Weekly Investing Idea
At the end of last week, the market had to digest a massive miss in the expectations for non-farm payrolls (NFP) jobs data. This comes on the back of some serious downturns globally through the manufacturing and services sectors, with the added worry of increasing disruptions due to the covid-19 delta variant.
Prior to the 2020 pandemic job losses, an NFP reading of 235k would have been very welcome, but as it stands, the labour force participation rate is very low, and the US economy could do with a million jobs being added each month for the Federal Reserve monetary policy to be proven effective.
Currently there is a consensus timeline that the market is following based on prior FOMC meeting minutes and Fed speakers. Now that we have had the Jackson Hole symposium, the next 3 FOMC meetings starting in September, become very important. September should have been when the monetary policy committee gives more formal hints of a taper. With November FOMC meeting being the consensus earliest time for a formal announcement.
If there is still a timeline, January would be when the taper starts, with the end of 2022 concluding this action with a view to starting a rate hike in the second half of 2023. Whether or not that timeline is still intact will become more apparent as the markets reposition themselves for a delay (or maybe not).
At the June 2021 FOMC meeting 4 members were expecting the economic conditions to favour a rate hike as early as 2022, with that number increasing to 7 for a rate hike in 2023.
It took the Fed nearly 7 years to begin raising rates after the Great Financial Crisis, so if the economic outlook doesn’t get any better there is a precedent for them to keep rates lower for longer. The big difference between now and then is that during 2020, the central banks were at a loss to how to support the economy without direct intervention from governments and fiscal spending. The US CARES act made sure that US dollar were directly sent to US citizens and for some this is what is now causing the inflationary pressures as seen in the higher readings in the CPI and PCE indicators. Although the Fed would like to get inflation back towards 2% it is holding off from hiking rates as it thinks the inflationary pressures will pass.
Looking at the US fiscal spending since 2020 it is obvious to see that current levels of spending are still far above the 5-year average by all most 200 billion. This money seeps into the markets both directly and indirectly and has gone a long way in keeping this equities bull run moving higher since March 2020. We now have MEME stocks being pushed by retail traders, running alongside corporations that have been able to buy back stock or directly benefit from a change in consumer culture, like the work from home phenomenon.
Since the June FOMC meeting the Nasdaq has moved higher by over 1500 points. The momentum and price action look extremely bullish with dynamic support being seen in the 20 and 50 daily exponential moving averages as great buying opportunities. There have been times of uncertainty in the Tech-focused index, with downside pressures coming as investors sold their positions as run-away inflation fears were being stoked by yield curves steepening. Also, there was a moment when the tech stocks looked like they were being ditched in favour of more industrial and materials as investors cycled out of the stay-at-home names as vaccination programmes appeared to be having a positive effect against covid-19. If there were a rate hike cycle it is possible that some companies who service a lot of debt would become less profitable. In an era of low interest rates and low to negative yields, there has been no alternative but to keep ploughing more money into stocks or the crypto verse.
As can been seen in the Nasdaq (weighted) heatmap, the four largest by capitalisation are Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN). All of whom closed near or at their open on Friday. When these 4 moves in the same direction the Nasdaq can be trending, and for the last year the cumulative gains these companies have created are all positive.
Amazon is clearly the laggard of the group and a deeper dive into why investors are less enamoured with this company would be needed, as the consumers have obviously moved towards an on-demand, on-line shopping experience, forcing bricks and mortar retail to suffer longer than just the lock-down disruptions.
Technically the AMZN ticker is bullish as the daily chart price is above the 200-exponential moving average (ema). Momentum is slow though, as we are on day 248/365 of 2021 and the 200 ema is just poking through the years opening price. In hindsight it would have been a great trade to use the years opening price as a mean regression to trade towards when price moved to the edge of the previous swing high or low.
Amazon have a debt pile of $52.3bln with a market cap of $1.76trln so currently in a great place. At $3,482 a share the consensus is that Amazon are trading below fair value at $5,000 and $6000 would be classed as overvalued. This gives investors a lot of potential to the upside considering we could be in an accumulation phase. If we were to get into a rate hike cycle Amazon are in a great place to service their debt so any knee jerk panics should be considered a buy the dip opportunity. While institutional investors are happy holding the stock, retail investors should be comfortable looking for entries too. Currently the largest shareholders of Amazon are Jeff Bezos, with ownership of 10%. The Vanguard Group Inc. is the second largest shareholder owning 6.4% of common stock, and BlackRock Inc. holds about 5.4% of the company stock. Vanguard and BlackRock are not the sort of funds that flip flop, so their holdings are key indicators of when to buy and hold or sell.
From the above chart the debt is expanding along with the equity and cash equivalents, so any change in trend should be quickly identified with an early warning coming from a drop in equity as a red flag for those worried about long term implications on an increasing debt burden. Amazon use their credit line to continuously grow into areas that the world seems to be shifting towards, or maybe Amazon are leading the way and we’re all following? For example, Robotic Fulfilment Centres, Renewable energy projects in Canada, USA, Finland, and Spain. Cloud computing and technologies, entertainment and TV/film distribution. With founder Jeff Bezos now successfully travelling into space.
A new trend to watch for is online reselling and goods arbitrage. SME’s are able to pick up stock at wholesale prices and resell at a premium through Amazon through the Amazon’s “Fulfilled by Amazon” function to store and ship out goods. In some cases, an individual or company can even sell without having the cost of warehousing through drop shipping business models. There will be a consolidation of the smaller businesses selling online as larger companies try and regain market share, but individuals and small start-ups are able to build through the “Fulfilled by Amazon” and will price competitively to control the “buy button”. The net result is more goods priced at value, will be sold through Amazon and we will become more reliant on the company for their distribution channel. For Amazon they will take their cut and build revenues.
The latest intraday price action shows that s previous market structure support acted as resistance on Friday. If we see price travel higher and retest that level of $3531 as support the July swing highs would make for a good upside target. $3780 would be a new all-time high with monthly, weekly and daily momentum signalling this is the most likely scenario.
When traders return to the markets following the Labour Day bank holiday, I am expecting some volatility, so will be interested to see which way the markets melt. I have a feeling the bad news for the Fed watchers is good news for the equities markets and their high growth constituents.