The market got smacked at the open on Tuesday. For the most part, it struggled throughout the session despite several attempts to lure buyers off the sidelines. While major equity indices finished off the lows of the day, it was the Russell 2000 that once again was able to climb off the canvas and record an all-time record close.

Other Unbroken Trends

Consumer Discretionary has gone from value to momentum. Kohl’s (KSS), Chipotle (CMG), and others rallied higher, but the superstar was Netflix (NFLX), which has gone parabolic.

Consumer Staples, Kraft Heinz (KHC) and Campbell’s (CPB), continue to edge higher.

Yesterday’s morning scuttlebutt was that Apple  (AAPL) would get a free pass from the Trump administration during the Trade War. This caught the attention of investors, who began buying computer chip stocks that had been under a fair amount of pressure.  I think that’s a smart area to buy the dip, as well as for those without exposure in their portfolios.

China isn’t going to mess with those computer chip names. They are central to China’s 2025 goal of dominating the world via technology.

Crude Oil Oversold Into OPEC

I also like the action in oil stocks, especially those with exposure to the Permian Basin (PBT) and Eagle Ford Oil & Gas (ECCE). I’m down in Concho Resources (CXO), as I think it’s extremely oversold. It’s the smaller Midland Texas ideas that are on fire, especially those in the Wolfcamp and Bone Spring formations:

• Diamondback Energy (FANG)
• Matador Resources (MTDR)

I know the Organization of the Petroleum Exporting Countries (OPEC) meeting is around the corner, but I think expectations are too pessimistic about a production increase. It might still happen. With crude oil at these levels, it would be suicidal to make them substantial. However, the long-term for crude oil is still in place, but West Texas Intermediate (WTI) must hold at its trend line.

Trade War Update

One of the imbalances we have a chance to fix is greater access to global markets for American goods and services - from lower tariffs to better economic mixes for our trading partners that rely too heavily on exports.

Exports as % of GDP	1960	2016
United States	5.0%	11.9%
China	4.35	19.6%
Canada	17.0%	31.0%
Mexico	8.5%	38.2%
Germany	-	46.0%

Earnings Season: Expectations Are Sky-High

Well, we are on the cusp of the next earnings season, and expectations are through the roof. 

The market will have the burden of clearing those higher expectations and delivering guidance. It will keep the market elevated as well as keeping the valuations intact. Earnings news will be a great reprieve for investors from all the headlines in Washington, D.C., and trade war concerns. 

There will be a reminder of America’s economic might and momentum.

No one expects the same results, as the first quarter saw the S&P 500 revenue climb more than 8% and earnings up more than 26%.

1Q 2018 Financial Change Year to Year	Revenue	Earnings
S&P 500	8.3%	26.6%
Energy	12.7%	86.4%
Materials	14.9%	39.4%
Financials	16.3%	30.7%
Industrials	2.2%	24.7%
Consumer Discretionary	8.3%	19.6%
Utilities	3.0%	16.5%
Health Care	6.9%	16.3%
Telecom	3.0%	14.7%
Consumer Staples	5.4%	12.7%
Real Estate	13.5%	3.1%

Look for those names that can’t beat and offer robust guidance to pay a heavy price. Even when it seems all the boxes are checked in the right way, there could be some hesitation with initial market reactions.

Case in point: after the bell, Oracle Corporation (ORCL) beat and offered solid guidance, and its shares are only slightly higher. While FedEx (FDX), which also beat and offered mixed guidance, was down in after-hours trading.

Of course, before we get to actual earnings releases, we will see earnings warnings in the next few weeks. 

Also, after the close, Starbucks (SBUX) announced it was closing 150 stores in heavily penetrated markets – that’s about three times as many as it typically closes per year. Management said it expects global same-store sales growth of only 1%. The Street was looking for 3%.

The market is dicey. There are clear trends against a clear and vibrant economic backdrop. 

Today’s Session

We have a good old-fashioned bidding war for Fox Entertainment’s assets with Disney lifting its original offer to $71 billion, in a combination of cash and stock.  The ball is now back in Comcast’s court.  

We could be on the verge of massive consolidation across several industries.  It’s important to me that most of these deals are all-cash instead of stock as currency.

Winnebago (WGO) blew away earnings estimates with record quarterly revenue and earnings per share.  Operating margins expanded as consumers spending on discretionary items continued to surge. This could be the biggest market winner out the gate.  The American consumer is coming on strong and companies are enjoying pricing power.

News this morning that Germany automakers are going to ask EU ministers to lower the 10.0% tariff on U.S. auto imports is huge and points to the possibility of curing this trade issue before its gets uglier.  I’m not surprised by the news, since many articles have been written about how dumb this was as Germans would never take a Ford Escort over a BMW.

Be that as it may, there are easy solutions.  Our trading partners need to lower their tariffs and offer easier access to their market.

Comments

It would be nice to see a table of tariffs between China, the EU and US. Jim Schenck on 6/20/2018 11:53:22 AM

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