"The complexity of the world is so overwhelming and so present to everyone."
- Susan Choi
RMS Titanic
Had to laugh. In fact... fairly sure that I laughed out loud. I saw Dow futures run more than 400 points below fair value last night. S&P 500 futures traded much lower as well. I check on futures markets every night. I am not a regular pajama trader, but I always check on the markets. As a trader that tries to simplify a complex enough marketplace, not just for others, but for my own brain...I try to process just what the heck I should be doing. This was going to be a dandy.
To say, that markets of late, have been volatile would be an understatement. I want you to understand what you are up against this morning, because the situation is titanic in nature. There are five overt forces currently pressuring financial markets in a negative way.
1) Trade Conflict
2) Short-Term Liquidity.
3) Volatility in Washington, DC.
4) US Consumer lagging Corporate America.
5) Aggressive Central Bank.
On Thursday evening, for those who hit the sack early, President Trump announced that he would seek to impose tariffs on an additional $100B worth of Chinese goods. US Trade Representative Robert Lighthizer is in approval with the President's statement. I say "statement" because this is all talk for now. More posturing if you will. Posturing that obviously scared the heck out of the equity index futures trading crew overnight.
What this "statement" does is increase the complexity around numbers One (Trade Conflict), and Three (Volatility in DC), on "Jobs Day". That forces the inclusion of numbers Four (Consumer Health), and Five (Fed behavior) with number One and Three.
Complex Systems
Understand the term? Complex systems are simply systems composed of many components that by nature, interact. In science, you might want to use global climate, or your own body as an example of a complex system. The economy, and this financial marketplace are part of such a system. Because of both apparent, and perhaps latent inter-dependencies, modeling outcomes becomes quite the difficult task. There will always be something one had not counted on, or an unpredictable outcome based on either reflexive or emotional human response.
The President is not wrong in the pursuit of fairer, freer trade. The President's method does give this trader some pause. By keeping up the pressure such as he is, the President is pressuring this system in ways that could produce increased non-linear volatility.
In The Fray
Going forward, though markets may at times seem to recover, and even become tranquil, I think it becomes imperative to anchor one's portfolio. How do you anchor a portfolio? By building a cash base, and placing a percentage of one's invest-able wealth in a physical asset. Some like gold (not paper gold), some like real estate, some might like something else such as art. I am an Irish Catholic kid from Queens, NY. I would not know a piece of art if it fell on my head.
As for equities, I fall back on what I know the planet still wants. Yes, I believe in the entire tech story. The rest of the planet is not so sure. I have cut back on my overall exposure there. I hope you have too. Now, think, what is everyone still reaching for? That's right. Defense. They say it wins championships. As I have reached for ever higher levels of cash since January, this is one corner of my portfolio (among a few) that I have added to on weakness. Nobody wants to fight. Everyone wants to be ready. These stocks will likely open lower this morning with the rest of the equity arena. I will look for advantageous pricing to add further to my established longs in Lockheed Martin (LMT) , Raytheon (RTN) , General Dynamics (GD) , and Kratos (KTOS) . I will also be on the lookout for entry points in a few names that I am currently flat such as Northrop Grumman (NOC) , L3 Technologies (LLL) , and Flir Systems (FLIR) .
Am I sure of anything? Of course not. I just focus on what I believe to be true and what I understand best. The key to working around a shock to a complex system (which we may or may not be headed for), is personal simplification.
How About Micron?
You already know that I like tech. I like the semis. In these markets, I have been forced to lighten up my exposure to the space broadly. I have traded around core positions in names such as Nvidia (NVDA) , Lam Research (LRCX) , and Intel (INTC) . The extraction of capital from these trades has fared far better than have the core positions themselves.
There are also a few names where I have not found a spot to get back in. Micron (MU) is a name that I have written positively on, and remained long as the share price eroded. Fortunately, earlier this week, the markets blessed us with a chance to lighten up. This I did, unhappily.
Now, that UBS analyst Timothy Arcuri placed a sell rating on the stock, and a $35 price target causing a 6.6% decline in the name, and with tech set for more selling pressure today, what does one do with this stock? Acuri sees a decline in DRAM pricing over the next 18 plus months. I am still long small, albeit just 10% of my original size. What do I do with this balance? Take a loss? Add?
1) In the wake of earnings, Mizuho, Cowen, and Stifel all increased their price targets in response to Q2 earnings. Credit Suisse, and Baird did so ahead of those numbers. In general, most of these analysts see continued strength in DRAM pricing, and though NAND seems past peak, some downplay the impact.
2) Citigroup analyst Chris Danely disagreed with the pack after earnings, and seemed to be two weeks ahead of UBS on taking a less than optimal view of the firm's prospects. Danely saw more of an impact from NAND possibly "rolling over'.
3) The shares are trading at $47 and change in the pre-opening hours. This spot provided significant resistance to this name back in December and January. This spot is also where you'll find a 61.8% re-tracement of the bottom to top move seen earlier this year.
What I Am Going To Do?
Nothing prior to the opening bell. If I see this name trade close to 47.50, I will double my tiny stake. It is Citi's Danely that has me cautious. Danely is the one who saw this coming. That call was made on March 23rd. Micron broke technically on March 26th. Arcuri simply jumped on a ball that was already rolling downhill. The other guys? They are likely clinging to hope at this point. I will not be coupling this position with any written put options, as the slope is too slippery. We'll take a look at call premiums after the open. As far as the Titanic goes, MU is a deckchair.
March Employment (08:30 ET)
Average Hourly Earnings: Expecting 2.7% y/y, Last 2.6% y/y.
Average Weekly Hours: Expecting 34.5, Last 34.5 hours.
Participation Rate: Expecting 62.8%, Last 63.0%.
Non-Farm Payrolls: Expecting 186K, Last 313K.
Unemployment Rate: Expecting 4.0%, Last 4.1%.
Underemployment Rate: Last 8.2%.
Other Economics (All Times Eastern)
13:00 - Baker Hughes Oil Rig Count (Weekly): Expecting 799, Last 798.
13:30 - Fed Speaker: Fed Chair Jerome Powell.
15:00 - Consumer Credit (February): Expecting $15.3B, Last $13.9B.
16:00 -Fed Speaker: San Francisco Fed Pres. John Williams.
Today's Earnings Highlight (Consensus EPS Expectation)
Before the Open: (GBX) (.97)
