Lessons From Super Bowls III and LIII
Though not really an avid pro football fan, I did end up watching most of the game on Sunday night. I had waited to catch a glimpse of some kind of 50th anniversary recognition of the 1968 AFL and World Champion New York Jets. I had sat in a cold Shea Stadium in Queens, New York the next season, after that win, as our Jets played their last game ever as defending Super Bowl Champions in an AFL playoff loss to the Kansas City Chiefs. I am told that "Joe Willie" Namath did eventually show up to present the Vince Lombardi Trophy to the New England Patriots as on-field celebration ensued. I was already back at this very desk by then, doing my pre-work-week prep.
The game, like that game 50 years ago, was very low scoring. I did notice on social media just how bored so many fans had become as the game progressed. My opinion is that this was a field position and defense game, an intellectual masterpiece pitting one coach versus another. This is, in fact, why I found the game so interesting.
I don't really care that much that in modern times, substance and quality are seen as boring. This does not surprise me, as attention spans have shortened and intellectual depth has waned across our society over time. As investors work their way through life, while there is nothing wrong with speculation as long as that was the original intent, base level truth has never changed.
This truth is that regularly picking the right stocks over a career is a difficult task. Regardless of the level of work done across the fields of both fundamental and technical analysis, an inherent lack of complete knowledge remains ever-present. Overlooked skill sets required in managing field position (net basis), and in consistent, competent defense (diversification, revenue generation) are now, and likely always will be, how championships are won when outcomes are uncertain.
The real MVP of Sunday night's game, as was the case 50 years ago, was probably the defensive coordinator of the victorious side.
Just Where Are We?
Like any navigator that has lost pace count while working from one objective toward another -- or perhaps simply getting around an obstacle had required angular movement that was different in reality from what we had worked out on a map -- we ask ourselves just where are we, and where to from here? Earnings season seems to be running ahead of expectations, as investors continue to grind through the busy part of the season.
As another 159 names from the S&P 500 go to the tape this week, the beat rate for EPS is running at around 70%, while earnings growth and revenue growth are both humming along above expectations. Keep in mind that a lot of tech and energy names have already reported, and the potentially "less than hot" retail sector always steps to the plate late in the season. I would think that there is great potential that aggregate performance is drawn, by that point, much closer to expectations.
Keep in mind that for the S&P 500, a 61.8% retracement of the October-through-December selloff lands at 2716. Normally Fibonacci levels are more or less reliable as area targets, but this one became as sharp as a well-aimed shot from the 1200 yard line on Friday when the index tested that precise spot three times and failed. Really no harm, no foul, from my point of view, as long as the index also stays above 2570.
So It Would Seem
The roaring pace of the equity market snap back had actually leveled off going into last week's FOMC policy meeting. Markets received a boost, as the Fed seemingly took a powder on the trajectory previously intended for short-term interest rates, while making public allowance for increased flexibility in balance sheet management.
Many financial pundits have openly criticized the Fed for "caving" to the markets, which in my mind, though I may have a bias, is not exactly the way it is. In the pure, unadulterated application of monetary policy, just what would drive a move toward tighter monetary conditions? No need to raise your hands, I know that you know the answer. Dangerously rising consumer level inflation, right? With year-over-year wage growth (according to the BLS) running well more than a percent above (Dec CPI) inflation, the economy at the surface would appear easily capable of absorbing the condition in its current relationship.
Now, what would cause a central bank to pause a tightening schedule, or lean toward easing, even in an economy that in most spots still seems strong enough? That would be, in my educated opinion, from the point of view of an American, dollar valuations that continued to strengthen in a global economy visibly weakening.
With glaring uncertainties that include, but are not limited to, the U.S./China negotiations, another U.S. government shut-down, and a no-deal Brexit, the global business investment cycle has obviously paused. A dramatically stronger dollar would, in this case, remedy nothing. Besides, the FOMC has really promised us nothing more than a more-thoughtful approach to policy implementation, and that is all. Honestly, should anything that impacts us all ever be left on auto-pilot?
A lot to think about, I know. Just keep in mind that, as hot as domestic labor markets are, just how much better can they get? Even the Participation Rate is now showing improvement. That's where the slack in the economy really is. But how much appetite for gainful employment is there among non-participants? This is where wage growth either starts to really take off due to the inelasticity of supply.... or the tide reaches its high water mark, and never scraping full-employment (in the economic sense), begins to ebb. This, and not robust headline GDP, will be the first sign of eventual recession. Remember, 40% of S&P 500 corporate revenue is derived outside of US.. borders. We don't do this alone. In fact, that's not even healthy.
Defending Against the Impervious
It's not a lot of fun for those of us who do stick our necks out and opine on markets to speak or write on something that we have gotten wrong. What bothers us more than having made a mistake that costs us our own money (those of us who actually trade our own money), is the fact that we have likely led other people who trusted our judgement down the same path.
Yes, I have led the way on some winners, such as the energy sector, in recent weeks, but I haven't forgotten that I led the way on the defense sector, as well. You have all been very kind, as not one of you has stuck that misguidance in my face, but I know how I felt about the group, and I know that many of you did applaud when I had spoken. I do know you were there with me. Thank you.
While I have come very near to completely evacuating the space throughout the calendar year 2018, as my thesis failed to provide the results that I had expected, I have maintained enough exposure to remain diversified, just in case one of my fears does actually play out. Those of you who also trade this space have no doubt noticed Raytheon's (RTN) revenue miss and cautious guidance last week. This firm is one of the names that I have at least kept a trace presence in. The others would be Lockheed Martin (LMT) , who also guided below expectations, and Kratos Defense (KTOS) . That one was actually a significant 2018 winner for us.
The reason, I stick, at least in minimal terms, with these two plus KTOS is simply this. At some point, and I have mentioned this before, I believe there could be some panic once it is publicly understood that both China and Russia are advanced in the field of hypersonic weaponry. While fighter planes and missile technology are going nowhere, the future of offensive capability is this, and thus the rush will be to defend against this high-speed form of delivery.
For those who do not quite get it, not spending on this defense should not be an option, regardless of the fiscal situation. Hypersonic weapons, for the folks who spend most of their time watching "reality" television or arguing about politics of social media, are capable of traveling at five times the speed of sound, rendering them in early 2019 as virtually impervious to modern anti-missile defense. China has supposedly successfully tested these weapons while Russia has talked about strategically deploying such weapons later this year.
Both Raytheon and Lockheed Martin seem, at least to me, to be the leaders in developing capability in this area. The two programs currently under development would be a Tactical Boost Glide weapon that would initially rely upon a conventional rocket capable of Mach 5 speed, and then a glider bearing payload would separate and "glide" toward target at already hypersonic velocity. The other program would be reliant upon the weapon's ability to breathe compressed air for high speed propulsion, unlike a rocket, as rockets rely upon oxidization.
Reason to panic on the personal level? No. Potential for a three-way Cold War situation where the U.S. does not automatically have the advantage? Certainly. As for the firms working on providing solutions, I think I'll stick around, even if it does not work for my portfolio in the short-to-medium term.
Economics (All Times Eastern)
10:00 - Factory Orders (Nov): Expecting 0.3% m/m, Last -2.1% m/m.
10:00 - ex-Transportation (Nov): Expecting 0.1% m/m, Last 0.3% m/m.