"... And The Thunder Rolls" -- Garth Brooks

The Calm Before the Storm

President Donald J. Trump met with several senior military officers and their spouses on Thursday. A mere photo op, you might think. Routine, you might think. "Maybe, it's the calm before the storm" the president says. When asked what storm, the president cryptically answers "You'll find out". Oh, joy. Later, when speaking to military families, President Trump was quoted as saying: "Recently, we have had challenges that we really should have taken care of a long time ago, like North Korea, Iran, Afghanistan, ISIS, and the revisionist powers that threaten our interests all around the world." And the thunder rolls.

Certification Lost

News outlets across the country reported last night that this president is likely to refuse to certify that Iran is in compliance with the international nuclear agreement of 2015. If the president takes this path, that pushes the next decision out to Congress. The Congress will be charged with deciding whether or not to re-impose sanctions after a 60-day review process. If Congress then takes that route, and Iran is considered by international consensus to actually be in compliance, then re-imposing those sanctions by the U.S. would be considered a breach of the accord's provisions. What a tangled web we weave.

What do we know? We know that the administration's national security team just completed a policy review in September, and the president approved it. Back to Thursday's proceedings, the president was briefed by senior officers. Prior to that briefing, President Trump inferred that Iran had not lived up to their end of the deal, and said "You will be hearing about Iran very shortly."

What does this mean to us? I have pounded the table on this, and I stand by my convictions. You know that I like certain energy names, and there very well could be short-to-medium- term support across that space if there is to be a period of sustained headline risk in the Middle East, as we have seen concerning the Korean peninsula. It's more than energy, though. Defense is key. Investors, in my opinion, must have a certain degree of exposure to the defense industry. For good. To me, that's as clear as a bell. Is the industry expensive? Actually, it is, for good reason.

Notice the ambush in Niger? We are spread out all over the place, it's not just threats in the Far East and Persia. The legislative progress made toward tax cuts on Thursday is also progress toward increased defense spending. Increased defense spending will likely be a global trend as well. My defense longs are Lockheed Martin (LMT) , Raytheon (RTN) , Kratos (KTOS) , and II-VI (IIVI) . I would also get myself long Boeing (BA) , if it ever came in. That stock is a beast that I have swung at and missed over and over again. I do not chase runaway trains, but that is a train that should have been chased.

Hitting Streak

In 1978, Pete Rose hit safely in 44 consecutive games. I was working for the New York Daily News at the time. Remember, baseball games were only on television once or twice a week back then. So, when that Daily News truck would roll up to my parents' house in Queens at zero dark thirty and throw bundles of newspapers at me, the first thing I would do was to read the sports section to see how the Mets had made out the night prior, and then to see if Rose had gotten a hit that night as well. Joe Dimaggio had managed a longer streak in 1941, but what Rose did, he did in an integrated league, which if anything means he faced a significantly broader talent pool.

The S&P 500 advanced for an eighth consecutive day yesterday, as well as its sixth consecutive closing high. "Hot" would be an understatement. This would be the longest such streak in over 20 years. In 1997, we still traded stocks in Spanish pieces of eight on the New York Stock Exchange trading floor. That's right, gang.... 12.5 cents between price points, with a market share in listed securities that averaged, if memory serves, about 85%. You could order whatever you wanted for lunch. You just probably were not going to have time to eat it until after 4pm.

The stock market is crushing it.
The stock market is crushing it.

Trebuchet

There were two major catalysts for the heat brought forth into the marketplace in Thursday's trading. Three, if you count the improved trade deficit that lifted third-quarter GDP expectations. Most importantly, though, the House of Representatives passed a budget resolution for 2018 that could be considered a major step toward ultimate tax reform. The big deal is that this could ultimately allow Republicans to get there on their own. On top of that, the Senate confirmed Randal Quarles, who is expected to take a soft stance on regulation, as the Federal Reserve's first vice chairman in charge of banking oversight. I am sure you noticed the performance of the banks yesterday, up 1.3% across the industry versus the 0.6% move by the broader equity market. Huzzah.

You Can Get There From Here

Now that the House and Senate have passed competing versions of 2018 budget resolutions, the two legislative bodies have to work out their differences. The House is in session next week, but not the Senate. The Senate is in session the week after, but not the House (Oh, the life of Riley). This is going to take longer than you think, and I have a feeling that the calendar will push up against Thanksgiving before we know if a compromised version of the budget will get to a point where the Senate can pass the bill with a simple majority. Without what we call Reconciliation, they'll need 60 votes, and some Democrats. So you can forget that option.

So, it is after the two bodies agree and vote on the same final budget that the House Ways and Means Committee will release a detailed tax bill, and then a committee vote will be scheduled. Baby steps gang, baby steps. Much headline risk in both directions lies ahead from this quarter. Are you up to the challenge? Rock and roll.

Fun fact: Clorox (CLX) has 8,000 employees.

Jobs

08:30 - Employment Situation (September)

Non-Farm Payrolls: Expecting 88,000, August 156,000.

Average Hourly Earnings: Expecting 2.5%, August 2.5% y/y.

Average Workweek: Expecting 34.4, August 34.4 hours.

Participation Rate: Expecting 62.8%, August 62.9%.

Unemployment Rate: Expecting 4.4%, August 4.4%.

Underemployment Rate: August 8.6%.

We are going to have to understand, when we take in this data, that Hurricane Harvey impacted Eastern Texas and then Louisiana too late in August to be included in last month's jobs numbers. That storm will hit these data-points in this release, as will what Hurricane Irma did to Florida, and then the southeast. Going into Friday morning's data, job creation has slowed markedly for two straight months. This was while month-over-month wage growth slowed, stagnating year-over-year growth. Average workweek slowed as well, putting a sort of double whammy on the wage issue. The sad reality is that it has now been 20 months since the average workweek touched 34.6 hours.

As has been true for some time now, of the three rates, the participation rate is now the most closely followed. A bump there would be considered a positive even if it brought with it a higher headline unemployment rate. Will Friday's numbers impact central bank thinkers on policy trajectory? The short answer is Yes, of course. The longer answer is that if they feel that they have a mandate to increase the fed funds rate in December, there are plenty of unusual factors that would allow policy makers to reasonably explain whatever they see here.

Other Macro

09:15 - Fed Speaker: Atlanta Fed Pres. Raphael Bostic will speak on labor markets from Austin, Texas. Bostic in recent speeches has indicated his skepticism over technology's negative impact on consumer level inflation. He has also leaned hawkish as far as I can tell. That said, Atlanta does not vote on policy until January.

10:00 - Wholesale Inventories (August-rev): Flashed 1.0% m/m. If the advance release is even close to accurate, we should see a fourth consecutive month of decent-to-healthy growth in this space. This is the report that is then combined with both retail and manufacturing inventories to produce business inventories. That one is a headline level number that can push GDP expectations around. You will see that number a week from today.

12:15 - Fed Speaker: New York Fed Pres. William Dudley is expected to speak on both monetary policy and the correlation between further education and income. Dudley, who with the pending retirement of Stanley Fischer might just be the second most powerful voice at the FOMC, has steadfastly stuck to his view that inflation will strengthen and interest rates will rise. Dudley will answer questions for both the audience and the media.

12:45 - Fed Speaker: Dallas Fed Pres. Robert Kaplan will be at the same conference that Bostic spoke at earlier. Kaplan has been pragmatic about inflation, and the current trajectory for interest rate policy. Away from that, he did warn earlier this week against tax cuts that would pull forward economic growth leaving the long term to suffer. Kaplan votes on policy this year.

13:00 - Baker Hughes Rig Count: Last Week total 940+5, oil 750+6. Oil rigs currently in production increased last week, but not in Texas. That state saw a decrease of two, so this was really a give-back of what we had seen in earlier weeks. It is now close to the point where I think we stop looking for impact from Hurricane Harvey in this space.

13:50 - Fed Speaker: St. Louis Fed Pres. James Bullard will speak on the domestic standard of living this afternoon. He will be in St. Louis. Bullard, who does not vote on policy this year, has not only been dovish for more than a year now, but is openly opposed to another rate hike this year.

15:00 - Consumer Credit (August): Expecting $15.9 billion, July $18.5 billion. Revolving credit, which is a sub-component of this item that largely represents credit card usage, printed at pitiful $2.6 billion for July, which put a halt to some momentum that had built up over the couple of months prior. This is dated material, but it can have a sneaky impact on the financial markets.

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: 2570, 2561, 2553, 2541, 2529, 2519
RUT: 1527, 1520, 1514, 1506, 1499, 1491

There are no quarterly earnings on my radar for Friday.

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At the time of publication, Stephen Guilfoyle was long LMT, RTN, LTOS, IIVI, although positions may change at any time.

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