Email
Print"I like the Japanese knives, I like French knives. Whatever's sharp." -- Wolfgang Puck
Intro
A three-day weekend comes to a close. As many of you try to pry that wretched thing you call your body away from the beckoning comfort of your blanket and your pillow, there are a few items that reach out this morning and shake you into an immediate state of heightened awareness. The second and third of these will likely be the overnight support for the long end of the yield curve. The momentum there suddenly seems to be pushing the spread between the two-year and the 10-year back toward the lower end of the 50-to-60 basis point range that we have seen now for quite some time.
The third item will be the visit that the "Ugly Stick" is apparently paying to holders of Bitcoin. The last sale I see for Bitcoin is currently $11,435. This is interesting. Today is Jan. 16. Did you know that depending on when in the day you bought Bitcoin, if you bought the cryptocurrency two months ago today, you are up something like 46% on that investment? However, if you purchased Bitcoin one month ago today, you are now down something close to 42% on your investment. Sheesh. Even more interestingly, by the time you read this, the math could be vastly different due the underlying product's unrelenting instability.
The number one item that will blast you out of your bed and straight to your computer is where U.S. equity index futures are trading. Yowza. Is this rally ever going to end, Sarge? You bet your tail it is. Just not right here, and not right now. Honestly, I have been getting a little cautious. I won't lie to you. In fact, I'll never lie to you, because I'm not trying to sell you anything, but the truth is that stocks are just not as expensive as many folks think. I do expect volatility, at some point (maybe soon), to slap us around as that sleeping giant arises from its multi-year slumber. That event, when it happens, will scare some traders. What I used to call the "snowball effect" -- or what Jim Cramer has termed as "pin action" -- will be in focus upon that eventual reality.
Enthusiasm has spread and is still spreading across the marketplace thanks to the recently passed tax reform bill. Analyst after analyst have been raising numbers for firms they cover. Are those projections overly aggressive? Well, we have to wait to hear from the firms themselves on this. The banks that reported Friday, JP Morgan (JPM) in particular, seem highly optimistic. From where I stand, though the S&P 500 is up a scorching 4.2% year to date, the forward-looking PE ratio for that index is now running at 18.8. Huh? Thought stocks were overvalued? Not if earnings projections are accurate, they're not. This ratio was a lot hotter than this back in December. Try levels well above 20.
What Will Rattle These Markets?
I see two roadblocks that could get in the way of furthering exponential gains in the equity space, despite having just made a case for the justification of current valuations.
1.The ongoing threat to the long end of the yield curve. Though some downward pressure on the U.S. Treasury's 10-year note and 30-year bond would, in my mind, be healthy, the truth is that this potentially scares some folks. Yes, the Bank of Japan policymakers may play with their quantitative easing program, and yes, the Chinese may send veiled messages regarding the future of their support for U.S. debt, and finally, yes, the Federal Reserve's reinvestment program will continue to evolve.All of these factors appeared to rattle the "bond king" Bill Gross last week. He's right. Someday, the bond market bull market will end, and that makes sense. I also believe that the NY Jets will win the Super Bowl someday. I am just not going to make that call every time the Jets win two games in a row. I will indeed pay attention to this growing threat to the equity space. I will pay more attention when I feel the 10-year starts giving up something close to 3%. Until then, any reduced valuation for the 10-year is positive.
Before quaking in your boots, remember, the Bank of Japan is likely a long, long way for doing anything substantial, and the Chinese need the U.S. market as much as the U.S. Treasury need the Chinese to bankroll their debt. The needs are symbiotic.
2. The US consumer. Healthy, right? Spending more money. The economy is booming. At least, that's the narrative. December Retail Sales increased by 0.4% month over month. This was on top of November data that had been revised to 0.9% m/m growth from October. The retailers themselves reported their fourth consecutive month of sales growth in December. 2017 ended up being the best year for the group in terms of sales growth since 2014, and the holiday season ended up as their best since 2010. Hmm. I don't see a problem, Sarge.Consider this, Batman. For the month of October, revolving credit grew across the nation by $8.3 billion. That was the largest one-month increase since November 2015. One month later, in November, revolving credit increased by a staggering $11.2 billion. That number represents the second largest one month increase since the financial crisis. Conclusion: Credit card usage is smoking hot. Increased confidence? That would be nice. Regardless, the U.S. consumer is currently behaving very aggressively.
Now, consumer credit is a lagging indicator -- an extremely lagging indicator. We do not have December numbers yet, but we see how folks went into the holiday season. Fast forward to December CPI, released on Friday. Where's the growth? Fuel oil, utility gas service, used vehicles, and medical commodities. These are the four areas that easily saw the largest month-over-month price increases in December. These are all clearly necessities. Nobody is buying medical commodities because they find them interesting. Nobody buys fuel oil because they have just loved fuel oil ever since they were children.
Let's go to my favorite indicator, what I call the "fun index". On to December retail sales. Know where the second worst performance came in? Sporting goods, hobbies, books and music. That, believe it or not, encompasses one line item in the report. It also represents a lot of what folks might buy when buying something "fun" or something they like, just for themselves (or as a gift). These are the kinds of things that one buys when one has disposable income. I ask again: highly confident? Is the U.S. consumer flashing the plastic more just to prevent the erosion of their family's standard of living? Serious food for thought, gang. If the consumer pauses, so will the exuberance. So will the chasm between the "haves", and the "have nots".
To Catch a Falling Knife
The Colonel called last night. The Colonel is one of the smartest traders that I have ever known. He had a question for me. Is it almost time to move into the utilities? Hmm. Darned good question. I worked on it overnight. The sector, as a bond proxy, has been pounded. Down 4.6% year to date. Down 9% in a month's time. When money flows, it takes no prisoners. Prime example of passive investment. Thoughtless. Even mindless.
We spoke earlier of the S&P 500, which now trades at a mere 18.8 times forward-looking earnings. By comparison, The Russell 2000 (small caps) trades at 27 times. The Nasdaq 100, 21 times. The Transports, 20 times. The utilities, however ... referring to the Dow Jones Utility Average, a paltry 17.8 times. Given the uncertainty facing the longer end of the yield curve, is this discounted enough at this point? May we use this sector as a hedge versus the rest of our portfolios?
The six largest components by weight in the Utilities Select Sector SPDR Fund (XLU) are NextEra Energy (NEE) , Duke Energy (DUK) , Dominion (D) , Southern (SO) , American Electric Power (AEP) , and Exelon (EXC) . By nature, all of these firms are sporting a lot of debt in comparison to cash levels. As far as forward-looking earnings, NEE is the most expensive, at 20 times, while EXC trades at just 13 times next year's earnings. EXC is also the only one in this group currently posting a current ratio above 1 -- although stripping out inventories pretty much halves that number. Individually, it becomes difficult to love any of these. Their ability to attract lies in their dividend yields, and that value decreases in line with bonds. Let's chart the ETF, shall we?
Charts of the Day: XLU... Invest, Hedge, or Stay Away?
A look at a daily one-year (plus 2018 so far) XLU chart illustrates just how ugly things got for the group come last December. Both Relative Strength and the moving average convergence divergence (MACD) look like something out of a monster movie.
The 50-day SMA seems to be closing in on the 200 day, but still has a way to go. If they cross over, this will provoke certain algorithms into action.
Adapting a year-long Fibonacci model to this chart allows us to see that the fund went out on Friday night at a pivotal spot, now standing at nearly a precise 61.8% retracement off the November peak. Would I jump in here? Reminder... I am not infallible, but I would not. This next chart shows why.
I usually do not go long-term on my charts. I feel the usefulness of such charts can be extremely suspect. However, given that the utility sector had been the beneficiary of perversely low interest rates that were created through artificial means, and not the free market, going way back 10 years or so becomes necessary.
Once we go back 10 years on a weekly chart, we can easily see that the current last sale also rests precisely upon support right now. To this point, pricing has strictly obeyed resistance at the central trend line, as well as support at the lower bound as provided by the Pitchfork.
My concern is this: Perception is that interest rates have room to run, perhaps a lot of room. I will actually be a little surprised should the lower trend line provided by this model, as well as the lower Fib level provided on the daily charts, hold for very long. This ETF traded in the high $20s prior to melting down in late 2008.
Is that where this is headed?I don't think so, but honestly, there is a chance. That said, the 38.2% retracement level on the 10-year chart lands at $42.25-ish. In a perfect world, where all my plans work out, this level is where I wet my beak, and would intend to scale in as far as $36.50. Hands in pockets for now.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2815, 2802, 2795, 2785, 2773, 2765
RUT: 1612, 1604, 1597, 1590, 1581, 1573
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (OZRK) ($0.75), (C) ($1.19), (CMA) ($1.25), (FRC) ($1.29), (INFO) ($0.51), (UNH) ($2.52)
