How Do You Like 'Em?
Sunny side up? You've been eating them scrambled for some time now. Yolks intact? You've been walking home on the dark, windy side of the street for years. The sunny side beckons. One sees storm clouds out over the horizon. Those clouds were there yesterday. Those clouds will be there tomorrow, and the day after.
It was Byron Wien who famously stated that "Disasters have a way of not happening." Wien is mostly right. Either human beings find a way to avert worst case scenarios, or policy makers choose to treat symptoms rather than find solutions. That's how cans get kicked down roads. I'm not going to lie to you, and I will never mislead you unless, I myself misunderstand a situation.
Financial talking heads like to whine about uncertainty. I have been playing this game longer than most of them, and I will let you in on a little secret. Yes, I am aware of all of the balls currently in the air. I am also well aware of the fact that since my earliest days on Wall Street, nobody, and I mean nobody has ever cited certainty going forward. It appears that the unknown arises as a best pal at times when cognitive deduction provides little in the way of thoughtful direction.
I like to rely on evidence. Numbers don't lie. Input can be correct or incorrect. Data can be complete or incomplete. Price is fact, even if it may or may not exactly be truth. Once one understands that every decision made, not just financially, but in life itself, is the result of a reasoned out projection of risk versus reward. Probabilities. From investing to who one associates with, to crossing the street against the light. In every one of these decisions, most know at the outset whether or not they were forever in their favor. Or not.
Warm and Fuzzy
There can be no doubt that a more optimistic feeling has found the "point of sale" of late. This week, our front presents as what should be significant from a macro-economic perspective. Not only is this "Jobs Week", but the FOMC will have to make a policy decision on Wednesday, one day ahead of data provided on Thursday by the Bureau of Economic Analysis that will provide a more complete picture of income versus spending on a personal level and how that condition results in price at millions of points of sale across the county.
Might it be just a wee bit wiser to do inflation on Wednesday, jobs on Thursday, and the FOMC on Friday? I don't know. Is it written somewhere that schedules can not be adjusted in order to accommodate common sense? I am but a man, but I guess it must be.
The good news is that equity markets are currently running close enough to all-time highs after a week that saw gains of 1.9% for the Nasdaq Composite and 1.3% for the S&P 500. Sector level analysis shows that over the past five trading days, Energy stocks were the clear leader. Yup. don't hear much about that unless one does the homework. Information Technology, the Industrials, Financial stocks, and Materials round out the top five. What do they all have in common? They all reflect optimism regarding the future of economic growth, despite the fact that nearly all manufacturing surveys, as well as September data for both Industrial Production as well as Durable Goods Orders tell a far different tale. Remember what I told you. Price is always fact. Truth is a far higher standard.
The facts are that the FOMC is expected to reduce the Fed Funds Rate this Wednesday. Futures trading in Chicago went into the weekend pricing in a 94% probability. There will be dissent. Most likely from Kansas City's Esther George who is something of a perma-hawk, and Boston's Eric Rosengren who must not understand that the Fed's targeted overnight rate technically needs to be lower than yields paid by the entire curve out to seven years. This has nothing to do with the economy. This is a technical necessity, and it troubles me greatly that "professional economists" do not understand this.
Simply look at the 3/10 year spread, the one that I have harped on all this time. That spread went positive on October 10th and has steepened ever since as U.S./China trade headlines have warmed and as Brexit headlines appeared to become less antagonistic. In fact, that January deadline has not been granted by the European Union.
One quickly see how this un-inversion, reflective of some market optimism, not only stopped a broad market selloff in it's tracks, returning large caps to their highs, but rescued the banks as they came out of earnings.
Proof? It's in the pudding. Optimism? Connected directly to the 3 month/10 year Treasury spread. Whether the slope of this one spread presents as cause or symptom, I am not that smart. I just know that it matters. More than everything else.
On That Note
Has anyone else noticed that as earnings have poured in, as in every quarter, FactSet (who I follow) adjusts it's aggregate expectation for earnings into a blend of already reported numbers and expectations for those firms still to report. How quickly it is that this expectation for the S&P 500 of -4.7% earnings growth has become a blend of -3.7%. Oddly, that blended rate for certain sectors has not improved but actually become worse as results have come in.
Among those sectors, whose expectations have been hurt by actual results would be Energy, Materials, and the Financials... all of whom were among last week's leaders. Ahh, the sunny side. After I finish writing to you this morning, I am definitely going to pound down some eggs.
Gonna Fly Now?
Adrian asked Rocky why it is that he wants to fight. You remember the answer? "Cause I can't sing or dance." One concern for this Wednesday... What if the Fed sings, but does not dance. I mean this. The markets clearly have priced in a rate cut this week. The Fed understands that and will not surprise. They'll sing.
Now, what if the statement around this decision, driven by the also expected dissension in the ranks, sounds a bit more hawkish that markets are comfortable with? We already have a balance sheet expansion program underway, and the asset purchases are targeted correctly, meaning that there is at least a better, broader understanding of actual conditions at the central bank this year than there was last year at this time.
Currently, given the high probability of that rate cut this week, the odds of a December rate cut are now very low. I think the marketplace handles that just fine, as long as the statement does not sound too tough, or too cautious. That's the risk outside of earnings, jobs and China this week. The Fed needs to learn how to dance.
Using The Force
It was no surprise that the last two players standing before the Department of Defense as they made a decision on awarding a potential $10 billion (over 10 years) contract for building out a large cloud based computing system for the U.S. military, would be Amazon (AMZN) and Microsoft (MSFT) . Amazon's AWS, and Microsoft's Azure are the industry leaders though both have shown signs (especially AWS) of decelerating growth in recent quarters. In full disclosure, I am a Microsoft shareholder, but the choice made by the DoD does not surprise me in the least. I do not at all see this as the upset that it is being made out to be by much of the media.
The contract, known as Joint Enterprise Defense Infrastructure of JEDI for short, finally went to Microsoft, the announcement made on Friday night. The reason much will be made of this is not just for the contract itself, but the potential for a rise in ancillary government or even allied nations' government build-outs as well. Keep an eye on Oracle (ORCL) this morning. I have not seen any trades as of yet in that name, but recall the firm has a cloud inter-operability arrangement in place with Microsoft. I don't know if this helps Oracle gain or retain any government contract business at all, but certainly bears watching. It doesn't hurt.
Now, I do more homework on Sundays than I do on any other single night. Simply, there are just more available hours. I have a lot of names on my book that look like they are breaking out as the market itself looks like it is breaking out. That said, I have three not really under the radar names that have run, but are now approaching what I see as pivot points. This means that either a) this area will not become resistance, or b) this area now becomes a sort of trebuchet launching the stock price toward a new target.
Last week, I showed you this chart as a series of lower highs running into a straight line of support. Just five days later, we have enough of a rally on out hands to present the entirety of 2019 as a basing pattern that was just not there this time last week.
Pivot: $140 Target: $168 Panic: $132
This name had actually pierced pivot, though I don't think we can yet call this a take and hold. What happens to this name early this week will be so interesting, and likely decided for me whether this is an add or a reduce at this price level.
Pivot: $143 Target: $175 Panic: $135
Another name coming out of a basing pattern, albeit this one is a lot shorter in the making, and up against earnings this Friday. Obviously this one has moved with the semis. the real reason this one is still on my book is the steady dividend (4.4%). This is a revenue stock more than a sector pick. Can't tell you how many years, through thick and thin, I've let this one hang around for that reason. I do it expects a lot, and I'll be cautious with my target here.
Pivot: $57 Target: $68 Panic: $54
Note: readers who have followed me a long time will not that I have pulled my panic points higher with names trading at profitable prices. (I am well into the green on all three of these.) One of my primary thoughts as a position move toward profitable is to get my panic points to areas on the chart, where even if I am forced by discipline, to liquidate, that sale is still profitable. Home runs are awesome. Hitting singles all day long is even awesomer. You do that, and the home runs will come.
Economics (All Times Eastern)
08:30 - Goods Trade Balance Initial (Sep): Expecting $-73.5B, Last $-72.8B.
08:30 - Wholesale Inventories (Sep-adv): Expecting 0.2% m/m, Last 0.2% m/m.
10:30 - Dallas Fed Manufacturing Index (Oct): Expecting 1.5, Last 1.4.
The Fed (All Times Eastern)
Fed Blackout period through 30 Oct 19.
Today's Earnings Highlights (Consensus EPS Expectations)