This post was originally published on this site

Things you need to know

  • Mkts churn ahead of     earnings
  • Estimates slashed – does     that bode well for future guidance?
  • Oil surges up thru     $64/barrel on Libyan conflict

  The mkt has continued to march higher at the start of the 2nd qtr with the S&P only a whisker away from kissing 2900  and only 40 pts away from the record all-time highs clocked back in Oct 3rd, 2018 –  as investors push and stretch valuations beyond short term resistance as we get ready for 1st qtr earnings season that are to start in earnest on Friday – with some of the big banks getting ready to report….JPM, WFC as usual will kick off the dance – (JPM expected to report earnings of $2.36/sh and WFC expected to report earnings of $1.10/sh.)   Momentum is building and this year’s rally led by technology and industrials is beginning to feel a bit long in the tooth – yet continues to push higher…..and while yesterday saw the S&P add on 3 pts and the Nasdaq add on 15 pts – the Dow and the Russell 2000 gave up 84 pts and 4 pts respectively…..…… yesterday’s action saw some of the biggest industrial names get clobbered – BA – lost 4% on the continuing drama surrounding its MAX 737’s, LUV (Southwest Airlines) losing 2.4% because most of their fleet are 737’s and GE losing 9% before rallying into the bell ending the day down 5% after an analyst at JPM cut his rating citing bigger problems than investors are willing to admit….and while the broader mkt managed to hold on – the focus is now beginning to shift to earnings….And while the street is expecting this season to be ‘tough’ – with earnings falling 4% yoy – investors appear to be discounting this news.

 Remember that analysts have been projecting slower yoy growth for months now……estimates have been coming down and then coming down again (and in some cases getting slashed again) bringing the overall growth rate to -4.2% – the first time that we will have seen an ‘earnings contraction’ since the second qtr of 2016 as the benefits created by the tax law slowly diminish, trade talks between the US and China drag on and a global slowdown continues to dominate the story.  That global slowdown though – has allowed central banks to pull back on normalization – taking any rate hikes off the table (for now) – putting a floor under stock prices……  But what is funny is that as estimates have been cut so dramatically, stock prices continue to rally (again think central bank policy)…….leaving us to wonder if investors now not only expect the FED to cut rates, but they also expect UPSIDE surprises, in fact it feels like they are demanding it.  Which leads you to ask the next logical question – If stocks have already moved higher on the expectation of a surprise – what will happen when that surprise comes?  Are we due for a ‘better than expected’ earnings season that will see stock prices fall?   A classic Buy the Rumor/Sell the Fact reaction? 

 Look – companies will also need to raise future expectations and guidance in order to justify current valuations in light of the global economic slowdown.   In her weekly report – my partner Nancy Tengler – Chief Investment Strategist at Tengler Wealth Management (A ButcherJoseph Company) reminds us that

 “AAPL’s CEO, Tim Cook, issued an earnings warning in early January. Note where the stock bottomed. Earnings came in slightly better than the warning and the stock has not looked back. The same is true for FDX and others. When expectations are low, stocks prices tend to exceed expectations”.

 Remember – 72% – 75% of companies reporting – end up beating the estimates – Will we see that number surge this qtr?  Have estimates been cut so dramatically that the number of companies reporting a beat will surge?  And then what will they say about the rest of the year?  Will they raise the outlook?  Will they cite the benefits of the trade talks as a reason for optimism?  My guess is that this time around – we could see more companies beat the estimates and raise guidance in order to justify current valuations…..I mean all of the talk of a global slowdown and tougher times ahead have only seen stock prices surge (around the world) – so any talk of weaker earnings and weaker guidance would not be a positive and we would see a swift correction in stock prices….. But we know – the pendulum always swings too far to the left and then too far to the right before settling in (think  the Oct/Dec correction -20% and then the Jan/April surge +22%…..and while the surge looks better than the selloff – remember – stock prices that fall 20% must rise by 25% just be even). 

 Trading overnight was relatively quiet  – Asian mkts did end the day slightly higher and European mkts have begun the day in the green as well – no matter that Donny has now threatened new tariffs on the Europeans (in a slap across the face) in retaliatioin for the subsidies paid by the European Union to Airbus Industries (1.9%) – which the World Trade Org (WTO) has conceded has had ‘adverse effects’ on the US.  This as the WTO also noted that the US is guilty of the same behavior with BA……and the clock ticks…..

 Besides earnings that begin this week – we have a fair amount of macro data to digest…..Tomorrow brings us CPI – exp of +0.4% m/m, ex food and energy of +0.2% m/m and CPI y/y of +1.8% (still below the 2% target set by the FED).   We will also get Real Avg Hrly Earnings, the FED mins  and the monthly budget statement…..Thursday brings us PPI of +0.3% m/m, ex food and energy of +0.2% m/m while PPI y/y is expected to be +1.9%, Initial Jobless Claims and Cont Claims.

 Oil – also marching higher despite a rise in crude inventories and an increase in US rig counts….renewed fighting in Libya being credited for the latest surge in prices…….Libya is a significant supplier of oil to Europe – so any disruption to production will send Brent higher dragging US WTI higher with it. The fighting in Libya and the tension it creates is on top of the tension that OPEC and the Russians are creating by cutting production significantly in order to artificially boost the price of oil as well as the tensions surrounding the US sanctions imposed on Iran and Venezuela.  Taken together these issues have caused oil to rally  and once it broke thru resistance at $60.78 cts – the road is wide open for a push towards $70 barrel.  Do not discount the good news out of China last week – that saw some of their macro data points turning up – suggesting that the Chinese economy may be on the verge of a turnaround which means that demand will surge…..Look for oil to test $65/barrel, back off and then surge up and thru as OPEC tries to create a 7 handle on the price of oil. 

 US futs are down by 2 pts as the mkts shrug off the latest Trump tariff threat.  There were no new developments between the US and China on trade.  The S&P is about to kiss 2900 – which is remarkable since the move up and thru 2800 was only one month ago and all the talk has been one of caution and trepidation over trade, earnings and the state of the global economy – or what is known as the Wall of Worry – The fact that the investors have taken the mkt higher in light of all of the worries – reflects the fact that investors expect that these ‘worries’ will be resolved at some point – now that being said – this wall of worry has also happened at the mkts peak – and in this case – you must ask yourself – Can the mkt continue to advance or is the mkt ripe for some profit taking?   I think that 2900 will pose some real resistance as we await the start of earnings season – and while I expect that we will see some surprises, I think we could see the mkt back off a bit…as usual – it will be the tone and the message of any forward guidance that will drive the next move in the mkts.  While I think that 2900 will present real resistance, I also think that there is real support below 2850…..individual guidance will clearly drive individual moves in stocks, and if there is a recurring negative  theme among them – then expect the broader mkt to fall prey to that conversation.  The algo’s will force the cancellation of inline demand creating a void in prices and any selloff will be quick. But again – watch for the solid names that get unnecessarily punished…. 

Take good care.


 Butterflied Leg of Lamb

 Here is a holiday classic.

  For this dish – you will need:  1 butterflied leg of lamb, sea salt, pepper.  For the marinade you will need:  Red wine, balsamic vinegar, Worcestershire sauce, garlic, shallots,  oregano, and rosemary……

 Prepare the marinade:  Mix 1 cup of red wine, ½ cup of balsamic, about 1 tblsp of Worcestershire sauce, 4 smashed/chopped garlic cloves, 1 minced shallot, oregano and fresh rosemary…..Now the rosemary is up to you….you can put as much as you like…..more or less….your call.

 Marinate the lamb overnight….remove from the fridge about 2 hrs before you intend to cook so that it warms up to room temperature….Leaving it in the marinade.

 Preheat oven to 475 degrees.  Remove the lamb from the marinade and place in a slightly oiled roasting pan.   Season with sea salt and pepper.  Put in the oven and roast for 10 mins….flip – season the other side with sea salt and pepper and roast for 10 mins.  Now – add a bit of the marinade and reduce heat to 325 degrees and cook for an additional 30 mins…..or until a meat thermometer reads 160 degrees.

 Remove and cover with tin foil and let rest for 10 mins.   Slice thinly on a diagonal – always against the grain.  Arrange on a serving platter that you have decorated with fresh Kale.  Remember it is all in the presentation…..the meal must be pleasing to the eye as well as the pallet.  

 Serve with the pan juices on the side.   Accompany this meal with roasted red potatoes, either steamed asparagus with hollandaise sauce or French cut green beans that you sautéed in onion and tomato sauce* and some wild grain rice.   Always have a large mixed salad dressed with feta cheese, s&p. oregano, lemon juice, olive oil and balsamic vinegar.   A nice Barolo works well with this.

Buon Appetito