle, which all of you know by now, was the root cause of much of the pain in the markets this year. Indeed, futures markets expect a +50 basis-point hike next week as well. So where is Santa? Well, here is the thing. Markets have been expecting the +50 basis-point bump for some time now. Since at least mid-October, so Powell’s admission was not really a game-changer. It is important in these moments, to remember that the general trend of the market is always trying to anticipate the future. What is becoming to be clear is that the market has started to move beyond the Fed and on to the potential for a recession, which also tends to have negative effects on the markets. That doesn’t mean that the Santa Rally has been canceled. There are still 22 days left in December for the magic to happen. We also have inflation numbers today and Tuesday, which are expected to show that inflation has softened. Also up is the Fed who will arrive next Wednesday. What it does and says will surely determine if we will end up with a lump of coal in our stockings. If the rally is bust, we needn’t worry because January has historically returned +1.2%... if you believe that sort of stuff.

WHAT’S SHAKIN

Broadcom Inc (AVGO) shares are higher by +3.56% in the premarket after it announced that it beat ESP and Revenue estimates by +1.97% and +0.29% respectively. The company also gave strong guidance for the current quarter implying that corporate IT spending remains strong (it sells enterprise software in addition to semiconductors). Dividend yield: 3.46%. Potential average analyst upside: +21.1%.

Microsoft Inc (MSFT) shares are higher by +0.48% in the premarket a day after the FTC announced that it will sue to block its merger with Activision Blizzard causing the broader markets to pull back. No one likes a frisky FTC, in the stock market that is. Despite what might have been negative news for the company, the stock rallied yesterday, gaining +1.24% in the session. Perhaps investors think that spending +69 billion on a gaming software company may be a bit excessive given the current economic climate. Regardless, the company has made it clear that it will not give up in its pursuit of the merger. Dividend yield: 1.10%. Potential average analyst upside: +19.7%.

YESTERDAY’S MARKETS

Stocks rallied yesterday ahead of today’s factory gate inflation figures. Expected to show a softening, the PPI is considered by some to be a leading inflation figure (see details in the next section). The S&P500 gained +0.75%, the Dow Jones Industrial Average climbed by +0.55%, the Nasdaq Composite Index jumped by +1.13%, and the Russell 2000 Index added +0.63%. Bonds fell and 10-year Treasury Note yields climbed by +6 basis points to 3.48%. Cryptos advanced and Bitcoin added 2.10%.

NEXT UP

• Producer Price Index / PPI (November) may have moderated to +7.2% from +8.0%.
• University of Michigan Preliminary Sentiment (December) is expected to have gained slightly to 57.0 from 56.8. The 1-year Inflation Expectations figure will be closely watched and is expected to come in at +4.9%.
• Next week: Consumer Price Index / CPI, Retail Sales Industrial Production, flash PMIs, and the highly anticipated FOMC meeting (Wed). Check back in on Monday for times and details.