ASH BENNINGTON: Welcome to Real Vision. It is Tuesday, October 20, 2020, just after market closed in New York. This is the Real Vision Daily Briefing. I am Ash Bennington joined shortly by Hedge Fund Telemetry's Tom Thornton, but first with the day's stories, Haley Draznin.
HALEY DRAZNIN: Hey, Ash. Well, we saw markets rise on Tuesday after a rough Monday, the Dow, NASDAQ and S&P 500 all rebounded from yesterday sell off as lawmakers continue efforts to reach a spending bill. A package must be agreed to today in order for it to pass before the November 3rd election. House Speaker Nancy Pelosi says differences with Treasury Secretary Steve Mnuchin are narrowing in stimulus negotiations. However, that does not mean that a bill will be able to pass in the Senate as Senate Republicans are still resisting the price tag on it.
President Trump and the White House have increased their package proposal to $1.8 trillion. Senate Republicans still think this is a bit too high. Whereas Democrats would like to see it around $2 trillion to $2.2 trillion. Investors can expect more volatility given an increase in COVID cases that we are seeing play out here in the United States, as well as in Europe. The economy needs some support, and the markets need some form of guidance.
In recent weeks, we are seeing the markets have swung a lot in every twist of these talks. If the stimulus negotiations do pass, I think we will continue to see stocks rally. If the negotiations do fall apart, and we cannot get it passed before the election, I imagine that it will be likely there will be a short lived sell off in stocks as well.
Another interesting story that I wanted to cover today is the US Department of Justice anti-trust lawsuit of Google, allegedly accusing them of abusing their power. Specifically, for the tech giant's dominance in online search. Shares of Alphabet, Google's parent company, actually edged higher though on Tuesday following news of this lawsuit. This is all on top of a handful of corporate earnings that were announced this week. Procter and Gamble, we saw their shares rise, maybe even being the best organic sales growth since 2005. This rise was in fiscal first quarter earnings and boosting its guidance.
Lockheed Martin on the other hand, we saw some of their shares fall after the aerospace and defense contractor reported third quarter revenue that beat estimates and raised its full year outlook. We are keeping an eye on how Netflix performs when it releases its earnings today after the markets closed. Now turning to UBS, the world's largest wealth manager reported its best third quarter for a decade. Net income came in at $2.1 billion. That is a 99% jump from the same period a year earlier. This is surprising as its profit for the second quarter saw a 11% drop. This is the first of the results for the European banks. Last week, we saw a number of US banks perform greater than expected.
Global coronavirus cases are now exceeding 40 million and showing no signs of it slowing down. Several European countries are imposing new restrictions especially on business activity and travel. Another story that I wanted to share with you all today was Fed Chairman Jerome Powell he is taking a cautious approach to possibly issuing digital currency. Yesterday on an IMF panel, he pointed to potential benefits, including faster and less costly international transactions. The Fed must also consider the risk of cybersecurity, counterfeiting and fraud as well as the impact on monetary and fiscal policy.
This comes as more central banks are really stepping up their research on the costs and benefits of central bank digital currencies, which would act as a supplement to existing national currency. Fed Chairman Jerome Powell yesterday, had said and I quote, "It is more important to get it right than to be first. This is because of the dollar central role in global financial transactions."
I want to point out Raoul's Expert View on all of this yesterday where he talks about the recent tidal wave of interest in central bank digital currencies. Raoul says he sees that central bank digital currencies are really the killer of stablecoins and the start of a new era in the world of monetary and fiscal policy. This is the first major step at technology eating away at the traditional financial world. On that note, back to you, Ash.
ASH BENNINGTON: Tom, welcome back to the show. Always a pleasure to have you here.
TOM THORNTON: Nice to be back.
ASH BENNINGTON: Tom, what are you looking at today?
TOM THORNTON: Here we are, we are hitting the peak of earnings this week into next week. I think that this is going to be a market that is going to look really close at third quarter earnings. I have been thinking economic reports that we have had have started to plateau starting in September, and will earnings start to plateau as well. I am looking right now at Netflix. It is down five or 6% after hours, did not look like a very good report. Texas Instruments is up a little bit. They usually are very good tell for the semis.
ASH BENNINGTON: Let us talk a little bit about earnings then. Tell us what your view of 3Q is, what have we heard so far, and whether you think we are at par, or you see a differential?
TOM THORNTON: Well, so far, I think the earnings beats have been a little stronger. The problem though is the stocks are not getting rewarded for those beats. That has been a problem that I have seen a few other times, I think, it was like the first quarter after the stimulus, excuse me, not the stimulus, but the big tax cut was announced, stocks were blowing away earnings but the stocks did not respond favorably. That is sometimes a sign that things are getting priced in and we had a huge third quarter for the market, we have had a huge move up from March.
I think now, it is important to watch where things are, if we start to see a topping pattern, usually Q4 sees a rebound but we could see a pullback first and then we will go from there. We do have the election and I am not getting into politics, but that always could be a little bit of a catalyst there too.
ASH BENNINGTON: You cannot go wrong by avoiding politics in 2020.
TOM THORNTON: I am not talking politics today.
ASH BENNINGTON: Let us talk about something that is a first cousin of politics, which is what is happening with the stimulus? What are your thoughts there? What is the impact in terms of US equity markets and other risk assets?
TOM THORNTON: Well, we are unfortunately addicted to stimulus, Fed intervention, fiscal stimulus. I wrote the other day that on the anniversary of the 1987 crash, and actually, it was the 20th of October that Greenspan came out with one line, basically, in support of the Fed ensuring liquidity for all the financial institutions. I think right then that did it. That was where the market said, okay, the Fed has our back. I do not think the market has ever let that down. I think Greenspan saw the benefit of him coming in and injecting liquidity or saying that they are going to inject liquidity, I think the market has just become completely addicted to stimulus.
We cannot live without it. Now, it is like a kabuki theater of are we going to get a stimulus package? Is it going to be 1.8 trillion? Is it going to be 2 trillion? It does not matter. It just gets bigger and bigger. We are bailing out more people. I think there is going to come a point, I do not know when, but it is going to end, and it is not going to end well. The growth in the economy is going to slow because of all this debt. All these people that look at MMT, I think it is just a very lazy way of bailing people out. I think it is a moral hazard, which people do not talk about enough.
ASH BENNINGTON: The question is, obviously, this is a long term, 30-year secular trend. There is a debt bomb that is coming, but if you have been short these markets, even since the beginning of COVID, you have gotten whacked. How do you play these markets in this time?
TOM THORNTON: I am not sure of the markets, obviously, that would be a distinct, complete disaster. I am not playing for the debt bomb to explode. I think it is going to happen in small explosions. Then we will start to see things unwind, and I do not know when that will happen but as far as how I am looking at the markets, I will play the ebbs and flows and take advantage of the 10% pullbacks, the 10% lifts sector rotation, which I think is going to be a real theme for 2021. I do not know when everything is going to come to a massive end with that, I do not really want that either, honestly, because I think it is going to be rather painful.
We will probably see things happen outside of the US that will start to affect the US. I do not think the US is going to initiate their own debt jubilee, I think you are going to see some other smaller countries initiate those debt jubilees first but right now, I am trying to just stay even, go with the ebbs and flows in the market, I think that is really the most important thing everybody can do.
ASH BENNINGTON: Tom, maybe we could zoom the camera out a little bit. You can give us a better sense of your framework and how you think about time horizons. I think one of the most critical challenges that people who are new to the investment space have is understanding that you can be long term short and short term long and all of these imbalances that come from not understanding how people think about trade horizons. The decades of experience that you have had investing and trading these markets, what are your thoughts? How do you think about time horizons?
TOM THORNTON: Well, I look at a lot of time horizons, and I recommend people looking at in the shorter term, I look at-- all my charts every day in front of me are 15 minute charts, and those are I use for intraday trading entry into positions. I look at daily, I look at intermediate weekly timeframes, and I do not necessarily look at a lot of monthly charts, because I think there is a lot of wiggle room in there. I will also take a framework of saying, okay, we have a long-term weekly chart that is moving in this direction, I will play it with a daily and the dailies obviously will move in advance.
I brisk manage around the daily charts. For example, if I am long position, I get a nice gain, I will take some off, and then add some back on dips if I like that position. I think it is really important that when you see a really persistent trend, let us say the FANGs. I tracked the FANG stocks all summer, they were just completely moving in the right direction up and everybody was just, this is the greatest thing. I ran a trendline on those and as soon as those trend lines broke, then these became a liability in people's portfolios.
You could see it on the daily and then you can also see it on the weekly and I like to see when if you have a real reversal, you see a four week-low on a weekly chart. If that happens, I think that then you could really be seeing a longer term or intermediate term pullback. My time horizon varies, but I would say that it is between two and five weeks. Those are the time horizons that I am looking for.
I think that gives enough time for a trade to develop or a trade not to work and you can exit out of it. That is really how I tend to look at things. I will trade around things. I will be in and out of things. For the most part, I try to stay in things as long as possible.
ASH BENNINGTON: What are the trendlines that you look at?
TOM THORNTON: Well, this has been a very easy year for trendlines, because you look at the bottom in March and you just run them up into August and anything that has broken those trendlines, I think right now, a really big pattern that I am looking at is a lower high developing right now with the markets. That is an Elliot wave, the first move down in September was the first wave, then we have a lower, Wave 2 corrective wave which does not make a higher high over the August highs. Then if we break those levels, that would be into the third wave down.
If you go back to 1987, we also had a lower high and it failed. Then it broke the previous lows on the first wave down and then it really became unglued. Not saying we are going to see another type of situation like that, I am not predicting a 1987, but I certainly think that there could be a risk-off moment if we do break those September lows. I think anybody that is watching their charts, it is very simple. Keep it simple. Look at the September lows, if we break those, I think we are going to have real risk in the market.
ASH BENNINGTON: That is a very straightforward answer. What do you think in terms of the probability of seeing that occur right now or is it just impossible to determine based on where we are in the pattern?
TOM THORNTON: We have been dropping for several days from last week, and I am looking at the five-day rolling returns and they are starting to turn negative. The one month rolling returns which I look at as well and a bunch of different factors in markets. Those are still positive because we bottomed, I think on the 24th of September. As we start to roll into a little higher next week, those returns are going to start to soften a bit.
When people see their returns are not as good after a month and let us say we do break those September lows, I think people become very motivated to sell. They do not like holding things that they are down in. If they are holding things, people always sell lower. I always tell people, people do not sell high, they sell lower. They panic, they sell, and the panic always brings in larger volume on the downside.
ASH BENNINGTON: Yeah, and with that, I should say, today's markets fractionally higher. The Dow Jones Industrial Average, S&P 500, NASDAQ and Russell 2000 all up between 0.25% and 0.47%. The leader on this was the S&P 500 closing up 0.47% at 3443.
TOM THORNTON: It is also interesting that we are seeing a little bit of a rotation back to some value as well. This pullback in the market, we have seen financials and energy pick up a bit and the regional banks actually had a really good day. I am long the regional banks, I am long XLF, I like a handful of the large financials. I think they have opportunity on the long side. It is not easy. I think that seeing interest rates go up is giving people a little bit of confidence that that will help the financials here.
Energy stocks, I am starting to see a lot of mergers occur. We saw, I think Concho was bought out. We have what is the other one? PD. Okay, everybody is saying I know that one, but we are seeing some small ones get bought. I study insider buying. I am seeing insider buying n a bunch of different financials out there. I think there is going to be a big consolidation wave in financials just to survive. I also think if Biden gets in, it will be a positive for the financials, or excuse me, both financials and especially energy.
A lot of people will say, well, why would you think that? I think he is going to put restrictions on drilling, and less drilling, higher prices. I think that will help the energy sector. Everybody thought that with Trump, I am getting to politics, Ash, do not get mad. Everybody thought with Trump coming in, it is going to be great for all the industrials and the energy companies, his best friends, but it has been absolutely terrible because they have drilled more, there is a ton of supply out there. If we can limit supply, keep demand relatively stable, I think the energy stocks could benefit from that which I think is a contrary trade and they have been awful. All bets are off if these things break some new lows.
ASH BENNINGTON: It is an interesting thesis energy select SPDR XLE up today 1.18%. Up, whatever it is, three or four times more than the indices on the equity side.
TOM THORNTON: It is a little value rotation today. Maybe it is the mergers that are happening. I think Halliburton's earnings were okay. Slumber J the other day was okay, not great but those stocks rebounded after falling a little bit. I do not know, I like these, I see the value in these. Again, if supply is constrained, and fracking is curtailed in a little bit, I think these things can work.
ASH BENNINGTON: Once again, slightly bigger picture question to leverage some of your decades of market experience, how do you think about sectors and what are the ETFs or other mechanisms that you look at as proxies for those sectors, and that rotation that we have just talked about?
TOM THORNTON: Well, I look at things top down, so I look at all the major of the sector ETFs. I have a list of 165 ETFs that I look at. I look at where things are moving. One of the things that I like to look at from a technical point of view is I rank all these ETFs by percentage above or below the 50-day moving average. It is a monitor that I created when I worked at my hedge fund for one of the partners because he said, look, I need you to force rank your favorite ideas. I said, okay, I am going to make something up mechanically that works.
You could see things work in that range. For example, remember, everybody loved gold stocks in the summer and GDX and GLD and silver were just ripping. These things got so far over the 50-day moving average. I can chart that and say, oh, my God, it gets too well overdone. Now those are down, I think the SLV is now down 4% below the 50-day moving average, it was I think 28% above the 50-day moving average. I see these rotations happen.
I look at a lot of different sectors and energy has been absolutely on the bottom for, I think, at least nine months. Now, they are starting to pick up. XLP is above the 10-day moving average, you are starting to see those start to move. You see those move over the 10-day moving average, and then the 20-day moving average. XLP is above the 20-day moving average as well. It is still 9% below the 50-day moving average so I think there is a mean reversion there, but that is a start, that is what I like to see.