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Morning Commentary

Tied Up in Knots
By Charles Payne, CEO & Principal Analyst
4/18/2017 9:39 AM

Despite the lower-than- expected data on manufacturing and housing, the market came out the gate on Monday with oomph and never looked back; all the things that tied the investor’s stomach in knots are still lingering issues.

Yesterday was a huge rebound in the market, in part to a sigh of relief over that dud missile that fizzled on the launching pad without an attempt to test nukes. Yet North Korea still sounds belligerent in the face of this administration’s show of force and warning that it will not be pushed around.

Of course, the threat of military entanglements is on the minds of many after the Tomahawk Missile salvo against Syrian President al-Assad was largely applauded. Since then, America has sent an armada towards North Korea and dropped the biggest non-nuclear bomb in history.

Perhaps looking the other way allowed the market to rally over the past few years, but it also emboldened the bad actors of the world to the point where it’s unclear if anything short of an actual military conflict will deter their wild-eyed ambitions. At this point, there doesn’t seem to be an end game other than “the end.” And yet, they continue saber-rattling.

As for the economic part of geopolitical angst, much will be learned and perhaps relieved after the initial phase of the French election.

On the Trump economic agenda, there are scuttlebutts of behind-the- scenes negotiations within the GOP, creating a growing sense of cautious optimism. Moreover, in an FT interview, Steve Mnuchin seemed less enthused about a border adjustment tax.

On that note, during the interview, Treasury Secretary Mnuchin made an admission on the goal of tax reform by August that many had already concluded it was:

Highly aggressive to not realistic at this point 

While weak economic data might be good news with respect to the Fed not hiking rates, it’s odd that financials were the strongest performers of the session. While it is true, regional banks and bottom fishing helped after M&T Bank (MTB) posted its biggest upside earnings surprise before the open as big money center banks, including Goldman Sachs (GS), enjoyed a strong session.

The biggest hit to the Atlanta Fed forecast for the first quarter came from disappointing construction, spending numbers, and I felt there was great news on the private side of the ledger. 

That being said, employment and auto sales were worrisome. The initial forecast of 2.3% growth is all the way down to 0.5%, which starts to bring to mind the “R” word – recession. 

Either way, it was a very impressive rally even on light volume, but the real test comes as the week moves along and more companies post their earnings and guidance.

Today’s Session

Major indices were looking higher, until Goldman Sachs (GS) reported financial results that missed widely on the top and bottom line.  The stock has been among the best performers since the election, gaining up to 24% coming into today’s session, so this miss is a big surprise.  Management at Goldman lifted the dividend, which is great news for long term investors that are smart enough not to fret about an occasional bump in the road.

However, the stock will be lower reflecting board risk of the market that assumed a lot of positive occurrences, including tax reform officially pushed out to later in the year – maybe.  

Additional stocks getting hit at the open:

  • Cardinal Health (CAH)
  • McKesson (MCK)
  • Harley Davidson (HOG)

Then there’s the latest on housing which is mixed this morning. 

Housing

(annualized rate)

Actual

Estimate

Starts

1.215

1.285

Permits

1.260

1.250

 

United States Building Permits

United States Housing Starts

The Building permits came in ahead of consensus, and bodes well for the reminder of the year, which must be a banner year for the industry and economy. 

There was demand for stocks before Goldman’s report, so let’s hold off and see where that might materialize elsewhere. 


 

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