New Highs on Earnings and GDP

We had a mini melt-up on Tuesday in the stock market based on earnings and continued optimism over Fed policy. The bar was set low for earnings this quarter so we are seeing companies beat expectations but fall short of good growth on a year over year basis. This puts the market at risk of overshooting on valuations as we exceed the top that was achieved last October. As you will see below in the economics section, the GDP number released on Friday looks good only on the surface while projections for Q2 growth are nowhere near as rosy.

In the chart below, we closed at the intra-day high from last October to create a new closing high for the S&P 500 index. It is common for the technicals to test previous highs and lows so now we wait to see if there is follow-through in the coming weeks. In general, there has not been a meaningful test of this uptrend since the December low so we are due for an upcoming corrective move in the coming weeks. The technical conditions are screaming overbought here but the market keeps finding a way to inch higher so patience is best here.

Below is another chart which warrants caution at these levels. The VIX is an index that tracks the volatility of stocks. As you can see, traders like to short this index as stocks trend higher – this is represented by the red area below the zero line. At times, everybody loads up in the same direction creating a spike in speculation as you can see below in Q4 2017, Q3 2018 and at present. This dynamic lays a high probability for a correction but it does not tell us when, however. These traders lose on their short positions when prices in stocks fall so there could be a very sharp spike in volatility during the next correction.

It will be interesting to see how much longer this interplay between volatility and stocks will continue. Here is what to watch for next week:

  1. End of month on Tuesday. Flows are typically bullish around these calendar dates.
  2. Earnings reports for next week: Google, McDonalds, Apple, Square and many others.
  3. Jobs data next Friday.

Chart of the Week!

The White House has announced it will end exemptions from sanctions for countries buying oil from Iran. Waivers for China, India, Japan, South Korea and Turkey are set to expire in May and those countries could face U.S. sanctions themselves. The U.S. move is aimed at significantly reducing Iranian oil exports which are the government’s main source of revenue. 

Economic & Central Banking Snippets 

  • GDP in Q1 rose 3.2%, much better than the estimate of up 2.3%. The upside beat was helped by net trade (exports jumped while imports contracted sharply) and inventories which contributed to almost 170 bps of the rise. Personal spending though, the biggest component was up only 1.2%. (Boock Report)
  • GDP: However, if you strip out the most volatile components of the GDP number (trade, state government spending and inventories) the reading was a much lower 1.3%. In fact several economists expect a drag on Q2 GDP from these volatile components where I am seeing forecasts of around 1% – not so great. Another thing to consider is that inflation slowed which subtracts from the raw GDP number. So, did growth accelerate or did inflation slow? Additional details on inflation developments in February and March will be released by the Commerce Department on Monday – stay tuned.
  • The Bank of Japan (BOJ) said they need more time to achieve their inflation targets. Like trying to be more precise when shooting yourself in the foot. As it currently stands, the BOJ owns 40% of the JGB market and 70% of the Nikkei’s ETF market to help spark inflation. Absolute lunacy.
  • South Korean gross domestic product, a barometer of global strength due to the nation’s export-heavy economy, shrank the most in a decade in the first quarter. Reflected in this weakness were exports that fell 8.7% y/o/y in the first 20 days of April which is the 4th month in a row of declines. In particular, semiconductor (computer chips) shipments plunged by 25% y/o/y which comprise about 20% of South Korean’s exports. (Bloomberg/Boock Report)
  • In March, Taiwan’s industrial production figure fell 9.9% y/o/y, well worse than the forecast of a 2% drop and it was driven by a drop in electronic parts. It’s the biggest y/o/y decline since January 2012.
  • Another central bank that is trapped below zero: The Swedish Riksbank, said that instead of moving its benchmark rate back to zero from -.25%, that they “will remain at this level for a somewhat longer period of time than was forecast in February.” (Boock Report)
  • US new home sales rose 4.5% month-on-month to an annualized pace of 692,000 units in March — the highest level since November 2017, the Census Bureau said. A regional breakdown showed sales fell sharply in the northeast but jumped in the midwest and also increased in the south and the west. Economists have noted that changes to the tax law have complicated the outlook for the housing market, especially expensive markets like the northeast, because of the lower deduction on mortgage interest payments and property taxes. (WSJ)

Macro Snippets

  • About a quarter of 16-year-olds had a driver’s license in 2017, a sharp decline from nearly half in 1983, according to an analysis of licensing data by transportation researcher Michael Sivak. Whereas a driver’s license once was a symbol of freedom, teenagers are reaching their driving age at a time when most have access to ride-hailing services such as Uber and Lyft to shuttle them around town. At the same time, social media and video chat let them hang out with friends without actually leaving the house.
  • Orbiting 22,000 miles above Earth, a fleet of American-built satellites are serving the Chinese government as nine of these satellites are being used to connect Chinese soldiers on contested outposts in the South China Sea, strengthen police forces against social unrest and make sure state messaging penetrates far and wide, according to corporate records, stock filings and interviews with executives. A 10th satellite, under construction by Boeing, would enhance China’s competitor to the U.S. Global Positioning System. U.S. law effectively prohibits American companies from exporting satellites to China. But the U.S. doesn’t regulate how a satellite’s bandwidth is used once the device is in space. That has allowed China to essentially rent the capacity of U.S.-built satellites it wouldn’t be allowed to buy, a Wall Street Journal investigation found. (WSJ)
  • Boeing’s first-quarter earnings have taken a big hit from the worldwide grounding of its troubled 737 Max aircraft. The company on Wednesday withdrew its previous financial guidance for the year because it cannot predict when the Max, its biggest cash generator, will return to service. First-quarter revenues at the Boeing’s commercial aircraft division fell by more than $1bn, to $11.8bn from $12.9bn last year.
  • Facebook has set aside $3bn to cover the potential cost of a privacy probe by the US Federal Trade Commission, causing the company to dramatically miss its earnings forecasts. In first quarter results released on Wednesday, the company gave its  first estimate of the likely cost of the regulator’s investigation into user privacy violations in the wake of the Cambridge Analytica scandal. “This matter remains unresolved, and we estimate that the associated range of loss is between $3bn and $5bn,” the company said. (FT)
  • Walmart Inc. is pushing into the meat business, the latest retailer to seek greater control and profits in the steaks and rotisserie chickens that fill grocery-aisle meat cases. The Arkansas-based chain will develop a network of cattle ranches and meat-processing plants to provide Angus beef products exclusively for its stores, a move Walmart said will provide the company and its customers better visibility into their food supply. (WSJ)
  • Tesla reports loss as Model 3 struggles. The electric-car maker reported one of its worst quarterly losses on record as its struggles with delivering the Model 3 compact car have raised questions about the rosy growth projections made by CEO Elon Musk. (WSJ)
  • Amazon notched a fourth straight record profit, but revenue growth slowed to its lowest levels in nearly four years, as the company tamed costs ahead of what is expected to be a heavy spending period. Apparently, international sales have been dragging on overall revenue growth. (WSJ)
  • Uber will seek a valuation of up to $91.5bn in its forthcoming IPO, lower than its bankers had previously hoped for but still putting it on track to become Silicon Valley’s biggest offering since Facebook. (FT)
  • Deutsche Bank cuts revenue target a day after merger talks fail. The German bank cut its full-year revenue target to “essentially flat” from 2018 in quarterly results, a day after saying it ended merger talks with smaller rival Commerzbank. (WSJ)
  • The Justice Department has started a criminal investigation of how Ford Motor certifies vehicles to meet U.S. emissions standards, the company said in a securities filing. In February, Ford said it was going to investigate its certification process and start by looking at its 2019 Ford Ranger pickup. Several European manufacturers were caught cheating on their emission standards so perhaps the U.S. regulators are picking up where left off. (WSJ)

That is all for now until next week’s Market Update. Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client. 


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.