"Everybody in New York City knows there's way more cars than parking spaces. You see cars driving in New York all hours of the night. Its like musical chairs except everybody sat down around 1964."
- Jerry Seinfeld
When The Music Stops
You played these games as a child. Duck, Duck Goose forces one player out of the inner circle at a time. That ostracized player, if swift enough might however.... regain their spot. Musical Chairs is much more cut-throat at a basic level. Every time the music stops, somebody loses their place. Children cry, and the game goes on. Recently the music stopped for outgoing Secretary of State Rex Tillerson. Prior to that, Gary Cohn also surrendered his chair. Markets wobbled. Traders mused the impact upon financial markets. Would it matter? Does volatility within a business friendly administration signal the end, or at least at a minimum the waning of the best corporate environment experienced by this nation in perhaps decades?
Markets have traded as if participants are unsure all week. Traders like Larry Kudlow. They think he's a positive for the marketplace. Kudlow replaces someone already thought of in that way though. At State, the changeover is more stark in the apparent trajectory of trade policy. Mike Pompeo, considered to be more of a hardliner on China, on Iran, on Venezuela, fills a slot that had been held by a talker... a negotiator.
Now, over night, it had seemed that according to reports that appeared in both the Washington Post, and Wall Street Journal that the president was prepared to bid adieu to National Security Advisor H.R. McMaster. This move had been rumored for weeks, maybe even months. This president has, since the very start of his term, had great respect for retired generals, and aside from the short, troubled relationship with Michael Flynn (whom McMaster replaced), the president has seemed to be able to work well with both Chief of Staff John Kelly, and Secretary of Defense James Mattis.
Is McMaster on the way out? How about Attorney General Jeff Sessions? Not so fast, says the White House this morning. Last night, Lt. General McMaster attended a White House function. Also, last night, Sarah Huckabee Sanders responded to the "breaking"news that there were indeed no changes being made at the National Security Council. Perhaps it is just too soon after the other recent changes to the president's inner circle. Perhaps there is less to this story than rumored. Either way, the thin ice that those who work around the president must skate upon can not be a positive. At some point, unless there is a point where some sustained continuity is reached, confidence in the administration's pro-business agenda will weaken. In my opinion, we are not yet at this point, but maybe not stopping the music for a little while might be a good idea.
Actually. for all the hub-bub about valuations, and jitters over market fundamentals, I don't see it as all that nerve-wracking. I mean, I'm no dope, or at least I hope I am not. I respect the possibility every day that I might take the beating of my life. Honestly, that's how I have approached every weekday since October 19, 1987. That day taught me that it wasn't up to me. You might prepare for a day like that. Then again, if you let fear control you, you might prepare for that day a thousand times over a couple of decades, thus surrendering too much of your hard earned dough to shadow corrections that either never materialize, or see themselves re-corrected over time.
That does not mean that I am all aggressive all the time. This simply means that I try to take a pragmatic, yet disciplined view of the marketplace. While disciplines might evolve as markets do, the decision to change behavioral response must be made ahead of the trigger event. Otherwise, a decision must be considered rash, and rash decisions are always prohibited for the well disciplined.
Fourth quarter earnings are largely in the books at this point. As for the S&P 500, my measure for broad market performance... 73% of corporations reported an EPS expectations beat, while more pointedly, 77% percent topped revenue projections. This is a 10 year high beat rate on revenues for those of you who wondered, but were afraid to ask. As we rise to greet this quadruple witching Friday with open arms, that same S&P 500 trades at 17.7 times forward looking earnings, which is high, but not exorbitantly so. The five year average for such valuations is just above 16, which is where the Dow Jones Industrials now trade, and above where the Dow Transports currently reside.
I am not foolish enough to believe that there is no point at which a rising interest rate environment will not ultimately have a negative impact upon equity prices. It is the unwind of the Fed's balance sheet that I see ultimately as a potential for any market roadblock. The reinvestment by the central bank of maturing securities reaches a critical point within the next month or so where it becomes a net extractor of liquidity for the economy. Quantitative easing was largely credited with tightening credit spreads, and keeping yields on sovereign debt low. This is in turn is credited with pushing higher equity valuations.
Now, it stands to reason, that the removal of the last vestige of the stealth expansion of money supply would then reverse these trends. I think we have already seen the re-emergence of volatility for a number of reasons. This may be a contributing factor. The good news is that as I just told you, I see valuations as mildly above what I consider to be normal, not grossly so, given that the balance sheet is never expected to return to it's pre-crisis levels. That would make, in my opinion, pre-crisis data on valuation levels largely irrelevant.
Briefly on China
Last night, the Department of the Treasury reported Long-Term TIC Flows for January. The headline print of cross border investment ($+62.1B) was obviously skewed by the stock market's run that month, which though ending only six weeks ago, was still ahead of the markets re-introduction to volatility. This is not what is interesting in this report.
What's interesting to me is that Chinese accounts were net sellers of $16.7B worth of US Treasuries. They still held at the end of that month a total of $1.168T worth of our sovereign debt. I have heard, in the financial media talk of China walking away from US Treasury auctions in response to the administration's attempt to level a tilted playing field, a field where China has consistently played outside of rules that they themselves agreed to in 2001.
Then I hear the same arrogance from economic circles that claim how small tariffs, and pressure aimed at preserving America's intellectual property rights will only hurt the US and US consumers. These critics claim that these measures can not fix anything in the grand scheme of things because the Federal government, and the people themselves are net negative savers. Savings must then be imported. I get that. Awesome. You guys are brilliant. I think we all understand that these measures will be unable to correct larger trends that overwhelm the American economic environment. I would also like to be the one guy who gets to sell these "economists" a house or a car. These fellows must walk into an auto dealership with their money stapled to their foreheads.
Get foused. Did you catch the number? $1.168T. China has a significant interest in preserving the value and integrity of the US Treasury markets. China also needs to preserve US consumer demand as best they can. This is a symbiotic relationship where one side has taken advantage of the other side for a very long time. Now, finally a US administration fights back. I may not be the sharpest pencil in the box, but if you punch me in the face 20 or 30 times, and I still get up... yeah, you know what happens now, sport.
Chart One: Adobe (ADBE)
Adobe (ADBE) reported last night. Uhm... Start the music. The firm in short beat expectations for earnings per share, beat revenue projections, and raised Q2 guidance for both. The story was a subscription rate that ran 30%, and expectations for digital media overall going forward.
The stock ran last night after these numbers hit the tape,and here at zero dark-thirty has kept on running. As you can see in today's chart, this morning's pop will likely curl the sagging 12 day EMA (found on the daily MACD) in a northerly direction. Money Flow should also tip back into the green, forcing Relative Strength above 70. This is all short-term positive. As for trend, the central line of our Pitchfork model will come into play. As you can see in the past, the name has largely played by Fibonacci's 20th century rules, but we will have to ignore the Fibs on the right as they will surely change today. The central trend line though... that line suggests rising resistance at 230, which very close to where the stock is trading in the pre-opening session.
This would have been my primary target. However, I did not get my fair share of stock prior to this pop, so this turns from an intended investment into a trade, and that in turn allows me more latitude in discipline given capital outplay is less than intended. If long is what is considered to be a full position, I would surely look to take some off around 230, being long a fraction of full position, I will look for a take and hold of this level, and shoot for 240 by April 1.
Chart Two and Three: China Syndrome... Boeing (BA)
This four month daily chart of BA illustrates just how pivotal last night's closing price was for this name, not to mention the aerospace industry as most of the other names in the group have been subject to some pin action this week as Boeing (BA) has been slapped around. The lows of the last two days have landed precisely upon a 61.8% re-tracement of the move from the 2018 lows through the late February highs. Fortunately the stock has rebounded from that spot on both occasions, and now approaches levels closer to a 50% re-tracement. Obviously projected numbers for BA's performance from a fundamental level are reliant upon sale made to China's and European accounts, thus, the pricing in of this uncertainty. What happens if 321 breaks to the downside?
I'm going to caution you, the Fibonacci Fan (blue) is only good if the name regains trend. That means making new highs. Good luck with that short-term. For now, the standard Fib levels based on a trend that begins with lows made two years ago would be in play. For those long this stock, this is worst case scenario, but given that a 38.2% re-tracement of this gargantuan,and lengthy move still allows the name to give up almost 65 more points, some kind of protection might be in order. The profit takers seem to have been ahead of you.
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: 2771, 2763, 2757, 2742, 2731, 2723
RUT: 1591, 1585, 1577, 1566, 1558, 1551
Economics (All Times Eastern)
08:30 - Housing Starts (February): Expecting 1.29M, Last 1.33M SAAR.
08:30 - Building Permits (February): Expecting 1.32M, Last 1.38M SAAR.
09:15 - Industrial Production (February): Expecting 0.3% m/m, Last -0.1% m/m.
09:15 - Capacity Utilization (February): Expecting 77.7% m/m, Last 77.5%.
10:00 - U of M Consumer Sentiment (March-pre): Expecting 99.1, Last 99.7.
10:00 - JOLTS Job Openings (January): Expecting 5.87M, Last 5.81M.
13:00 - Baker Hughes Oil Rig Count (Weekly): Expecting 794, Last 796.
16:00 - Long Term TIC Flows (January): Expecting $37.1B, Last $27.3B.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: BKE (.72), TIF (1.63)
After the Close: ATEN (.03)