"You will never do anything in this world without courage. It is the greatest quality of the mind next to honor." -- Aristotle
There may be an absolute torrent of macro-economic data-points headed your way this morning. There may be still be a handful of well-known corporations putting quarterly numbers to the tape today. There may also be three Fed speakers scheduled to make public appearances later today. There is no doubt, however, what today's headline event will be.
Enter the President
President Donald J. Trump will make an unofficial "State of the Union" address tonight before both houses of congress. What to expect? A whole lot, in my opinion. I believe this president goes full Trumpian tonight, in a style that he has made all his own. The president will be aggressive. He will be bombastic. He will make sure you know how hard his team has been going at it, and how much has been accomplished in a short amount of time. He will outline perceived problems that must be solved. Political opponents, even those who had boycotted the inauguration will respond by not only attending, but inviting guests who either have been, or likely would be adversely impacted by the president's intentions on policy. This will be must-see TV. Better than Monday Night Football, and a lot better than the Oscars. We, however, are not here to be entertained, nor are we political in this space. We are here to try to make a couple of bucks. Let's stay on mission, shall, we?
The President's proposed budget (which assumes a very attainable 2.4% GDP expansion) made headlines yesterday, and will likely remain in focus. We now know that the proposal, which is still a month away from being sent to Congress (where jurisdiction over budget matters resides) will include a $54 billion increase in defense spending, pushing that slice of the overall budget to a level over $600 billion. The money to pay for that increase will draw from discretionary spending, notably from the State Department (foreign aid), and the EPA. To make this change palatable for most Americans, entitlements such as Social Security and Medicaid will remain untouched.
Aerospace and defense stocks easily outperformed the broader market, as well the sector (industrials) in which they lie, in response. Unsure of a good defense name to get involved with? One popular ETF that gets that job done would be iShares Dow Jones US Aerospace & Defense (ITA - Get Report) . This one is heavily weighted toward Boeing BA, United Technology (UTX - Get Report) , Lockheed Martin (LMT - Get Report) , General Dynamics (GD - Get Report) , Raytheon (RTN - Get Report) , and Northrup Grumman (NOC) , so it pretty much covers the important bases. ITA ran up 1.26% yesterday. A strictly speculative name in the space (not part of the ETF) could be Kratos Defense (KTOS - Get Report) . Though cheap on the surface, the name runs at a negative EPS, and could be expensive relative to value. Target prices should be kept rather tight, and know your tolerance for risk.
Wednesday's Opening Bell
So, we are sure that the president will touch on the budget, but what investors really want to hear about is tax reform, first and foremost. Some specifics regarding a timetable and the underlying components such as the border adjustment would be nice, but also unlikely. Traders would also like to hear more on deregulation and infrastructure spending, and I am sure we will, especially when the president gets around to discussing our borders, and "The Wall". This is precisely where the president runs the risk of impacting Wednesday's opening bell at 11 Wall Street.
Before we get to all of this truly interesting material, the speech will have to touch on health care reform. Repealing and replacing the Affordable Care Act with something "more affordable" will certainly get a strong mention. As we "now" know, this is complicated stuff, and really cannot be done with making it part of the budget, which is why this political football must come before all of the already mentioned growth and inflation producing goodies. Outside of flipping Express Scripts (ESRX) , I really don't trade health care all that much, but it is key to note that the president met with executives from the health insurance industry yesterday and they will probably get some kind of mention tonight. The SPDR Health Care sector SPDR ETF (XLV - Get Report) is the top performing SPDR ETF year to date, despite the sector's obvious uncertain future.
08:30 - GDP (Q4-rev): Expecting 2.1%, Advance 1.9% q/q SAAR. Possible upside revisions to consumer and business spending, as well as the inclusion of gross domestic income, have this item set for an upward revision at the headline as well. There are some economists out there as high as 3% on this one, which is likely a bit much. However, the marketplace should take well evidence that the fourth quarter was not quite as weak as previously thought.
08:30 - Goods Trade Balance (January): Expecting $-66.0 billion, December $-65.0 billion. The U.S. economy suffered a sharp decline in exports throughout the late summer into autumn. Since then, exports have kept pace with imports, but not made up the ground lost. This item may not move the marketplace. It will, however, have an impact on first quarter GDP, which according to the Atlanta Fed's model is currently tracking at 2.5%.
08:30 - Wholesale Inventories (January-pre): Expecting 0.5%, December 1.0% m/m. Wholesale inventories have been the strength behind the overall business inventory build that we've seen over the last couple of months. This item is expected to have cooled a bit in January, which will unfortunately put more focus on retail and manufacturing inventories. This is not a market-moving event.
08:55 - Redbook (Weekly): Last Week 1.1% y/y. This series, amid a plethora of bad news for the retailers, has clawed its way on year-over-year basis back to levels seen in December. An ability to hold here at 1%+ would be key for an industry that needs all the help it can get right now.
09:00 - Case-Shiller HPI (December): Expecting 5.4%, November 5.3% y/y. The number that Wall Street follows here is the headline 20-city year-over-year, non-seasonally adjusted print. That particular data-point has shown growth of at least 4.9%, but not more than 5.7% in every month going back to February 2015. It may not be exciting, but you'll take 5% growth forever, now wouldn't you? This month should stay on trend. It's the data that gets broken up by region that real estate investors and economists dig into.
09:45 - Chicago PMI (February): Expecting 53.1, January 50.3. This is probably the least predictable series in our macro-universe. To tell you the truth, I don't know why anyone even tries to measure business activity in the Chicago area. The last time the print hit the tape even within a full point of the consensus expectation was August 2015. Spin the wheel. Nobody leaves without a prize.
10:00 -Consumer Confidence (February): Expecting 111.1, January 111.8. This item missed expectations in January, but continues to cruise at very high altitudes in the wake of the U.S. election. The last three months are indeed the top three prints in this space since July 2007.
10:00 - Richmond Fed Manufacturing Index (February): Expecting 11, January 12. This has been a very strong month for headline manufacturing growth among the Fed's regional district surveys. All Richmond has to do today is put up a positive number in order to complete the fourth consecutive sweep for the big five (NY, Philly, Dallas, and KC).
15:00 - Fed Speaker: Philadelphia Fed Pres. Patrick Harker will speak from Philadelphia on his outlook for the U.S. economy. There will be a Q&A session with the audience afterward. Harker, who is a voting member of the FOMC, said just last week that he is supportive of a rate hike in March.
15:30 - Fed Speaker: San Francisco Fed Pres. John Williams will do much the same (give his outlook for the economy) from Santa Cruz, California. Williams does not vote this year, but is considered to be influential at the Federal Reserve. He will take questions from both the media and the audience. We have not heard much from Williams since earlier this month. At that time, he was still talking up the possibility of a live March meeting.
18:30 - Fed Speaker: St. Louis Fed Pres. James Bullard speaks tonight from Washington, DC. Bullard is not a voting member of the committee this year, and is well known for his rapid swings on opinion regarding monetary policy. There will be questions with both the media and the audience.
21:00 - Unofficial "State of the Union" Address: President Donald J. Trump will make what probably is his most important speech yet tonight before Congress. On deck? You name it.
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: 2392, 2381, 2375, 2367, 2361, 2351
RUT: 1426, 1419, 1411, 1405, 1397, 1391
Tuesday's Earnings Highlights (Consensus EPS Expectations)