Friday, April 27, 2018

End of Days For Markets?

Tae Kim of CNBC reports, Amazon hits all-time high as Wall Street gushes over Prime price hike, new markets:
Wall Street is buzzing over Amazon's impressive March quarter results.

Analysts are growing more confident over the prospects for many of Amazon's new businesses including subscription services, advertising and cloud computing.

The e-commerce juggernaut reported better-than-expected first-quarter earnings results Thursday. It also gave profit guidance for its second quarter significantly above Wall Street expectations.

Amazon shares soared as much as 7.9 percent in early trading Friday, briefly surpassing its all-time high of $1,617.54.

Goldman Sachs reiterated its buy rating, saying Amazon is still in the "early stages" in many of its key markets.

"We are in the sweet spot between Amazon investment cycles where new fulfillment/data centers are driving accelerating revenue growth while incremental capacity utilization is driving margin expansion," analyst Heath Terry wrote in a note to clients Friday. "We still remain in the early stages of the shift of compute to the cloud and the transition of traditional retail online and, in our opinion, the market is underestimating the long-term financial benefit of both to Amazon."

Terry raised his price target for Amazon shares to $2,000 from $1,825, representing 32 percent upside from Thursday's close.

Several analysts expressed optimism over the company's Amazon Prime price hike. The company announced on Thursday it plans to increase the price of its annual Prime membership to $119 from $99 starting on May 11.

"We are raising our topline and operating margin estimates for FY:18 and beyond reflecting the continued momentum in Prime and accelerating growth in its two more profitably businesses, AWS and advertising," Stifel analyst Scott Devitt wrote in a note to clients Friday.

Devitt raised his price target to $2,020 from $1,800 and reaffirmed his buy rating for the company's stock.

J.P. Morgan believes consumers will stick with the service even with its higher cost.

"The last time AMZN raised the price of Prime was in March 2014, & we do not expect the company to get much pushback from consumers given the increasing value of the service," analyst Doug Anmuth wrote in a note to clients Friday.

UBS predicted Amazon's Prime price increase will benefit the company's subscription services sales growth.

"We believe that strong Prime member growth, and fast seller FBA [Fulfillment by Amazon] adoption will continue to advance Amazon's Prime + FBA flywheel effect that is likely to be supportive of a ~20% rev growth CAGR ('17-'22)," analyst Eric Sheridan wrote in a note to clients Thursday. Our "upward revision [of subscription services revenue] also reflects announced Prime membership fee increase."

In similar fashion, Bank of America Merrill Lynch predicted strong earnings growth from the company's high-profit margin new businesses.

"Amazon's share in its key markets continues to expand, supported by strong fulfillment infrastructure and Prime lock-in, while the earlier stage higher margins businesses of AWS and advertising are contributing to more meaningful profit growth," analyst Justin Post wrote in a note to clients Friday.

Post reiterated his buy rating and increased his price target to $1,840 from $1,650 for the company's shares.

Amazon is one of the best-performing large-cap stocks in the market. Its shares rallied 30 percent this year through Thursday versus the S&P 500's roughly flat return.
It's Friday, I get to relax my brain from pensions and focus on markets, markets, and markets!

It was a month ago where I was wondering whether a quant style crash has arrived and went over daily and weekly charts of Amazon (AMZN), Facebook (FB), Twitter (TWTR) and Tesla (TSLA) using the 50, 100 and 200-day and week moving averages.

I was cautious but should have blindly bought the dip on all these stocks except Tesla which I still think is fragile.

Funny thing, when you're trading and looking back, it's easy to say "I should have bought the dip" but when it comes to risking your own capital, it's much harder pulling the trigger.

Importantly, while buying the big dips on big tech has proven to be a winning strategy, especially for hedge fund quants, there will come a time when the music stops for these Boom Boom markets and momentum traders will get their head handed to them.

I think we're coming close to an important market juncture. I don't see chaos ahead, at least not yet, but as I stated a couple of weeks ago, the market isn't underestimating great earnings, it's simply looking well past Q1 earnings season.

Let me give you two specific examples by looking at Amazon (AMZN) and Boeing (BA) shares this week (click on images to enlarge):



Both companies are leaders. Amazon is a leader driving the NASDAQ higher and Boeing is the main reason why the Dow Jones has done so well over the last couple of years.

But I noticed something. Boeing reported blowout earnings mid-week and so did Amazon today and yet the market basically yawned. Other companies have seen their shares decline after great earnings.

What is going on? I think we're reaching an important juncture here where you have peak earnings which typically coincide with peak coincident economic indicators at a time when short rates are rising and the Fed is still intent on raising rates despite the flatter yield curve signaling a slowdown ahead.

Interestingly, the yield on the 10-year Treasury note hit the all-important 3% this week and even surpassed it temporarily, hitting a one-year high of 3.04% on Wednesday, before falling back below 3% to close at 2.96% on Friday (click on image):

Notice long bond yields have backed up quite a bit over the last year which is why US long bond prices (TLT) are bouncing around their 52-week lows and are off their yearly highs (remember bond yields move in opposite direction from bond prices; click on image):


Last week, I explained why the market is worried about oil and rates, going into detail how the rise in energy prices has lifted inflation expectations over the last year which has been why long bond yields have risen too.

However, I also noted the yield curve is flattening because short rates are rising faster than long rates and that I see a second half slowdown ahead where we risk seeing an inversion of the yield curve:
[...] it's worth noting most of the rally in commodities is driven by higher oil prices so it's also important to take a step back here and THINK of the fundamental ramifications:
  • Higher oil prices lead to higher gas prices and in a debt-laden economy, higher gas prices pretty much wipe out Trump's tax cuts for most Americans, which is why he came out to tweet against OPEC on Friday morning. I found it interesting that Minister Mohammed bin Hamad Al Rumhi of Oman came out shortly after to state oil prices probably won't rise much beyond recent highs near $75 a barrel this year (of course, OPEC is petrified of Trump nor does it want oil prices too high to risk a global recession).
  • More importantly, the Fed has raised rates six times and will continue to raise for the foreseeable future, global PMIs are rolling over, which means a global economic slowdown is ahead, so even if oil prices keep creeping up this summer, it will only add fuel to the fire by tightening financial conditions even more.
  • The yield curve hasn't inverted yet but investors can't ignore it and as AIMCo's CIO Dale MacMaster told me yesterday, the forward yield curve has inverted which is worrisome.
All this to say, those playing the "sector rotation" into energy (XLE) or metals and mining (XME) thinking this is a sustainable rally really need to ask themselves some tough questions as to how sustainable this rally in cyclical energy shares really is.

I still maintain that going forward, US long bonds (TLT) will offer the best risk-adjusted returns. The rise in oil prices and the rise in long bond yields only makes me more certain that a slowdown is ahead and I'd be jumping on US long bonds at this level, especially if the 10-year Treasury yield surpasses 3% which it might (but I still have my doubts).

To recap, I'm preparing for a second half global 'synchronized' economic downturn, and as such I'm recommending investors to trim risk in their portfolio by investing at least 50% in US long bonds (TLT) and overweighting consumer staples (XLP) and interest-rate sensitive sectors like utilities (XLU), telecoms (IYZ) and REITs (IYR) and underweighting cyclical sectors like energy (XLE), financials (XLF), metals and mining (XME), industrials (XLI) and emerging market shares (EEM).

I also think too many investors still don't understand the inflation disconnect and they're being sucked into a market phishing for inflation phools.

What else? It's critically important to understand inflation is a lagging indicator. An astute investor and reader of my blog sent me a comment from Kessler Investment Advisors explaining how inflation is the caboose of the economy.
I know, David Rosenberg thinks markets better prepare for stagflation but I respectfully disagree.

Let me repeat, and I say this with great respect to David Rosenberg and others who are worried about stagflation, the biggest risk ahead is DEFLATION unlike anything we've ever seen, not 1970s-style stagflation or stagflation of any kind.

What about oil and commodity prices and rising labor costs? What about them? There was a brief rally and energy shares caught up but I remain very cautious on this sector for the simple reason that I can distinguish between cyclical inflation due to higher oil prices and a lower US dollar and structural deflationary headwinds which remain alive and are gaining steam.

You see while Jeff Bezos can raise the Amazon Prime rate by $20 and reap billions in gains, more than half of 60-somethings say they're delaying retirement because they can't afford to retire, and this despite the triple-digit gains in the stock market over the last nine years and its positive impact on Americans' savings.

Inequality, the retirement crisis, high structural unemployment, especially among young workers and increasingly among older workers, are all part of the deflation theme I've long been worried about. High debt will only exacerbate structural deflation.

But even on a cyclical basis, macro winds are shifting. Last week, I told you to pay attention to the US dollar (UUP) as it might be turning the corner here (click on image):


The US dollar made big gains this week and I expect this to continue as economic weakness in the rest of the world persists.

Importantly, in the second half of the year we will likely see a flatter yield curve which might invert, higher volatility in risk assets, a rally in both US long bonds and the US dollar which doesn't make sense to most people except when the world is scared, everyone wants to own US assets.

Some market pundits are warning you there's nowhere to hide as asset correlations are flashing caution to investors (click on image):


I say bullocks! Given my fears of long-term deflation, I think you can hedge a lot of downside risk in your portfolio via good old boring US long bonds (TLT) even if rates are low by historical measures.

And if long bond rates head lower in the second half of the year, you want to overweight consumer staples (XLP) and interest-rate sensitive sectors like utilities (XLU), telecoms (IYZ) and REITs (IYR) and underweight cyclical sectors like energy (XLE), financials (XLF), metals and mining (XME), industrials (XLI) and emerging market shares (EEM).

A little note on dividend stocks, however, be careful because some like BCE (BCE) are more solid than pipelines like Enbridge (ENB) here even if both experienced a sell-off as long bond yields backed up (click on images):



Both stocks provide excellent dividends but there are a lot of reasons why pipelines are getting killed in Canada so proceed with caution when picking your dividend stocks (still, I prefer pipelines over energy stocks).

What about technology shares (XLK)? Despite the big rally in FANG stocks this week, I remain cautious (click on image):


I'm actually bearish on semiconductor shares (SMH) and would favor less cyclical tech shares like sofware here (click on image):


What about biotech (XBI), Leo, you like biotech, right? Nope, even here I would proceed with extreme caution and choose my biotech shares wisely (click on image):


From my vantage point, it's becoming a lot more of a market of stocks (alpha) than a stock market (beta) game. Investing in ETFs won't cut it in this environment we're headed into but what do I know, I'm just making a casual observation from staring at my screens all day.

Below, you will find the biggest gainers and losers on my watch list for Friday, April 27 (click on image):



Unless you're an expert trader or investor, don't even think about trading or investing in any of these stocks, you will get your head handed to you.

I screen stocks and read macro 24 hours a day and have gotten my head bashed on more than one occasion, so I know what I'm talking about.

Are there stocks I like here? Sure, I'm looking closely at Teva Pharmaceuticals (TEVA), Valeant Pharmaceuticals (VRX) and Intrexon Corp (XON) but who cares? That doesn't mean anything in these markets and unless you know how to trade and invest properly, don't bother with the stock selection game because a) your timing is critical and b) you need to be very lucky.

Every other day, I call or email Fred Lecoq, my former colleague from PSP, and we screen stocks together and sometimes we agree and many times we disagree. He still likes energy shares (XLE) here, I don't, but we both agree that we missed the big rally in shares of First Solar (FSLR) and that it might rally further (he's more bullish than I am on that stock now, thinks there's more upside):


Another stock Fred likes here is McKesson Corp. (MCK) as it got hit after Amazon announced a joint venture into healthcare which it recently said it wouldn't go through with (click on image):

 

It's getting late, I'm hungry, will eat dinner and call it an early night because I want to get lots of sleep. I stayed up late last night watching an old Arnold Schwarzenegger movie, End of Days, and woke up early today (I regret it!).

Below, CNBC's Wilfred Frost and Seema Mody discuss the day's market action and earnings coming next week. And Dominic Chu looks ahead to what are likely to be next week's top business and financial stories.

Dominic Chu also reports that a technical glitch has halted trading for all exchanges operated by the TMX group in Canada (how embarrassing, this I why I only trade on US exchanges).

Fourth, take the time to watch the full interview with ValueAct CEO Jeffrey Ubben, he raises many interesting points.

Lastly, the trailer from the movie End of Days. Whatever you do, don't ever stay up late to watch this garbage, you're way better off dozing soundly in bed! And don't believe everything stock strategists tell you, they don't realize it but it's the end of (good) days for stocks for the remainder of the year.





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