Simple as black and white TV

Stocks rose for a second straight session harkening back to the days… which seem to be a lifetime ago. Volatility, which works in both ways, swung in the favor of the bulls yesterday, ahead of today’s full calendar of releases.

The loan ranger. “Who was that masked vigilante,” you ask? As the lead character rides off into the sunset… turning right from NYC’s Park Ave onto a street in the 40s… on a Citi Bike wearing a Patagonia vest, donning a pair of expensive Apple headphones, not wielding a traditional set of six-shooters, but an HP 12-C financial calculator (exactly like the one that I still use from the 1980s). Riding aside our faceless lead character is his/her sidekick… Jerome “Tonto” Powell. Together, they fight inflation.

We all know the good work of faithful-companion Powell and his tribe of inflation fighters. They have done their level best to tame the wild-horse economy into a state of… um, tameness (that is a real word). Keep all those visions I just painted for you in your head and join me in the real world for about 4 minutes. This won’t take too long, I promise.

You have read my notes, you have heard me say it, and you have certainly witnessed it firsthand. There are two very big roadblocks for the economy and meaningful, consistent stock index gains right now. The Fed with its hawkish interest rate policy (1) and high Treasury Bond yields (2). The Fed, for obvious reasons, and Treasury yields which are holding back growth stocks, the growth engines of stock indexes. They share the same first names (Growth), but Growth stocks are named that for a different reason . Bond yields didn’t always have such mystical power over Growth stocks, but, like the swelling prevalence in peanut and gluten allergies, these things change over time, and these days Growth stocks are highly allergic to high yields… FACT, so let’s not question that. But let’s do try to understand what the heck is driving bond yields to be so high.

Well, if the Fed comes to mind, sure it has something to do with it, but probably not for the reasons that you think. Raising the Fed Funds rate should impact short maturity treasuries and it does. If the ploy works to fight inflation by cooling down the hot-running economy, longer maturity bond yields should come down in anticipation of a slower economy and lower inflation. But that has obviously not happened. Ke-mo Sah-bee aside, bond yields have ratcheted higher causing bonds to log 2 rare, back-to-back years of losses and on track to have a third, rarer yet, year of losses. For the record, loan rates on things like home-mortgages and auto loans are more closely linked to longer maturity bond yields than Fed Funds, which is more likely to impact financial investors and corporate borrowers. So, what does the Fed have to do with, say, 10-year bond yields? Well, the Fed has been conducting what has been termed Quantitative Tightening (QT), the opposite of the wildly popular Quantitative Easing (QE). QE involved the Fed buying bonds in the open market to inject cash into the economy and push bond yields lower. In doing that for many years in the wake of the Global Financial Crisis and COVID pandemic, the Fed kept rates lower and at the same time accumulated a HUGE balance sheet of bonds. Huge as in $5.8 Trillion at its 2022 high. Clearly, in monetary tightening, the Fed is no longer buying bonds. It is doing the opposite… kind of. If the Fed is not selling, it is letting its existing bonds roll off the balance sheet, by simply letting them mature and not using proceeds to purchase new ones. With the balance sheet now at around $4.9 Trillion, resulting from QT, the Fed’s not-buying has certainly aided in the rise in yields.

Back now to our masked rider. I will now reveal that masked character as none other than Speculative Investors. That’s right, hedge fund types are buying and selling Treasuries speculatively like it was the 1990s. Do you remember those days and those characters? They were called Bond Vigilantes. These speculative investors are known to sell large amounts of bonds to challenge the markets or policy makers. Despite what their moniker implies, they don’t do it for the greater good but rather to earn trading profits. The bond markets have become quite volatile and even illiquid at times, and it is thus ripe for being pushed around… or rather up and down. Have you noticed a bit of that lately? That is being caused by traders taking advantage of this vacuum being created by the Fed’s holding pattern. You don’t believe me? Check out this chart from JPMorgan which shows how bonds are leaving the hands of traditional long-term, institutional investors and into the hands of traders.

Can you see it now? Of course, you can. Those speculators are actually keeping yields higher and making them more volatile than they have been in a long time. The Fed is quite content with this because the higher yields are actually restrictive to growth. The Fed can simply sit and watch the vigilantes do its dirty work while letting its balance sheet size dwindle and make room for more purchases in the future… if needed, of course. Well, this afternoon we can hear what Chief Jerome Powell has to say on the matter in his post FOMC meeting press conference. He is expected to say something like “things good, inflation high, unemployment low, hawks still fly.” That can be interpreted as a hawkish pause, which is what the market is expecting. Regarding our masked vigilantes, they are still riding through Wall Street’s canyons doing their level best to keep yields high and at bay… and they will keep doing so until the Fed truly pivots. “Hi Yo Silver, away!”

WHATS GALLOPING ABOUT THIS MORNING

Paycom Software Inc (PAYC) shares are lower by -37.2% this morning after the company announced that it beat EPS estimates while missing on Revenues. The company significantly lowered its full-year guidance and provided current quarterly guidance to well-below estimates. This prompted ratings cuts from Piper Sandler, Cowen, Stifel, KeyBanc, Citi, Oppenheimer, and Deutsche Bank. Dividend yield: 0.61%. Potential average analyst target upside: -0.7%. WHY IS THIS NEGATIVE? Because the stock’s price is above the average analyst 12-month price target. While this can be interpreted as the company being overpriced, it does not mean that stock cannot go higher from here.

Generac Holdings (GNRC) shares are higher by +5.93% in the premarket after it announced that it beat on EPS and Revenues by +8.9% and +2.59% respectively. IN the past month, 20% of analysts have modified their targets, 0 up, 5 down, 18 unchanged, and 1 dropped. Potential average analyst target upside: +61.2%.

YESTERDAY’S MARKETS

NEXT UP

• ADP Employment Change (October) is expected to show a gain of +150k jobs, up from September’s +89k additions.
• JOLTS Job Openings (Sept) may have slipped to 9.4 million from 9.61 million vacancies.
• ISM Manufacturing (October) is expected to come in at 49.0, level with September’s release.
• FOMC Policy will be released at 2:00 PM Wall Street Time. It will be followed by the Chairman’s press conference at 2:30.
• After the closing bell earnings: McKesson, Sunrun, AIG, DoorDash, Serepta, Avis Budget Group, Zillow, Vista Outdoor, QUALCOMM, Albemarle, MetLife, Energy Transfer LP, Electronic Arts, Williams Cos, Aribnb, Roku, Etsy, and PayPal.