Record Highs — Now What?

Posted On Apr 29, 2019 By Dave Gonigam

  • Earnings season scorecard: All hail low expectations!
  • Inflation in retreat as Fed prepares to meet
  • How “FOMO” could set new stock market records
  • Will OPEC really do Trump’s bidding on oil prices?
  • And what if China decides to defy Iran oil sanctions?
  • Consumers spend out of an empty pocket… the gullible and greedy invest in the wrong Zoom… uranium prices and your electric bill… and more!

The new week begins with the S&P 500 and the Nasdaq hovering near the record-high closes notched last week.

Earnings season is in pause — very few companies report their numbers after the close on Friday or before the open on Monday — but it kicks into high speed after the close today when Google parent Alphabet (GOOG) will report.

With earnings season about one-third done, “many companies have reported profits that are well above investor expectations,” says income specialist Zach Scheidt.

According to FactSet, nearly half of the S&P 500 companies have reported… and 77% of them have beaten analyst expectations. That “beat rate” is above the five-year average.

OK, but what about sales, you ask? Earnings are easy for the accountants to manipulate; sales, not so much.

Well, even there, 59% of the companies reporting so far have beaten the analysts’ “top line” estimates.

“Part of this outperformance,” says Zach, “is due to companies continuing to cash in on the growing economy.

“But there’s also the fact that investors anticipated weak profits from the start,” he goes on.

“Remember, the last earnings season happened when the market was just starting to recover from the December sell-off. And investors were worried about higher interest rates, the government shutdown and tense trade negotiations with China.

“Today, many of those fears have proven to be false or overblown.

“The Federal Reserve didn’t raise interest rates at all — and signaled it’s not planning to raise them for the rest of the year.

“And trade negotiations with China are reportedly going well. I anticipate we’ll receive some more definitive news about the final agreement this quarter. The final announcement should help drive stocks higher.”

Speaking of the Fed, there’s zero pressure to resume interest rate increases — judging by the Fed’s favorite measure of inflation.

“Core PCE,” it’s called. When the Fed talks about its goal of 2% annual inflation, this is the number it refers to.

The Commerce Department issues this number every month. Well, it usually does, but the “partial government shutdown” in January caused a series of delays. Only this morning have the wonks finally caught up with the numbers for February and March.

From a figure very close to 2% in December, it’s tumbled to just under 1.6% for March…

Inflation in Retreat

The Fed begins one of its every-six-weeks meetings tomorrow. It wouldn’t surprise us at all if the statement it issues on Wednesday afternoon drops a hint about an interest rate cut later this year.

It takes time for the Fed’s policies to work their way into the economy — up to a year in many cases — but the reaction in asset markets is much quicker. Easier Fed policy, even if it’s just words in an official statement, could give stocks another jolt upward.

And when stocks get another jolt upward… from what are now record-high levels… that kind of buying has a way of feeding on itself.

Reminder: The S&P 500 is up nearly 25% from its lows going back to Christmas Eve last year. A couple of weeks ago we told you the major driver of that rally has been companies buying back their own shares. Investors, meanwhile, have largely sat out the rally.

But imagine being a big institutional investor — say, a hedge fund manager — who’s missed that 25% jump.

Which brings us back to Zach: “As a manager of someone else’s money, one of the most dangerous things for your career is to miss a major move when the market is trading higher.

“Can you imagine stepping in front of a gathering of your wealthy and powerful clients and telling them, ‘Yes, the market had a spectacular year, but we didn’t make any money because I don’t believe the economy is really improving. Therefore, I kept your money on the sidelines. You’ll thank me one day when the market trades back lower.’

“He probably wouldn’t be able to finish the statement before his clients started pulling their money out and moving to invest with another manager who WOULD participate in a positive market.

“All that is to say there’s a lot of money on the sidelines right now. And money managers who are not fully invested have an acute case of fear of missing out (FOMO), especially now that the market hit a new closing high.”

[Ed. note: Zach is giving everyday Americans access to a type of device that — until recently— was available only to Wall Street’s heavy hitters.

It’s a strange type of black box. You can see it in action at this link.

This device could deliver you gains that outperform the stock market many times over. But supplies are limited… and only hours remain in which you can claim yours. Click here for access.]

As the day wears on, the major U.S. stock indexes are “digesting their gains” from last week.

In other words, they’re treading water after touching record highs. That’s healthy, normal market action. Often an asset or an index has to “consolidate” before another run upward.

Thus the S&P 500 is up about five points as we write, to 2,944. The Nasdaq is up 14 points, to 8,160. The Dow — which has yet to reclaim its record highs — is up 11 points, at 26,554.

Gold has shed some of its gains from last week, the bid back to $1,279.

In other economic numbers today, the Commerce Department says consumer spending leaped 0.9% in March — the biggest one-month increase since the early days of the post-2008 recovery. Unfortunately, much of that spending came out of an empty pocket — wages and salaries grew only 0.4%.

With sanctions on Iranian oil exports hitting full force in another three days, a barrel of West Texas Intermediate is stabilizing just above $63.

When we left you on Friday, WTI had tumbled more than $2.50 a barrel after the president said, “I called up OPEC, I said you’ve got to bring them down. You’ve got to bring them down.”

Whomever he spoke with, it wasn’t the secretary-general of OPEC. Nor was it Saudi Arabia’s energy minister nor Saudi Arabia’s Crown Prince Mohammed bin Salman — if The Wall Street Journal’s reporting is to be believed.

Saudi Arabia’s government budget is strained whenever the Brent oil price — the global benchmark, which is typically a few bucks higher than WTI — is much below $80 a barrel.

As this chart of Brent would indicate, the kingdom’s finances are under stress…

Breaking the Bank in Saudi Arabia

All we’re saying is we have our doubts the Saudi Arabian princes are in any hurry to agree to the president’s demands.

Meanwhile, the White House says it won’t allow Iranian oil customers even a short-term grace period after the sanctions kick in Thursday.

As you might recall, the sanctions were originally supposed to take effect last November… but the administration granted waivers to eight major Iranian oil customers, including the biggest, China.

The Reuters newswire cites two anonymous “Trump administration officials” as saying the Chinese can buy oil from the United States and Saudi Arabia.

“We understand they don’t like this,” said one of them. “But at same time they tend to act pragmatically and they are going to take what the best most reliable deal is.”

But what if they don’t?

There was a stir last week after the White House announced the end of the waivers when Iran’s Revolutionary Guards threatened to block the Strait of Hormuz — the narrow channel linking Middle East oil producers to global markets.

But what if China’s feeling defiant and it’s the United States that blocked the strait to keep an Iranian oil tanker from making its way to the big Chinese oil port of Ningbo-Zhoushan? Just askin’.

Well, that’s not the only recourse Washington would have. Back to the Reuters story: “If China does not cut Iran oil purchases to zero, the Trump administration may have to make a decision on blocking Chinese banks from the U.S. financial system.”

In what might be the understatement of the year, the article continues, “That could have unintended consequences for finance and business between the world’s two biggest economies, already in negotiations over trade disagreements.”

Either way, if Washington is serious about enforcing the sanctions, and Beijing is serious about defying them… things could start getting sporty mighty quickly….

From the SMH department (that’s “shaking my head” in internet lingo)…

Last week’s hyped-up IPOs included Pinterest and the web-conferencing app Zoom Video Communications.

Zoom Video Communications, trading under the ticker symbol ZM, is not to be confused with Zoom Technologies Inc., a Hong Kong-based penny stock trading under the ticker ZOOM.

“There is no connection between the two companies,” points out Josh Belanger of our Hot Money Trader service, “but this confusion caused the price of ZOOM to surge 865%.”

A few big-money investors expected the unwashed would fail to do their homework and make this basic mistake. So they bought ZM before it went public.

“Their gamble paid off, but those who bought the wrong stock took a loss the next day with prices crashing from $6 to $1.”

Oy… Reminds us of when Twitter went public in late 2013 under the ticker TWTR. Some investors got so excited that before the actual IPO day, they bought shares of a bankrupt electronics retailer called Tweeter — trading under the ticker TWTRQ.

(Pro tip: The “Q” at the end means the company is bankrupt.)

“You are totally misleading readers,” says an entry in our mailbag, “when you imply that a rising price of uranium is going to have a big impact on electrical costs.

“This does not have the same cost effect as raising the price of gasoline; although I would expect that the U.S. nuclear industry appreciates your complaining. Come to think of it, keep complaining and you may be right about them raising rates, but who should take the blame then?

“Any extreme financial pressures on nuclear power are coming from high construction and operating costs instead of from fuel costs. Increasing the price of U3O8 from about $28 a pound to $125 a pound would only double the cost of fuel from about 1/2 cent per kWh to about 1 cent per kWh. Not the same as the effect that quadrupling the price of gasoline would have on the cost of driving.

“Relying on state-subsidized sources has resulted in too much supply coming from those not necessarily having our best interests in mind, especially, when uranium powers a big part of our security in addition to running about 20% of the washers and dryers being imported.

“Initially there are about 4 to 5 tonnes per year domestic supply on standby that can be brought on stream fairly quickly, but getting the bulk of the 25% domestic-sourced requirement will take several years of development. I should think that the sooner we get started, the better.”

The 5: While we addressed the costs of both transportation fuel and electricity last Wednesday, we weren’t saying the increases were in any way comparable. In both cases, we were merely following the breadcrumbs of government action and the law of unintended consequences.

Meanwhile, who’s this “we” that should “get started” on a crash program to generate more domestic uranium production? Sounds as if that would entail an immense amount of top-down central planning.

Hmmm… Isn’t there a word for that? Something that’s been in the news a lot lately? Think it starts with an “s”…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Last call: Americans are using a strange black box to identify massive market moves.

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