We Are Never Going Back to Easy Markets: Market Recon

 | May 02, 2018 | 7:31 AM EDT
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"If opportunity doesn't knock, build a door."

- Milton Berle


Way back on Monday morning, which BTW, was way back in April, equity markets opened the new week at considerably higher prices. Then promptly reversed lower. Those markets then opened on continued weakness Tuesday morning, only to reverse sharply higher sometime around mid-session. Reasons for such wild volatility? Anticipation of Apple (AAPL) earnings certainly helped the semiconductor stocks. This is bigger than that though. For days now, we have discussed the obvious headwinds that asset prices must run interference against here in the second quarter of 2018. They all matter. Aggressive monetary policy, sloppy fiscal policy, and ongoing trade conflict all present tests, and pressures that must be dealt with.

Today, we'll hear from the FOMC on monetary policy. No, there will be no actions taken. There are eight Fed meetings a year, but only four come with press conferences and the silliness of long-dated economic forecasting by a group of people who at least in the past have averaged less real-world experience than your neighbors. This largely reduces the other four policy meetings to little more than practice sessions for official statement composition. On Tuesday, the economic data was for the most part disappointing. March construction spending rolled right off the table, and total vehicle sales for April not only declined from March, but also missed expectations. That bodes poorly for headline April Retail Sales. The Census Bureau will release those numbers in two weeks.


The real story for the Fed was a Monday story. The BEA's PCE Price Index finally confirmed what the CPI (released by the BLS) had been telling us for months. Consumer level inflation is for all intents and purposes at, or above, the Fed's stated 2% target, and likely has been for more than half a year. Inflationary pressure was reinforced further Tuesday morning as the ISM printed it's Manufacturing Index. Yes, a slowed headline rate made this item seem disappointing, but several items rang out as clear as a bell. New Orders remained hot, Backlogged Orders grew from already hot levels, and Pricing increased from absolutely white hot levels.

The Fed's greatest fear would be, assuming the ability to reason (which can be assuming a lot at the central bank), should be having to chase inflation. Our central bankers are trying to do this slow and easy.... and striving to stay one step ahead of the monster without laying waste to economic growth. My comments aside, this Jay Powell is no fool, and this Fed may be different. This is precisely why Fed Funds Futures trading in Chicago are now pricing in a rough 50% probability for a fourth rate hike this year at the December meeting. The Fed will continue to push out the short end of the curve. They will leave the long end to the growing fiscal slop, which might just take some time to manifest. Danger? Of course. Get used to it. This is where the threat of inversion will come from. This is where the threat of recession at some point over the late 2019/early 2020 time period will come from.

Don't forget the Fed's quantitative tightening program, currently pulling liquidity of $30B a month out of the economy. That number ran from $10B to $20B in January as volatility struck financial markets. Hmm. That number will climb to $40B in July, and to $50B in October. This will, if the Fed stays on plan, reduce the balance sheet by $420B for this calendar year (2018), and $600B for 2019. My point here is not to frighten you. My point is meant for the home-gamers. We are never going back to easy markets. That 10 year period was perverse, and is being unwound. In the era of electronic trading models, and passive investment, volatility could reach levels far surpassing anything us old guys who like to tout out experience have ever seen. You do not have to make friends with volatility, but you do have to understand the beast and it's terrifying potential. You have to adapt in order to overcome. You have to overcome in order to win. You have to win in order to survive. We're all pretty smart here. Consistency in discipline will make the difference. Your children are depending on you.

Tesla (TSLA)

I have no position in (TSLA) . That could change prior to the close. Regularly I get this close to the firm's earnings release with no position in hand. I have never been long this name. I have often been short the name, and often profited from the short, but not always. I do not like managing a position in this name. It is always stressful.

Expectations for tonight's Q1 release are for an adjusted loss of $3.50-ish per share. Whispers are generally running at a slightly greater losses than that, however. I have seen analyst expectations for this loss at levels as optimistic as $-2.60, and as pessimistic as to approach negative five bucks. Revenue is expected to print somewhere between $3.1B and $3.25B, but does anyone really know? The catch is that despite awful fundamentals, and twelve month equity performance of almost -5%, the name retains a cult following. People believe that this name represents the future. Who am I to argue? That said, from here it would appear that this stock is priced as if TSLA will have a monopoly if and when electric vehicles become the widespread norm. We all know that won't happen, and really, it takes a lot of either guts, or tolerance for risk to ignore those already mentioned fundamentals.

Honestly gang, except for the persistent losses, incredibly weak Current and Quick Ratios, contracting Gross Profit and Operating Margins, horrendous cash flows, and rising interest costs, I don't see what's so attractive. Maybe the promise of increasing production of the Model 3 to somewhere between 3k and 4k a week sometime this month, and targeting 6k a week by years end is enough? Maybe a corporate front man famous for both clowning around, as well as raising money when it's most needed is enough? Much will be covered tonight. Only two things will truly matter to investors and traders.

1) Production. Progress on moving the Model 3 to the public. and a timeline for the firm's other products such as the Semi that they need to start delivering by 2020. By the way, though there are plenty of pre-orders for that Semi, TSLA is currently being sued for patent infringement to the tune of $2B by Nikola Motor Co, a start-up with plans to build a startlingly similar looking vehicle.

2) Cash Burn. The questions here are fourfold.

  1. Will the firm run out of capital?
  2. If so, when?
  3. Does the "money man" tap debt markets yet again?
  4. If that is not possible, or affordable, does the firm resort to diluting the shares?

Economics (All Times Eastern)

08:15 - ADP Employment Report (April): Expecting 197K, Last 241K.

10:30 - Oil Inventories (Weekly): Last +2.17M.

10:30 - Gasoline Stocks (Weekly): Last +840K.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (CLX) (1.31), (CVS) (1.40), (EL) (1.07), (HUM) (3.20), (MA) (1.25), (SO) (.84), (W) (-.84), (YUM) (.69), (ZTS) (.69)

After the Close: (AIG) (1.27), (APA) (.33), (CAR) (-1.03), (CW) (.87), (ESRX) (1.76), (KHC) (.82), (MET) (1.17), (PRU) (2.99), (QRVO) (1.05), (SPOT) (-.26), (TSLA)  (3.48).

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