Weakening Wednesday – Powell’s Testimony Doesn’t Really Help

The Fog of Truth.

That's what Robert Reich calls the confusion and bewilderment Americans feel when listening to the President but the same can be said for our New Federal Reserve Chariman, Jerome Powell, who testified before the Senate yesterday and will testify again tomorrow without actually saying anything at all but, like the parable of the blind men feeling an elephant – everyone will be able to draw a conclusion about what he said – even if those conclusions are diametrically opposed to each other

CNBC says "Powell backs more rate hikes as economy growing "considerably stronger"" while Market Watch says Treasury yeilds are heading lower on doveish testimony and CBS says "Jay Powell shrugs off trade worries, expects rates to keep rising" and Bloomberg says "Powell's 'For Now' Caveat a Sign Fed Rate Hikes Not on Autopilot."  So Jerome Powell, like the President, is all things to all people – whatever you want to think he said – he kind of said it.

Is that really what we want in a Fed Chairman?  Why is our monetary policy a closely guarded secret?  There was, briefly, a movement to make the Fed more transparent and have them set firm tartgets for actions well ahead of time but investment banks can't make money if EVERYONE know what the Fed is going to do – who would they be able to bet against with their inside information?

It doesn't get more inside than Goldman Sachs, of course, who have alumni like Neel Kashkari, Stephen Friedman, Bill Dudly, Patrick Harker and Robert Kaplan.  In fact, there are 12 GS Alumni currently on the Fed Board (not to mention Carney heading the Bank of England, and, of course Draghi at the ECB)  and Goldman was even fined $50M after one of it's emploees was caught obtaining regulatory documents from former collegues at the NY Fed but don't worry, no one has been caught since!  Treasury Secretary Steve Mnuchin is also a former GS partner.   

And, of course, a few Trillion Dollars worth of our National Debt (which you and your children owe) was accrued by the Fed (who still have $4.5Tn worth of debt on their balance sheet) bailing out Goldman and other…
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$2,000 Tuesday – Netflix Earnings Give Us a Big Win on Nasdaq Shorts

Wheeeee!

That's the way to play earnings!  In yesterday's Morning Report we called for shorting the Nasdaq (/NQ) Futures at the 7,400 line in hopes that Netflix (NFLX) would disappoint and take down the index and that's exactly what happened.  Nasdaq Futures contracts pay $20 per point so the 100-point drop paid $2,000 for each short contract – not bad for a day's work and, of course, our other index contracts were also winners:

  • S&P (/ES) short at 2,800 fell to 2,792 is just 8 points at $50 per point for gains of $400 per contract.
  • Dow (/YM) short at 25,000 fell to 24,960 and 40 points at $5 per contract gained $200 per contract
  • Russell (/RTY) short at 1,690 fell to 1,675 and 15 points at $50 per point was a gain of $750 per contract.  

And, of course, our Netflix (NFLX) short play will be doing very well this morning as that stock dropped $50 (12.5%) on disappointing subscriber growth and we could see that coming a mile away as no stock is likely to justify 250x earnings – even in the best conditions and we simply didn't see the current economic conditions (rising oil prices, economic slowdown, political turmoil) as a good recipe for continued super-bullishness on NFLX. 

There is, however, still time to initiate our bullish earnings trade on Sketchers (SKX) as detailed in yesterday's Report.  That stock finished right at $31.07, down 0.22 for the day despite our bullish pick – but what do we know?  Speaking of what we know, my comments were featured in Investing.com's weekly commodity outlook and that led to yet another $2,000 per contract day's gain on Oil (/CL) Futures shorts at the $70 line – which is a follow-through from our $5,000 per contract gain from our original call to short oil at $75 on July 3rd (nailed it!).

Though we have a longer-term target of $65, we're now using our Ultra-Short Oil ETF (SCO) play to cover that, not the Futures.  Our goal in the futures, as noted
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Monday Market Movement – Trump has his First Debriefing

President Trump is meeting his handler this morning.

It's a private meeting, of course, and whatever goes on from there we will only know from what Trump and Putin say about it but, fortunately, both men are well-known for giving the public faithful accounts of their actions behind closed doors, right?  According to protocols, however, Putin at least should have a report and maybe one day we'll get to see it.

Futile though it's been, we're taking another whack at shorting the Futures this morning as noted in my 7:21 note to our Members:

On the whole, I still like the short side and we'll be looking to cash a lot of positions in our portfolio reviews.  /NQ below 7,400 (tight stops above for all) is good as is, /YM 25,000, /ES 2,800 and /RTY 1,690 – 3 below and short the laggard is the safest way to play but I'm hoping NFLX disappoints and hurts the Nasdaq and, of course, it's time for negative AAPL rumors!  

Powell testifies before Congress for the first time tomorrow – that's a biggie.  June Retail Sales this morning, Industrial Production tomorrow, Housing Wednesday and the Beige Book and NY and Philly Feds this week too!  So plenty of data to chew over.

TIME (ET) REPORT PERIOD ACTUAL FORECAST PREVIOUS
MONDAY, JULY 16
8:30 am Retail sales June   0.5% 0.8%
8:30 am Retail sales ex-autos June   0.3% 0.9%
8:30 am Empire state index July   -- 25.0
10 am Business inventories May   -- 0.3%
TUESDAY, JULY 17
9:15 am Industrial production June   0.6% -0.1%
9:15 am Capacity utilization June   78.3% 77.9%


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TGIF – Crazy Week Grinds to a Halt, Earnings Season Begins

21%.

That's the expected earnings gains for S&P 500 companies this quarter compared to the same quarter last year.  Most of that is due to the tax cuts and the rest is due to buybacks as there are now no longer $2 TRILLION worth of shares to divide the earnings among due to buybacks and M&A (which earases the shares completely while putting the earnings into another company).  

As you can see from the chart on the right (only through June), buybacks have been heavily oriented to the tech sector, as has M&A activity so it's no surprise the Nasdaq is plowing higher despite the actual companies not actually making more revenues or even more profits – it's just the same profits divided by a lot less shares.  

Still, it's real.  As an investor, if I buy a stock that makes $1Bn on 1Bn shares then I'm making $1 per share and I'll pay $20 ($20Bn) at 20x earnings but, if the company takes $4Bn and buys back 200M shares (20%) then the same $1Bn in profits becomes $1.25/share and 20x becomes $25/share – on the same revenues and the same profits.  So, for a CEO who gets paid based on stock performance, it makes sense to do share buybacks whenever possible and the $2.5Tn of offshore funds that have been "repatriated" from overseas (from where they were hidden to avoid paying taxes and are now being rewarded for their behavior) have gone almost entirely to this practice.  

Image result for stock buybacks debt 2018As I was saying, as an investor, you are getting your $25 worth from an earnings perspective as it's still 20x earnings but, consider that last year, this company had $4Bn in cash on the $20Bn valuation (or cash and no debt) and now it does not.  Wasn't the OPPORTUNITY to use that $4Bn to grow the business part of what made the company worth 20x earnings in the first place.  Now that opportunity is lost and the company is what it is at $25/share with MUCH LESS possibility of growth down the road as it WASTED 25% of it's market cap buying back it's own stock!

We're not building things anymore – the only kind of engineering US companies do…
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Thrilling Thursday – Senate Overrides Trump Tariffs – Everything is Awesome Again

Image result for trump nato cartoon88 to 11.

Just 11 Senators backed President Trump's call to impose additional tariffs on China and Europe and, in fact, the Senate passed a resolution calling on Trump to get Congressional approval before using "national security" as a reason for imposing tariffs.  This marks the first time Congress has actually taken a serious step to reign in Trump's powers but, watching Trump's speech at the NATO summit this morning – I don't think anyone told him what happened.  On Tuesday the Senate voted 97-2 in favor of a pro-NATO resolution and this morning Trump acted like it was his idea to keep the US in NATO – of course.    

"Let's be clear, this is a rebuke of the President's abuse of trade authority," said Sen. Jeff Flake, an Arizona Republican and a frequent and vocal critic of Trump's policies. "Can you imagine being Canada and being told your steel and aluminum exports to the United States (are) a national security threat?"  The tariffs measure was written by Sen. Bob Corker, a retiring Tennessee Republican who chairs the Foreign Relations Committee, and Sen. Pat Toomey, a Pennsylvania Republican and a free-trader from a steel producing state.  Everyone is suddenly very brave when Trump is on the other side of the Atlantic…   

The NATO talks have been well summed up in this one image of Trump looking in the opposite direction of everyone else in the photo leading people to speculate what it is he might have been distracted by during the group photo.

Was it the Goodyear Blimp? John Kelly jangling a set of keys? Another solar eclipse? A Space Force sighting? Someone carrying a Quarter Pounder? The skywriter he hired to spell out "OBAMA SUCKS"? The flaming wreckage of America's proud, hard-earned spot as the leader of the international community? The dot emanating from a laser pointer surreptitiously manipulated by Angela Merkel, as the others stifle their giggles and try mightily not to give up the joke?

None of the above as it turns out it was simply the President, already bored with meeting with his former allies, was looking forward to heading off to…
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Philstockworld July Top Trade Review

Image result for top trade ideasYes, this is Wednesday morning's PSW Report.

I don't have much to say about the markets this morning, other than "I told you so" as they give up the week's gains on more Trade War nonsense that we KNEW was coming (see yesterday's morning Report for my warnings about following that idiocy).   We'll see what holds today and we'll make adjustments in chat and in this afternoon's Live Trading Webinar – so no need to talk about what an idiot the President is here, right?   What we do need to do is bargain-hunt in case it's another shallow sell-off and we need to add more longs and the best way to do that is to look back on past trade ideas and see if we can find some that haven't gone up yet.  

We did our last Top Trade Review in Aprilso it's a good time to do one of those and, as our Members well know, the vast majority of those trades turn positive so, when they're not, it's usually just a matter of time.  As of the April review, we had looked at Top Trades that were initiated through last August and, out of 36 Top Trade Ideas in 35 weeks, we had 29 winners and 7 losers for a very solid 80.55% winning percentatge.  In fact, our only loser in July was TEVA, who have since recovered completely and turned into a winner and THAT is why these reviews are so valuable – those "losing trades" often turn into the best opportunities:

Our Top Trades are what we think are our best trade ideas of the week with the highest chances of winning and we send out Alerts to our Members via Text and Email but we don't have a specific portfolio for them as they ofen ended up in one of our 5 various Member Portfolios already.  

There's a bit of randomness to the reviews in that we check in on trades after roughly 6 months so they are usually in progress and may be randomly up or down at the moment but that's why these reviews are so great for identifying bargains that simply haven't
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2,800 Tuesday and the S&P – Are We There Yet?

66.6 Thousand

That's the volume the S&P's (SPY) ETF hasn't broken since June.  Yet the S&P, on no volume at all, has gained 100 points (3.7%) in the first 10 days of July and is now just another 100 points away from the all-time high, after matching January's high at 2,872, of course.  Things looked fantastick then – the S&P was on a run from 2,550 so up 322 points was 12.6% and, on the morning of Jan 18th, I noted the following in our report:

Up and up the markets go but we see shorting opportunities this morning IF we cross back below Dow (/YM26,100, S&P (/ES2,800, Nasdaq(/NQ6,810 and Russell(/TF1,585.  The rule of thumb for shorting the futures is wait for 2 to cross below and then pick the next one that crosses and keep very tight stops back above the line and if ANY of the indexes go back above their line – kill the trade and wait for the next set-up.

The Dow is much lower now, at 24,850 (-4.7%) but the Nasdaq is way up at 7,320 (+7.4%) and the Russell is at 1,711 (+7.9%) and we're short both of those indexes on the assumption the Dow and the S&P are not crazy (and the much broader NYSE is down at 12,776 from 13,637 so that's 861 points or -6.3%).  Of course, right after I wrote that note, the market dropped 10% into early February and boy were we glad to have been caustious then!

 

IN PROGRESS

 

 

 

Meaningless Monday Market Movement – Time for Earnings

It's Monday so we must be up in the Futures, right?

Monday mornings have market the high for the week in 3 of the past 4 weeks (last week being the exception but it was low-volume, holiday training), so we're not taking today's open too seriously, especially at the start of a data-heavy week that gives us Consumer Credit this afternoon, Small Business Confidence and Job Openings tomorrow morning, PPI on Wednesday along with a likely disappointing Petroleum Status Report, CPI on Thursday and Friday, not only do we have Import and Export Prices and the Michigan Sentiment Survey but we'll have earnings from 5 big banks to kick off the season (C, FRC, JPM, PNC & WFC).

So far, the markets seem to be unconcerned about the opening round of the Trade Wars though shots have been fired with the US imposing $34Bn worth of 25% tariffs (taxes) on flat-screen TVs, aircraft parts and medical devices and China has fired back with $34Bn worth of tariffs on US goods including soybeans, Autos and lobsters.  Another $16Bn from each side is expected to be announce Thursday, as Trump heads off to Europe to fight with NATO.

 

IN PROGRESS

 

 

 

 

 

 

 

 

 

Trade War Friday – “You Maniacs, You Blew It Up!”

Image result for you maniacs you blew it up gifWell, Trump has started World War III.  

Sure it's "only" a Trade War, at the moment but that's how World War I started and this trade war is far bigger than that and  the second biggest trade war in the 20s and 30s led to the Great Depression which clearly led to World War II so I don't think I'm jumping the gun declaring this World War III – just give it some time…

 

 

IN PROGRESS

 

 

 

 

Thrilling Thursday – Trade Talks at S&P 2,728

2,728 once again!  

It's the same bounce line we were talking about in March – and that was 4 months ago now!  At the time (3/16), I said: "That, in turn, indicates that the majority of this trading is being done by robots and those robots are not trading with emotion or enthusiasm – they are just trading their pre-programmed ranges and it won't take much of a change of human hearts to send the whole thing crashing back down another 10% from here."  As it turned out, we did fall back to 2,575, "just" a 5.6% correction. 

As Fundamentalists, we need to consider whether things have improved or not since mid-March.  Earnings were generally good but Economic Indicators have deteriorated and, of course, we have entered into a bit of a Trade War, which could destroy the entire global economy – but let's not dwell on the negatives, OK?

The Chinese markets, of course, are falling off a cliff, like they did in 2015, when our markets also ignored them, until 3 months later, when the S&P dropped 12% from 2,100 to 1,850.  Maybe this time will be different – maybe China doesn't matter, maybe Trade Wars can be won, maybe Trump is a genius and his policies will all work – even though they seem more like they are going to bankrupt us at the momnet.  Hope can spring eternal but that doesn't make me want to bet on it!  

Rising money-market rates have forced the Fed to take steps to maintain control over its key policy benchmark. With the bill issuance rising and the Fed unwinding its balance sheet, the front-end is poised to take center stage and we'll get the Fed Minutes at 2pm this afternoon and, of course, Non-Farm Payrolls come out tomorrow at 8:30 am, which can also be a market-mover.  

Note the overall p/e for the S&P 500, according to JP Morgan (JPM) is up at 20.6, about 5% over the historical norm but the forward p/e still carries inflated expectations of 16.1, which is in-line with the historical norm but a huge stretch to think earnings will improve 20% over the next 18 months but hope continues to spring eternal and the…
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