Most directly, price as described by Merriam-Webster, is defined simply as the quantity of one thing that is exchanged or demanded in barter or sale for another. (basically this definition of price rules out Bitcoin as money, as there still has been no broad acceptance as a medium of exchange.) There are several other definitions, but I think this most directly covers the word's meaning, at least as a noun. In another way, the word, or versions thereof, such as "pricing" might be used to describe the process of quantifying such value. We, in the world of business and economics, refer to this as "price discovery." Price discovery is really nothing more than a process. A process that illustrates human response to conditions of both surplus and scarcity, those real, as well as those artificially created through the implementation of policy.
The S&P 500 and Nasdaq Composite have both now spent three weeks in contraction, the far more narrowly focused Dow Industrials have been shuffling backwards for five. Those two larger, broader indices though, have surrendered roughly 4% and 6%, respectively, over a month's time. The growth based commodity complex, best represented by copper and crude in my opinion, has also taken a direct fist to the chin over this time, further exacerbated by dollar strength. The Bureau of Economic Analysis will grant us a revision to the initial first quarter print for GDP on Thursday morning. That print surprised to the upside for a number of reasons that will not repeat themselves in the second quarter.
Quite obviously, what had been priced into financial markets had been a trade deal between the U.S. and China, and now, and the repricing of these expectations is what has caused the current state of correction across our markets. The run into the bond market, particularly U.S. Treasury securities has been somewhat unsettling... to say the least. It can be lost on no one this (Tuesday) morning that the U.S. 10 Year Note yields less than 2.3%. It should surprise not one of you, yet rattle everyone's cage that 30 day paper yields not just eight basis points more than 10 year paper, but 19 basis points more than the much lower profile seven year note. Kids, we have a problem. Either the bond market is over-bought... or equity markets have a way to go, as does this Trade, I mean Cold War. Ever see "Ice Road Truckers?"
Understand this. The U.S. increased tariffs on $200 billion worth of Chinese exports to the U.S. to 25% on May 10th, and has threatened to add the remaining $300 billion worth of currently un-taxed exports to this group. (By the way, these big round numbers are obviously smaller now as we use prior years numbers for our dollar amounts, but supply lines are shifting, and China will never regain some of this business as there are now cheaper places to manufacture and to route.) This swinging gate missed for the most part, first quarter earnings season. The season, now nearly complete, has witnessed a -0.4% growth rate for S&P 500 earnings. Eighty companies among S&P 500 constituents have issued some kind of negative guidance, and broad projections for Q2 earnings are now running at -2.0% or worse. Mind you, the bigger, badder trade war news is not likely factored fully into that now daunting projection. Buckle up for the now likelihood of an "Earnings Recession."
The market's recent haircut had brought forward looking PE ratios for the S&P 500 down to 16.1 times. That said, even those representing the Federal Reserve have maintained (for the most part), their currently neutral position on short term rates, futures markets trading in Chicago now price in a 79% chance for a reduction in the Fed Funds Rate this year, and a 38% probability that there will be more than one such cut. This is where I believe support will come in for higher equity valuations, deserved or not. The five year average for forward looking earnings for the S&P 500 according to FactSet is 16.5 times, so by that metric at least, equity markets are undervalued. The most grossly undervalued sectors versus their sector five year averages, would be Energy (still !!), and Financials. That a net interest margins story that continues to get worse. As I have stated in the past, repairing the yield curve should be first and foremost on the mind of anyone foolish enough to use the term "Economist" on their resume. Though, I support the already mentioned neutral stance for now, there is now question that the macro-economic data is getting softer, and that there is no juice on the long end of the curve. The Fed will, in my opinion be forced to consider short-term rate cuts in order to attempt to reestablish a more normal, healthier looking yield curve. Sooner or later? That's up to them. They have a history of taking action once the barn has burnt down.
You kids read James Grant's column in Barron's this past weekend? You really should, in my opinion. In fact, my thought is that one should read Grant whenever they can. One of the smartest voices anywhere in our field. The column this week, addressed the growing global exposure to negative yielding debt, the negative side effects of such perverse manipulation of price discovery, and the inability to ever escape a dungeon (my word) of one's own creation.
I will not sit here and rewrite Mr. Grant's article, though there is certainly temptation to do so. In short, Grant discusses how this misguided direction in monetary policy is a reminder that "radical monetary policy only begets more radical monetary policy." He points out this this policy has forced the populations directly impacted to behave less aggressively, not more so, as was the intent. In short, this was the best thing I read this weekend.
One last point. Grant closes with this gem, and it really should make investors stop and think. Think hard. Grant wrote "Ten year Treasurys may not yield much. but they deliver 240 (maybe now 228?) basis points more than nothing. For all that matters, gold bullion, yielding nothing, nonetheless yields more than $10.6T of notes and bonds that yield less than nothing." That dollar amount is the global aggregate of all negative yielding debt, and yes... that's a letter T.
What would frighten a people so much so that they would pay for the right to lend at a guaranteed nominal loss? Preservation? I bet more of you than you know, in a roundabout way through bond funds or ETF's are the proud owners of such debt indirectly. Did you even know that you were terrified?
What Am I Doing
Well, gang, I have been raising cash again. How? Simple enough. By getting rid of all of the junk on my book, as well as reducing in size, even a few positions that in theory, I still believe in. (For the record, I continue to focus on cloud/software names, at the risk of becoming less diversified... as these mostly growth names have held up rather well in my opinion, and will benefit first if and when there is a return to increased capital spending.) This is where the rule of placing target prices and panic points comes in. This is why we limit losses to 8%, unless the loss is the result of an overnight gap. This is why we move panic points higher as we move target prices higher. Lastly, this is why we take some kind of action when these points are breached... even if we really do not want to.
I will use Apple (AAPL) as an example. You may recall that as the stock roared back to life this spring, I benefited I would guess did many of you. I even publicly raise my target price to $240 from $197 when the shares hit $197. I also increased my panic point to $180. Did I miss the top? Of course. I thought the shares were going to $240. That said, because I live by rules, I took something off at $197, when I changed my target. I also took something off at $180 on the way down... in a name that I still like. Between the two sales, I am down to 30% of my original position size. I do not expect to sell more just yet, but now, in this time of increased indecision, this position will not keep me up at night. I have not changed my target or panic yet. I need to. It's just that the Cup with Handle formation that I had based my last public analysis on, now appears broken, and nothing telling has materialized in it's place just yet.
Will I be sorry I sold those shares? I will buy them back at some point. My net basis is still far below the last sale, and I have another rule. A win is a win. Even a sloppy win.
A Time to Add?
The new hit live action movie Aladdin is smashing the competition at the box office. A few weeks ago, it was Avengers: Endgame, which by the way is still in third place. The studios at The Walt Disney Company (DIS) have been hot. That's not news. They have been hot for a long while now since Marvel and Lucasfilms moved in. This is clearly a driver as the firm spends liberally to build up it's own stable of competitive streaming television/video services meant to stem cultural declines in cable viewership, and to stave off the more established (in this space) Netflix (NFLX) , and Amazon (AMZN) Prime, as well as other rising entries offered by the likes of Apple, Comcast (CMCSA) , and Alphabet (GOOGL) .
In addition to the movie studios, Disney's theme parks have been a driver as well. Crowds, not to mention margin, is set to increase there as well... nearly immediately. The latest expansion of at least Disney's domestic parks "Galaxy's Edge" will open at Anaheim, California's Disneyland this Friday. This Star Wars themed, 14 acre addition to the park is drawing such demand that the company is being forced to require that guests make reservations to visit Galaxy's Edge for at least the first month and that a four hour time limit be imposed upon these guests. By the way, Galaxy's Edge is scheduled to open in Orlando, Florida's Walt Disney World this August. We are talking, in my opinion, years of increased tourism at these locales at increased pricing. More food. More drinks. More toy sales. More stuff. Period.
When I drew this Cup with Handle for you, I gave you a 140 price target for DIS. I benefited greatly with the rest of you on the gap created the morning after Disney's investor day in April. Some of you may or may not recall that I took an early exit in DIS and missed part of the ride to prices above that target. Now, the excitement abates, the share come in. I have finally started to rebuild the position. I still think that the area of that gap still may have to be tested. "All gaps must fill" is what they say.. and the fact is that most of them do.
Simple, to have a full position in place by the time the shares test the 50 day SMA (125.40). If that line cracks then, I'll have a little risk management issue to take care of. Should the shares approach that line and hold it, I'll have an investment. Should the shares not decline that far, leaving me with something less than a full position, well that's what I call a trade.
Economics (All Times Eastern)
09:00 - Case-Shiller HPI (Mar): Expecting 2.8% y/y, Last 3.0% y/y.
09:00 - FHFA HPI (Mar): Expecting 0.2% m/m, Last 0.3% m/m.
10:00 - Consumer Confidence (May): Expecting 129.9, Last 129.2.
10:30 - Dallas Fed Manufacturing Index (May): Expecting 6.4, Last 2.0.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BAH) (.62)
(Apple, Disney, Amazon, Comcast and Alphabet are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL, DIS, AMZN, CMCSA or GOOGL? Learn more now.)