Lightning. That was quick. Yes, I took a week off. While the shortened trading week did go by in a literal heartbeat, that's not exactly what I am thinking on this Monday morning. December 2019. Not just the last month of the year, but the last month of the decade. Twenty years since the Y2K panic. Somewhere between 15 and 20 - five years since you discovered the internet. Look at the internet now. The information superhighway, or as some might say... the misinformation superhighway.
The internet remains in focus among a multitude of headline level news events as what was once known as "Black Friday" melts into what is still known as "Cyber Monday." Why present the weekend past in that way? No big deal really. Just that I did try to drive past the Smith Haven Mall (Suffolk County, NY) on Route 25 on Friday. In years past, that would have been unwise. This year, the road was quite passable, the parking lots were fuller than they would be on a normal weekday, but not close to what I would expect for Black Friday. There is a local diner just a block away, with two chain eateries also withing walking distance. The diner look packed. The two competitors not so much.
According to data provided in the Wall Street Journal, reliant itself upon Shoppertrak, foot traffic at U.S. brick and mortar retailers declined on Black Friday by a rough 6.2%. This, while Adobe Analytics reports that online sales made on Black Friday experienced an increase from $6.2 billion to $7.4 billion (+19.3%) over just one year.
Maybe we'll just call it "Cyber Weekend", or let's be honest... "Cyber Life", since personally, I now need the internet to trade, invest, keep up with acquaintances, read my newspapers, and yes, even to write to you, the truly dedicated, highly motivated, and earnestly persistent. For what prize among us stands greater than "Esprit de Corps"? Winning is the stated mission. In our unity, we know that we have something special. That said, saddle up and move out. Victory awaits.
On The Map
Last week, equities, outside of the energy sector remained quite hot, Friday's month end algorithmic selloff excepted. November, in fact was one heck of a month. Tech stocks, Health Care, the Financials, the Industrials all soared. The cash to get stocks where they went did not really come all that much from the bond market, though there was certainly a consistent level of volatility present at longer dated maturities. The "new" cash came from yes, energy (where it may head back ahead of the OPEC and "OPEC plus" meetings later this week") as well as sectors labeled as bond proxies. Oh, and "the sidelines". There is likely less cash on that sideline at this point.
According to updated information published at Yardeni Research late last week, the S&P 500 now trades at 17.8 times forward looking earnings. According to FactSet, the five year average for the index stands at 16.5 times. The tech sector trades at the greatest premium to it's own recent history, now at an aggregate 20.7 times versus a five year average of 17.3 times, and a 10 year average of 15.1 times. Extremely interestingly, it is still software that investors are willing to pay up for, even as it seems the optimism around global trade, or trade with China, seems to be focused on the semiconductors. Even now, the semis as a group, (still pulling data from Yardeni) trade at 16.9 times next 12 months' earnings, while their wafer manufacturing pals just 16.2 times. In other words, the semis are still an ankle weight that has slowed sector performance. This while investors (aka... portfolio managers) pay more than 36 times for Application Software and 24 times for Systems Software type names.
Is anyone still trading on the cheap? Sure. Even excluding energy, as that group suffers from widespread global divestiture as much as lackluster performance, the Health Care sector as a political football still trades at a discount to the group's five year average, despite the "cash cow" status of many industries within the sector. Be a little careful with the Financials. Even though 12.9 times seems cheap, that level is in line with five year and actually above 10 year averages for the sector. The yield curve matters. Yes, I know the banks are quite profitable, and have found many ways to drive revenue. That may matter to net fund flows at some point, but for now as in the recent to not so recent past, these guys only pay up for net interest margin.
Many decades ago, in a far, far away place, I played hockey. One play sticks out in my mind more than any goal I ever scored. We were playing our rivals (back when fighting was still part of the sport), and right in front of me, my brother was plastered into the boards by the biggest, baddest player in our league. Of course, I dropped the gloves. What did you think I would do? I thought my brother was hurt. We squared off, I was clearly over matched physically, but I was kind of good at this sort of activity, and the opposing goon knew my reputation. His whole team did. There was a pause. Out of nowhere, my brother, who I thought was down and out, simply devastated this guy from my right peripheral. It was friggin' awesome... still the single greatest sucker punch that I have ever seen. That fight was over.
Last December, financials markets... not to mention the investing public were sucker punched by a central bank that simply misunderstood the environment that the economy was functioning in. The economy had shown rapid improvement in the wake of broad reductions made at the Federal level to both corporate and personal income tax rates. The Fed had long called for, and finally gotten significant help on the fiscal side. The FOMC saw this as opportunity to draw down it's balance sheet exposure, while increasing short-term interest rates. At the same time. The drastic shift in policy after a near decade of being overly (an probably inappropriately) accommodative was too much. Too much in the face of a growing trade war. Too much in the face of political upheaval. Too much as corporate earnings growth clearly could not continue at what had been a fiscal burst.
The Fed may no longer be a foe of economic growth at this point. That said. I would be slow to guess at the size of, or the location of something that would approach the definition of a "Fed Put." The outlook for Q4 GDP, according to the Atlanta Fed, has "improved" to 1.7%. The 3 month/10 year yield spread appears to have found support as that spread's 50 day SMA has moved into positive territory, crossing over (bullish) a still negative 200 day SMA. Oh, and broad equity indices currently trade very close to record levels.
What does this mean? Simple. Markets have priced in trade optimism that may or may not be a bit ahead of reality. Markets have priced in the Fed's aggressive move to increase the central bank's balance sheet after realization dawned that the lack of liquidity (not just last December) in overnight, cash markets had been at least partially self inflicted. Markets have priced in the overt anchoring of short-term rates to a base level, while allowing for free market control over pricing at the long end of the bond market, making this increase in money supply truly different from past programs described as "quantitative easing." This posture would also support economic growth should it occur naturally.
What Could Go Wrong
I do expect there to be some early to mid-December profit taking. Yes, I still thing Santa shows his face as 2019 melts into 2020, but to get from here to there without hitting some mid-month turbulence would be a pleasant surprise.
- China is pressing for rollback of current U.S. tariffs on Chines goods ahead of any Phase One trade deal, while suggesting a delay of cancellation of future tariffs would not be enough. This makes what happens on December 15th regarding trade a very big deal for financial markets. Likely somebody either blinks by then, or gets tough. Real tough. Be surprised at nothing.
- OPEC. The Joint Technical Committee meets Tuesday (tomorrow), OPEC member nations formally meet on Thursday. OPEC members the meet on Friday with non-OPEC producers currently participating in part on reducing such production that runs through March. I think obvious, that the Saudis will push for an extension ahead of the Aramco IPO, while there will likely be opposition from those in need of driving revenue, such as Russia.
- President Trump will head to London to mark the 70th anniversary of the NATO alliance. This high profile event takes place while the House Judiciary Committee is expected to announce witnesses on Monday for an impeachment hearing set for Wednesday. The White House has already announced that it will not participate in this hearing. My guess? Maybe something good happens for defense contractors in London, as perhaps a positive headline would be welcome.
- Jobs Week. It's almost easy to forget with so many news items in circulation, and the labor market so strong that Friday is "Jobs Day". By the time this week expires, those numbers will either add fuel to a fire, or act to change the narrative. There will be no rest for the wicked as this week progresses.
What Sarge (love that guy) Is Watching
- Adobe (ADBE) has been up for five straight sessions, closing at $309.53 on Friday.
The pivot here is $313. That is where either this name truly breaks out, or resistance allows the chart to add a handle to that cup pattern. My target price is $355.
- Mastercard (MA) is another name marching to victory, closing Friday at $292.23.
This name now threatens to break out a basing pattern in place since June. A take and hold of the $294 pivot, would allow (in my opinion) for a move as high as $340. By the way, upon failure, I panic at $265, and add at $258.
- Merck (MRK) , at a last sale of $87.18, has actually surpassed what I see as pivot.
The name closed on Friday battling with a potential breakout of an ascending triangle that appears to be closing. We get this take and hold? I think we see $97. The name fails? The 200 day line would be realistic.
- Nividia (NVDA) may be stalling.
With shares still trading more than 20% above pivot I would certainly consider (meaning, I'm going to sell some) a reduction for the long crowd. Yes, I still think the shares can go to $227, but I, like you, have profits to protect here.
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (Nov-rev): Flashed 52.2.
10:00 - ISM Manufacturing Index (Nov): Expecting 49.3, Last 48.3.
10:00 - Construction Spending (Oct): Expecting 0.3% m/m, Last 0.5% m/m.
The Fed (All Times Eastern)
No scheduled public events.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (COUP) (.06)