Raindrops On Roses
Actually, I'm not really the raindrops on roses kind of guy. I don't really mind schnitzel with noodles, though it probably would not have found its way into the song if I had written the lyrics. If I had indeed sat down and thought about what I like, maybe not in the first stanza, but somewhere in the song would come a winter rally off of a desperate holiday season selloff, that would have the S&P 500 up 9% year to date, the Nasdaq Composite 11% higher, and the more highly specialized Russell 2000 and Dow Transports up an incredible 14%... by mid-February. Huzzah. Don't hear much about Dow Theory when the transports lead to the upside, now do we?
In six weeks, we've gone from, "Uh oh, this could be the big one," to, "Go ahead, you guys feel like an appetizer tonight." Small wonder too, if you think about it. It's always easier to see the path of wisdom in the rear view mirror. The sharpness of both the selloff -- that ran past what would by definition, be considered a bear market -- and the rally that ensued were both engineered at the central bank. Of course, it is easy in mid-February to rationalize that those who guide and implement monetary policy would realize what they were doing to the domestic economy. But it was not so easy at the time to extend that level of trust. That's for sure.
In a public appearance in Cincinnati on Tuesday, Cleveland Fed President Loretta Mester, who does not vote on policy again until 2022, but has, since taking the job, been a leading voice from the hawkish side -- and whom I often agree with on policy in a pure sense -- opined on the future of balance sheet management. Mester said plainly, "At coming meetings, we will be finalizing our plans for ending the balance sheet runoff and completing balance sheet normalization." That was not the very end of Mester's appearance, but that would have been a great spot for a mike drop.
The point is that though I am often critical of monetary policy, and I fantasize about the day that the efficiencies of a free market economy return the truth to its rightful place, wherever that may be, the Fed's sudden compliance allows other, global impacts to be accurately priced in -- without overtly divergent trajectories on policy further distorting the results of human response at the point of sale. Yes, we are the cleanest dirty shirt in the hamper, but we are still in the hamper, and the rest of this hamper reeks.
Your chances are awfully good. Your author played a lot of hockey in his prime (and beyond). In fact, if not for all of the dislocated shoulders, broken teeth and busted ribs, this kid would love to play forever. I scored a lot of goals in my day. Can't remember any of them.
I do remember a game almost 40 years ago, though. My team was losing in the third period 15-0. Really. Toward the end of the game, the puck bounced my way. I had just obliterated the guy covering me (he had just popped my brother, so this response was necessary). I took the puck on my stick and skated in on a goaltender -- to this point untested by our pathetic effort on offense. I deked to the left, he went for it. I pulled the puck back, swept to the right and backhanded the puck over his outstretched catching mitt. My girlfriend (now wife of thirty years) was in the stands. That puck hit the post, and we lost 15-0.
Losing is one thing. Being shut out, another. Not scoring in front of your wife when you badly beat an opposing goalie... that stays in your head until you die.
Last week, the S&P 500 failed at the 200-day simple moving average. A great time to take a profit on some nice gains, I thought. In Tuesday's trading (yesterday), markets retested, and actually pierced, that level to the upside. For the new kids, a trading level is not broken until successfully tested from the other side, so a piercing is nice, but not truly meaningful until ground taken is held. That's why the Battle of Antietam in 1862 is considered a Union victory.
Yes, the possibility that Congress somehow avoids another government shutdown is a positive, but the driver here, primarily, is the trade discussion this week in Beijing. Results reached at the point of sale should be, and truly often are, masterpieces in their own right. The beauty in the creation of all that goes into that spot where demand hits supply at a precise place in time is just as beautiful as anything hanging on a wall at some fancy-pants museum uptown. The difference is that what is created in not just this marketplace, but in any, is not just dynamic, but also eternal.
We've covered a Fed that is no longer a sure thing. Dynamic. President Trump's administration if anything, is clearly pro-business. Again, dynamic. Equities are certainly not over-valued at these levels... Not that last sales are truly under-valued, perhaps they are just right. Oh, and as we will see on Wednesday morning when the Bureau of Labor Statistics goes to the tape with January CPI data, inflation is not yet a reason to force the Fed into a less-compliant position.
So, more than anything else right now, it's China. Last week, markets skated in, took their best shot and hit the post. As night turns into morning, the S&P 500 gets a second chance. No victory necessary. Just something that sounds like progress. A president opining on pushing back on the deadline for an increase in tariffs on $200 billion worth of Chinese goods sounds like progress to this guy. Dynamic.
Pump It Up
Catch the information put forth by the U.S. Energy Information Administration (EIA) on Tuesday? Domestic oil production for November averaged a record 11.9 million barrels per day, the six consecutive monthly record. The EIA also bumped projections for U.S. crude production for 2019 up to 12.4M bpd from 12.1M bpd. For 2020, a similar uptick was made, moving expectations from 12.9M bpd to 13.2M bpd. Obviously, U.S. drillers have increased activity in response to OPEC's production cuts.
About that... early on Wednesday morning, the International Energy Agency (IEA, not to be confused with the EIA), increased ex-OPEC output for 2019 to 64.4M bpd, up from 61.1M bpd. Growth in production is to be led, according to the IEA, by, you guessed it... the U.S. shale crowd. The IEA maintained its projection for 2019 global demand at 100.6M bpd. FYI, aggregate OPEC production is currently believed to be a rough 30.8M bpd.
What all of this does, probably, is keep market prices for crude in their current ballparks. The EIA expects WTI crude to average $58/barrel in 2020, which is down from prior expectations of $61. For equity investors, these prices are good enough for the E&P crowd to profit. To excel, like how we manage net basis on our own positions, these firms are going to have to manage their break-even points down, and they will. This is, in my opinion, a reason to maintain long positions at current levels across the space going forward, while waiting patiently for a risk-off scenario to buy back those portions, already having taken profits ahead of this information. Patience pays. So do dividends.
Both Take-Two Interactive (TTWO) , and Electronic Arts (EA) puked the bed on earnings. Take-Two remains well below levels reached for the shares just about a week ago. EA pulled a literal rabbit out of a hat post-earnings, with this "Apex Legends" game released on February 4. That game, by the way, has already signed up more than 25 million users. This is a free, last-man-standing type game much like the ballyhooed "Fortnite" from Epic Games that became not just a cultural turning point, but a threat to the business of entertainment itself.
What would Activision Blizzard (ATVI) do in response? Better be good. ATVI released the firm's Q4 results on Tuesday evening. Adjusted EPS met expectations of $1.29 on revenue that grew 7.6% year over year, yet still disappointed. It gets worse. The firm's guidance was just plain dreadful. For the current quarter, the firm expects to earn $0.20 per share on revenue of $1.175 billion. Industry consensus had been for $0.48 on $1.49 billion. Whoa. Full-year guidance is no better.
While many had speculated as late as Tuesday afternoon that Activision Blizzard might release a "Battle Royale" game of its own in response to what Electronic Arts had just done, no dice. So why is the stock higher overnight after first selling off hard in response to such an anemic outlook?
Restructuring. The firm is focus on revitalizing its more-successful titles, while, you guessed it, laying off a rough 8% of its headcount. Did I mention the dividend increase? Funny how these always come up when a firm reports awful news.
The annual dividend will be increased 8.8%, which sounds impressive, until you realize that it's only an increase of $0.03, and brings forward yield to a whopping 0.89%. No thanks. I think I'll go buy an oil stock where I have both upside potential for growth AND get paid something nice to wait for that growth.
I'll fade the rally in this name. Better fish in the sea? Yes, that. But at the end of the day, I'm just a guy with an opinion.
Economics (All Times Eastern)
07:15 - Fed Speaker: Atlanta Fed Pres. Raphael Bostic.
08:30 - CPI (Jan): Expecting 1.5% y/y, Last 1.9% y/y.
08:30 - Core CPI (Jan): Expecting 2.1% y/y, Last 2.2% y/y.
08:50 - Fed Speaker: Cleveland Fed Pres. Loretta Mester.
10:30 - Oil Inventories (Weekly): Last +1.263M.
14:00 - Federal Budget Statement (Dec): Expecting $-12B, Last $-205B.