Win or Lose
Don't confuse. It's up to you. I have made my case for weeks now that I felt an expansion of valuation metrics was indeed at hand. In an era of "better than expected" slowing economic growth, supported by the central bank that has handcuffed itself through it's own early aggression, a sloppy earnings season may just provide enough wiggle room to allow late investors to enter, and traders to generate a little cash.
We have already started to see forward looking PE ratios for the S&P 500 move slightly above the five year average for the index. What some analysts do not understand is this is not an overvaluation given the environment provided. That does not mean that these markets will not sell off. The yield curve is still flat enough that one misstep by the central bank will cause the domestic economy to contract. There is no room for relaxation. My opinion is that portfolios need to be segregated as to purpose. You, the retail investor will be able to think more clearly when purpose is defined. This is my aggressive money. These are my revenue stocks. This is my cash reserve. Understand? My own history suggests that if a portfolio is segregated from other funds, and then defined through a (written) mission statement, that goals are more likely to be reached. Is this scientific? No, but unlike 99% of the talking heads you will listen to in the media today, I'm not trying to sell you financial services. I'm just a two-fisted kid from the neighborhood, just like you. I puts my shoes on one foot at a time, just like you. They tried to get me, but I'm still standing. Just like you. Team.
Check This Out
There are a couple of prominent take-always that I think investors might glean from recent action at the point of sale. Helpful information? Possibly. Participants certainly yearn for the next catalyst... the next big thing. That's why the Chevron (CVX) stab at Anadarko (APC) , and the Walt Disney (DIS) investor event made such a splash. Perhaps macroeconomic data can be that catalyst. Perhaps it's the yield curve. Perhaps any leadership that might come from those two directions is in a way... stuck between how bad it could be, and where conditions really are. Earnings season should be such force in the marketplace. Yet, I think it might be said that the banks no longer set the pace for the season, or the markets. At least not right now. Traders are looking past the banks, toward other sectors. Toward growth type names. Trade type names. Technology. Transports. Industrials.
Take a look at two interesting slices of information that are developing right in front of our eyes. We have spoken often in recent weeks of declining volumes. As one sees here, as the S&P 500 has in general, worked its way higher, volume has slowly ebbed lower. The gray and pink bars on the bottom of this chart represent volume.
I would normally take the very concept of ascending prices on declining volume as short-term bearish. That said, take a look at the two week chart.
What you see here, in eight of the past 10 business days, is a late day reversal to the upside. In other words, early on, there is attempt to take profits that runs out of steam, and buyers step in. This is clearly short term bullish. Think you don't know? I'd say that there is a visible lack of overt institutional participation in equity markets right now. The pros don't know either. What does that tell you? It tells me to at least try to be diversified enough where I can be aggressive where I think I should be, while tamping down portfolio volatility. What's the best way to tamp down volatility, gang? The VIX? Wrong. Hedging every position? I would prefer to manipulate net basis than simply hedge. That's costly.
The answer is to be nimble with the cash held in reserve. Don't be afraid to raise cash when the least bit nervous. You don't have to exit. Think of cash as an anchor. You do not have to have a high cash level at all times. You just have to not be afraid to go there. When the wind blows, you anchor your boat. When volatility calls, anchor your portfolio. This type of portfolio manipulation is so easy. Under-performing to the upside never feels as bad as does performing with the market to the downside. Go ahead, sleep at night.
Come one. Come all. Step right up. See the strong man. See the magician. See the alligator wrestler. The best for last. See the Fed speaker.
Chicago Fed President Charles Evans, who is a voting member of the FOMC, made the rounds on Monday. Evans appeared in the media. Evans spoke in New York City. You're going to love this. Evans told the Wall Street Journal "I do have expectations that towards the fall of 2020 we have one rate increase, and one more rate increase the following year." Hmm. Evans does realize that month to month economic projections have become increasingly more difficult to make, right? Perhaps he is unaware of the still very flat and recently inverted yield curve. Maybe he has other things on his mind. Or maybe he has a crystal ball. He also, in a clear indication that nobody here knows anything, said "Inflation running too low is justification for deciding our setting for monetary policy is actually restrictive and we need to make an adjustment downwards in the funds rate." Wow. These two quotes are attributed to the same man on the same day. Why not just flat out tell us that you plainly don't know?
Perhaps even more dangerous than not knowing, which would be acceptable if actually presented in that way was a statement made later in the day in the Evans speech. "I would communicate comfort with core inflation rates of 2 1/2% as long as there is no obvious upward momentum and the push back toward 2% can be well managed." What the heck is that? So. let's get that straight. Core inflation gets to 2.5% without upward momentum, and can be rather easily manged back down. Gee whiz.... and we were worried.
After what this crew did to the economy and the marketplace in late 2018 due to the lack of a basic understanding of what human response would be to rapidly rising short-term rates coupled with a simultaneous reduction of general liquidity at a rather significant monthly pace? We are to trust that the FOMC might be able to mange consumer level inflation up and back down to target almost at will? This is the same crew that spent a decade unsuccessfully trying to create that inflation? The fact, my friends is that plenty of smart people offer a lot of meaningless thoughts, and the media will gobble it up as news. Trust not a soul. Make no mistake. We are on our own.
Expectations for global growth will face the music tonight (NY Time), or Wednesday morning in Beijing. China's National Bureau of Statistics will put the bulk of that nation's high profile economic data to the tape to be headlined by Q1 GDP. That number, projected by the rest of the planet to print at 6.3% y/y, will be followed by data for Industrial Production, Retail Sales, Fixed Asset Investment, and Unemployment. In other words, global equities and U.S. equity index futures markets are going to move around while you sleep tonight.
We already know that the Chinese government eased their 2019 projected growth from 6.5% to a range spanning from 6.0% to 6.5%. Q4 hit the tape at 6.4% by the way. Since then there has been a substantial attempt to stimulate the economy going into the Lunar New Year that at least right now appears to be working.
In an effort to move the needle away from the slowest pace of economic growth that Beijing has seen in nearly 30 years, China's State Council has cut taxes, while it appears that governments both at the Federal and local levels are resorting to increased spending on infrastructure once again. The fact is that Chinese banks set a quarterly record for lending over the first three months of the year. That money has to show up somewhere. You'll find it tonight.
Gently Down The Stream
You probably took note that AT&T (T) sold their minority stake of 9.5% of Hulu back to Hulu on Monday for $1.43 billion. The sale, which leaves the Walt Disney Co. running the operation, and Comcast (CMCSA) with a 30% ownership stake, would value Hulu with 25 million subscribers at roughly $15 billion.
How interesting? As Netflix (NFLX) goes to the tape this evening with the firm's first quarter results. Wall Street is looking for EPS of $0.57 on revenue generation of $4.5 billion Keep in mind that performance such as this would paint a picture of significant growth on that revenue side (+21.6%), but also declining profitability. That EPS expectation would be a nearly 11% decline. Keep also in mind that Netflix has beaten EPS projections every quarter going back seemingly forever, but that the firm has missed consensus view for revenue growth in two of the past three quarters.
What will likely matter above all else for now will be subscriber growth for two reasons. One, as a measure of how well the consumer has tolerated the recent price hikes at Netflix, and two... to get as many folks in the door as they can prior to November, when Disney brings the ax. Not to mention already in place competition from Amazon (AMZN) , and the coming of the deep-pocketed offering at Apple (AAPL) .
Netflix ended the year with paid subscriptions of 139.4 million accounts. Growth of 1.6 million domestically, and 7.3 million internationally is projected. My expectation is that the global number will be the most focused upon number released of all. You may get a rebound off of this two day beating.
My expectation is that the name will run into trouble in the medium to long term. The thought here is that the future picture for the firm in terms of margins are problematic, and going forward... any growth for the streaming industry will certainly be shared by the competition far more equitably than it has been in the past. That said, the stock has been punished ahead of these numbers, and is on this day, a very dangerous equity play. My thought for Tuesday for NFLX is that any trading in the name be done through the reduced risk profile offered by the options market.
You will notice in the disclosure below a short position in Disney. That is a small position, and just a trade left over from Monday. Not at all indicative of how I feel about the name, in case you were going to ask.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 4.8% y/y.
09:15 - Industrial Production (March): Expecting 0.2% m/m, Last 0.0% m/m.
09:15 - Capacity Utilization (March): Expecting 79.2%, Last 79.1%.
10:00 - NAHB Housing Market Index (March-F): Expecting 63, Last 62.
14:00 - Fed Speaker: Dallas Fed Pres. Robert Kaplan.
16:30 - API Oil Inventories (Weekly): Last +4.091M.
Today's Earnings Highlights (Consensus EPS Expectations)
(Anadarko, Disney, Comcast, Amazon, Apple, Johnson & Johnson and UnitedHealth are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells APC, DIS, CMCSA, AMZN, AAPL, JNJ or UNH?? Learn more now.)