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Morning Commentary

Internals Needed Bolstering

By Charles Payne, CEO & Principal Analyst
1/10/2018 9:49 AM
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On Tuesday, all the major stock market indices finished at record highs as investors reacted positively to more signs that the consumer is coming back. The retail discount store Target (TGT) was written off for a variety of reasons. Last year, TGT posted strong same-store sales and raised its guidance in order to find its way in the Amazon era of retail. In addition, the new tax law will provide a big lift to cash and earnings.

We also heard from a variety of companies, including Union Pacific and D.R. Horton on the impact of the new tax law. One of the most encouraging aspects of corporate reactions is the funding of pension funds and 401k matches.  I’m also in awe of funds being geared toward charities. 

Heartbreak Hill

Yesterday, the rally continued but there were signs of fatigue as all the key equity indices finished off the intraday high points, including the Dow, which gave up more than 50 points heading into the close.

Moreover, market breadth was very telling, especially on the New York Stock Exchange where declining stocks swamped advancers:

NYSE

NASDAQ

I should also note that the Russell 2000 Index was down on the day, which is somewhat disappointing, considering we are rooting for domestic names to outperform. That being said, I think the better proxy for the domestic economy are regional banks and they stood out big time:

 

Small Business Optimism

Investors also took their cue from optimism numbers from the December National Federation of Independent Business (NFIB) report. Small business optimism has been on fire since the election, and now the outlook for expansion is up 200% from October 2016.

The key point made in the NFIB statement:

“2017 was the most remarkable year in the 45-year history of the NFIB Optimism Index,” said NFIB President and CEO Juanita Duggan. “With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans.”

“We’ve been doing this research for nearly half a century, longer than anyone else, and I’ve never seen anything like 2017,” said NFIB Chief Economist Bill Dunkelberg. “The 2016 election was like a dam breaking. Small business owners were waiting for better policies from Washington, suddenly they got them, and the engine of the economy roared back to life.”

 

Global Economic Optimism

Yesterday, there were several standout stocks, but none spoke to the surge in global prosperity like Boeing (BA). Boeing climbed to a new record high on news of plane orders and deliveries in 2017. 

I’m very frustrated with myself for not being in Boeing. After spending half a dozen years on TV, along with our daily Hotline commentaries, I have always stated that Boeing was one of four stocks investors should never sell.  The company has faced competition; while I’m not a fan of the Export-Import Bank; subsiding business management took a potential adversary relationship with the Trump administration and turned it around. The stock was one of my picks on the Trump special report from November 2016.

2017 Boeing Orders:

Family

Gross Orders

Net Orders

Deliveries

Unfilled orders

737

865

745

529

4,668

747

6

-2

14

12

767

15

15

10

98

777

60

60

74

428

787

107

94

136

658

Total

1,053

912

763

5,864

 

Riding the Asian Century

We have officially entered the Asian Century. While I think America will continue to be the top economy in the world, there is no doubt that growth will be dominated by China and the Asian tigers and non-tigers.  Boeing and Caterpillar (CAT) are going to make a fortune on this trend.

Fleets

NA

Europe

Asia

ME

LA

Africa

World

2016

7,060

4,800

6,380

1,430

1,550

720

23,480

2036

10,130

3,660

17,520

3,900

3,660

1,603

46,950

Today’s Session

The market has been under pressure all morning, even before a couple of earnings reports came up short.  Lennar Homes (LEN) is partially intriguing as the company missed in part to a delayed closing of a deal, but lower gross and operating margins were yellow flags as well.  Moreover, the effective tax rate edged to 35.5% from 32.7% a year earlier. 

The company is going to benefit greatly from a 21% federal tax rate.  In addition, the new tax law will help top line revenue growth mentioned in the company press release:

"Our results ... benefited from strong demand for homes, low unemployment, favorable interest rates and increased consumer confidence," Lennar Chief Executive Stuart Miller said in a statement.

"General enthusiasm for the strength of the economy, combined with the added tailwinds of recent tax law changes, continue to propel the housing market forward."

Signet Jewelers (SIG) missed this morning too, but FY18 guidance of $6.22 is bumped to $6.50 because of tax reform. 

 


Comments
one of reasons I like you and subscribe is you honesty....especially your admissions of missed opportunities like Boeing. Can you advise when we should buy both Boeing and Cat?

don Paschal on 1/10/2018 11:06:51 AM
 

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