No Spoilers

361 Capital Market Commentary | April 29, 2019

Wow! What a weekend for global screen viewing. GoT: Battle at Winterfell, “Avengers: Endgame”, Pucks and Hoops playoffs, Battle for the Premier League and for Taylor Swift’s 83 million Twitter followers, a new music video.

So the U.S. markets continue to hit new highs as more evidence of rebounding economic growth (GDP and Durable Goods) with little inflation attached. Sell in May and go away will not work this year if the stock market continues to price in a Fed Funds interest rate cut and a steeper yield curve. (Take note that the bank stocks are beginning to wake.)

Earnings have helped the market. With about half of the S&P 500 reports on the table, sales growth has come in more or less in line, while earnings growth has surprised to the upside. There were some real misses like MMM, UPS and Intel, but also some big hits like Microsoft, Ford and Facebook. The good news for the markets is that earnings growth is now being raised during this earnings season versus being cut like during the last two reporting periods.

On the macro side, this week saw the U.S. Dollar break out to the upside which held back the foreign equity and commodity exposures. So far U.S. stocks are ignoring the dollar strength. There is a Fed meeting on Wednesday, but don’t expect a rate hike or cut but listen for what they say about inflation (or lack of it). There is an increasing debate about how a rate cut or two might stave off deflation. With short U.S. rates so much greater than the rest of the world, maybe there is room to cut, but will the Fed really pull this lever now?

Hope that you enjoyed the screens this weekend. Now someone tell me: How much did Audi pay to logo every cool car in the Avengers movie?

On that new debate at the Fed that we might learn more about on Wednesday…


Sluggish inflation numbers are persistently overshadowing firmer US growth and teeing up a debate in the Federal Reserve over whether the next move in interest rates may need to be down rather than up.

The US central bank, led by chairman Jay Powell, is likely to keep policy unchanged at 2.25 to 2.5 per cent when it meets on Tuesday and Wednesday. With US activity improving after a shaky start to the year and overseas risks diminishing, many analysts remain confident the Fed will keep rates at their current level for the remainder of the year.

But policymakers including Charles Evans of the Chicago Fed have opened the door to future discussions over whether the central bank may wish to lower rates if inflation disappoints further or growth takes an unexpected turn for the worse. Richard Clarida, the Fed’s vice-chair, this month noted in a CNBC interview that in 1995 and 1998 the central bank had taken out some “insurance cuts” even though a recession was not looming.


New all-time stock market highs!


Remininiscences of an American Capit... Tweet

Wonder how the Target warehouse manager is positioned?


As equities surge to all-time highs, volatility has all but vanished. Hedge funds are betting the calm will last, shorting the Cboe Volatility Index, or VIX, at rates not seen in at least 15 years.

Large speculators, mostly hedge funds, were net short about 178,000 VIX futures contracts on April 23, the largest such position on record, weekly CFTC data that dates back to 2004 show. Commonly known as the stock market fear gauge, aggressive bets against the VIX are, depending on your worldview, evidence of either confidence or complacency.


VIX Positioning

Guess this must be the wall of worry that the FOMO players have to climb…


FMS investors are long defensive assets and short cyclical assets

The snap in Q1 GDP will help the keep recession talk away…



And the lack of inflation will keep the Fed from raising the Funds Rate in 2019. The market still expects a cut…


Probability of Fed Cut in 2019

Relative to other developed countries, the U.S. has plenty of room to have lower short-term rates…


Charlie Bilello Tweet

Stocks follow earnings…


During the last two earnings periods, estimates were being cut. Earnings estimates have now turned the corner and are moving higher.

Updated 1Q-4Q 2019 $SPY EPS growth expectation

As for individual earnings, what a mess at MMM…


No wonder the stock was -13%. Sales came up short (especially in China and in Autos) and margins were a disaster across the board. This is gonna take more than Scotch tape to fix.

Q1 Business Group performance

Over at Amazon, they made so much money that someone decided to give you another free day of shipping…


The faster you ship, the more people buy

And at Microsoft, the cloud is a very powerful growth engine for a $1 Trillion dollar market cap company…


Azure +75% YoY on a constant currency basis underscores strong demand as large enterprises move workloads to the Cloud, and turn to Microsoft as the partner of choice for digital transformations. Our checks and UBS Evidence Lab survey work suggests that there’s lots more opportunity ahead. Azure is growing fast, but margins are still expanding with GM +130bps YoY and op. margins +290 bps. We see Microsoft’s balanced approach of growth investments and margin scale in legacy supporting mid-teens FCF growth, while we believe shares can hold the current multiple of 26x EV/CY20E FCF and track higher with underlying growth in the business.


Another very big week of earnings with another 30% of the S&P 500 reporting…


Most Anticipated Earnings Release April 29, 2019

U.S. Growth and Small Cap stocks led the markets last week…


The strong dollar made things difficult for International, Value and Commodity based assets.

Stock Returns 4-26-19

About that U.S. Dollar breakout…


Good and bad news on $USD breakout
Good news: Breakout on US relative strength
Bad news: 39% of $SPX revenues are non-US & $USD strength will pressure margins


Health Care sector bounces to get green for 2019…


Earnings (FB, CMCSA, TWTR) and the Avengers (DIS) help the Communication sector for the week. A steepening yield curve is now helping the Banks.

Sector Returns 4-26-19

Good news for bank stocks…


US 10yr-2yr Government Bond Spread

A big member in the Communications sector is Disney…


Walt Disney Co.’s superhero epic “Avengers: Endgame” became the first movie to gross more than $1 billion in its debut at the world-wide box office.

The Marvel Studios blockbuster, powered by record-setting hauls in the U.S. and China, collected an estimated $1.2 billion in its first five days of release. An estimated $350 million of that total came from the U.S. and Canada, an amount that blew past the previous opening-weekend record set last year by “Avengers: Infinity War” by about $92 million.

Hollywood had expected “Endgame” to set a record, but the movie’s performance stretched the limit of what many studio executives thought was even possible in an opening weekend. Demand forced exhibitors to dedicate about half the nation’s screens to the superhero movie, with dozens of locations screening it round-the-clock and even 2 a.m. showtimes selling out.


Avengers Endgame Photo

This chart is good news for Colorado…


As Denver is now Schwab’s largest employee base.

New Net Asset - Schwab, Merrill Lynch, Morgan Stanley


Trend following has been depressing. I hope that AQR is correct in forecasting a change in this trend…


“The unusual lack of large moves across global markets during the current decade in the wake of the global financial crisis is the main driver of recent poor trend-following returns,” wrote AQR Capital Management LLC in a note Tuesday. “While we cannot for certain say when markets will exhibit sustained large moves, we expect that they eventually will, and that trend-following strategies will be able to profit from them accordingly.”


Here is another trend that many are looking to be broken…


@charliebilello: Ratio of Growth to Value in large caps at its highest level since 2001…

Ratio Large Cap Growth vs Large Cap Value

Bernstein has a good thought on how European stocks could beat U.S. stocks going forward…


Over the next 12 months, U.S. stocks will lose the major support they get from buybacks as a deterioration in the quality of corporate debt and slowing economic growth put an end to a share-repurchase bonanza that reached $1 trillion in 2018, according to Bernstein. That’s where unloved European stocks enter the picture, with their low dependence on buybacks.

“This would remove one advantage of U.S. equities over Europe,” said Bernstein strategists led by Inigo Fraser-Jenkins. “As the buyback support is reduced it will make a stronger relative case for Europe.”

While the U.S. Federal Reserve’s decision to halt rate increases may have reduced market concerns about lower-quality debt hurting equities, Bernstein analysts say the topic isn’t off the table and expect credit spreads to keep widening over the next 12 months.

The significance of corporate share repurchases to the U.S. stock rally is pronounced, with the $1 trillion companies plowed into their own shares in 2018 overshadowing the $100 billion net flow from all active and passive funds.


US buybacks and issuance vs Pan Europe buybacks and issuance

The Scots have had it with the Brits…


It may not matter what happens with Halloween Brexit. Scotland is busily filling out the paperwork for divorce.

Scottish independence: Should Scotland be an independent scountry? %

Who wouldn’t pay to see RBG debate Stephen Moore?


After watching “On the Basis of Sex” over the weekend, I had the idea that maybe Congress would kick the Fed nomination review up to a pay-per-view event with Chief Justice Ginsberg to help pay down the budget deficit. This could rival Avengers: Endgame ticket sales.

On why women should never earn more than their husbands:

“What are the implications of a society in which women earn more than men? We don’t really know, but it could be disruptive to family stability. If men aren’t the breadwinners, will women regard them as economically expendable? We saw what happened to family structure in low-income and black households when a welfare check took the place of a father’s paycheck. Divorce rates go up when men lose their jobs.” (National Review, April 2014)


Given it was NFL draft weekend, here is a final Tweet for thought…


Elizabeth Warren NFL Tweet

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