So close to a deal…

361 Capital Market Commentary | May 6, 2019

Given that it is graduation time, why don’t we just throw in a box of blank Stanford, Yale and USC diplomas and move on? The external pressures on the White House must be increasing if they first caved on the Chinese IP constraints and then decided to Tweet a Friday deadline. I am beginning to lose track if we are in the last out of the 9th inning, or still at the National Anthem. But the POTUS must know that if he doesn’t fix this big trade war soon, the farmers, auto workers and new home buyers of America will make sure the next POTUS does. Just more noise for the stock markets in the very short term.


Agricultural prices continue to hemorrhage…

 

The average ag commodity is down 16% year over year as silos, barns and feedlots are full.

Invesco DB Agriculture Fund

Of course this agricultural financial impact will affect the elections…

 

The agricultural woes in Wisconsin are a microcosm of the difficulties that farmers across the country have faced as a result of the multifront trade disputes that have lingered for more than a year. In 2018, farm income nationally was $63.1 billion, the second-lowest total in a decade. Commerce Department figures released on Friday suggested that farmers were not anticipating much relief, as purchases of agricultural equipment were tepid…

The political implications for Mr. Trump remain unclear. Wisconsin remains very much split when it comes to support for the president. In the 2000, 2004 and 2016 presidential elections, Wisconsin was decided by a margin of less than one percentage point. Mr. Trump beat Hillary Clinton by nearly 23,000 votes, making the state a hotly contested battleground.

(NYTimes)

Meanwhile, I will happily lose $3.75 everyday at Starbucks…

 

Donald Trump Tweet China

A quick visual reminder why we want to remove all barriers to trade with China…

 

The World's Busiest Ports(VisualCapitalist)

I agree with Oppenheimer…

 

The trade wars will either get settled in the next few months, or in January of 2021. Just up to the White House to decide if they want to sign the deal or the next team. Don’t forget that the Fed has your back, so buy your favorite stocks at lower prices on the trade war dips.

Oppenheimer Tweet

This was the correct call on Sunday night…

 

The Rational Walk Tweet

Jobs Friday was a positive surprise for the U.S. economy…

 

@charliebilello: US Unemployment Rate moves down to 3.6%, its lowest level since December 1969. #payrolls

US Unemployment Rate

Jerome Powell sent the markets on a ride after last week’s Fed meeting…

 

With a single word — “transitory” — Federal Reserve Chair Jerome Powell has sprung the “dove trap,” leaving market participants wondering if the central bank will ever commit to its 2 percent inflation target.

The two-day Federal Open Market Committee meeting that ended Wednesday produced a statement that closely matched expectations. The Fed held the target range for short-term interest rates steady, justifying their “patient” strategy with weaker domestic demand and slower inflation. This outcome seemed consistent with growing concerns among policy makers about low rates of inflation. Those concerns gave rise to growing expectations of a rate cut this year.

Powell, however, quickly upended that story. During the post-meeting press conference, Powell attempted to explain away slower inflation. Specifically, Powell said we “suspect that some transitory factors may be at work.” This means central bankers intend to look through the recent soft inflation numbers. In contrast, Powell just a few weeks ago described slower inflation as a “major challenge of our time.”

(Bloomberg)


This great chart from Ned Davis Research is a reminder to ‘Don’t Fight the Fed’ (and the tape)…

 

So, when yields are moving lower and the market is trending higher, BE LONG.

Dont Fight The Fed or The Tape

The Fed would tell you that 3-4% bond yields make sense…

 

Bond Yields Buffett

We know that Growth has crushed Value, but wow, look at that multiple spread.

 

SP 500 valuation dispersion is wider than average


As my 361 Capital team shows, Growth may still be outperforming Value, but at a decreasing rate…

 

The Growth index has still outperformed on a rolling 52-week basis, but the spread has shrunk. This is by no means evidence of a prescient call. The previous post mentioned the then-current spread had been above one standard deviation for 18 weeks, below the average of 24 weeks of the previous high-growth regimes. It finally dropped below the one standard deviation level in September, lasting 45 weeks (counting from the first breakthrough to the final, as there were a few weeks that ended below one standard deviation – 39 weeks ended above in the period). This most-recent regime ended up being the second-longest since the end of the tech bubble (07/20/07 to 07/04/08 lasted 51 weeks from beginning to end, with 38 weeks above the one standard deviation line).

(361 Capital)

R2K Growth (RUO) - R2K Value (RUJ) (relative return difference)
(361 Capital)

If Value versus Growth makes a move, you will see it strongly exhibited in the Small Cap space given the very different Financial and Healthcare exposures in those indexes…

 

If the economy and Fed continue on their current path then the yield curve could steepen which will help banking stocks. And with the recession being pushed out due to the Fed’s new accommodation there will be fewer worries about credit losses and bad loans. So with Financials making up almost 1/3 of the Small Cap Value indexes, they are in a good position to outperform Small Cap Growth for the next 12-24 months.

Another important factor is that Healthcare is ¼ of the Small Cap Growth indexes and that could be challenged going into the Democratic primary and then the Presidential election in 2020. This could be too risky to be overweight this space for many active managers for the next 18 months.

iShares Russell 2000 Value ETF vs iShares Russell 200 Growth ETF
(Morningstar)

Last week, Small Caps won the day even with a lagging U.S. Dollar…

 

Returns 5-3-2019
(5/3/2019)

Among sectors, Banks were the shining stars, while Energy stocks continued to underperform…

 

Sector Returns 5-3-2019
(5/3/2019)

A couple earnings tidbits I found interesting from last week…

 

Apple is more positive on China…

Our year-over-year revenue performance in Greater China improved relative to the December quarter and we’ve seen very positive customer response to the pricing actions we’ve taken in that market, our trading and financing programs in our retail stores, the effects of government measures to stimulate the economy, and improved trade dialog between the United States and China. In the iPhone space, we saw a better year-over-year performance in the last weeks of the quarter as compared to the full quarter or November and December, which was sort of appears to be the trough. Our App Store results are still reflecting the impact of the slowdown in regulatory approval and gaming apps in China, but we are encouraged by the recent increase in the pace of approvals. We believe strongly in our long term opportunity in China”.

Chubb is positive on insurance pricing…

“We grew premiums globally over 5% in constant dollars and took advantage of an improved pricing environment. In fact, in U.S. commercial lines, London wholesale and certain other international markets, it is the best we have seen in a number of years”.

Uber and Lyft will be public companies. This will be interesting…

 

What’s happening in the ride- sharing market is typical of industries with massive overcapacity. In those markets, whether airlines or steel, too much capacity means brutal price wars until some of the combatants are annihilated, and the victors gain enough pricing power to cover their production costs. To be sure, you don’t usually see this pattern in markets that are already dominated by only two competitors, as is the case for ride hailing in the United States. But ride sharing is special in a number of ways.

First, it offers what economists call “network effects”: The more riders you have, the easier it is to attract and dispatch drivers, and the more drivers you have, the more riders you will attract. Markets that display network effects tend to consolidate toward a handful of players, and possibly only one.

Second, ride sharing has low switching costs. It’s simple to install both apps on your phones, and many riders and drivers do just that, the better to comparison shop. Which means fierce competition over every single ride.

Third, Uber and Lyft aren’t in competition with only each other; they’re competing with conventional taxis. And public transportation. And your personal automobile, not to mention your bicycle, moped or feet. Eventually, if the companies can make people dependent enough on ride hailing , they might be able to raise prices a bit and still retain most of their customer base. But “eventually” keeps receding over the horizon — and in the meantime, they’ve also got to undercut each other.

(WashingtonPost)

Charlie Munger must be one of the most read men in the world which is why I pay attention when he talks. There was a great long interview in the WSJ this weekend that you must read all of. Here are two very small excerpts…

 

First on reading…

Q: How much time do you spend reading in a typical day?

A: Oh, it’s huge. I read myself to sleep every night. I read enormously. I like doing it. Not only that, what I found very early in life was that once I learned to read and handle elementary math, I really didn’t need professors or anything. I could figure out almost anything I wanted better from the written material than from having some professor tell it to me, because he’d be going too fast or too slow or telling me something I already knew or didn’t want to know. And so of course I like doing it by reading.
You look at [Andrew] Carnegie and [Benjamin] Franklin, they had a few years of primary school, they learned everything by themselves by reading. Whatever they needed, they just learned. It’s not that hard. Imagine educating yourself by firelight, no lamps, no electricity, after a day’s brutal work. Our ancestors had it tough.

 

And interesting thoughts on the election…

Q: Do you have any predictions about the Democratic presidential primary?

A: Well, I am fascinated, fascinated, by that [Mayor Pete] Buttigieg. I think he is, he’s so refreshingly different from other people. I think he might go a long way. He’s thoughtful and a pleasure. Bernie looks like an angry prof up there, lecturing you.
I think [Buttigieg] could go a long way. [Editor’s note: Mr. Munger is a lifelong Republican.]

(WSJ)

If you need a Mother’s Day or Graduation gift for a Strong Woman who wants to change the world…

 

The Moment of Lift by Melinda Gates
(TheMomentOfLift)

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