Trade Talks, Buy in November & Earnings

By Jeff Kelly on October 11, 2019

The week in the market has been quite something. The best example was Wednesday evening after the close of regular trading. There was a report the Chinese Trade delegation was leaving the trade talks early! Assuming this meant there wouldn’t be a trade deal the S&P 500 futures quickly fell over 35 points or about 1.2%. Then a report came out saying this was not correct and the futures traded back close to even in less than 1 minute. After a few more reports the futures proceeded to trade back down almost 1%. However, by the open of the markets the next morning, things were back to even.

The trade talks are important. But if you are a long-term investor this is all noise. The noise level has indeed been very loud this week. One of the most important things an investor can do is know themselves. If the day to day craziness bothers you, your investments should reflect that. An allocation you can stick with is the most important thing anyone can do for their investment success. From the lows of Wednesday evening, the market, measured by the S&P 500, is up close to 3.75%.

As of Friday morning, we still don’t have any details of the trade discussions, except the usual tweets that things are going well. If there are problems the market will trade lower. Much more important to us is we start to see 3rd quarter earnings next week. The market’s reaction to these numbers will frame the performance for the next couple months. How the markets react to the numbers is more important than the numbers themselves. We will see some poor performances, but the key will be the outlook for the coming quarters.

The Federal Reserve this week committed to increasing their balance sheet. This looks to be the start of another round or quantitative easing, QE4. They will not call it that, “but if it walks like a duck and quacks like a duck,” it’s a duck. This also likely means we will see some further rate cuts. These are market friendly events. Let’s hope there are no surprises later today or this weekend.

Charts From The Week Past

Stocks look cheap relative to bonds.

Cheap’s a relative term but when this setup has occurred in the past stocks have rallied.

Sources: Bloomberg, Citigroup

There is an old saying on Wall street, “sell in May and go away.”

We can argue the logic of this but JC Parets of All Star Charts says we should remember to “buy in November” and as the chart below shows, the next 6 months have a great track record.

Sources: StockTradersAlmanac.com, AllstarCharts

The Federal reserve said this week it was going to expand its balance sheet.

This is a form of quantitative easing. When this has occurred in the past, we have seen the Purchasing Managers Index (PMI) head higher.

Sources: Macrobond, Nordea

We are bullish going into the fourth quarter, but there are many issues in the world which can cause a pullback prior to a sustained advance beginning.

Keep in mind, even a retreat to 2606 on the S&P 500 would not negate a bullish setup for later in the 4th quarter and into 2020.

Sources: Ciovacco Capital, @StockCharts.com

This has been the cycle on the trade talks.

Let’s hope for a big change later on Friday.

Sources: Wallstreetbets, reddit

Households’ lightening debt load, the chart below is great.

The debt service obligations of U.S. households are at levels not seen since the 1970’s and 1980’s. The link to the Federal Reserve blog is also included above. Prior to the recessions of 2000-2002 and 2007-2008, we saw significant up ticks in these ratios. The charts at those times looked nothing like today. Great news.

Source: Federal Reserve

Pessimism is still at extremes despite equities in the U.S. near all time highs.

The last time this occurred was in 2012 and 2016, right before the market broke out higher.

Sources: AAII, @MacroCharts

Tariffs are chasing the price of home furnishings higher.

No, tariffs aren’t paid by the Chinese.

Sources: Arbor Research & Trading, BLS

The trade war, if it continues, will be hard on GDP growth around the world.

Sources: Bloomberg, GS

The narrative that “dumb money” consumers are optimistic while “smart money” insiders are prepping for a recession sounds really good and bearish.

It’s also useless – The only 2 other times it happened, stocks took off to the upside. Source: SentimenTrader

Sources: ISM, Conference Board, SentimenTrader

Insider selling continued in September – setting a 10-year high: Insiders unloaded $14.2 billion worth of their companies’ stock last month through Sept. 26, according to a TrimTabs analysis of Form 4 filings with the Securities and Exchange Commission – That’s the highest of any September in the past 10 years. September also marked the sixth month this year that insider selling has topped $10 billion, which is already the most months to cross above that 8-figure threshold in a year since 2006. Source: TrimTabs, Jones Trading

Job openings are falling quickly in the Midwest.

Layoffs are picking up across many industries.

Sources: Federal Reserve, TheDailyShot

NFIB Small Business Optimism Index falling along with small business hiring plans.

Sources: Charles Schwab, Bloomberg, National Federation of Independent Business 

Nike is very popular among teens.

I think they will overcome the NBA/China debacle.

Sources: Piper Jaffray, Yahoo Finance

Below is a chart of valuations for WeWork pitched by various bankers, 43 billion on the low end and 104 billion on the high end.

They just under estimated the gullibility of the public for “community adjusted EBIDA.”

While many big banks have already earned millions of dollars in fees from WeWork, none is as entwined with the company and its co-founder as JP Morgan. It led a $1.2bn credit line for the company in 2015, was the lead underwriter on its $702m corporate debt sale last year and has extended part of a $500m personal loan to Mr Neumann along with UBS and Credit Suisse. It has been the bank of choice for Mr Neumann when he has taken out mortgages to finance his own property purchases — including deals, now unwound, that attracted conflict of interest questions because he took stakes in buildings that were leased to WeWork. In August JP Morgan said it had lent Mr Neumann a further $97.5m. The bank’s asset management arm has also invested directly in WeWork. 

Sources: FT Research, Crunchbase

Presidents running for a second term are usually reelected unless there is a recession.

Sources: LPL Research, St. Louis Fed

Weekend Homework

That Will Never Work: The Birth of NETFLIX and the Amazing Life of an Idea is quite a story.

Once upon a time, brick-and-mortar video stores were king. Late fees were ubiquitous, video-streaming unheard was of, and widespread DVD adoption seemed about as imminent as flying cars. Indeed, these were the widely accepted laws of the land in 1997, when Marc Randolph had an idea. It was a simple thought-leveraging the internet to rent movies-and was just one of many more and far worse proposals, like personalized baseball bats and a shampoo delivery service, that Randolph would pitch to his business partner, Reed Hastings, on their commute to work each morning. But Hastings was intrigued, and the pair-with Hastings as the primary investor and Randolph as the CEO-founded a company. Now with over 150 million subscribers, Netflix’s triumph feels inevitable, but the twenty first century’s most disruptive start up began with few believers and calamity at every turn. From having to pitch his own mother on being an early investor, to the motel conference room that served as a first office, to server crashes on launch day, to the now-infamous meeting when Netflix brass pitched Blockbuster to acquire them, Marc Randolph’s transformational journey exemplifies how anyone with grit, gut instincts and determination can change the world-even with an idea that many think will never work.

Keith Wasserman – How To Scale A Real Estate Portfolio Behar On The Block – Keith Wasserman has gone from one 4-plex in Bakersfield to a 1.5 billion real estate portfolio in 10 years. A great success story from a guy who is also giving back to his community. Interesting stuff on co-living spaces and manufactured housing.

Keith Wasserman and his company Gelt Inc. are based in Los Angeles but are impacting many communities around the US. What intrigued me about Keith, is how fast he scaled his real estate investment company at such a young age. But, it is not only the impressive real estate holdings he amassed, he has also created new payments systems that are disrupting how tenants pay rent, and he also created a non profit to help tenants in need. He started in 2008 with a single 4 plex in Bakersfield CA during one of the worst economic times our country has ever witnessed. Now, this portfolio is valued around $1.5 billion. Keith shares how and why it all started. This is fun interview with a really good guy who’s doing a lot more than just buying apartments.

It’s been quite a week. Unfortunately, we had to make a very difficult decision about our cat, Diego. She couldn’t really get around after the weekend. She was with us 20 years. She watched the kids grow up, us deal with the death of parents and she lived a strong, complete life. We will miss her a great deal. I’m looking forward to the weekend and some time to remember. I hope you have a wonderful time with family and friends.