Action Not Words
Given the performance of the Dow Jones Industrial Average, up 227 points or 0.85%, it becomes at least on a superficial level, easy to credit the second day of Fed Chair testimony (this time before the Senate Banking Committee) for extending equity market exuberance. The truth falls far from the fairy tale in this case, however. Every market veteran knows that the second day of this semi-annual Washington clambake accounts for little from the viewpoint of equities. The truth is that news flow, and external impact mattered far more on Thursday, than did the more high profile grilling.
First one sees trading volumes that fail to impress. Second, one sees that while the blue chip index showed strength, the small caps (Russell 2000) showed weakness. Again. On a day where the U.S. dollar rallied mid-session relative to competitors. Not the way that's supposed to happen. Both the Nasdaq Composite and the S&P 500, or what many of us refer to as the broader market, really didn't move much at all. While blue chip strength was widely spread, it was United Healthcare (UNH) that easily led the way north, once President Trump announced plans to drop the idea of eliminating drug rebates. Pharmacy Benefit/Managed Care managers saw immediate relief. That rally beyond UNH would include names such as Cigna (CI) , and CVS Health (CVS) .
The day's real action was in debt markets, more specifically Treasury markets, as the U.S. 10 year note made a serious move toward "uninverting" with 90 day paper, coming within about two basis points of doing so at one point. This is where the Fed Chair did have an impact. (Not to mention slightly warm consumer level core inflation for June) Traders have purchased the short end of the curve on prospects for a reduced Fed Funds Rate, knocking that particular yield below 2.15% overnight. This is something that in this morning note, we have been trying to provoke for quite some time.
There is a real hope that the curve will complete this uninverting later this morning, as German 10 year Bunds have sold off hard throughout the wee hours. As I write you, as darkness of early morning prevails, the German 10 year now "pays" -0.19%, up from -0.37% earlier in the week, and -0.30% just 24 hours ago. Though still negative, this move pushes out the spot where longer-term U.S. sovereign debt becomes attractive to foreign of European investors. Got it? My model (which includes the use of fingers and toes) allows the U.S. 10 year note to approach yields anywhere from let's say... 2.16% to 2.20% based on that level in Germany. Probably more like 2.17%. That would get the job done, gang. You see a 3 month/10 year yield crossover in the right direction, my guess is you'll also see an algorithmic reaction across other financial markets that could surprise should one get caught sleeping.
Why the sudden "weakness" across European debt markets? I mean didn't the European Central Bank talk the talk back in early June? Did not outgoing ECB President Mario Draghi (he's gone by Halloween, gang), seemingly sound somewhat committed to go deeper into the proverbial rabbit hole? Whatever it takes?
You may have noticed this week that first, Germany's Trade Balance improved for May. Then the Industrial Production number rolled in. Germany again showed improvement. Then France and Italy both somehow ripped the cover off the ball, crushing expectations. Does this push out any intention by the ECB to rush kerosene to the scene of the fire? It has become apparent that at least those who have been willing to take a discount on their money at maturity until now might be having second thoughts. Does this change under the guidance of Draghi's likely successor, Christine Lagard? Like Jerome Powell, she is no economist. Unlike Jerome Powell, she is most certainly a politician. A consensus builder if you will. French President Emmanuel Macron is an ally, who supposedly pushed for her nomination. Does that lend France influence? Know what, let's hear Draghi out on July 25th before we get ahead of ourselves.
For Those About To Rock
Ready to salute PC manufacturers? On Thursday, Gartner reported that sales of personal computers (PCs) had experienced a 1.5% increase for the second quarter. IDC reported a 4.7% rise. IDC for the record includes sales of Chromebooks, hence the odd looking difference in the reported data. Apparently there are several factors that led to this pop in deliveries. For one, the shortage in CPUs at Intel (INTC) abated, allowing for back-filling of order flow. Then there is the ongoing condition created by Microsoft's (MSFT) scheduled January 2020 termination of support for Windows 7. That creates underlying demand on a business level more than for home use, but should at least aid sales in some way over the second half.
Most important to this pop in sales though would be the trade conflict with China, as the majority of laptops are manufactured there, and there was an overt effort to get ahead of tariffs. This directly impacts HP (HPQ) , Dell Technologies (DELL) , and Apple (AAPL) . While Both HPQ and DELL reacted well to this news, it will be in quarterly guidance where we find out just how much demand might be expected over that second half. Apple is a far more curious case, as analysts continue to focus on iPhone demand, and traders more on the developing services businesses that provide recurring revenue as well as a higher per earnings equity valuation. Sales of Apple PCs, by the way, were reported in wildly varied fashion by the two agencies. Gartner had Apple at -0.2% for the quarter, while IDC had the firm at +9.6%. I'm going to go out on a limb here and say that Apple probably does not deliver a whole lot of Chromebooks. Things that make you go "hmmm."
Know where Fed Chair Jerome Powell did have an obvious impact? Or maybe it was President Trump? Both expressed concerns over Facebook's (FB) idea for the "Libra" digital coin network. "I think we agree that Libra raises a lot of serious concerns, and those would include around privacy, money laundering, consumer protection, financial stability. Those are going to need to be thoroughly and publicly addressed and evaluated before this proceeds."
Hmm, that took a bite out the share price on Thursday. This greatly reduced any prospect that this idea might have had in the positive on earnings anywhere in the medium-term.
Just a reminder, the shares remain with a rough percent of pivot. With even the idea that Libra might have been used as a method for the firm to greatly enhance the advertising business as a revenue driver, my thought was that a target price of $240 was possible in the next 12 months. That said, short to medium-term traders will need to keep one eye on this $199 pivot point, and another on the 50 day SMA (currently $186) as a possible panic point. Perhaps we look at an add in the $194 area. At least as we approach earnings in two weeks.
Going forward, yes, regulation would be a threat. I think however that we must consider this. A forced break-up, though probably not likely, could add shareholder value. Increased regulation might make it difficult for Facebook to perform as well in the future as the firm has in the past. Depending on just what this regulation might entail, the prospect could have the unintended effect of building a mote around Facebook's businesses as they were built ahead of any "new rules" and the advent of any rising competitor would have to play by these rules from the get go. My Facebook long remains unchanged, with an add more likely than a reduction. Even though I am no fan of management, this is business, and when it comes to finance, I am a mercenary.
Did you WATCH Jim Cramer's "Mad Money" show last night? His newest acronym based on scale across the retail landscape makes sense. Honestly, I don't know how he comes up with this stuff. It's genius and so is he.
W. Walmart (WMT) ... Long the name. Check. A. Amazon (AMZN) ... check, sort of. Not in the name right now. Should the good Lord grant me at least a few more hours, I will be in and out of this name all day. T. Target (TGT) ... Not in the name now. Agree that CEO Brian Cornell is a visionary, and the stock can be (should be) held. C. Costco (COST) ... Out of the name for awhile after taking profits way too early. H. Home Depot (HD) ... Love, love, love Home Depot. Long that name since the cows came home. Might be my oldest position.
Now, the question for me, as someone who wakes up everyday trying to make money becomes... Is it too late to get back into Costco (COST) . Has that ship sailed? The stock did run more than five bucks on Thursday in response to Jim's acronym.. and some kind words from Goldman Sachs (GS) , a name that enjoyed a nice technical move itself on Thursday.
Back to Costco. The firm does not report their fiscal fourth quarter until late August. The third quarter did show a slowing of earnings growth, but on a sustained level of sales. You can fix earnings with sales. Doesn't really work the other way around. Valuation is an bit rich at 34 times forward PE. The dividend is not particularly attractive, though Oppenheimer opines that there is potential for a special dividend in the $10+ range. This week, at least four five-star analysts have piped up on this name. Rupesh Parikh (Oppenheimer), Peter Benedict (Robert Baird), and Mark Astrachan (Stifel Nichlaus) are whom I refer to. All three have buy ratings on Costco. All three have price targets between $289 and $295. All three have very successful track records with COST. All three have been correct on direction. That has been easy for this name. All three however, can boast average returns for COST after their calls of anywhere between 19.7% and 23.5%. That's impressive in an industry that often is not.
See my blue line. That's the top end of a period of consolidation that came on the heels of a previous move higher. The stock is due for another. The recent move prices in a lot of the positive. Perhaps that "special dividend" is priced in. I think there comes some profit taking. I do think the shares reach $295, maybe even $300. I also think that I do not buy the stock at the top end of a steep slope like that. I like the name. I want back in. In my fantasy, I pay the 50 day Simple Moving Average (SMA). A trader with similar thoughts could....
A) Buy a Rubik's Cube to help pass the time.
B) Sell a series of cascading naked puts that would put the trader in a position to accumulate a long position at the desired average price, or at least get paid to take on the risk. An example would be, in minimal lots....
One COST $260 August 30th put (Value: $1.35)
One COST $255 August 30th put (Value: $0.90)
One COST $250 August 39th put (Value: $0.60)
Aggregate Credit: $2.85, or $285.
Worst case? Long 300 shares at a net basis of $254.05 on September 1st with the shares trading lower.
Economics (All Times Eastern)
08:30 - PPI (June): Expecting 1.8% y/y, Last 1.8% y/y.
08:30 - Core PPI (June): Expecting 2.2% y/y, Last 2.3% y/y.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 788.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (INFY) (.13)
(United Health, CVS, Microsoft, Apple, Facebook, Amazon, Home Depot, and Goldman Sachs are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)