Ghost Riders
An old cowpoke went riding out one dark and windy day.
Upon a ridge he rested as he went along his way.
When all at once a mighty herd of red-eyes cows he saw.
A'plowin' through the ragged skies and up a cloudy draw.
Yi-pi-yi-ay, Yi-pi-yi-o
--Stan Jones (1948)
Ready for third-quarter earnings season?
Fear? Not us. Not ever.
We are the last of our kind.
We are the last of the hard.
--Your pal (right stinkin' now)
Enter The Abyss
We enter darkness. We scan left and right. Up and down. Still we cannot see. Cautious, we move, but still forward. Always forward. At the ready. Ready for what? Exactly. All of the broader domestic equity indices closed down small on Monday. Holiday trading volume was inconsequential. Draw no conclusion. Judge nothing. Without bonds trading alongside, equity trading becomes (even more) like gambling.
What we do know is that broader markets have dealt with a bit more professional distribution (as opposed to accumulation) than we have seen of late going into the season to our front. That said, both the S&P 500 as well as the Nasdaq Composite stand on the right side of their respective 50-day and 200-day simple moving averages. For those among us who prefer to work off of weekly charts, but struggled to pass Sister Mary Ann's 11th grade math class, that's roughly equivalent to the 10-week and the 40-week SMAs. There, now we all move out together. If that one gave you trouble, drop and give me 50. Too slow. Make it 75. Honor system.
Unfortunately, as we move into earnings season, the focus may shift temporarily away from trade negotiation between Washington and Beijing, but don't think for a second that pervasive topics such as China, this trade war, or the impact on currency exchange rates and global economies are going anywhere.
The fingerprints of a tough condition for cross-border commerce will be all over the numbers reported, and even worse, will not just color guidance, but for large-cap firms, likely come in handy as both an excuse as well as a handy tool for lowering the bar of expectation. That all said... may I (bent at the hip, arm extended) have the honor of this dance?
Less Than Great Expectations
Though I must confess to being a sincere fan of author Charles Dickens, the orphan Pip will not come up again in this segment, but most of us will need a bit of his work ethic and perseverance. Being that I know most of you rise well before the sun and read the material that we create here at Real Money, I know that as the "Last of the hard" you run a surplus of both.
According to FactSet, who I often rely upon, the earnings season to our immediate front is expected to make a poor showing and expectations have been ratcheted even lower quite rapidly in recent weeks. Estimated aggregate earnings growth for the S&P 500 for Q3 now stands at -4.6% year over year. That's down from -4.1% just one week ago, and quite incredibly down from -0.6% as recently as June 30. Ouch.
Earnings are expected to return to positive growth for the fourth quarter, but on October 15, that seems like a wild stab in the dark.
These expectations have been pulled back for nine of the eleven sectors, leaving only the REITs, Health Care, and somehow Information Technology (already awful) somewhat unblemished over the past two weeks alone. Aggregate expectations for S&P 500 revenue are still positive, at +2.7%. As far as sales go, the Health Care sector is expected to lead the way, with Materials, Energy, and yes, the Financials bringing the ugly stick. That is where the trade condition as well as the yield curve will make their presence known.
As we have discussed here many times, there will be a divide in performance between firms that derive a majority of sales domestically versus those more reliant upon a global business model. Sticking with the data provided by Fact Set, that expectation for earnings "growth" of -4.6% can be broken down to -0.5% for those firms that derive more than 50% of sales domestically, and a truly horrific -11.7% for those firms that get more than 50% of those sales outside of U.S. borders. Remember how S&P 500 sales used to be 45% comprised externally. Yeah, that's down to 38%.
Want More?
Not everyone's hand went up. Burpees. Begin. Dig deep. Remember your "Why." Everyone has a why. Why you get up at night. Why you read constantly. Why you refuse to be outworked, and why though you respect and love the heck out of him, it will tick you off until your last breath that Jim Cramer can out work you. Every day. All day. For those of you who doubt, the man is indeed the sharpest tool in the shed. Ever been the smartest soul in the room? Not if Jim was in the room.
Net profit margin for the quarter (still for the S&P 500) is now projected at 11.3%. That will be down from 12.1% one year ago, and is expected to be lower for ten of our eleven sectors. Somehow the Materials sector may have reduced expenses enough to show improvement here.
Are valuations too high for the environment? My opinion is not excessively. There are many metrics in use by different market watchers. The truth is cold and simple though. The S&P now trades at forward looking (next 12 months projections) earnings of 16.6x. The five-year average? You guessed it.. 16.6x.
Yes, the 10-year average, at 14.8x, is far lower. That, however, still includes the aftermath of the financial crisis. My thoughts on this is that the environment is constantly evolving. Just think of the changes made to monetary policy, fiscal policy, trade relations and your own personal situation. Historical comparisons are simply a reflection of change or lack thereof. Be very wary of making too much, or leaning too heavily upon relying on the these.
In addition, while here, rely less upon financial talking heads (self included) who at times appear too sure of what they see, especially if they work for the bigger firms. Opinions are, well you know the idiom. Now just how valuable are opinions that have been scrubbed down by legal departments?
Proceed
I ask only this of you. The future is uncertain. Some of us will struggle at times. Remember the guy to your left and the gal to your right. They may need help, or perhaps just a sounding board. Be there for each other. We move only as fast as the slowest among us. Victory alone accomplishes what exactly?
Again, remember the "why." Duty. Loyalty. Respect. Integrity. All code. Code for keeping one's honor clean. Nothing, and I mean nothing, can be more fulfilling. Lose money? Rise again. Dishonor is the only way you lose for good.
Chart Work
There was no hockey on ESPN Plus last night. The baseball game was not close, and as a Mets fan, I really do not like the Nationals. So, I looked at charts. One thing about charts. They don't tell you the future, but they can certainly help, and even though I fancy myself a balance sheet kind of guy, there is no doubt that I also make heavy use of technical analysis. My feeling is that for me to succeed, I have to dig deep into both the fundamental as well as the technical.
I found a couple of interesting stocks last night, both stocks that I regularly trade in and out of that appear to be closing in on pivot points.
The first would be that wonder of wonders, Lululemon Athletica (LULU) . Take a look at this year-to-date picture.
How many times can this name form a base and then take the next step by rising above an existing pivot. This thing looks like slow and steady staircase. Except... this is not slow, nor steady. The stock is up 67% year to date. Talk about "own, don't trade." That is my personal vice. I trade. Given the pattern, should this $204 pivot be taken, another $10 rise in the market price ahead of earnings. Keep in mind, that's conservative and that LULU does not report until early December. This one has time on its side.
Now, the second one is tricky. Citigroup (C) reports this morning. I am writing this ahead of that release, but you are reading it after. I literally just got flat this name myself ahead of the numbers. That just means that I am cautious. It does not mean that I don't like Citigroup. I especially like how aggressive this firm has been in returning capital to shareholders.
See it? These shares have closed on both Friday and Monday precisely at a pivot coming out of a two-month cup with handle. A positive reaction this morning could set up prices that approach $80 in my opinion. A dip into the mid-$60s? My personal reaction would be to initiate close to the 50-day or 200-day SMA, as they are not very far apart.
That's it for now, gang. Now, let's wind it up. Let's wind it up until we are fully wound. Then let's take that field. Let's let them know that they barked up the wrong tree on this day. Let's win, and let's do it together. Always faithful.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 5.5% y/y.
14:00 - Federal Budget Statement (Sep): Last $-200B.
The Fed (All Times Eastern)
04:25 - Speaker: St. Louis Fed Pres. James Bullard.
09:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
12:45 - Speaker: Kansas City Fed Pres. Esther George.
15:30 - Speaker: San Francisco Fed Pres. Mary Daly.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BLK) (6.99), (SCHW) (.64), (C) (1.95), (GS) (4.91), (JNJ) (2.01), (JPM) (2.46), (OMC) (1.30), (UNH) (3.76), (WFC) (1.18)
