A strong non-farm payrolls report offset the dual implementation of tariffs by the U.S. and China Friday, and the U.S markets continued to sail upwards on their merry way. If there's a wall of worry out there anymore, it is certainly a very short one, and as an active asset manager that's a challenge. Owing to reinvestment of dividends, interest payments, portfolio reconstruction and the injection of new client monies, I always have extra funds to invest.
Short-term money is now yielding more than the S&P 500, finally, with three-month LIBOR at 2.34% and the S&P's yield at 1.81%, but the flat yield curve means that 10-year U.S. Treasuries yield only 2.82% and 30-year Treasuries yield just 2.94%. I don't get paid to hold cash, and my clients would not be happy with sub-3% returns in a market of inflated equity pricing, so that means decisions have to be made.
Read Tom Graff's take on Friday's jobs report and the Fed here.
Other than "wall of worry" my second least-favorite market cliche, is "risk-on/risk-off" when used to describe the market zeitgeist on any given day. It's a risk-on world, and $34 billion worth of dual tariffs (with more in the comments stage) is not enough to move the needle for the markets as a whole.
If you are a risk-off person, it can feel like the great Redd Foxx as Fred Sanford portraying his endless series of fake heart attacks. Trade war with China: "This is the big one." North Korea tensions: "Elizabeth I'm coming to join you." Higher interest rates/flattening yield curve "Arrrrgh."
All of Fred's coronary episodes were fake and all of the perceived bogeymen on equities have been just as misleading as seeing the junkyard owner clutching his chest.
There is only one thing that can stop this train -- in terms of intermediate term direction, not day-to-day moves -- and that is weakness in earnings. Here, it's important to know the craft of an equity researcher. As my director of research at Donaldson, Lufkin & Jenrette used to tell us, an earnings note should be composed of 10% analysis on the reported quarter and 90% analysis on management's guidance for future quarters. Equities are forward-looking accounting mechanisms, and the future is always more important than the past.
So, from a broad view, it's important to know what your stocks are due to report in the season that begins in earnest next week. The first analysis should always be sectoral, so here are bullet points on a few sectors of interest:
Energy
Oil prices whether measured by the European benchmark Brent or the U.S. WTI are higher than they were one month, one quarter, and most importantly for earnings analysis, one year ago today. Do not overthink that one. If you have exposure in your portfolio to companies that produce black oil or service companies that do, you should not even consider selling them. Exxon Mobil (XOM) and Chevron (CVX) are the safest long-term plays here.
Autos
The sector I followed as a sell-side analyst for 11 years. Many hard lessons learned during that time, but the most important one was don't own stocks of domestic automakers when the U.S. auto sales cycle is past its peak. A corollary to that is don't own these names when interest rates are rising, and that is occurring as well. So, forget about the wow factor in the news flow about the race to autonomous vehicles (AVs) and battery electric vehicles (BEVs) with regards to General Motors (GM) , Ford (F) , and, yes, Tesla (TSLA) is actually a car company. Don't own the group here.
Tech
It is all about growth rates here, and reported earnings, which are really driven by profit margins, are not as important. Quick: What was Amazon's (AMZN) operating margin last quarter? I don't know off the top of my head, either. So, in looking at FAANG, you should separate the rapid growers -- Facebook (FB) , Amazon and Netflix (NFLX) -- from Apple (AAPL) and Alphabet/Google (GOOGL) , which are more mature companies. If any of the "FAN" names miss on reported revenues, or more importantly revenue guidance, that stock will get hammered, a move that is frankly long overdue. So, watch earnings reports from the tech titans closely.
China
As mentioned in prior Real Money columns, I'm in Asia this month, and I certainly am not seeing any signs of an economic slowdown. I have been hoping for a trade war-induced meltdown in Chinese equities so I can add the chinese tech titans -- Alibaba (BABA) , Baidu (BIDU) , Tencent (TCEHY) and Baidu-controlled iQiyi (IQ) -- to my clients' profiles for the long-term. Earnings are a more a reliable driver for freakouts than Ministry of Trade press releases, however, so I'll be watching numbers from the Chinese tech giants very closely this month, as well.
Facebook, Amazon, Apple and Alphabet are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.
