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"You come to a point in your life when you really don't care what people think about you, you just care what you think about yourself."
--Evel Knievel

Rally Caps

Last week began with a rally across U.S. markets. That rally seemed, at least early in the week, to be for more than one reason. First off, Hurricane Irma, while devastating to certain areas of Florida, ended up being less destructive than had been originally forecast. Second, the markets took well the fact that North Korea had not launched any missiles in celebration of that nation's "Foundation Day" the Saturday prior to the one just past. What strikes me as somewhat odd is that North Korea did fire a missile over Japan later in the week, and nobody cared.
 
Oh, Japan, South Korea, and President Trump certainly cared, but the marketplace did not miss a beat. Risk on was the theme of execution for financial markets. Treasury yields worked their way higher. Gold worked it's way lower. In fact, for the broader U.S. equity market, the S&P 500 rallied into Friday's closing bell to land precisely on 2500, just four months after crossing 2400. Why are U.S. markets reacting with measured but steady strength? Oh, friends... there are reasons.
 
Could it be a whiff of inflation at the consumer level? Both month over month, and year over year pricing beat to the upside last week. Then again, that really was mostly due to gasoline and shelter. You could say that this is where the storm's impact was felt outside of areas that were directly damaged. You could say that we have become calloused to North Korea's faux aggression. That much could be true, and might remain true... until it's not true anymore.
 
The most likely reason for the recent upward pull on market prices, at least later last week, and in this morning's futures markets, has been the President's crossing of the aisle last week. The market is starting to believe in the possibility of tax reform. This year? I wouldn't bet on it. Six months out? Seems do-able. How about you? Does a President who is willing to make a deal with anyone who is also willing to make a deal improve the chances of our esteemed legislative bodies actually getting something accomplished? You bet it does.
 
The Fed? U.S. equity markets seem to be okay with the idea of putting off the next rate hike into 2018. The market also seems to be fine with pumping up the Fed Funds rate by another quarter of a point in December, which is suddenly being priced in at the CME. After the probability of a December rate hike had fallen to very low levels just about 10 days ago, futures markets are now pricing in about a 57% chance of such a move this morning. We should certainly know more about that and the trajectory of a balance sheet unwind by this Wednesday afternoon. What a beautiful mosaic our marketplace is. What a thrill it is to try to survive in this environment. 

Present Arms

It's no secret that defense budgets are on the move around the globe. North Korea remains a persistent problem, but it's not just North Korea. The Middle East has been unstable since before the days of Xerxes. North Africa remains a hot spot, and Eastern Europe remains a tough neighborhood almost 30 years after the end of the Cold War.
 
It really should not be any surprise then, as planet earth realizes that the day of the Cold War premium (reduced defense spending) has passed that there would be consolidation across the space. With news of United Technologies Corp.'s ( UTX) $23 billion deal to buy Rockwell Collins ( COL) still fresh came news over the weekend that Northrup Grumman ( NOC) was close to sealing a deal to purchase Orbital ATK ( OA) for something in the area of $7.5 billion.
 
Time to sell defense stocks?
Time to sell defense stocks?
 
Late last week, (and also on many other occasions) Market Recon has pounded the table for the defense industry. These are all names that I have not mentioned. This does intrigue, though. Will the larger contractors that appear to be trying to do everything end up gobbling up the smaller shops that seem to be more focused on missile defense? That's what's hot right now. That's what's more and more important to almost all sovereign nations? This directional focus will only become more so as the world contracts -- meaning that regional players seem to be reaching for global impact.
 
At some point, do antitrust concerns become an issue? I would think at this point, that there are still enough players for that to not be an issue. I would think that among those bigger names, there are certain projects that they all have laid claim to without significantly overlapping each other. While making things easy from a regulatory point of view, this also leaves room for further consolidation. Hmm.

Energized?

You may have noticed currency exchange rates rolling back and forth this morning. The euro has been to 1.91 and back versus the U.S. Dollar. The US Dollar Index (DXY) has been straddling both side of 92 all morning. As that particular battle has been engaged, WTI Crude has also skirmished with the $50 level. This $50 resistance for Crude has been in play all night, not to mention last week, as well as mid-August. In fact, WTI has not significantly surpassed that mark since May, and sustained support above that level since April.
 
While most financial eyes, and ears, will focus on the FOMC this week, others will focus on the big meeting in Vienna this Friday. OPEC nations, as well as those allied for the purposes of production cuts, will meet there in order to discuss pushing those cuts beyond the first quarter of 2018. A chance to make some short-term dough in the space? Perhaps.
 
We have become conditioned to expect this commodity to push higher going into these events, and then sell off in disappointment in the aftermath. How much do the storms that recently hit Florida, and Texas impact the industry, and thus the market prices for both WTI Crude as well as gasoline? 

Deep in The Heart

Texas is home to roughly 31% of all U.S. refining capacity. Much of that capacity is back on line, but with fourteen plants either down or running at sub-optimal levels, refining capacity remains suppressed to the tune of about 12%. The higher market price for WTI could put upward pressure on the shale crowd to produce. We have not really seen that yet, as U.S. oil rigs currently in production decreased by seven last week, to 756. For those keeping score, Canadian rigs producing oil increased by 10 last week, to 102. Competitors will compete. Know what I mean, Vern?
 
You probably have noticed the recent movement in share prices for the refiners. This is where the industry will see improved margin at the retail level. Gasoline prices are higher across the nation, and in some of the most devastated areas, it could be months before local markets for the lifeblood of modern living returns to normalcy.
 
The Wall Street Journal reported over the weekend that Valero ( VLO) , Phillips 66 ( PSX) , and Marathon Petroleum ( MPC) are now all expected to show noticeable pops in year-over-year third quarter earnings. The thought, though all of these firms are dealing with some degree of damage, is that it will take months for these refiners to:
 
1) return to capacity;
2) replenish supplies; and
3) transport these supplies to where they need to go.
 
This should be enough to keep gasoline prices at the retail level elevated for the short to medium-term. To late to get in? This kid does not think so. This kid remains long VLO. Bang.

Macro

10:00 - NAHB Housing Market Index (September): Expecting 66, August 68. Regardless of the facts that builders admittedly face the rising costs of materials, as well as a shortage of available skilled labor, optimism remains high. As far as builders are concerned, this confidence is the result of low unemployment, low mortgage interest rates and a steadfastly confident U.S. consumer. This item kicks off a huge week for housing data.
 
16:00 - TIC (July): Expecting $36.9B, June $34.4B. June presented this series with a sixth consecutive month of positive cross-border long-term investment. Of that net $34.4 billion, Treasuries represented $19.3 billion of that total. Chinese accounts, by the way, added a net $44.3 billion in Treasuries. That may tell you something about the rest of the planet. Obviously, this series will not impact today's trading session.

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: 2524, 2513, 2506, 2498, 2492, 2482
RUT: 1451, 1445, 1436, 1428, 1422, 1417

Today's Earnings Highlights (Consensus EPS Expectations)

After the Close: Steelcase ( SCS) (0.23)

At the time of publication, Stephen Guilfoyle was long VLO although positions may change at any time.

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