"Don't try to buy at the bottom and sell at the top. It can't be done except by liars."
- Bernard Baruch
Have Equities Bottomed?
I was asked this question more than once after Tuesday's closing bell. The question itself smacks of fear. Facebook's (FB) Mark Zuckerberg would still be grilled by legislators for a few more hours. Zuckerberg, by the way... did perform well, as did the stock as it became obvious that at least some of the shorts in the name had started to cover open positions. Back to the question at hand. If precisely picking bottoms were so easy, then investors would never have to spend the time nor capital on hedging positions that we regularly stress as necessary.
The mindset, in my opinion has changed. Though forward looking multiples have become much more reasonable, traders have changed the way they look at the current state of volatility. Instead of using market dips to add exposure, many have started using the dips to reduce overall exposure, or to rotate that exposure. Use yesterday's action as an example. Significant rally. No? Still, the S&P 500 did not claim even Thursday's levels. I write these notes in the wee hours of the morning. It would appear from this vantage point that the pajama crowd (really mostly foreign traders and algorithms) are betting against any positive follow through. Are there positives? Sure, take the view out to a couple of years or more, and the upward momentum of at least the S&P 500's lower trend line remains in tact. This would mislead you. Times are different.
Besides trader sentiment, exactly what is different? Silly question. Yes, we do have corporate earnings on our side, and the impact of corporate tax cuts will unleash both an increase in corporate re-purchases as well as margin expansion. Will that be enough to out-muscle the incredible side show that pervades in Washington? Will that be enough to stay one step ahead of a central bank that appears too bent on preparing for the next apocalypse? Perhaps those two items... the political atmosphere, and the aggressive nature of this FOMC are why you can not think of saying that equities have bottomed.
1) The game of musical chairs played at the cabinet level coupled with these raids made upon the president's personal lawyer create uncertainty. It will not take much for these items to further rattle the marketplace. All traders would need to see would be a president unnerved, or a mid-term election that would appear to work it's way toward the party currently out of power.
2) Back to the central bank. This morning, we'll see the March edition of the Consumer Price Index (CPI). Expectations are that the headline print comes in at 2.4% y/y, while the core number hits 2.0%. Numbers at these levels or higher will impact futures markets in Chicago that provide us with information on just how much a fourth rate hike in December is actually priced into financial markets. Currently those probabilities stand at a rough 29%. On top of that, do not even think about letting yourself forget that managing the Fed's balance sheet is pulling $30B worth of liquidity out of the economy every month. That drag goes up to $40B in July, and $50B in October with the intention to continue at that pace.
3) Trade war? Oh, President Xi of China played nice in the sandbox this week. That put the markets in a sweet spot. That is if the president of China actually capitulates. Does that sound realistic? Perhaps that was simply a display of power. Obviously it is in the best interests of all to negotiate an agreement here, My best guess is that publicly, things are more likely to turn negative in this space before the "all clear" can possibly be sounded. The hearing on May 15 has the potential to disrupt anything positive vibes being emitted in aggregate by the corporate earnings' season. The feather in our cap here is that both leaders consider the need to save face as important and seem to respect that in each other.
4) Three Month US dollar LIBOR rates are still high.
5) The US Consumer is not spending. Savings are weak, and so are retail sales. More on this next week.
6) European macro continues to fade, jeopardizing the whole synchronized global growth narrative. This as the ECB continues it's efforts to pull back on quantitative easing. If you're squeamish, don't even look at Industrial Production, Retail Sales, or Investor Confidence numbers from across the Atlantic this month.
For one, I am surprised at how well the young man performed yesterday. At least the Facebook founder and CEO wore a suit and a tie. The mere fact that this becomes worthy of mention quickly makes one cognizant of just how low expectations had become. Facebook equity performed well too once questions started to fly. Though obviously stumbling at some points, Zuckerberg did seem quite patient and poised for the most part.
At one point, Senator Lindsey Graham asked Zuckerberg if his social media company held the position of monopoly in the field. Zuckerberg intimated that he did not feel so, and cited Alphabet (GOOGL) , Microsoft (MSFT) , Twitter (TWTR) , and Snap (SNAP) as competition. Personally, I do not feel that any of these four actually offer direct competition to Facebook in the type of social media offered. Of the four, I am long two. I bought TWTR on the stock's recent dip. I like the service, but not really the stock. That one is merely a trade, not an investment. I also remain long MSFT, and believe in their story. That obviously would have little to do with social media however, and much more to do with the firm's public cloud services and their position in the video game industry.
Eye On Defense
Syria in the news? That's headline material and certainly has given a lift to the Energy sector. You may or may not have noticed last week that the Indian Air Force formally asked for corporate proposals on the sale of 110 fighter aircraft. This order would be worth more than $15B and is currently the largest potential order of this type on the planet. On top of that, India is also looking to modernize fighter aircraft for it's Navy in a separate contract that could be worth another $10B.
For the most part, the Indian military is still reliant on Cold War era Soviet MiG fighter craft. I do not need to tell you that India lives in a tough neighborhood. Who benefits here? Well, there are choices, but both Boeing (BA) (F/A-18 Super Hornet), and Lockheed Martin (LMT) (F-16) are front-runners. Both have offered to move manufacturing centers to India in order to help them win significant slices of these orders. Others in competition would be the Eurofighter Typhoon, SAAB of Sweden, and the United Aircraft Corporation (Russia), which makes the modernized version of the MiG fighter. My thoughts? This sector will remain hot for some time as defense spending spreads across the globe. Buy defense names on weakness? I am. A smidge at a time.
Economics (All Times Eastern)
08:30 - CPI (March): Expecting 2.4% y/y, Last 2.2% y/y.
08:30 - Core CPI (March): Expecting 2.0% m/m, Last 1.8% m/m.
10:30 - Oil Inventories (Weekly): Expecting -250K, Last -4.62M.
10:30 - Gasoline Stocks (Weekly): Expecting -1.2M, Last -1.2M.
13:00 - 10 Year Note Auction: $21B.
14:00 - Federal Budget Statement (March): Expecting $-183B, $-215B.
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (FAST) (.61)