Season of Redemption
The passing of time. One season withers, only to experience its own rebirth at some later date -- and another begins a new. Fourth-quarter earnings were broadly positive. There were some bumps in the road, but who would argue about 14% earnings growth that had been built upon 6% revenue growth. It is perhaps not quite as robust as the growth experienced across our marketplace throughout the year, but certainly muscular enough when one stops and thinks about the volatility of not just the macroeconomic data that provides the financial environment, but the volatility in the release dates themselves.
One thing that we all must make ourselves fully cognizant of is that the low hanging fruit has now been picked clean. Missed it completely? Tough cookies. First-quarter earnings growth, impacted by both having to live in a tougher neighborhood and by the expiration of the easy cover provided by tax reform for twelve months, will make sure that victories must now be earned.
Expectations for Q1 earnings growth have fallen well into the negative. Forward-looking P/E ratios (for the S&P 500) stand nearly precisely at 16x, which is below the five-year average for the index, yet still above the 10-year average. That fact implies nothing really -- except for indicating that as the central bank launched one quantitative easing program after another that over a decade, prices had skewed toward the perverse.
Are those equities fairly valued now? Tough question. If they make money, then yes. If not, then no. What did you expect? The answer? That game is one that I will have to play along with you in real time. Tape on the foil.
The season of redemption that I refer to begins in earnest this morning. Rebounding off of an inconsistent spate of lousy macroeconomic performance? Do poor economic results released during and after the December/January partial government shutdown turn into trend, or perhaps find solace in the world of gentle revision? (Oh, how nice.) Will, the early Monday morning release of the Census Bureau's Retail Sales report show at least some stabilization coming off the December print that blindsided nearly everyone?
Even if markets get past retail sales just fine, the rest of the week brings key data for consumer-level inflation, January Durable Goods Orders that will likely exhibit a significant reduction in defense purchasing, and then on Friday... February Industrial Production that itself will be coming off of a very negative January print.
Without much in the way of earnings and with the evolution of the condition on trade left to rumor, the cold, hard facts may have to lead the way for now. Cold hard facts, until revision that is. Could be fun. Wait, there's more.
Aerospace
I would expect that most of you have noticed that most equity index futures are outperforming those tied to the Dow Jones Industrial Average overnight into Monday. That's due to the weight placed upon that group by the Ethiopian Airlines disaster that killed the 157 people on board. The aircraft had been a Boeing 737 Max-8. This tragedy comes five months after the Lion Air crash of a similar airplane in Indonesia that killed 189 folks. In response to this news, and due to the fact that both events took place upon take-off, China has grounded aircraft of this type until more is known.
Boeing (BA) is trading more than 10% below where it close on Friday night, and close to 16% off where it had traded a week earlier. My expectation would be that given how shares are traded in 2019, ETFs' order flows executed broadly through the use of algorithms could blindly impact the defense and aerospace industry, potentially forcing discount pricing on names having nothing, or little, to do with the selling of civilian aircraft.
Keep somewhere in the back of your mind that President Trump will likely make public his budget for fiscal 2020 sometime later on Monday. There will be 5% cuts across non-defense areas within this budget. Defense spending in the budget plan (only a plan), however, is expected to show an increase. That, in itself, could provide a playable pop in some of these softened names as the day wears on.
Raytheon (RTN) , a name I am long, and Northrop Grumman (NOC) , a name I am currently flat, look more interesting to me on Monday than Lockheed Martin (LMT) , might (even though I am long), as the DOD is expected to have requested less F-35 fighter aircraft than originally thought. In addition, there is the cloud of uncertainty now hanging over the possible sale of such F-35 craft to the Turkish military now that Turkey is purchasing missile systems from Russia.
By the way, you do know who landed an $850 million DARPA contract without a lot of the facts released to the public last week? That's right, Kratos Defense (KTOS) , how'd you guess?
The Prairie Sky
Is wide and high... deep in the heart. IHS Markit hosts CERAWeek conference this Monday through Friday in Houston, Texas. About the only thing we know for sure is that energy prices may move around a bit this week. One would think the conference a positive. One never knows. Speakers include not just Energy Secretary, and former Governor of Texas Rick Perry, but the Secretary of State Mike Pompeo (in my opinion the smartest person in the room just about every time he's in a room). Also speaking will be Mohammad Barkindo, OPEC Secretary General -- in addition to corporate leaders from across the energy spectrum.
Items that you traders need to be fully aware of away from word spoken in Houston is that ancillary news items arfe and will be plenty. Already on Monday morning, Saudi Arabia has signaled clients that the nation will supply less oil than requested for the month of April, which in effect extends the Saudi's own greater than agreed to production cuts first implemented in March.
In addition to this, the IEA (International Energy Agency, not the guys who count U.S. domestic inventory) will make public their five-year, forward-looking analysis of oil markets later today (Think there's enough going on? Gee whiz.). OPEC will release its monthly report at week's end, as the whole shindig in Houston wraps up.
My take? I am still playing this game with exploration and production outfits. I like the energy space, but only if you can show me fat cash flows and pay me a nice dividend just to hang around. There was some nice mention over the weekend in the financial media on the much-maligned deep sea drilling industry.
You can do what you want. You can buy Transocean (RIG) , and Diamond Offshore (DO) on spec, if you'd like. I won't be in that foxhole with you, however. Stocks that trade at low market share prices usually do so for a reason. Negative earnings. negative margin. I can wait longer to put my money here. The U.S. is producing a rough 12M barrels of oil per day. That's largely shale, gang.
Oh, One More Thing
Seems like the U.S. and China are getting closer to a currency deal that would come ahead, or be part of, a trade deal. On Sunday, PBOC Gov. Yi Gang spoke very confidently that China would be able to avoid engaging in competitive devaluation in order to get a leg up in the import/export business. Not that enforcement in this arena would be easy regardless of what is agreed to, but this does make for a positive backdrop. An eventual trade deal, regardless of whether it might be a good or poor deal in reality, is a development, and thus a market positive medium to longer term. Short term, who knows what the heck is priced in? My guess is a lot.
Okay, One More Thing
Remember earlier in the year, when I gave you Netflix (NFLX) as a short idea. Well, I covered that trade long ago, once I realized it was going to be a punch in the nose. Well, I'm thinking about it again. I don't expect you to dance this dance with me, but there are reasons.
Just in case traders missed the news late last week, first Kelley Bennnett said that he'll be stepping down as Chief Marketing Officer after seven year on the job. Bennett says, and I quote "We are at the top of our game, which is why this was the right moment for me to retire." Hmm. That's not very encouraging in the least. The very next day, Buckingham Research downgrades the stock from a "Buy" to a "Neutral", mentioning the coming level of increased competition across the streaming entertainment industry.
While Netflix already competes against the likes of Hulu and Amazon (AMZN) in the space, the big dogs have not even started barking yet. Among Apple (AAPL) , AT&T (T) and Walt Disney (DIS) , only one is truly the king of content. The good thing is we don't have to choose just one.
Economics (All Times Eastern)
08:30 - Retail Sales (Jan): Expecting 0.0% m/m, Last -1.2% m/m.
08:30 - ex-Autos (Jan): Expecting 0.3% m/m , Last -1.8% m/m.
10:00 - Business Inventories (Dec): Expecting 0.6% m/m, Last -0.1% m/m.
19:00 - Fed Speaker: Fed Chair Jerome Powell.
