You know I used to be a decent bowler. Pretty much a 140 roll. Enough that you would want me on your team, because while my roll wasn't smoking hot my pin action always surprised, getting me more than my fair share of strikes.
I thought we would see strikes galore today when Nvidia (NVDA) pre-announced a horrendous quarter and Caterpillar (CAT) cut its forecast. You have the semiconductor company that's pretty much known for its outrageously fast growth taking a meat axe to its estimates and you have Caterpillar highlighting weakness in China for its biggest miss in 10 years.
Nope, the pin action, while not non-existent was surprisingly muted, the kind of roll where you hit the one pin and you hit the one, it glances of the two, and the right into the gutter. That's almost an impossibility.
And yet that's exactly what happened today.
How can a shortfall and guide down of one of the biggest machinery companies and one of the smartest run semiconductor companies, not cause the equivalent of two strikes in their sectors, especially given the etfs that magnify and link the weakness or strength of ke y stocks.
The answer?
Because this is some sort of whacky, crazy bull market that doesn't want to go down, at least at this point. This is a market based on hope and the hope seems to have paid off since the bottom in late December and now big managers are willing to press their bet by refusing to acknowledge today's reality and, instead, are thinking about what could happen down the road.
Let's put these bowling balls in context. First Caterpillar had a huge year with revenue up 20% and record profit per share of $11.22. Now the company most definitely had a fourth quarter shortfall, $2.55 v. $2.99, and the company's talking about making $11.75 to $12.75 well below the estimates of $12.73
Some of that bottom line disappointment came from higher raw costs. But the most jarring part of the company's entire call came when the company discussed China and I quote: "we are forecasting the overall China market to be roughly flat in 2019 following two years of significant growth. China represents about 10% to 15% of our total construction industry sales and about 5% to 10% of total Caterpillar sales and revenues."
Boom. That's what did it -- China. The strength around the rest of the world, especially the United States, could not offset that weakness.
So why isn't that enough to crush the entire sector and, for that matter, why wasn't Caterpillar's stock down more, too? The answer is two-fold: one these manufacturing stocks are already reflecting a lot of pain. CAT itself sells for only 10 times earnings and it's forecasting a modest gain for the year, not a decline.
Second, we get a trade deal and what happens? You have a $125 stock that goes to $150 in, what, two days' time?
Contrast that with the safety stocks that didn't rally nearly as much as I thought they would. You are simply paying too much for these equities.
Now how about the pin action from Nvidia?
First, while CAT represented a shade down, Nvidia was a complete blowup, calling out weakness in China in gaming and in the data center. Now, to be sure, the data center players, Microsoft (MSFT) , Amazon (AMZN) and Alphabet (GOOGL) got hammered off this.
But the gaming stocks? They've already been pummeled. The data center providers? Last week Intel (INTC) told us the business had some indigestion. The worst was baked in. Oddly, like Caterpillar, even though Nvidia was down, it wasn't down nearly as much as it could have been. This stock did not even approach its low of $127, finishing about 10 bucks higher.
Why wasn't it worse? First, Nvidia 's stock has already been more than cut in half since October. Second, this group, more than any other group, is regarded as tremendously undervalued. Third we just heard from Lam Research (LRCX) , the giant semiconductor equipment maker that things are bottoming. Why else announce a $5 billion buyback.
So, the result?
The entire set of semi pins teetered but then fell back in place. No strike. No spare. Just the lead pin.
Again, the fact is people fear President Trump's prowess in making a deal with the Chinese. They fear that the will have to scramble much higher if they don't buy now.
Now I am not as sanguine as a lot of the buyers. We have so many potentially nasty hurdles this week. We have AMD (AMD) tomorrow with a book of business that is remarkably like Nvidia's. We have Apple (AAPL) tomorrow which already pre-announced a terrible quarter with no sign of a comeback.
We have Facebook (FB) Wednesday where there is a ton of chatter about a further slowdown since the last time it reported. Or how about Microsoft on Wednesday? It's got a huge data center business. Same with Amazon Thursday. If Nvidia sees slowing in the data center business isn't that terrible for these two web titans?
I want to wait and see before giving people the all clear because there is way too much uncertainty
But that's not how the big funds view this market. They want to buy the stock of Xilinx (XLNX) which actually, at one point, hit a high today ignoring Nvidia totally because Xilinx is involved with 5G and that's on fire. Broadcom (AVGO) , which makes all sorts of semis spent most of the time in the green. Lam closed up. So did Western Digital (WDC) .
Now there were plenty of stocks that were dinged. The cloud kings, the Adobes (ADBE) and the Salesforces (CRM) got hit. But they just gave back what they picked up at the end of last week. Deere (DE) , Eaton (ETN) and Cummins (CMI) , three machinery companies that trade in synch with CAT did give up some of their strength. But I would pick up some Deere right here because the ag cycle remains quite strong.
I think the big takeaway of today, though, is that the market's resilience is extraordinary, especially given how far and fast we have come up from the bottom. The combination of what could happen in China and what has happened here -- the potential pause in the Fed's rate hike plan, to be tested this Wednesday, entices many investors to take the leap.
It's just hard to keep this one down. You want one more close to home example? Last night Howard Schultz pretty much announced that he plans to run for president as an independent. Now Starbucks (SBUX) just reported a very good quarter but what did we hear in the wake of Schultz's announcement? Democrats, for one, calling for boycotts of Starbucks if he runs because he will siphon off votes from their party. Second, you know Schultz will have to sell a huge slug of stock to pay for any campaign. We heard a $300 million amount thrown around last night on "60 Minutes." That's low and that's after tax. Before tax I think he might need almost a billion dollars. Plus, there's always the possibility that Starbucks will become more of political football in China.
How badly was it hit? Not even half a buck.
That, again, is part of the resilience that I must call out, a resilience that will be tested this week multiple times -- including times that I think will be worse than today. Frankly, it's astounding. Except, though, when I think how my bowling game has deteriorated. I know now that when I hit the one pin nothing goes down. It's just the nature of the game.
