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  1. Home
  2. / Investing

Permian Basin Stocks, DIS Reaction, AAPL/QCOM, GDP, Railroads: Market Recon

What I see from 10,000 feet above... in the age of suddenly profitable fuel as cargo, are the railroads.
By STEPHEN GUILFOYLE
Apr 15, 2019 | 08:29 AM EDT
Stocks quotes in this article: JPM, PNC, C, GS, CVX, APC, CXO, APA, NBL, FANG, DIS, QCOM, AAPL, BA, JBHT, CSX, KSU, UNP, SCHW

Tax Day

Oh, how I have long dreaded April 15th. Working nearly every day since the sixth grade, and having been an active trader with my own account since the eighth, I have never really relished the fact that when I ran with a good idea, I had a partner who had not shared in the labor, nor the risk standing in the shadows with open arms, but when my ideas had not worked out, it was all on me. Think about that the next time some politician comes up with the half baked idea of taxing unrealized capital gains on an annual basis. How many folks would be taxed on the gains made since News Year's Day in stocks that they would have suffered a significant unrealized loss on in 2018 without enough gains to pair them off with. Those folks might be losing money on those holdings, yet face sizable taxes should certain politicians be permitted to move forward with such undeveloped economic thought.

That said, this is your reminder. Those of you who work for someone else have until today to file. Those of you who work for yourself must pay your first quarter taxes while also reconciling your 2018 payments with the estimates you made last year at this time by today. Not fun. Good luck to you all.

Old School

I would imagine that it was lost on no trader that the names that ran the table on Friday were all old school, old economy stalwarts. The banks roared back to life, as JP Morgan (JPM) beat expectations up and down what was really a stellar quarter. A flat to inverted yield curve should greatly damage a banker's ability to drive net interest margin. Well, someone forgot to tell JPM, or PNC Financial (PNC) for that matter. It with great interest that we turn to the likes of both Citigroup (C) and Goldman Sachs (GS) on Monday, to see just how far out in front of the pack, "best in breed" JP Morgan really is. The entire sector reacted very well in Friday trade.

Then there was the oil deal. By the way, I did initiate Chevron (CVX) on Friday with about 1/8 of a long position on that discount. Anadarko Petroleum (APC) ? It remains unclear at this time whether or not a bidding war erupts for the likes of APC, or if other operators in the Permian become more interesting on top of gains made in Friday's session. Names like Concho Resources (CXO) , Apache (APA) , Noble Energy (NBL) , and Diamondback Energy (FANG) all popped on the news, yet all remain within their sideways year to date range. Keep your eyes on these names. I am.

That brings us the the reaction seen in the shares of the Walt Disney Co. (DIS) to the investor event last Thursday evening. Wow. Just call the new service "Disney A plus." We set this one up perfectly, with our $140 price target ahead of the event, and yours truly came in loaded fairly nicely, still long 75% of what I consider a full position in that name. That's because I am an investor. It is because I am a trader with an ability to turn off emotion that I took my leave when handed such a large profit overnight. That said, maybe greed is an emotion, and I do not in my heart bear the nature of the mercenary trader that I thought I liked to brag about. My intention is to buy back the shares at a discount when it comes in. Will I get that chance? Discipline? I preach it. Did I practice what I preach? Not really. If I had, I would have sold the shares incrementally.

Those of you who do work for another, probably go through a quarterly or annual review. Your first line supervisor will judge your performance versus your peers. You hate that. Trust me, the supervisor hates that too. Upper management will not accept from this manager that all of his or her people are performing adequately. Even if the average is a high bar, someone must be below average. Well, when you work for yourself, you audit your own performance, measured against the broader markets, as well as circumstance. Sure, because I came in long the high profile name that ran wild to the upside, I handily beat the broader marketplace. However, I failed to live up to my own standards. I may still buy back those shares cheaper on a different day. It would be easy to mentally wipe clean a failure in personal discipline. That would be a breakdown in code. That must never be tolerated.

Remember this, my young Padawan, once you cut yourself slack here, you will cut yourself slack there. You will learn to tolerate personal failure in both method and practice. Before you know it, you will lose something more precious than money in some far more important time and place. It is painful to admit a breakdown in personal discipline before my readership. It would be more than painful, to say nothing, to count the money, to lie to myself, and to not pass on to those of you who trust me to be honest with my lessons learned.

Rough and Tumble

So much. I look ahead, trying to make something of this week. A shortened week. I see Apple (AAPL) and Qualcomm (QCOM) set to square off in a San Diego courtroom. The trial will take weeks. Apple CEO Tim Cook is expected to tale the stand. Apple and several Apple suppliers are suing Qualcomm for $27 billion. Just for the purposes of situational awareness, Apple is expected to generate revenue of more than $27 billion for the current quarter, while Qualcomm is looking at revs of less than $5 billion. This is a whole lot of dough, kids. The fight is over royalties and damages. Qualcomm is denying any wrongdoing, and is looking for missed back payments on these royalties plus damages of their own. Stay tuned. High profile event.

Aside from that, the week will be about growth, or lack thereof. According to FactSet, expectations for earnings growth across the S&P 500 for the first quarter have decreased further to -4.3% y/y, while now earning for Q2 are running at an estimate of -0.4%, a deeper hole than was projected just two weeks ago. You know what two minus signs in a row are, right? Earnings Recession. Been there, done that. Didn't like it.

That said, as the European Union prepares to retaliate to the U.S. intentions stated a week ago to place tariffs of $11.2 billion on imports from the single currency zone, Germany apparently came under some pressure at the IMF meetings over the weekend for not doing enough fiscally to get through this "rough patch" in that nation's economic performance. For those of you who I just lost, export driven Germany, the economic engine of Europe, saw it's own economy contract in Q3 2018, and then not bounce back, but print flat in the fourth quarter. There are clear signals that the German economy will print somewhere very close to contraction for the Q1 2019 as well. We stand a couple of weeks from seeing that number. While, technically, you need to see two consecutive quarters of contraction to fulfill the textbook definition of a recession, I am sure that the economic climate there is now getting fairly rough.

On Growth

The Atlanta Fed's Q1 snapshot of U.S. GDP is now running at 2.3%, far above what most economists were thinking just a few weeks back. If that's even close, then perhaps the Fed's U-turn made after the last rate hike in late December might have been just in the nick of time. After all, raising short term rates in spite of what the yield curve was screaming at the FOMC, while the obvious negative impact of the aggressive rate of the quantitative tightening program put the squeeze on perceived liquidity in the marketplace did probably come very close to bringing this economy to it's proverbial knees. Very rare that the central bank realizes it's own policy error in the making and reverses course. Though the committee created the problem, they do deserve some credit for recognizing the fact when they did.

A couple of growth related stories for traders to stay focused on this week. February Balance of Trade to be reported this Wednesday, and Thursday's print for March Retail Sales are crucial to any revisions made to Q1 GDP projections. I expect to see a significant rebound in Retail Sales for March. That's growth positive. Is it policy positive? I'll tell you what. There is still only a spread of 13 basis points between U.S. three month and 10 year paper, just 16 bps between the two year and that 10 year. Would it make sense to anyone to put upward pressure of 25 basis points on the Fed Funds Rate target, which at the upper boundary of the range is inverted right through the U.S. five year note when measured against the U.S. Treasury yield curve?

Now, you get it. No sentient being would raise short term rates without first repairing the slope of that yield curve. See how easy this game is. Oh, China will go to the tape this Tuesday evening (Wednesday in China) with crucial reads on GDP, Fixed Asset Investment, Industrial Production, Retail Sales and Unemployment. Needless to say that we'll know more about the Chinese economy by Wednesday.

Just In Case...

You missed it... I just laid out the case for increased multiple expansion. Forward looking PE ratios have been creeping higher, now up to an aggregate 16.7 times the next 12 months for the S&P 500. For my fellow nerds, that's above the five year average of 16.4 times, and the 10 year average, way down there at 14.7 times. I see this as the necessary result of an economy not in a state of collapse that can still attract safe haven value investment from less fortunate economies with it's monetary policy controlled by a central bank that has been forced to put itself in the penalty box.

As an investor, that means watch growth names keenly. Yes, the banks report this week. So, do a few of the transports. Though Boeing (BA) has put the airlines in a delicate spot, they are all off of their lows. As is trucker, J.B. Hunt (JBHT) . That firm reports tonight. What I see from 10,000 feet above though, in the age of suddenly profitable fuel as cargo, are the railroads. CSX (CSX) , Kansas City Southern (KSU) , and Union Pacific (UNP) all report this week, all seem to be shaping up nicely on the charts, all benefit from a potentially weaker dollar that makes commodities more valuable, and all benefit from the likelihood of improved trade conditions with China, as well as our North American neighbors should this become reality. Right now, I am long KSU, and may look take action in CSX as that name approaches an obvious pivot.

Economics (All Times Eastern)

08:30 - Empire State Manufacturing Index (April): Expecting 7.2, Last 3.7.

08:30 - Fed Speaker: Chicago Fed Pres. Charles Evans.

12:00 - Fed Speaker: Chicago Fed Pres. Charles Evans.

16:00 -Net long-Term TIC Flows (Feb): Last $-7.2B.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (SCHW) (.65), C (1.79), GS (5.02)

After the Close: JBHT (1.25)

(JP Morgan, Citigroup, Anadarko, Disney and Apple are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells JPM, C, APC, DIS or AAPL? Learn more now.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Stephen Guilfoyle was Long AAPL, CVX, KSU equity, Short DIS puts.

TAGS: Earnings | Economic Data | Investing | Markets | Oil | Stocks | Trading | Market Recon

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