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Repo Madness

10-17-2019

In last night's game of beat-the-number, the rotting carcass of a formerly important company, that being IBM, reported its lowest revenues in 17 years, even with the recent Red Hat acquisition! As if that weren't bad enough, they had recently reset the guidance in the wake of that deal. Thus, September obviously didn't work out as they had imagined.

Stranger Things Have Happened As for the stock price, it was actually penalized to the tune of about 6%. On the positive side for the bulls, Netflix was a big winner, at one point seeing its stock price up 10% before giving up a chunk of that. I only glanced at the results, but it wasn't so easy to see what everyone was so excited about. The only interesting point was that the initial euphoria seemed to wear off.

After speaking to Fred Hickey, I think there may be a connection between the lowered expectations at Workday and IBM. Both seem to have been caught by a weaker-than-expected September. That could be because of the problems that a lot of these "unicorns" have had, which may have spilled into the order rates at other companies. Obviously, WeWork has been a disaster, but many others also haven't been the success that people expected, and there is the potential that this is all affecting planning at some of these companies, which would potentially reduce the amount of technology they consume.

In addition, it could all theoretically be related to the scramble for reserves in the banking system that the Fed is trying to alleviate with its repo operations and monetization (today saw the launch of a repo facility totaling $104 billion).

Some Potholes In Sand Hill Road It is possible that beneath the surface there is starting to be some indigestion, which at some point will matter to the public markets as well. I have heard stories of insane lending games being played in the so-called private equity and venture capital world, so I would find it easy to believe that there could be some disruption emanating from that sector, but until we see it in the public markets we really won't know for sure if that's just hypothetical or it's actually happening.

If I were looking for an analogy, it could be similar to when Bear Stearns' subprime funds began to crack up, which was a precursor to the whole unraveling of the credit/real estate bubble in 2008. Having said that, I don't want to raise my hopes about when people will come to their senses. This is mostly just meant as a heads-up for folks to think about.

Note Worthy? Turning to the action, stocks were perky out of the gate for the first couple of hours, then they started to slip a bit. I was interested to see if the thesis I shared at the start of this column would play out. What I was looking for was the kind of action on the tape that might indicate concern at a lot of the favorite tech companies, but I think it's too early to draw a conclusion.

In any case, by midday the gains were rather modest to the tune of 0.2% or so. In the afternoon, the indices inched a bit higher, led by the Nasdaq, which gained about 0.5%.

Away from stocks, green paper was weaker. I think the repo facility, M#4, and potential future rate cuts are going to undermine the bull case for the dollar. It is starting to act a bit wobbly, but that could just be noise. Fixed income was a freckle lower and the metals were a little higher, with silver gaining 1% compared to a couple of bucks for gold. The miners actually had a reasonably good day today, but from one session to the next the action doesn't necessarily imply mean much.

Positions in stocks mentioned: none.