It was another seesaw session on Wednesday that saw continued resolve, which has become the main characteristic of the market since Christmas. Stocks stumbled out of the gate on poor economic data (out of China and Europe) with the Dow Jones Industrial Average that quickly slipped to a 400-point loss.

The reversal was swift, building on itself instead of any specific news, although a jump in crude oil lifted stocks in the Energy (XLE) sector. Buying begets buying, but there wasn’t a sense the train was leaving the station, so there wasn’t any panic buying.

Emerging Themes

Small Caps

Small caps and the January Effect might work this year. Over the last couple of weeks, buyers certainly have been focused on small caps.

• Russell 2000: +0.54
• NASDAQ: +0.46
• S&P 500: +0.13
• Dow Jones Industrials: +0.08

Oversold

Oversold household names continue to attract buyers, led by General Electric (GE), which found a bottom after a long-term bear (who moved to sell on the stock at $30) said the worst was over. It should be noted the analyst only moved to neutral; but for many, it feels as if the risk-reward dynamics are very favorable.

Value

Big money center banks continue to act great, led by Goldman Sachs (GS), which is interesting, considering the long term proposition a year ago assumed of a lot of Fed rate hikes, which happened but didn’t help the banks. Now, the Street is expecting zero rate hikes, and these stocks are catching bids albeit at much lower valuations.

Dollar Too Strong

Earlier last year, the Trump administration took heat for suggesting the U.S. dollar was too strong.  There was a clumsy effort to walk those comments back, in part because there is a worry the dollar can get too strong.

I think the strong dollar was the biggest reason so many companies missed on revenue during the third quarter, and why guidance was so disappointing. For instance, Apple (AAPL) posted great financial results on November 2, but the stock plunged on guidance, which management says will be weighed down by $2.0 billion because the dollar is too strong.

Even with last night’s Apple warning, Tim Cook mentioned foreign exchange (FX) and the strong dollar (see more on that below).

Apple wasn’t alone.  In an assessment of all 30 Dow Jones components on the biggest risk to growth in the fourth quarter, 2/3 of the companies pointed to the strong dollar. The next components where raw materials and transportation costs, followed by China and Europe’s weakness. 

By the way, Hurricanes tied with tariffs have a potentially negative impact. However, you wouldn’t know that from all the talking heads that are mostly speaking for themselves with the fear-mongering over the administration’s efforts to fix trade.

The Dollar Index (DXY) hit a 17-month high at the start of November, exacerbating the broad market and stocks sold off even more.

It’s not un-American to say the U.S. dollar can get too strong. In fact, one of the biggest cheerleaders for the dollar is Steve Forbes. He told me as much on my show yesterday, saying the focus should be on a stable dollar.

The only currency the Dollar is struggling against is the Yen, which is more of an indictment of the global economy where there is an increased worry of a recession. 

Apple Cooked

After the close, Apple offered guidance of revenue of $84 billion against the high-end of its own guidance of $93 billion and Wall Street’s consensus of $91.5 billion. Tim Cook gave an interview, where he placed the blame squarely on the slowing Chinese economy, adding that trade tensions are putting additional pressure on China’s economy.

Cook went out of his way to say there has been no Chinese government effort to slow sales. Outside of sporadic chatter on social media or outside stores, the company isn’t being targeted by the Chinese consumer. Apple’s phones are luxury items in China and in America; luxury items across the board have been under pressure.

I think the media is going to miss the real issue here. They are trying to make this a Donald Trump story rather than a Tim Cook story. I live in a household of Apple fanatics, but no one is clamoring for their latest products. There just aren’t enough new bells and whistles for that pilgrimage to the Apple store as there has been for years.

(You know how many times I waited for hours at the Genius Bar wishing they sold drinks.)

Tim Cook is going to have to do better, and I think he needs to shift his focus from solely buying back stock and relying on the iPhone halo. It’s true that non-iPhone product sales increased 19% as several business segments, including the Apps Store, Google Play, Music, and The Cloud, hit records.

However, as other big tech and momentum names are shifting to other revenue streams, it’s just not enough to offset weakness in core offerings. The company has $130 billion. They need to make a couple of giant acquisitions, instead of following the IBM model of looking the other way, thinking big stock buyback programs would save the day.

The Glitch

glitch

noun

a sudden, usually temporary malfunction or irregularity of equipment.

"a draft version was lost in a computer glitch"

verb

suffer a sudden malfunction or irregularity.

"her job involves troubleshooting when systems glitch"

Taken at face value, Tim Cook’s comments will reverberate at the Federal Reserve, which must take an eraser to its ‘Dot Plot’ and communicate a new message to the world fast. Certainly, this is what President Trump was feeling and thinking yesterday when asked about the stock market and he blamed the recent swoon on a “glitch.”

I don’t disagree. The Fed was the biggest reason the market sold off into the close. He suggested an epiphany at the Fed and a resolution on the China trade battle that could happen soon.  

 The good news from Apple’s bad news is there will be so much misinformation and poor reporting that it could force the Fed to pause if they were still on the fence.

Once the Fed and trade are out of the way, the war on Capitol Hill could cast a negative shadow. On the other hand, maybe we’ll be surprised with a bipartisan deal on immigration that opens the government sooner rather than later. 

Note: The shutdown itself isn’t hurting the economy or the stock market. However, the notion of two years of a fierce-pitched battle isn’t great for the nation’s psyche.

 Portfolio Approach

We still have the same cash position, although some may have averaged on Goldman Sachs and/or Apache Corporation (APA).  Just make sure you have your cash ready to go.

Communication Services	Consumer Discretionary	Consumer Staples
2	3	1
Energy	Financials	Healthcare
1	1	1
Industrials	Materials	Real Estate
3	4	0
Technology	Utilities	Cash
1	0	3

Today’s Session

Early weakness in the markets is being mitigated by three things/events.

Federal Reserve

Comments from Dallas Fed President Kaplan that the Fed should not hike rates the first couple of quarters, and it should rethink taking $50.0 billion out the economy each month.

Mergers 

Mega Merger: the takeover news of Celgene (CELG) by Bristol-Meyers Squibb (BMY), which is paying $74 billion, is a monster deal underscoring there is a ton of value out there. 

U.S. Economy 

ADP for December at 271,000 comes in almost 100,000 above Wall Street consensus led by solid mix of Goods producing (construction +37,000) and Service (transportation +33,000 & professional +66,000) jobs.

The futures have improved but are still pointing to a lower open, especially on the Nasdaq. 

 

Comments

Thanks for the continuing great analysis and commentary. A stable dollar is best and should reflect our growing economy. El Zorro Oro on 1/3/2019 10:10:25 AM

Great post! The economy is not roaring back to warrant the Fed to raise rates. It’s trying but not there yet Ray on 1/3/2019 10:18:58 AM

Charles, Yes the dollar is Too STRONG, the fed Powell is trying to derail the wage increases we the dirty fingernail worker's USA legal CITIZENS taxpayers have finally got thanks to president Trump. MSFT, AB, BA, NVDA, AAPL, So many are being hurt by exchange rates. J on 1/3/2019 2:11:22 PM

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