"When somebody challenges you, fight back. Be brutal, be tough." -- Donald J. Trump; "Hmmm" -- Your buddy
Loose Lips Sink Ships
It was often said during World War II that "Loose Lips Sink Ships". The old saying was created as something of a reminder for folks to guard against careless talk. Words often do have consequences. Over the last few trading sessions, this has certainly been the case. Though we are not speaking of ships, or something so precious as human life at this stage, we are referring to market cap. The S&P 500 gave up 1.4% in Thursday trading, ending a streak of 58 consecutive days when the index did not experience a move of 1% or greater. The Nasdaq Composite suffered a 2% beat-down, while the losses were less severe for the Dow Jones Industrials. You can see on any one-day chart that, while the equity markets were already soft on these obvious geopolitical jitters, a floor had been put in. The markets were trying to rally going into the final hour of the session, as they so often have throughout this long bull market.
- Nvidia CEO: Here Comes Robot Taxis
That was precisely when the rhetoric was taken to another level. In response to threats made by North Korea against the U.S. territory of Guam, the president considered that his already tough talk "maybe wasn't tough enough". The president opined that if North Korea were to act against the U.S. or American allies, "things will happen to them like they never thought possible". You and I both know how much markets like uncertainty, particularly when the uncertainty includes military action in general, and, more specifically ... global thermonuclear warfare. Appeasement is never a good option. I do not suggest going that route. That is precisely what got us here. However, I might not be quite so publicly outspoken. What do I know? That's just me.
Sold!! Bids were pulled, and those that were not, were indeed hit. It did not matter where or what. Risk Off, baby. Ten of 11 sectors closed in the red, seven of those sectors gave up more than a full percent ... the tech sector lost 2%. The only green on your screen was seen in safe-haven assets. Gold, Treasuries, and utility stocks all saw the benefit of this selloff. The U.S. Treasury put $15 billion worth of 30-year paper to the tape at an awarded yield of 2.818%. That was the lowest rate seen in that space since November in an auction that was not seen as especially strong. This morning, the carnage has continued in both Asian and European trading. Appetite for safe harbor continues. The world awaits the opening bell at 11 Wall Street.
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Do Not Be Afraid
I cannot tell you that everything will be alright. I can tell you that fear does not help. I was a net buyer yesterday. I reacquainted myself with several stocks that I had either missed or taken my profits a bit too early. A 2% discount, I figure is a good starting point. A starting point. Remember, we initiate long positions in increments. We nibble. Will stocks sell off again today? Those trading equity index futures markets seem to think so. If something stupid happens, will equity markets go much lower? Yes, they will. You still want your decision making to be the result of reasoned thought. You are a sentient creature. Fear can be a great motivator for personal defense or achievement. Fear should never be a factor in capital decision making. The algos will not panic. They are your opponent.
There are two ways to look at this. If this situation passes peacefully, equities may now be trading at artificial discounts. If this situation results in a severely negative outcome, well, then it will be some time before the success of your portfolio even crosses your mind. No fear.
Sometimes, nobody sees it coming. You always think about it at the beach. At least I do, ever since the Summer of 1975. Live Nation (LYV) - Get Report was out riding the wave of a very successful quarter yesterday, while most stocks were being pummeled by rhetoric. Wednesday evening, LYV's second-quarter data showed victories across many lines. An EPS beat of $0.10 cents. A 29% increase in revenue; a 22% increase in operating income; 68 million tickets sold year to date, a 21% increase over 2016. Growth in free cash flow of 42%. Oh, bravo.
Then, it struck. Like so many other firms across so many other industries, Live Nation was in danger of being Amazon-ed. Reuters reported yesterday that Amazon (AMZN) - Get Report would seek to partner with venues across the U.S. to sell tickets to events. Amazon, by the way, has already been doing this in the U.K. Many top venues in the U.S. already have deals to sell tickets through Ticketmaster, which is owned by Live Nation.
Poof!! Shares of LYV, which had been riding a 12% gain for much of the day, traded in a six-dollar range over the final half hour of trading, even trading in the red for the day at one point before closing up 5.6% for the session. Apparently, Amazon had already approached Ticketmaster about a partnership, but those talks went nowhere as both sides wanted control over customer data. The lesson here is, if you control a market, or even if you don't, even if you are just successful, Amazon may be coming for you. The firm has already shown a willingness to forgo profit for the sake of market share. How do you fight someone like that?
The Ugly Stick
A little before 7am ET, shares of Snap Inc. SNAP are trading more than 13% lower, after having traded as low as 15% earlier. The firm reported second-quarter earnings results last night. I guess stating that they missed expectations for both earnings per share and revenues would be stating the obvious at this point. Growth in daily users was less than expected. Those revenues that missed expectations still increased by 153% year over year. That would be awesome, if net losses had not also grown to $443.1 million, which was roughly an increase of 380% year over year. EBITDA (Earnings before interest, tax, depreciation, and amortization) amounted to -$194 million. That was below consensus as well. Free cash flow came rolling in at -$228.94 million. Oh, the firm is still sitting on $2.0 billion in cash, so it isn't going anywhere, but there is no way to sugarcoat the direction this business appears to be going in.
The company points to the fact that more than 25% of all smartphone users in the U.S., the U.K., and in France are now using Snapchat every day. The company considers this a positive. I think this could also mean that the market of potential users is dangerously approaching a saturation point. Time will tell. I will not be long these shares anytime soon.
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08:30 - CPI (July):Expecting 1.8%, June 1.6% y/y.
08:30 - Core CPI (July):Expecting 1.7%, June 1.7%. The rate of growth in consumer level inflation has just cratered, falling from a year over year rate of 2.7% in February to just that 1.6% in June. We could blame energy prices. We wouldn't be wrong, but the problem is much broader than that. Weakness in pricing spans a wide range of industries from telecom to auto sales to apparel. Troubling, I find it that even with the rebound in prices for crude in July, there is not all that much expectation for a rebound in this data-point today. This will be the macro event of the day.
09:40 - Fed Speaker.Dallas Fed Pres. Robert Kaplan will speak at the University of Texas, and will field questions from both the audience and the media. Kaplan is currently a voting member of the committee, and has been one it's more hawkish members at that. Until last month, that is. That's when Kaplan became publicly concerned about the lack of inflation at the consumer level, and started urging caution on further rate hikes.
11:30 - Fed Speaker.Minneapolis Fed Pres. Neel Kashkari will be in Bloomington, Minnesota to speak at a bankers' convention. There will be a questions and answers session. Kashkari is a voting member of the FOMC this year, and has maintained his dovish stance on interest rates, even after last week's employment report.
13:00 - Baker Hughes Rig Count.Last Week: total 954-4, oil 766-1, Permian 379 unch. The onward growth of oil rigs in operation came to a screaming halt last week. Has the U.S. reached a saturation point? Has the Permian? Now is the time to watch capital spending plans versus debt levels for firms at the low end of the spectrum. For those keeping close track, there was an increase of two rigs for Eagle Ford (Texas), and a decrease of three in the Cana-Woodford basin (Oklahoma).
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2458, 2450, 2442, 2432, 2422, 2411
RUT: 1390, 1384, 1378, 1368, 1362, 1352
Today's Earnings Highlights (Consensus EPS Expectations)
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At the time of publication, Stephen Guilfoyle was long AMZN, although positions may change at any time.