Morning Briefings
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Vertical Earnings
(1) Handful of S&P 500 industries showing moonshot earnings. (2) Tax cut provided most, but not all, of the rocket fuel. (3) Industries with out-of-this-world earnings mostly in Tech, Consumer Discretionary, Industrials, Materials, and Energy. (4) Amazing Amazon! (5) Entertaining earnings in Movies & Entertainment industry. (6) CAT earnings expectations are hot despite threats of protectionism. (7) Rising commodity promises boosting Energy and Materials earnings, confirming solid global economy. (8) Sandra explains the art of Italian politics. (9) As shown in the opera Pagliacci, comedies can end tragically.
Around the World
(1) Trump’s monkey wrench. (2) Commodities holding their regained ground. (3) Fed’s gradual normalization and Trump’s protectionism lift dollar. (4) Higher US interest rates and stronger US dollar is a bad cocktail mix for some emerging economies. (5) Our international capital flows indicator could soon be signaling outflows from the rest of the world to the US if dollar remains strong. (6) Global M-PMI is down from recent peak, but still solid. (7) Some signs of weakness in global exports. Blame Trump? (8) Forward revenues for major MSCI global stock composites showing strength, not weakness. (9) Stay Home may trump Go Global as long as Trump goes rogue on protectionism.
Corporate Finance Extravaganza
(1) Diving into the data to see how TCJA impacts corporate finance. (2) Tax on repatriated earnings treated as capital transfer from business to Treasury. (3) Moving from worldwide to territorial corporate tax system still leaves taxes to be paid on GILTI and BEAT. (4) Tax cut and capital consumption adjustment lift after-tax profits from current production and cash flow to record highs. (5) TCJA already lifting capital spending significantly among S&P 500 companies. (6) Protectionism is a potential wet blanket.
Keep on Trucking
(1) So far this year, S&P 500 has held up reasonably well despite lots of bearish noise. (2) Cyclical sectors mostly outperforming, while interest-rate-sensitive mostly underperforming. (3) SmallCaps at record high because they are less exposed to the global economy, which may be challenged by the strong dollar and protectionism. (4) Sounding the retreat alarm: Going back to Stay Home investment recommendation. (5) GDPNow now predicting 4.8% growth this quarter. (6) Record-high truck freight index belies shortage-of-truckers scare, as does truckers’ modest pay gain. (7) Our Earned Income Proxy at record high again. (8) Movie Review: “Adrift” (+ +).
Soap & Apple Chips
(1) Lots of soaps and stocks to choose from. (2) Consumer Staples got cheaper as bond yield rose this year. (3) Lots of M&A in the Consumer Staples space. (4) Getting hipper. (5) Pepsi goes organic. (6) Others going to the dogs. (7) This is your brain on stem cells. (8) Meet the organoid.
The Italian Job
(1) The same Old Normal for Italian politics. (2) Eurosceptics ascending in Italy. (3) How much more can Draghi do to save the euro? (4) ECB likely to postpone monetary normalization till next year. (5) ECB has failed to revive inflation and to stimulate much lending…and now this! (6) TARGET2 payments system shows mounting imbalance between Germany’s surplus and PIIGS deficit. (7) Italian crisis flattens US yield curve in a way that might pause the Fed’s gradual normalization. (8) Another summertime crisis in Eurozone.
Recession Watch List
(1) Second longest day’s journey into the longest day. (2) Fielding questions in North Carolina and Texas. (3) Is it monetary “normalization” or tightening? (4) In the past, rising interest rates rose until they caused a financial crisis, a credit crunch, and a recession. (5) Slicing and dicing the yield curve. (6) Will credit markets start to crack in the corporate bond sector this time? (7) Trump makes a deal with the Saudis by breaking Obama’s Iran deal. (8) Rounding up the usual troublemakers in the Eurozone. (9) Trade war…yada, yada, yada. (10) Fed officials worrying about flattening yield curve. (11) Is it the third mandate?
Surviving In Amazon World
The next Morning Briefing will be sent on May 29. (1) Widening 2018 performance gaps among the sectors. (2) Kohl’s, Macy’s, and TJX repairing their business models. (3) Zuckerberg goes to Brussels. (4) Zuck beats the clock in bizarre one-hour session with EU legislators. (5) EU’s General Data Protection Regulation aims to protect online privacy. (6) Facebook giving European users take-it-or-leave-it option.
Focusing on the Signal
(1) Backward vs forward looking P/Es. (2) Too bearish vs too bullish. (3) Stay bullish as long as no recession in sight. (4) Stripping down the Blue Angels into a noise-to-signal model. (5) Fed’s Williams is passionate about r-star, and wouldn’t mind higher inflation. (6) Fed Chairman Powell claims he isn’t worried about impact of tightening US monetary policy on EMEs. (7) So why did he give a speech on the topic?
Some Like It Hot
(1) Another relief rally following another panic attack? Probably. (2) Declaring a ceasefire before trade war has even started! (3) Chatter about shortage of liquidity is drying up. (4) Going forward, profits earned abroad will no longer be taxed in US. (5) Record year ahead for sum of buybacks and dividends. (6) Q1 S&P 500 earnings up 24%! (7) Latest economic indicators indicating no boom, no bust.
Bond Market’s Message
(1) Fed, not inflation, is driving bond yields higher. (2) Fed isn’t behind the curve on inflation. (3) Peak bond yield likely to be 3.50% over next 12-18 months. (4) Bond Vigilantes Model compares nominal GDP growth and bond yield. (5) Fewer reasons to be vigilant since 2008 as central bankers eased to avert deflation. (6) Inflation Premium Model based on unmeasurable r*. (7) Yield Curve Model posits that shape of yield curve indicates outlook for short-term interest rates. (8) Bond yield discounting not only investors’ inflationary expectations but also Fed’s perceived inflationary expectations and policy response. (9) Does the federal budget deficit matter? (10) Foreign bond yields matter.
Google’s World
(1) AI: The good, the bad, and the ugly. (2) Want a robot personal assistant to schedule your appointments? Just don’t get it mad. (3) Fear grips Industrials sector after a CAT call—buying opportunity? (4) Korean deal far from a done deal.
Capital Ideas
(1) From giddy about tax cut to confused about full impact, while worrying about trade war. (2) Short wait-and-see period? (3) CEO survey is more bullish for capex than are capex indicators. (4) Capex as a percentage of cash flow is down from previous highs. (5) Business spending on high tech is flying high, not counting computer hardware, stalled by the cloud. (6) Plenty of cash for capex and buybacks. (7) Will NAFTA exist mañana? (8) Italy remains ungovernable and a thorn for EU.
Revisiting the Phillips Curve
(1) Commercial break. (2) Yellen was a fan of Phillips Curve Model while she was Fed chair. Powell not so much. (3) When is a flat curve not a curve? (4) Phillips curve not totally dead, but with jobless rate at 3.9%, wage inflation should be closer to 4.0% than to 2.5%. (5) Wage inflation showing more lift in goods than in services. (6) Price inflation showing more lift in services than in goods. (7) Rent inflation boosting services inflation. (8) Low price inflation (resulting from disinflationary structural forces) may be driving, and keeping a lid on wage inflation.
What Are They Smoking?
(1) High on life, revenues, and earnings. (2) Revenues are strongest among cyclical sectors. (3) As latest earnings season unfolds, Q1 beat expectations, yet remaining quarters remain unchanged. (4) Analysts now predicting earnings will grow 21% this year and 10% next year. (5) Profit margins at record highs. (6) Margins could get squeezed by more outlays on labor and capital. (7) Our earnings estimates are upbeat, but not as much as analysts’ consensus. (8) Alternative earnings scenarios are mostly bullish for stock prices.
AlterEgo
(1) S&P 500 unfazed by 3% bond yield. (2) No sign of tightening credit in junk bond yield spread. (3) Forward P/E has much more noise and less signal than does forward earnings. (4) Our Boom-Bust Barometer is at a record high. (5) Consumer Discretionary R&R companies reporting solid results at their various resorts. (6) Tech companies continue to mess with our heads. (7) AI may soon help you find the keys you lost.
Cautiously Optimistic Central Bankers
(1) More caution than optimism. (2) Fed’s Williams and Dudley wouldn’t mind a brief inflation overshoot. (3) Fed’s 2% inflation target is viewed as a tight range around this mean. (4) Fed officials conceding Phillips curve is flat-lining. (5) Draghi dragging his feet, saying “patience, persistence and prudence” will drive monetary policy. (6) Eurozone’s economy is debatable at the ECB. (7) Eurozone’s flash CPI not very bright. (8) ECB sticking with its asset-buying program for now. (9) Kuroda will tell you where inflation is going, but won’t say when it will get there.
Worldly Matters
(1) Slowdown chatter picking up. (2) Diffusion indexes are cyclical and trendless. (3) Global PMI remains on solid ground. (4) CRB index, especially its metals component, confirming global strength. (5) Oil price remarkably strong despite lots of oil supplies, suggesting global demand is strong. (6) All Country World MSCI forward revenues setting records. (7) Phillips curve is flat on its back. (8) Price disinflation keeping a lid on wage inflation. (9) Wage gains continue to outpace price increases. So real wages are at a record high.
Zigzagging Markets
(1) Insane volatility. (2) Stocks fall on some better-than-expected earnings, but rise on other positive surprises. (3) No recession out there unless trade wars break out. (4) Investors aren’t sure whether rate hikes and yield curve flattening are bearish or not. (5) If the Fed is ahead of inflation, then expansion can continue for a long while. (6) Deregulation is bullish, while regulation is bearish. But what if they happen at the same time? (7) The Trump reality show: We are all in it together, like it or not. (8) The dollar’s recent strength may be signaling weaker global economy, or reflecting divergence in central bank policies. (9) Firm commodity prices suggest global economy growth remains firm.
Winds of Change
(1) Turbulent stock market has brought P/Es back to reasonable levels. (2) S&P 500 forward P/E now stands at 20-year historical average. (3) Certain sectors look particularly attractive. (4) Telecom faces volatile business environment, disrupted by consumer choice. (5) Telcos’ response: M&A. (6) Disruptor extraordinaire Jeff Bezos casts his sights beyond Earth.
Peak Earnings Sense & Nonsense
(1) Has the market discounted “peak earnings?” (2) An important distinction between growth and level of earnings. (3) Forward earnings continue to make record highs. (4) Earnings giveth, while P/Es taketh away. (5) The earnings trend is our friend. (6) 2019 earnings at $166 per share a solid bet ... now go figure year-end 2018 P/E to get S&P 500 price target. (7) Comparing dividend yield and interest rates to time recessions and bear markets doesn’t work very well. (8) The second-longest expansion could be the longest next July. (9) Watching out for the next financial crisis and recession.
Fed on Course
(1) Victory dance at the Fed as inflation approaches 2.0% target. (2) Three more rate hikes this year, in June, September, and December. (3) Federal funds rate hasn’t exceeded core PCED inflation since March 2008. (4) No inverted yield curve in our outlook. (5) Mounting cost pressures more likely to come out of record profit margins than to push prices higher. (6) Regional surveys of “prices paid” reflecting higher commodity costs. (7) Employment Cost Index showing more of an upward trend in wage inflation than average hourly earnings. (8) Fed was right to expect reversal in transient factors that depressed inflation last year. (9) Rent inflation might have peaked, as the number of owner-occupied households has been increasing while renting ones decline.
Trade Talk
(1) China’s IDAR approach is major source of trade tensions. (2) Protectionism is mostly talk for now. (3) China and US have plenty of time to negotiate trade deal. (4) Keeping a timeline on trade developments. (5) China offering some concessions already, but they don’t add up to much. (6) Often it helps to have a Chinese partner in China. (7) Mexico’s production stalls at record high awaiting NAFTA outcome and mounting political risk from a leftist presidential candidate called "AMLO." (8) Other than NAFTA talks, Canadians face challenges, with an inflated housing market and uncertainty about commodity prices and currency value. (9) Movie review: “A Quiet Place” (- -).
CAT on a Hot Tin Roof
(1) CAT’s CFO learns that loose lips sink stocks. (2) CAT’s CEO walking back on peaking talk. (3) CAT’s major customers are running hot or at least hotter. (4) Mixed bag of earnings for Industrials. (5) Electric cars are coming. (6) Tesla misses production targets and plans to open plant in China (without Chinese partner!). (7) Volkswagen paying the price for diesel scandal by installing electric-car charging stations in US. (8) Clock is ticking for fast NAFTA deal.
Earnings: New Highs
(1) Impact of TCJA on earnings is a work in progress. (2) Back to old normal growth for earnings next year. (3) Analysts expecting S&P 500 profit margin to rise from 10.5% in 2017 to 11.8% this year and 12.4% next year. (4) S&P 500/400/600 forward revenues and earnings still making record highs. (5) Boom-Bust Barometer and Fundamental Stock Market Indicator remain in record-high territory. (6) So far, corporate managements not as giddy about earnings as they were during previous earnings season. (7) A few examples of DJIA companies talking about the impact of TCJA on earnings.