What a ride!
On the whole, we've gone nowhere since Christmas. The S&P Futures (/TF) were at 2,260 on 12/26 and they finished the day yesterday at 2,266 with dips and pops along the way but, ultimately, nothing happened. Great news has already been priced in and the markets are now looking for justification to these all-time highs. S&P earnings are expected to be up 15% in 2017 but most of that is because Trump is expected to cut taxes – not because things are getting so much better in Corporate America.
The Fed has been fairly consistent in letting people know they expect to hike rates 3 times in 2017 and 3 rate hikes are certainly not baked into this market. We'll be getting earnings this morning from 6 Big Banks and the Financial sector is up 17% since Election Day – can they justify that kind of price action? JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), PNC Financial (PNC), First Horizon (FHN) and First Republic (FRC) are scheduled to report, as well as BlackRock (BLK) and, so far, BLK, BAC and FHN missed on Revenues with FHN also missing on earnings with PNC beating and we're waiting for FRC and JPM.
In anticipation of disappointment in the Financials, we put up a nice hedging play using the Ultra-Short ETF (SKF) offset by a bank we thought would recover (WFC) in Monday's post. We'll see how that plays out later today. Our target is $33 to make $6,150 but, so far, no shockers. Of course, I'm not sure you need a shocker to knock financials back from a 17% run, which knocked SKF back 25% over the same period.
Ah, there's JPM and they earnings are up 2% from last year but how does that justify the 2016 50% bull run from $57 to $86? It's the same with BLK, who made $4.75 last year in Q4, when shares were $300 but now shares are $378 (26% more) with earnings hitting $5.14 (8.2% more). That's pretty much the story for the 2016/2017 market – paying 3x for incremental earnings!
Meanwhile, back in the catastrophe that is retail, GameStop (GME) reported a 16.4% drop in holiday sales with comp store sales even worse, down 26.6% in November and down 13% in December. “During the holiday period, sales in the video game segment were impacted by industry weakness, promotional pricing pressure and lower in-store traffic, amidst a difficult holiday season for many retailers," notes CEO Paul Raines or, in other words – "Aaugh!"
Overall Retail Sales for December were up just 0.2% vs November ex-Autos and Gas vs up 0.5% expected. Overall retail sales, even including Autos and Gas were $541Bn in December and that's up just 4.4% from $518Bn last December yet the Retail ETF (XRT) is up 19% since last January. I really don't know how many different ways I can warn you that this market is very, VERY bubbly! Watch out for Big Box Retailers, who reported a 2.8% decline over Dec 2015.
Oil (USO) took a nice dive this morning and we got our money back on the /CL Futures at $52.50 but it was a disappointing play and it's going to be hard to short them again into the long weekend. OPEC themselves caused the drop with several delegates stating:
OPEC is unlikely to deliver fully on its target to cut production despite Saudi Arabia saying it had trimmed more than it had committed to, OPEC delegates say, but compliance of 80 percent would be good and as low as 50 percent acceptable.
"Compliance won't be 100 percent, it never is," said an OPEC source, who added that an overall rate of 50 to 60 percent would be good enough, based on past compliance levels. Now consider that along with today's Baker Hughes Rig Count (2pm) which will show more growth in US drilling and plenty on non-OPEC drilling picking up World-wide and then consider that we had a net 13 MILLION barrel build in inventories last week and then tell me why oil is up 30% since last winter? That's a bubble that's going to burst!
As you can see, we also had a run in January that took oil from $38 to $45 (+$7) and this Jan we've run from $46 to $53 (+$7) but then we hit new lows in February so we'll see if history repeats itself after the Holiday Weekend though last year it was after President's Day that things really fell apart.
We're hoping for a re-entry on our /CL shorts at $53 but we'll take $52.50 (with tight stops above) if that fails first. The Dow makes a good short at 19,850 as long as 101 holds on the Dollar and the S&P (/ES) with lots of Financials and Energy companies makes a nice short at 2,265 – those are our early-morning lines.
Janet Yellen gave an upbeat report that should allow the markets to hold up into the open, saying the US economy is "doing quite well" and faces no serious obstacles in the short term with the labor market looking strong. Yellen's concerns are the longer-term issues like widening income inequality, weak growth in labor productivity and a rollback of Dodd-Frank regulatory changes.
Over in China (and who worries about them), 2016 Exports have fallen 7.7% and Imports fell 5.5% in the worst year/year drop since 2008-09, when we also ignored China's troubles as if they didn't matter. In one week, China's leaders will see if President-elect Donald Trump makes good on a campaign pledge to brand Beijing a currency manipulator on his first day in office, and starts to follow up on a threat to slap high tariffs on Chinese goods.
"It is hard to see what could drive a more substantial recovery in Chinese trade," Julian Evans-Pritchard, China Economist at Capital Economics, wrote in a note. "Further upside to economic activity, both in China and abroad, is probably now limited given declines in trend growth. Instead, the risks to trade lie to the downside…," he said, saying the chance of a damaging China-U.S. trade spat has risen since Trump's appointment of hard liners to lead trade policy.
So, as much as I'd love to join this party and BUYBUYBUY, I'm still advocating CASHCASHCASH into Trump's first month (that's right, all the way through February) so we can get a good look at earnings and get somewhat of a handle on what policies President Trump will actually push into place that will affect the markets (and various sectors) in 2017. It's not that we don't have plenty of longs – it's just that they are well-hedged, just in case…
Better a late start than a wrong one!
Have a great weekend,
– Phil
