Markets In Suspense Over Biden Spending And Fed Lending

Yesterday’s session reminds me of the first time I tried rollerblading. I was all over the place – and then, “Boom!” From the moment I laced those bad boys up, I was in trouble. The struggle was real. I tried rollerblading one more time, but it’s a long fall for a guy my size. So, just like the 1200 CC Sportster Candy Apple, Red Harley that I rode three times before selling, I sold the rollerblades shortly after.

A late move higher in the S&P fizzled as mega-cap names pulled back right before the closing bell.

Market breadth was a perfect reflection of the session, light volume with a bearish tone.

Some Musing from Earnings

Alphabet (GOOGL) crushed it and is poised to keep crushing it, as its cloud business is on the cusp of profitability. Buybacks are king this year, and management crowned itself with a $50.0 billion authorization. Microsoft (MSFT) had a great report, but it was not significant enough considering the anticipation.  

Consumers are showing remarkable discipline using debit more than credit. Visa’s CEO Alfred Kelly says the use of cash is fading, and digital is ramping. Also, Advanced Micro Devices (AMD) is crushing it with the right innovative products, and there are too many Starbucks (SBUX) in the United States.

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Alphabet (GOOGL)

• Revenue: $55,314,000,000, consensus $41,159,000,000
• Earnings: $26.29 from $9.87, consensus $15.82
• Operating Margin: 29.7 from 19.38
• Buyback authorized: $50.0 billion
• Initial Reaction: Screaming Higher

Microsoft (MSFT)

• Revenue: $41.7 billion +19%, consensus $41.03 billion
• Earnings: $1.95 +39%, consensus $1.78
• Operating Margin: 40.87 from 37.05
• Initial Reaction: Screaming Lower

Visa (V)

• Revenue: $5.73 billion -2%, consensus $5.55 billion
• Earnings: $1.38, consensus $1.27
• Operating Margin: 65.47 from 67.59
• U.S. Credit Transactions: $508 billion +0.1%
• U.S. Debit Transactions: $806 billion +31.3%
• Initial Reaction: Higher

Advanced Micro (AMD)

• Revenue: $3.44 billion +93%
• Earnings: $0.52 from $0.18, consensus $0.44
• Operating Margin: 22 from 20
• Guidance (2Q): $3.6 billion
• Initial Reaction: Higher

Starbucks (SBUX)

• Revenue: $6.67 billion consensus, $6.81
• Earnings: $0.62, consensus $0.53
• U.S. Comp +9% (ticket +21%/transaction -1.0%)
• China Comp +91% (ticket -1.0%/transactions +93%)
• Initial Reaction: Lower

Portfolio Approach

We took profits in Technology and added a new position to Consumer Discretionary yesterday in our Hotline model portfolio.

Today’s Session

All eyes will be on the Federal Reserve during the session and Apple (AAPL) earnings after the close.

On the Fed, there is a growing school of thought the Fed must hint at near term action this year that would begin with reducing its monthly asset purchases, which are currently $120 billion a month in treasury bonds and mortgage-backed securities.

Jerome Powell has promised to give clear hints ahead of taking significant action that would eventually lead to hiking interest rates.  If there is no mention unwinding asset purchases, that means it will not happen until the fall, as he would have to telegraph it at the June FOMC gathering. 

Conversely, if the street comes away convinced the ball has begun to roll toward unwinding asset purchases, leading to rate hikes, it will be interesting to see how investors handle such a message.  Here’s the rub: it is inevitable the Fed will remove the punchbowl.

Ideally, the stock market would take such action in stride like taking off the training wheels, because the economic backdrop is strong enough to support higher share prices.

Ideally.

During the question-and-answer period look for nuances on three key questions.  Powell’s feeling on the threat of Covid19 and if its just about domestic cases or global.  Powell’s interpretation of “full employment.” And if he will announce fewer monthly asset purchases.

Tonight, President Biden lays out the plan to spend another $1.8 trillion toward the great Progressive Utopia.  It will be laid out as a way to get everyone involved in the economy. But sending people checks for not working is not really all-hands-on deck. 

The nation needs to create opportunities for everyone to grab an oar and contribute – that is getting everyone involved in the economy.  Sadly, those that take the bait on the Faustian offer of lots of money not to work doom themselves and create huge hurdles for their children to climb the ladder of success.

The devil will be in details that will not be mentioned tonight, but the notion that somehow wealthy people like Jeff Bezos and Elon Musk are paying for this will be promoted.