"Is the goal I've set been determined by a desire to avoid the goal I should have set?" -- Craig D. Lousbrough
Hidden Ball Trick
How does the market apparently not react to the circus in Washington? Last night, the Washington Post ran a story reporting that President Trump revealed classified information in a meeting last week with Russian officials. Later, National Security Adviser HR McMaster labeled that report as false. There is far more to this story than I will write about in this space. There are questions about just how much information was revealed. There were several other folks in the room. There will also be questions about just who went to the press. I try not to get political in this space. I feel that political opinion injures the mission, which, as always, is simply to excel in a changing environment.
I followed Twitter last night. My liberal friends all vilified the president. My more conservative friends all labeled this as just more "fake news". I followed equity index futures markets all night. I was stunned. They simply showed almost no sign of reacting to this story. I find this amazing. This comes after markets never really reacted to the controversy stirred by the firing of FBI Director James Comey last week.
Whether or not the story is accurate, the controversy that surrounds these stories is a story in its own right. The startled reaction from both side of the aisle, you would think, would block and/or delay any hopes for implementing the president's pro-growth agenda. You would think. That is unless the markets have already given up on politics. In that case, Washington is really not the driver of this rally at all. I'll admit to being in the camp that believes current equity valuations are at least in part due to hopes for a higher level of growth based on tax cuts that themselves increase the velocity of money. I also have to admit that I am less sure of that than I was. There is still an elevated level of hope out there. Maybe projected policy is not as great a slice of that sentiment as we thought.
Buck Stops Here?
Equity markets certainly ran the right way on Monday, albeit on lighter than average volume. Add some disappointing manufacturing data out of the Fed's New York regional district -- no problem. Add that to weaker-than-expected data for both retail sales and consumer level inflation released on Friday. Still no problem. The S&P 500 ran half a percent to, again, record levels. The dollar did weaken somewhat. That put a bid under the commodity complex, already aided by the public cooperation put on display by Saudi Arabia, and Russia regarding oil production cut extensions.
The energy sector took off. The materials sector took off and, with the help of a global ransomware attack, the technology sector took off. The run forced such names as Fireye (FEYE) , Symantec (SYMC) , Palo Alto Networks (PANW) and Cisco (CSCO) front and center, both in the headlines, and on the leader-board.
The U.S. dollar is weaker again this morning, as the DXY basket scrapes against the lowest levels seen in more than six months. This is due both to the soft U.S. data and a euro that continues to strengthen in the wake of the French election. The commodity complex is grateful.
Cotton? Yes, Cotton.
Last Wednesday, the U.S. Agriculture Department cut estimates for domestic inventories of cotton. The cause? Simply increased export sales. In the three trading sessions since, cotton futures have gone nearly parabolic, rising 12%. On a longer timeframe, cotton is up a rough 30% since last Autumn, but let's get back to what's current. Cotton futures moved 4% higher just yesterday, after trading "limit up" not just on Monday, but also on Friday. By the way, despite the "limit up" status, Monday's action resulted in record trading volume for this series, topping the old record, which was set in 2010 by more than 7%.
Will this rally last? Where does the commodity go from here? Cotton is in between seasons. The harvest does not resume until July at the soonest. Many of those who need to purchase cotton have entered into contracts with a still-to-be-determined price (sounds kooky, but that's how it's done), which usually does not hurt them. There are supposedly more than 4.6 million bales of cotton in a "sold" condition, but without a sale price. Another 700,000 remain unsold. Due to this run, margin calls are expected to slow things down over the next couple of days.
What's obvious is that businesses are going to pay a lot more both for their product and likely for margin calls than was ever anticipated. There is some scarcity, and this will show up in the apparel line of producer and consumer prices, perhaps in the May data. Apparel has been a drag on the CPI, as prices have contracted outright on a month-over-month basis for two consecutive months and for four of the last six. This will be a developing story.
The Mind's Eye
We keep hearing how S&P earnings are set to have run an approximate 15% year over year for the current season. Then we hear that the number is more like 11% ex-energy. That's fine. We understand that the energy sector was coming off a very low base. Retail will end up being a counterweight there. The comparisons have been great for U.S. corporations, but starting later this year, these comps are going to start to get a little tougher. The "hopium" may not be a factor just yet, but I doubt very much that equity markets will digest slower earnings growth very gracefully, so Washington is going to have to get itself unscrewed.
Rising interest rates are a boost to the financial space, and indeed seen as a positive in a growing economy. The Fed's intent is as clear as a bell. That catch is that this has the potential to become a market headwind in a heartbeat. Nightmare recipe? Lack of economic growth on top of equity valuations left unjustified by what could become slowed earnings growth on top of tighter monetary environment.
Does this have me changing direction on my net long portfolio? No, of course not, but it does have me paying attention. It should be in that back of your mind as well.
08:30 - Housing Starts (April): Expecting 1.258 million, March 1.215 million SAAR.
08:30 - Building Permits (April): Expecting 1.271 million, March 1.267 million SAAR. Housing starts actually slowed in March to their second-lowest print since October on a seasonally adjusted, annualized basis. The number did disappoint, but March is a notoriously poor month for the series, and permits did mildly surprise to the upside, allowing for forward-looking hope. This release has the potential to impact the financial marketplace.
08:55 - Redbook (Weekly): Last Week 1.3% y/y. Last week, this number printed at growth of 1.3% when measured year over year. That was good enough last year. Now, however, this is considered disappointing. On top of that, the month-on-month print fell off a cliff (-1.6%) last week.
09:15 - Industrial Production (April): Expecting 0.4%, March 0.5% m/m.
09:15 - Capacity Utilization (April): Expecting 76.3%, March 76.1%. Industrial production is a volatile series that does seem to be trending in the right direction. That said, this print does not appear to have the market impact that it once did. Perhaps more important will be the capacity utilization component of this release that has been trending northward. March utilization ran at the highest level in a year, and the April number is expected to show improvement.
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: 2425, 2414, 2404, 2399, 2392, 2382
RUT: 1414, 1407, 1399, 1392, 1385, 1378
Today's Earnings Highlights (Consensus EPS Expectations)
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