1/18/2019
By Willie Walker, Senior Research Analyst

The week had a bullish tone going into Friday’s explosive broad base rally.  Breadth had been improving and dip buyer were chase stocks higher for fear of missing out on the party. 

• Dow Jones Industrial Average closed higher on the week by 2.96%
• S&P 500 was higher by 2.84%
• Nasdaq +2.66%
• Russell 2000 +2.58%

Thoughts and themes for the week

• The U.S. economy might be slowing, but it isn't going to suffer a recession
• The market got too pessimistic in discounting lower earnings growth
• The slowdown unfolding in China and the U.S. will motivate both countries to get a trade deal done by March 2
• The "Fed put" has been resuscitated, evidenced by Fed Chair Powell's vocal pivot to watching market signals closely and embracing a more patient-minded approach to monetary policy.
• The speed of the rebound has fueled a fear of missing out on further gains
• The market is enthusiastic about the possibility of a trade war truce

Monday:  We started the week out on a weak note after China reported disappointing trade data.  December exports and imports fell unexpectedly.  Investors were concerned the trade war is taking its toll on China’s economy.  It was another round of tight trading range.  At its worst level of the day, the Dow was lower by 235 points, never making it into positive territory (down 30 points was the best it could do).  The good news is the market didn’t collapse.  The bad news was the market was having difficulty clearing overhead technical hurdles. 

Another merger Monday:

• MNG Enterprises to acquire Gannett (GCI) for $12/share in cash, a 40% premium
• Newmont Mining (NEM) to acquire Goldcorp (GG) in a deal valued at $10 billion  

Citigroup ( C ) initially reacted negatively to a revenue shortfall, but eventually overcame the early weakness as investors turned their focus to earnings that were driven by expense controls. Citi closed higher by 4%.

Micron (MU) pressured the semiconductor sector after Morgan Stanley commented that it might be to early to buy the recovery.  MU closed lower by 4.1%  

Tuesday:  Futures pointed to a higher open on scuttlebutt of stimulus to spur China’s economy.  Some high profile earnings misses paired their gains prior to the open.  Markets opened unchanged and worked their way higher throughout the day, the Dow closed higher by 155 points.

Brexit vote was the largest defeat for a British Prime Minister in modern history, and the first British parliamentary defeat of a treaty since 1864: (202 yes’s, 432 no’s).

The Producer Price Index declined 0.2%, while the core index (less food and energy) declined 0.1%.  Pricing pressures are easing, which should appease the Fed and help expand corporate margins.

Management teams from Sherwin-Williams (SHW), JPMorgan (JPM), and Delta Air Lines (DAL) all said business was better in January than in the fourth quarter of last year. 

Sherwin Williams (SHW) issued lower downside guidance, but indicated things began to improve towards the end of December.  SHW closed lower by 4%, but recouped the loss and closed higher on the week, very impressive move. 

Wednesday:  The Dow opened higher by 70 points and tacked on another 215 points during the day on the back of earnings from Goldman Sachs (GS).  The Dow gave back a good chuck of its gains going into the close.  Volume was light, but we like that because it underscores the fact most investors are still hesitant, maybe waiting for the market to hit or re-test the highs to become aggressive.     

Fiserv (FISV) announced plans to acquire First Data (FDC) for $22 billion, $22.74 per share in an all-stock offer.  .   

Goldman Sachs (GS) soundly beat on both the top and bottom line, revenues rose 17%.  GS closed the day higher by over 9%.

Bank of America (BAC) posted a solid beat, led by increases in consumer and business loans and a conservative approach to trading that had hit its rivals hard during the quarter.  BAC closed higher by 7.2%. 

Nordstrom (JWN) reported holiday comps +1.3% and expects EPS to be near the low end of the company's prior outlook range.  JWN traded down 4.8%.   

Import and Export Price Index for December hasn't turned the tide with respect to the market's view that inflation pressures overall remain in check. Import prices declined 1.0% month-over-month and were down 0.6% year-over-year.  Excluding fuel, they were unchanged in December and up just 0.5% year-over-year.  Export prices declined 0.6% and were up 1.1% year-over-year.  Excluding agricultural products, they were down 1.1% in December and up 1.0% year-over-year.  Another indication inflation pressures are easing.   

The Fed Beige Book

Boston - Some retailers and manufacturers raised selling prices. Most respondents said their outlook was positive, although somewhat less certain than earlier.

New York - Input costs and selling prices rose at a steady pace. Holiday season sales were a bit on the sluggish side, but still up from a year ago. Tourism remained brisk.

Philadelphia - Lack of qualified labor continued to constrain hiring and raise wage pressures. Firms remained generally positive about the six-month outlook.

Cleveland - Upward pressure on costs and selling prices continued. Nonresidential construction continued to be strong and housing demand stabilized.

Richmond - While many service sector industries saw growth, manufacturers reported a decline in shipments and orders and faced higher input costs due to tariffs.

Atlanta - Holiday sales were solid. Manufacturers noted a decrease in new orders and production.

Chicago - Wages for farm income improved as corn, soybean, and wheat prices moved higher.

St. Louis - Reports from contacts indicate that economic conditions have continued to improve, although the pace of growth has slowed since our previous report.

Minneapolis - District manufacturers indicated that business conditions were strong and generally expected to continue, with upbeat outlooks for the year to come. Holiday retail spending was strong.

Kansas City - Economic activity has been flat since the previous survey, but expectations were generally positive.

Dallas - A broad-based deceleration was seen across manufacturing, services, retail, and energy. Hiring continued, and widespread labor shortages further elevated wages. Price pressures eased slightly.

San Francisco - Labor market conditions remained tight, and price inflation was flat. Sales of retail goods expanded moderately, and activity in the consumer and business services sectors was solid.

Thursday: The Dow was down 100 points on the open, then rallied strong and hard after, as dip-buyers stepped in.  The market spiked mid-day on reports that the White House is considering lifting tariffs on imports from China. Thereafter, the Treasury Dept announced there were no changes, but the rally mostly held up anyway.  In the end, the Dow was higher by 170 points, closing at 24,370.  It was a strong performance and the Dow regained its 50-day moving average at 24,346, the 200-day moving average @ 24,966 is the next target.     

Morgan Stanley (MS) laid an egg, including a big miss on FICC business. 

• Revenue $8.50 billion versus estimate $9.35 billion
• Earnings per Share $0.73 versus $0.89

High-end jeweler Signet (SIG) missed already lowered expectations.  The company reported same-store sales of -1.3% as traffic was considerably lower than anticipated.  The stock closed lower by close to 25%. 

CSX reported fourth quarter revenue rose by 10% as volume increased 3% combined with a 7% pricing gain. Earnings increased by 58% and came in slightly above estimates. Locomotive miles per day increased by 22%, while cars online, a count of the number of active freight cars on company-owned lines, was lower by over 300 locomotives (10%).  Less locomotives saves on expenses. Operating margin improved to 39.8% from 33.05%.  The stock initially traded lower but recouped most of the losses by the end of the day, closing lower by 1%. 

Philly Fed Index came in at 17, versus 9.1 the month before and above consensus of 10.

Friday:  The markets lifted off on reports that China will completely erase the $323 billion trade surplus with the United States reducing it to zero by 2024.  The offer suggests that one trillion dollars will be used to buy additional American goods and services.  Although the reports have not been confirmed, the markets were encouraged and traded significantly higher. 

Rumblings that President Trump will promote infrastructure spending in the State of The Union boosted stocks such as Jacobs Engineering (JEC) and U.S. Concrete (USCR).    

Earnings out of Schlumberger (SLB) energized the energy sector.   SLB traded higher by 7.9% and the Oil Service Index, OSX, was higher by over 3.5%.    

Tesla (TSLA) slashed its employee headcount by 7% in an attempt to cut costs.  The move cut TSLA’s price by 13%.     

Trucker J.B. Hunt (JBHT) and rail operator Kansas City Southern (KSU) reported better than expected earnings that drove the Dow Transportation Index trading higher by close to 2.5%. 

VF Corp (VFC), the maker of Vans footwear, reported blow out earnings and issued strong guidance.  VFC ran higher by over 12%  

The Baker Hughes North America weekly rig count saw a decline of 21 oil drilling rigs.  This was the biggest weekly decline since February 2016.  The Energy fund, XLE, gained 2.0% on the day.       

On the week:  The week had a bullish tone going into Friday’s explosive broad base rally.  Breadth had been improving and dip buyer were chase stocks higher for fear of missing out on the party. 

• Dow Jones Industrial Average closed higher on the week by 2.96%
• S&P 500 was higher by 2.84%
• Nasdaq +2.66%
• Russell 2000 +2.58%

Willie Walker
Wall Street Strategies

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