Is cautious the right word? Multiple sources across the realm seemed to have reported on Tuesday that perhaps Washington might delay the self-imposed Sunday deadline for the imposition of new tariffs on $165 billion worth of imports from China. As has been much discussed, this tranche would focus largely on consumer goods, complete the "blanket" of tariffs on Chinese imports, and leave the increase of such duties as the only avenue toward escalation once in place. Markets tried to act on this 'news". Just one thing.
That news was, at least in real time, more smoke than fire. Would President Trump delay this Sunday's scheduled tariffs? White House Economic Adviser Larry Kudlow made clear that the president has not yet made that decision. Spreads between short term and long term yields contracted just a bit, equities sold off in slow motion. Yields for U.S. 10 year paper peaked just as the results were published for Treasury's December auction of $27 billion worth of such product, costing the federal government a few basis points. Bid to cover was decent enough. Indirect bidders (mostly foreign accounts, such as central banks) took down 64.6% of the issue.
Slow Burn
More like "slow churn." How to read the recent action? Actually, you're right. It's not easy with algorithms moving on every headline, portfolio managers more willing to take profits than they have been in two months, and many traders simply making less decisions ahead of today's (Wednesday) FOMC policy statement, tomorrow's ECB meeting featuring a new sheriff (Christine Lagarde) in Brussels, anarchy (the election) in the UK, all before one even thinks about the weekend, or the Army-Navy game that we all agree dwarfs in magnitude all other sports rivalries.
Check out this two-week snapshot of the S&P 500 using 15 minute candlesticks. So easy to see when laid out like this, that island on December 3rd that led to the rally late last week. So easy to see that the rally stalled at resistance, as the mood shifted to one of "mucky" price erosion ahead of several newsworthy events. I find it interesting that in the year 2019, the attempt in the House of Representatives by members of the majority political party to impeach a president of the other party is not even a blip on the financial radar. Nobody cares.
I also find it somewhat interesting that on Tuesday, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all closed slightly lower for the session, yet winners beat losers and advancing volume beat declining volume at both the New York Stock Exchange as well as the Nasdaq Market Site.
Trading Big Oil
Saudi Aramco rocketed up 10% (limit-up) after opening on the Saudi Tadawul on Wednesday. After listing 1.5% of the firm at 32 Riyals, the shares hit 35.2 Riyals before shutting down. At the last sale, Aramco's valuation would now be $1.88 trillion in U.S. currency. Of course, the Saudi government had, according to the Financial Times, asked both Saudi institutions and wealthy families to buy shares of the newly listed equity following the open of trading.
My thought, as one who still invests in "Big Oil" for the dividends, despite the obvious divestiture by portfolio managers for a number of reasons that do include the fast growing ESG (Environmental, Social, and Corporate Governance) movement. Just how much less does Wall Street value fossil fuels? Broadly. Energy sector names that reside withing the S&P 500 trade a 16.8 times forward (12 month) looking earnings, below the 17.6 times valuation currently applied across the index. Now, the five year average for the S&P 500 in terms of next 12 months' projected earnings stands at 16.6 times. We discussed that earlier this week. The energy sector, however, over the past five years has averaged an incredible 29.1 times when valued in that way, easily the most highly valued sector over that time frame.
The question becomes, over time, just how attracted will energy based global investment funds be attracted to Saudi Aramco, at least until the shares are co-listed at an exchange more readily accessible to broad investment. Even, until then, while I would think that discretionary institutional investors might be slow to act, certain passive vehicles may soon be forced by mandate to participate in some way. Will that draw even more investment dollars from the current majors? One would think, making already lofty dividend yields an even more focused upon reason to stick around. Readers know that I have been long Chevron (CVX) for most of the year.
The Hokey Pokey
Now, Chevron is up about 8% year to date, badly underperforming the S&P 500 (+25%), while significantly out-performing both the Energy Select Sector SPDR ETF (XLE) at +4%, and Exxon Mobil (XOM) at +1.3%. Chevron pays an annual dividend of $4.76. At a last sale of $117.89, that's good for a yield of 4%. Now, Exxon pays shareholders $3.48 annually. At a last sale of $69.06. this yields 5%. Granted, XOM trades at 18 times forward looking earnings, and CVX 17 times. They both trade close to 1.5 times last 12 month's sales, and this trade is about driving revenue.
- The idea is to sell Chevron and purchase Exxon Mobil. This will be a "pairs trade" with a ratio of 1.7 to 1.0. In other words, at the current prices, a trader (such as myself) long CVX would need to buy 170 shares of XOM for every 100 shares of CVX sold. This would keep the sector allocation unchanged in percentage terms, while paying the investor more to be there. This said, the ratio will change once trading starts, and you may have to do your own math, but you get the point. The investor may for a time, unintentionally be in both names, depending of position size. Hint... do this in baby steps. Leg out, Leg in (The Hokey Pokey). Create the cash, then spend it. Not the other way around.
- The idea here is for the portfolio where revenue is an objective, to own more shares at a lower price that pay a higher yield, resulting in more cashola in the pocket. Over one year, 100 shares of Chevron paying $4.76 each will land the investor $476 annually (and to think, I did that in my head). Conversely, should that same investor instead own 170 shares of XOM paying $3.48 annually, the year end total comes to $591.60. One hundred and fifteen clams good enough for you? Yeah, me too. Rock on.
Monetary Policy
This afternoon, the FOMC will release their final policy statement for 2019, their first economic projections since September, and then half an hour later, the Chair, Jerome Powell will try to answer any and all questions posed by the financial media without actually saying anything. He simply can not. Not ahead of this Sunday's trade deadline, and not ahead of Christine Lagarde though I would imagine that they are in communication.
Just where are we? The Atlanta Fed's GDPNow model for Q4 is now running "hot" at 2.0% (quarter over quarter, annualized and then seasonally adjusted). 2% is good by modern and global standards for a highly developed economy with an aging demographic. Futures markets trading in Chicago have priced in more than a 97% chance that there will be no change made after today to the Fed Funds Rate. In fact, futures markets are not pricing in any change until September. The Yankees should have a 15 game lead on the AL East by then.
The Fed is on pause as far as targeting short term rates goes, and that is how it should be at this time. The central bank has easily met its twin mandates, price stability and maximum sustainable employment, at least in the way that we measure these two metrics. Sure there are weak spots, sizable ones at that within our domestic economy. That said, passing the USMCA deal will be accretive to further economic growth, while any deal with China (a pipe dream) would simply unleash the beast. BUT, and this is a big but... we do not need them. American exceptionalism? Every friggin' day... all day long. Got it?
Go back to Friday. Job creation and even wage growth are stronger than they have been in a generation. So are personal savings rates relative to disposable income. This is during a trade war. Let that sink in. Median U.S. household income, I heard on the radio last night, is now up between $3k and $5K per annum over the past three years (versus $1K the eight years prior, and $400 the eight years prior to that), so the economy is in a better place since the cows literally came home.
The messaging this afternoon that may impact markets the most are twofold. One would be any mention of the Fed's balance sheet expansion program. I don't see any realistic mention of ending this program early as overnight repo markets remain tight. This will certainly come up in the Q&A. The other would be any mention of revamping how the central bank targets inflation. This in my opinion would be where one word misspoken could spook the long end of the Treasury curve.
Economics (All Times Eastern)
08:30 - CPI (Nov): Expecting 2.0% y/y, Last 1.8% y/y.
08:30 - Core CPI (Nov): Expecting 2.3% y/y, Last 2.3% y/y.
10:30 - Oil Inventories (Weekly): Last -4.856M.
10:30 - Gasoline Stocks (Weekly): Last +3.385M.
The Fed (All Times Eastern)
14:00 - FOMC Policy Statement.
14:00 - FOMC Economic Projections.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AEO) (.48)
