What Have We Learned?
Tough question. Tougher answer. I read across the realm of financial media how surprisingly dovish the Federal Reserve had become on policy. I really don't know how anything we take away from this March meeting is surprising in the least. We all expected that there would be no change in the targeted Fed Funds Rate. We all expected a reduction in GDP forecasts moving forward. We all expected direction on the unwind of the balance sheet management program known as "quantitative tightening", and we all expected that this would show the unwind ending in September. Literally every single talking point made public on Wednesday had already been consensus view among equity traders for at least a week.
Clearly in our midst, there were some non-believers as there was a more severe reaction across debt markets than in equities. This is where I see not a surprise, but surely some disappointment. I have already explained, I believe in some detail... the necessity of the central bank to better manage the composition of the balance sheet. I have been harping on this for over a year. You all saw on Wednesday a three month T-bill that now yields 15 more basis points than does the 5 year note. That spread between that same three month T-bill and U.S. 10 year paper is now less than five basis points away from inverting. Five!!
There needs to be a sense of urgency here, people!! This is not, might I repeat ... NOT Okay. The standard Treasury yield that economy watchers prefer to keep eyes upon as a potential harbinger of economic contraction is the 2 year/10 year. That beauty is down to 12 basis points. You ask why I allocate such a high percentage of my portfolio to cash? With equities trading close enough to all-time highs, and a U.S. Treasury market that screams at us to take some cover, do you really need to ask? Maybe you just don't want to know. That I understand.
In the information released on Wednesday covering the "normalization of" the balance sheet, the Fed states that starting in October, re-investment of maturing securities "will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities." Please tell me that you understand that this is not aggressive enough with the majority of the yield curve already inverted, and the most focused upon spread now knocking on the door.
The central bank needs to cut this off at the pass. The Fed needs to buy short-term paper RIGHT FREAKING NOW, and sell off longer-term paper. Waiting to repair the slope of the curve will only increase the potential for a very negative outcome in my opinion.
Darkness Falls
Hard to miss the significant underperformance of the Transports over several weeks. Hard to miss what happened to the small-caps, even in a very strong dollar environment, where one might think investment flows might abandon large caps. Nope. If the fact that FedEx (FDX) , an international global delivery services corporation, happened to fall short on earnings, on revenue and reduce their forward guidance for the second time in three months based on what they are seeing globally does not at least give the investor reason to pause for sentient thought, then perhaps all really is lost. Futures markets trading in Chicago are now pricing in a 36% chance of a reduction in the Fed Funds Rate anytime in 2019. There currently is no market for a rate hike. Those particular futures are deader than Bitcoin futures, even after the CBOE has announced that they will drop that product from their line-up.
I believe at this point, that there is no possible way to look at what the Fed has done over past decade as anything other than abject failure. The courage to act? Keep patting yourself on the back there, Sparky. While attempting to try something not well understood at the time might seem reasonable as a means to avert disaster in retrospect, the mere fact is that Operation Twist was harmful to domestic growth. There is, in my humble opinion, no way to look at what became QE 3 (2012) as anything other than the willingness of the central bank to take us all somewhere we should never have gone, and now... can never leave. Barring the need to chase down run-away consumer level inflation, globally... central banks are becoming coordinated, now that the Fed is in line, as the ECB and the BOJ really never got the ball rolling in the first place. The PBOC will seemingly always be willing to err on the side of easy money, as there is not even the pretend version of monetary independence visible there.
Remember John Mauldin's book... "Endgame"? Published in 2011, I think we need to give that title a re-read. The debt super-cycle. What does economic death look like? After that, re-read "The Road To Ruin" by Jim Rickards. You guys need to understand some of these things.
I am thrilled that the U.S. remains the cleanest dirty shirt in a hamper full of smelly clothing. Safe haven valuation. The U.S. economy grew nicely in 2018. Of course the irresponsible fiscal policy that made that possible is not sustainable. As the economy runs out of fiscal ammunition, the cry will come from political circles of even greater irresponsibility for the ridiculousness of Modern Monetary Theory (MMT). That is when the economy actually dies. That is when monetizing the debt, and printing as much as is needed to implement whatever it is that sounds good blows up price discovery for good. Green New Deal that costs five times GDP? No problem. What else do you need? Tuition? Debt forgiveness? Helicopter money? Look at the moron still going to work every day. Just vote, baby. First you'll end up paying more than you can for the necessities of life. Then you will fight your neighbors in the streets as supplies of those necessities run dry. Then you will hunt your neighbor's pets.
The Trade Deal Will Save Us
About that. You may have noticed that there is a willingness on the Chinese side to greatly increase purchasing of U.S. goods in order to get a deal done. Understand this. President Trump knows that he already has that, yet there has been no deal. The president speaks of leaving the current level of tariffs in place for a spell even after a deal is agreed to. Why? Because he does not trust the other side. President Trump and his administration do not like tariffs. Pay attention. Tariffs are a tool in an economic fight, and they seem to be the only tool that the other side responds to.
After seeing the president walk away from a deal with North Korea despite the obvious political benefit, and favorable press coverage that would have ensued, it should be clear that public perception is not really on his radar. The primary goals here are not evening up the trade gap, that would be a beneficial result, to progress made on the actual front lines of this dispute.
The real fight is going to based on... yes, the enforcement of anything agreed to as well as what appropriate response to violation would be.... but beyond that. Realize this. We are in a Cold War. Technology transfers, theft of intellectual property rights, cross-border data flows, The One Belt, One Road initiative, the Made in China 2025 program. This is where the fight will actually be. These are issues that could be where neither side gives an inch. There may be an agreement that offers something up for financial markets, but this dispute will live on. Am I wrong on this? I sure hope so. I doubt it.
Denim Jacket
I wore a denim jacket with the sleeves cut off in high school. That was 40 years ago. I still do. It's the same one. I still wear the same pants I wore then. Well, the same size anyway. Same brand. Levi's. Always Levi's. Why? For one, they're durable to say the least. Two... they look good. Three... they're comfortable.
Thursday morning, Levi Strauss (LEVI) goes public. On Wednesday night, more than 36 million shares were priced at $17 per. That number comes above the high end of the range of expectations that had been at $16. CNBC had reported ahead of this pricing that the deal had been something like 10 times oversubscribed. Welcome back. Levi Strauss is a 166 year old company that has been public before, but has been privately held now for a whopping 34 years.
What I Don't Like
To be honest, I am not crazy about the dual class structure of the shares outstanding. This leaves nearly all of the power in the hands of current leadership, the Haas family. Yes, the same Haas family that took Levi's private in 1985. Shares held by the family will have 10 times the voting rights than will the shares purchased in the secondary market this morning. Not that I ever actually respond to my proxies, but it's nice to think that I might, and that my votes would at least in proportion to shares outstanding, simply count in some way.
What I Do Like
Growth, and the opportunity to grow further. One might think this brand quite mature. One might want to think again. Brand revenue printed at $5.6 billion in fiscal 2018, a 14.2% increase over fiscal 2017. What is considered to be a tougher time for apparel and for retailers could be the right spot. This is the deal. Why there is potential for growth? Of that $5.6 billion in sales, $4 billion, or 71% was in lines catering to males. Only 3% of those sales were in China. That's the potential. Expansion across genders. Possible benefit from a deal where China imports more U.S. goods.
When to Buy
There is no doubt that the name carries with it something of a trophy value, at least for guys my age. Now, as a rule, I do not participate in IPO names shortly after they open unless I am running the book myself, and that participation would be on behalf of someone else. Better to let the stock settle and see if the bankers need to stabilize the name at the deal price. Then if an investor were to be interested in an entry level position... who am I to argue.
Tonight's the Night
Many of you will be riveted to Nike (NKE) earnings after the close of business. Good luck. That firm is expected to post EPS of $0.65 on revenue of $9.6 billion, which would be a year over year increase of 6.8%. I am flat that name.
I will be watching this evening as Zuora (ZUO) releases their Q4 digits. You may recall that I named ZUO my stock of the year for TheStreet back on New Year's Eve, and have reiterated that call twice on national television. By the way, ZUO is up 30% year to date. While that's great, and makes me look smarter than I am, do not be surprised if the release causes some profit taking in response, regardless of the quality in performance or guidance. This may be the chance investors who missed this trade get to add. We'll see.
Zuora
Target Price: $28 short-term.
Add: $22
Panic: I'm not.
Economics (All Times Eastern):
08:30 - Initial Jobless Claims (Weekly): Expecting 226K, Last 229K.
08:30 - Philadelphia Fed Manufacturing Index (Mar): Expecting +5.2, Last -4.1.
10:00 - CB Leading Indicators (Feb): Expecting 0.1% m/m, Last -0.1% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -204B cf.
Today's Earnings Highlights (Consensus EPS Expectations):
Before the Open: (CCL) (.44), (CAG) (.49), (DRI) (1.75)
After the Close: (CTAS) (1.72), NKE (.64), ZUO (-.12)
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