So it was. Forever, an eternity in fact. Our friend. Now, searching an empty room for something hidden. Window open. Our recent past. Oh, so easy. Our immediate future. An inaudible whisper...I think. The answer? Speak aloud, I could not hear you. Nothing. Still searching. The room seems larger now. Window closed. Alone.
Equity markets struggled on Wednesday. There would be no follow through of Tuesday's head fake rally. Nice as that rally was, it still failed to recapture the 50 day SMA (simple moving average) for the S&P 500, for the Nasdaq Composite. Neither of those two most important indices has kissed that focused upon line in the sand since Thursday. Far better to see that line as support than as resistance. No such luck. So it is that money moved from growth, and into the Utilities, the Staples, and the REITs. Safety, Defense. Are the people of the village frightened just yet? Not quite. They will be.
From the four corners of the field they ride. When the people run in terrified response to the creatures before them, they run to... not from the four horsemen of the apocalypse... U.S. Treasury securities, the Utility sector, Gold and the VIX take the attentions away from all that screams of beta. Still, the VIX has not yet run wild. Gold remains dormant. This tells me that the inconsistency of this correction may or may not be nothing more than the warm up act. A relentless U.S. dollar has kept gold in check, and may for years to come. Until the day that fiat is exposed as what it really has been all along. Don't worry, that day is not today. You have other problems.
Blood on the Saddle
On Wednesday evening, Japan went to the tape with their May flash Manufacturing PMI. Hopes were high after a significant Q1 GDP beat in the land of the rising sun. There should have been less hope. The Japanese manufacturing sector has fallen back into contraction. In contraction for a third month in four. Why? Export orders declined at the fastest pace seen over those four months. Trade war. Sit down Francis, there's more.
On Thursday morning, Germany went to the tape with their May PMI flash. For manufacturing, all important to the German economy, May will be a fifth consecutive month in decline, a fourth straight in what might be termed a condition of embarrassingly deep decline. Backlogged order flow decreased for the seventh consecutive month. Trade war.
Where From Here
Buckle up, Sparky. China's President Xi has obviously found surrender distasteful. He calls on his people to prepare to endure a "Long March." This evokes images of the hardships endured by the Red Army in the pre-PLA, the pre-Chinese Civil War days. The Long March has been used as a tool of propaganda ever since. This is where Mao Zedong comes to prominence.
The Chinese even have a patriotic fight song now, meant to inspire the nation in this trade fight, a trade fight that is really far more about national security and strategic influence in both regional and perhaps global spheres than it ever was about cross-border commerce. Understand what Xi is doing now?
Know what I think? I think you can have your fight songs. You can evoke your history. The Long March by the way was a retreat into isolation made by the communists in 1934 that began in Jiangxi province, now the "rare earths kingdom"... see the veiled threat there, gang? Dress the behavior over the last couple of decades however you want. You've still institutionalized cheating. You're still the offending party.
That said, the stage is set for the protracted cold war period that I have been writing about for far longer than much of the media, which seems to have finally awakened on this.
What is clear to me is that Xi is trying to frighten U.S. financial markets into taking a short-term view. To pressure President Trump into agreeing to something that would not likely be in the best longer term interests of the United States, but would allow for a rally across financial markets. Barring one side taking an inferior position, which I think we can agree is less probable than it appeared a month or two ago, there are some other possible outcomes.
For one, conditions could remain in place for a bit, and I think they will. We already know that this places something of a drag on large cap corporate earnings, as well as on economic growth in all nations, not just the big two. A next step could be President Trump taking the trade war to the next level and implementing a 25% tariff on the remaining $300 billion in Chinese imports. Obviously, this would increase the hurt across all theaters. Then again, both sides could eliminate or reduce tariffs and restart talks in good faith? Um. No.
What You Need to Do
The retail investor needs to refocus his or her portfolio for a changed environment. I tell you often to understand. and to identify, so that you can adapt to overcome. How? Improvise. I also remind you often that fundamental analysis provides direction while technical analysis lets you know where to get on and off. How many of you are strong on fundamental analysis? Hmm, I only see a few hands.
Okay, what I need you to do, perhaps over the long weekend, is pull up the press releases from some recent earnings. You need to able to get around a consolidated balance sheet, or a statement of income and know what it is that you are reading. Follow Jim Cramer. Follow Doug Kass. These guys are at your disposal, and I can think of no one better.
Learn to look at specific data. Just as important as forward looking guidance is sustained history. Not historical valuations. That's more a result of external impact. Sustained earnings growth is important. Sustained revenue growth even more so. Margin only matters if the money is there in the first place. Cash flow. Volume on up days versus down days, also known as accumulation versus distribution. Quality of ownership. In other words, does management have a stake? How broadly, and what kind of funds own a piece? Indebtedness. Inventory levels. Current Ratios. All important data to decision making. One thing I always look at... I like dividends and buybacks. Who doesn't? I don't like fat returns to shareholders (even this shareholder) in cases where at least some respectable percentage of sales is not reallocated toward research and development.
That's a lot. There a lot more. Remember this. Learning technical analysis is important and useful as a tool. A trader's tool. For investors, there is probably nothing more important than learning the basics of fundamental analysis. Most try to learn TA first because it is easier to pick up. Should be the other way around. You learn how to work a pitch count, lay down a bunt, take a lead, before you can be a good ballplayer. That first step is learning the signals. Same here.
Big and Bright
Deep in the heart... of Texas. Maybe not so much for Boeing (BA) . Boeing claims to have completed the necessary work on creating a software fix for the MCAS (Maneuvering Characteristics Augmentation System). This is the system where a number of design flaws had been discovered in the wake of the Ethiopian Airlines and Lion Air disasters.
Today (Thursday), global regulators get together with the FAA (Federal Aviation Administration) in Fort Worth, Texas to discuss what might still be necessary to get Boeing's 737-Max aircraft back in the skies. Happen to see the Financial Times on Wednesday? Appears that the EASA (European Union Aviation Safety Agency) already has their answer. The EASA has demanded that three overt requirements be satisfied, and they have informed both the FAA and Boeing of this going into the meeting. The EASA demands that...
1) Forward looking design changes made by Boeing must be approved and mandated by the EASA.
2) The EASA must first conduct and complete an additional independent design review.
3) 737-Max flight crews must be adequately trained.
Roughly 1500 miles to the northeast, the International Air Transport Association has invited airlines impacted by the grounding of Boeing's 737-Max fleet to meet on the matter. Nearly all have been quiet on the topic going in, but it is known that representatives of American Airlines (AAL) , United Continental (UAL) , Southwest Airlines (LUV) , and Air Canada (ACDVF) will be attending. You may have noticed that the transports in general, and the airlines in specificity, have been taking it on the chin of late.
My thoughts on Boeing? Still not cheap enough to be worthy of the risk. Still almost impossible to evaluate.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 215K, Last 212K.
09:45 - Markit Manufacturing PMI Flash (May): Expecting 52.8, Last 52.6.
09:45 - Markit Services PMI Flash (May): Expecting 53.2, Last 53.0.
10:00 - New Home Sales (Apr): Expecting 679K, Last 692K SAAR.
10:30 - Natural Gas Inventories (Weekly): Last +106B cf.
11:00 - Kansas City Fed Manufacturing Index (May): Last 5.
13:00 - Fed Speaker: Dallas Fed Pres. Robert Kaplan.
13:00 - Fed Speaker: Richmond Fed Pres. Tom Barkin.
13:00 - Fed Speaker: Atlanta Fed Pres. Raphael Bostic.
13:00 - Fed Speaker: San Francisco Fed Pres. Mary Daly.
Today's Earnings Highlights (Consensus EPS Expectations)