Session Explained

The Dow had a great session, marked with some profit-taking (I sent out several alerts to my subscribers to take profits on certain names, mostly high-Beta stocks that are up huge, ahead of their earnings release).

I must note, the Dow has the biggest exposure to the tariff battle; and yet, it saw buyers reemerge to buy a midday lull, lifting the index back to an almost 200-point gain.

• The S&P 500 continues to be steady now, less than 2% from its all-time high
• NASDAQ - Google (GOOGL) turns the table on Amazon (AMZN), announcing Cloud Services Platform (Cloud Build), which knocks $13 off Amazon, but it really wallops a roil into smaller cloud names
• Russell 2000 continues to mark time since rebalancing in late June when the biggest and strongest names shifted into the Russell 1000

Fake News?

I can understand perfectly how the report of my illness got about, I have even heard on good authority that I was dead. [A cousin] was ill in London two or three weeks ago, but is well now. The report of my illness great out of his illness. The report of my death was an exaggeration.

-Mark Twain

All the pundits keep saying the tariff battle is hurting the stock market, but I say the market is in the stealth rally mood:

• On March 23^rd, the Dow hit 23,533; yesterday, 25,241+1,700 points or 7.3%
• On April 2^nd, the NASDAQ hit 6870; yesterday, 7840 +970 points or 14.1%
• On April 2^nd, the S&P 500 hit 2581; yesterday, 2820 +239 points or 9.3%

Blame it on the Weather

I would caution investors to make sure to delve into stocks in your portfolio that may be down this earnings season.  Management at many companies that either miss or offered lower guidance will blame it on tariffs, which could become the new “blame it on the weather” excuse. 

There is no doubt industries that rely heavily on metal inputs will have legitimate near term concerns, but even there, make sure those concerns aren’t masking more important investment issues like demand, pricing power and market share.

This morning, General Motors posted solid results for the quarter but lowered guidance significantly.   Management was clear not to blame tariffs, although financial media is making that the headline.  Like all multination companies the strong dollar is actually having a much more dire impact and when you hear “commodities” make sure to figure in the spike in crude (and all its derivatives like resins).

My concern with General Motors is the slip in market share.  Only North American trucks increased:

North America 16.1% from 15.7%

• Cars 10.4% from 11.2%
• Trucks 26.3% from 24.4%
• Crossovers 13.7% from 14.5%

Asia/Middle East & Africa 8.4% from 8.9%

South America 14.6% from 15.8%

Settled Science

For 1,500 years, the smartest minds in the world made it settled science that the earth was the center of the universe using the Ptolemy's geocentric model for astronomical charts (see below).

I don’t believe any science is settled and if so why are there so many scientists?  Seriously, conventional wisdom yesterday isn’t going to be facts tomorrow.  While there is no doubt tariffs are a tax on consumers of imported items, they do provide cover for domestic industries and products.  This explains why China has been able to grow its economy from less than 2% of global GDP in 1979 to about 15% today.

At some point, you have to fight fire with fire.   

Europe’s Fading Clout

I’m actually more inclined to blame slower economic growth in Europe due to woes I have seen by several multinational companies, including those that are complaining the most about tariffs. This is worth keeping in mind ahead of the much-anticipated meeting today with Jean-Claude Juncker, President of the European Commission.

Yesterday, management at Whirlpool (WHR) blamed their earnings miss on tariffs and by increased input costs. I found that their explanation didn’t match the actual data. It seems more like slow global sales, especially in Europe, might have been the real story.

Regional Revenue Change Uses Constant Currency:

• North America -2.25
• Europe, the Middle East and Africa (EMEA) -12.3%
• Latin America -11.4%
• Asia +14.5%

Moreover, the company offered a disappointing forecast back on January 24^th. Lastly, the gross margin actually improved to 17.1% from 16.4% as the overall cost of sales declined year-over-year.

I’m seeing this in so many industries from washing machines or even higher-end products such as champagne, expensive handbags, or watches.

Check out the Louis Vuitton (LMVH) sales trends results posted yesterday.

Louis Vuitton Global Sales Trends	1Q2018	2Q2018	1H2018
United States	+10%	+11%	+10%
Japan	+18%	+16%	+17%
Asia	+21%	+15%	+18%
Europe	+6%	+4%	+5%

 

There are so many more examples, but I would bore you with them. Suffice it to say, there are many other issues more detrimental to the market right now, including the dollar.

Seeking Value

Material names (XLB) led the way yesterday, led by one of my favorite names Avery Dennison (AVY).  I had the pleasure of watching the L.A. Clippers at the Staples Center with the CEO a few years ago. He remarked how little he cared about the quarter-to-quarter news.

Avery is in areas that tend to be harbingers of U.S. business, and if that’s the case, then the rest of the year is looking great. 

S&P 500 Index	+0.48%
Communication Services (XLC)	+0.70%
Consumer Discretionary (XLY)	-0.29%
Consumer Staples (XLP)	+0.17%
Energy (XLE)	+1.26%
Financials (XLF)	+0.29%
Health Care (XLV)	+0.94%
Industrials (XLI)	+0.46%
Materials (XLB)	+1.31%
Real Estate (XLRE)	-0.28%
Technology (XLK)	+0.55%
Utilities (XLU)	+0.35%

 

The Lack of Enthusiasm

The lack of enthusiasm in the market is considered perhaps the biggest “buy signal” out there.  Individual investors aren’t bearish, but they are a long way from being exuberant.

That’s a shame. 

 

Today’s Session

The market will open lower this morning mostly lead by Boeing, which offered mixed guidance that sees revenue ahead of Wall Street consensus but earnings slightly less.

Then there’s Norfolk Southern, which posted strong results paced by records:

• Operating Ratio
• Operating Income
• Net Income
• Second Quarter EPS
• Intermodal Revenue
• Intermodal Volume

Let’s see how the market shakes out this morning.

 

 

 

 

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