Tuesday Night. Seemed normal. Equity markets had stayed within a range that held for hours. That said, I did think it notable that the broad indices closed on weakness, and that trading volume had been eerily thin. Breadth was negative, but not quite as negative as 10 of 11 sectors closing in the red might suggest.
Everyone was home from work just a little early. Thought we might take in the "all-time champions tournament" on Jeopardy as we love to compete in all things... from the intellectual to the athletic. Just starting to put dinner together, I check S&P futures markets. Whoa. Jeopardy was quickly forgotten. While some younger folks seem to fret endlessly over a potential military draft that will never exist, in my house they talk about skipping work the next day to visit a prior-service recruiter. We were at war. Or were we?
Iranian forces, it appeared had fired more than a dozen missiles from Iranian soil at U.S. forces stationed at two bases in Iraq. My first thought was that this was just too obvious. I searched my history books for cases where an inferior force used diversionary tactics in an attempt to put a superior force off balance. There had to be some kind of flanking attack if this was real. Thoughts of Jackson's dinner time surprise at Chancellorsville passed through my brain. There would be an infantry style fight. Iranian backed militia would try something. Right? Twitter was no help. There were so much disinformation spread around social media, it took me back just for a bit to 9/11, and all of the false information that somehow made its way down to those of us moving through the darkness, through the city's ruins that afternoon.
The Iranian military quickly claimed responsibility for those missiles that came in several waves. Oil prices screamed, WTI peaked around $65.50 per barrel, S&P futures traded as much as 57 points below fair value. Physical Gold traded above $1608 per troy ounce. The U.S. 10 year note gave up just 1.71% at that point, and Bitcoin, yes Bitcoin traded at $8422 in U.S. dollar terms. Iran had threatened, if what was being passed around was true, to broaden this "response" to the U.S. strike against Iranian General Soleimani, which in itself was a response to both past and expected aggression.
Just One Thing
All night, it seemed we asked about U.S. casualties. Of course, social media once again provided answers. False estimates of as many as 20 U.S. military were reported KIA if you believe everything you read. A U.S. fighter jet shot down over the Persian Gulf... if you believe everything you read. Much more too that I won't even mention. There was however, one glaring item that seems to be overlooked this morning. There were no U.S., nor Iraqi casualties. None. Apparently, unless the Iranian military simply does not train on their weapons, which I do not believe, the exercise was one of saving face... for now.
President Trump, to his credit, which of course will not be brought up by the mainstream media, held his fire throughout the evening. Now, think about that. The U.S. military clearly under attack. You are in command. Rumor is rampant. Threats are flying. The impulse to allow U.S. forces to defend themselves at the point of contact has to be real. Tremendous show of restraint at the leadership level that at this point, seems to be the correct call.
From Twitter...
"All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow (Wednesday) morning."
... President Donald J. Trump
Almost Incredibly
Hard to believe, but there is more. Overnight, a Boeing (BA) 737 (not the Max), operated by Ukrainian International Airlines crashed in flames just after take-off from Tehran's international airport en route to Kiev. All 176 on board are reported as dead.
In addition, a 4.9 magnitude earthquake occurred in a strategically important region of Iran. The earthquake began approximately six miles beneath the earth's surface, just roughly 40 miles away from a focused upon site tied to Iran's nuclear program at Bushehr. This same area suffered a magnitude 5.1 quake on Friday. Coincidence? How can we even guess?
Defense Stocks
Glad I am long Lockheed Martin (LMT) , and Kratos Defense (KTOS) .
Wish I was long Raytheon (RTN) over Untied Technologies (UTX) going into the merger.
Would love to get back into Northrop Grumman (NOC) at some point, not chasing though.
L3Harris (LHX) is close to breaking out of its basing pattern.
If it becomes necessary to isolate the Iranian Navy, General Dynamics (GD) is obvious, maybe that wakes up former Sarge name Coda Octopus (CODA) .
My Thoughts
Obviously, finding good information is very difficult. Social media merely presents as the home base of the panic stricken as well as those purposefully attempting to dis-inform the public. Many in the mainstream media will present fact, but through the lens of their overt political agenda. Though painfully slow in this modern era of information delivery, I think it best to watch for story points presented as fact across news services that you would think would be held to an accountable standard for journalism, that at least on the opinion level, might not usually agree on conclusions made. Why go slow?
That's easy. There are many possible outcomes to varying scenarios based on what decision makers do in response to both fact or threat. You don't know what they see, what they know, or how they feel that day. While navigating not just financial markets, but daily life, we fall back on our time tested formula.
We Understand changing situations, so that we can...
Identify targets of opportunity, avenues of attack, methods of escape, so that we can...
Adapt to the environment provided, in order to...
Overcome all obstacles and disadvantages, as we proceed to...
Maintain our level of progress.
Use whatever works for you. This has been my mantra since I was a young pup. Speaking just for me, prayer works. Pray not for victory, not for positive outcomes. Pray for the personal strength and stamina to endure. Anything more would be like sprinkles on an ice cream cone. Oh, you like sprinkles, but all you really need is guts.
Market Positive?
The Fed's balance sheet expansion program, which does add liquidity, but is not truly quantitative easing? Yes, but no. Fourth quarter earnings are going to surprise to the upside? Hmm, probably, but I don't know for sure. Chinese Phase One Trade deal? Priced in at this point. Passive investment mandated increase in demand versus dwindling supplies of available equity? Yes, but not where I'm going.
Dividends, baby. Income. According to an article published at the Financial Times, U.S. corporations paid out an aggregate $485.48 billion to shareholders just to stick around in 2019. That numbers does not include share repurchase programs that would have to added to total up a complete picture for "return of capital to shareholders." The number represents 6.4% year over year growth, down from the tax plan inspired 8.7% growth for 2018 over 2017, but an eighth consecutive year of record dividend payment nonetheless.
Better yet, Howard Silverblatt a senior index analyst at S&P Dow Jones Indices, who is quoted in the piece, said that the S&P 500 "already has a 3.3% dividend increase built into 2020". Some folks have asked why I'm always long the oil patch. Simple. They pay me to hang around, and if one makes the least of efforts, these have been simple names to manage in terms of net basis.
2020 Matters
Sticking with the oil patch, or really more broadly, the energy space, 2020 matters. Electric vehicles only get hotter and hotter, as does the temperature. The 2010's were the warmest decade on record, as 2019 was one of the warmest years. Both crude and natural gas remain, even with reduced domestic stocks, with oversupplies globally.
Across the space, an approximate $41 billion in debt matures this year. What does that mean? Bankruptcies. Cheaper than hoped for consolidation. This all seems fairly bleak. Aren't there any potential positives for fossil fuels moving forward? There are. The easing of tensions between Washington and Beijing is a big one, and really could influence almost all commodity markets one way or the other moving forward. Another could be a reduction is U.S. shale production. Not good for those cash-strapped operations that I just mentioned, but perhaps good for the underlying commodities. Rig counts in operation are dropping aggressively, and it had been reported that some of these wells just don't produce as expected.
I think though pressure on the industry will be constant, or perhaps ratchet higher going into the election, that demand will also remain constant as much of the emerging world will continue to rely on what's cheapest. Even, gulp... coal.
First and Ten
Ten million dollars, that is. It's a billionaire throw-down as both incumbent U.S. President Donald Trump, and rising Democratic rival, former NYC Mayor Michael Bloomberg, have each reportedly purchased more than $10 million in 60 second television commercials to be aired during the National Football League's Super Bowl game on February 2nd, just one day ahead of the Iowa caucuses. 98.2 million viewers watched last year's game, and that was a bad year.
The kick is high enough. It's far enough. The kick is ...
Economics (All Times Eastern)
08:15 - ADP Employment Report (Dec): Expecting 158K, Last 67K.
10:30 - Oil Inventories (Weekly): Last -11.463M.
10:30 - Gasoline Stocks (Weekly): Last +3.212M.
13:00 - Ten Year Note Auction: $24B.
15:00 - Consumer Credit (Nov): Expecting $16.2B, Last $18.91B.
The Fed (All Times Eastern)
10:00 - Speaker: Reserve Board Gov. Lael Brainard.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (STZ) (1.87), (LEN) (1.89), (MSM) (1.17), (RPM) (.73), (WBA) (1.41)
