It was another rough session for the market that saw the Dow off 620 points at the worst part of the session.
- Dow Jones Industrial Average -424
- NASDAQ -121
- S&P 500 -36
- Russell 2000 -8.8
What’s Eating at the Market?
Anxiety exploded into panic as there were numerous shots across the bow of the market yesterday.
- This is as good as it gets
- Geopolitical tensions coming to a boil
- Anxiety comes to a boil
Have we Peaked?
The market's wild ride yesterday had ominous overtures that I believe have more to do with mounting skittishness than authentic economic uncertainty.
Actually, the market is a victim of its own success, best illustrated by the action in Caterpillar (CAT), which made a massive reversal from being up 4% on a strong earnings report only to tumble hard on commentary that margins may have peaked for the year.
When discussing the company’s outlook, the company’s CFO spooked investors with this comment:
"The outlook assumes that first quarter adjusted profit per share will be the high watermark for the year."
Amy Campbell, Director of Investor Relations at Caterpillar reported that for the balance of the year, “We expect material costs increase to be greater than price realization.” She also remarked the company adjusted its modeling for a stronger Chinese economy, and I suspect a better pricing power.
Meanwhile, I think there is some profiteering in steel with respect to tariffs that only apply to a few nations, including China, in which experts said was barely a source in the first place. I think Caterpillar actually played a very dangerous game on Tuesday, using its bully pulpit to push back on the White House and it backfired miserably.
Those comments wiped out the huge earnings beat and out-sized guidance before the start of trading and the conference call. I’m surprised at the intensity of the reversal, but it was a classic example of how quickly panic-selling can beat down a stock.
Caterpillar hiked its guidance by a mile, and I think it’s still a long-term buy/hold in my opinion; I’m confident that barring worst-case geopolitical scenarios, Caterpillar will post financial results better than anticipated this year.
As the World Turns
Geopolitical tensions, including revamped trade deals, are running close to deadlines and moments of truth. President Trump’s tough language toward Iran added to the market sell-off, but he couldn’t let go of Iran’s warning about “severe consequences” if the United States ripped up the nuclear deal.
I think there will be deals with our North American Free Trade Agreement (NAFTA) partners and even China, but I have no clue on Iran and that is a dark cloud for the market.
Pressure Bust Pipes
I have a buddy in construction who loves to say, “Pressure bust pipes.” We are seeing that play out in this sideways market that claws its way higher, only to be smacked lower. The chart illustrates this anxiety as the Dow and other indices that have made a series of lower highs; and now, we have to wonder if the low of the year will be tested.
I’m not sure that will happen.
Beyond the way, in addition to great earnings, we got a lot of economic data that points to a very strong and confident consumer that might not be willing to pay extra for toilet paper but will for a new home.
New home sales soared, matching the good news on existing home sales yesterday. In addition, we heard from Pulte Homes (PHM), which beat on sales and earnings and offered strong guidance citing:
"Robust buyer demand in the face of mortgage and financial market volatility attests to the strong underpinnings of this housing recovery which is being bolstered by sustained economic growth, good job trends, favorable demographics and a limited supply of homes for sale."
I hate these periods for the stock market but I say look at the fundamentals and if folks want to sell stocks against this backdrop because the ten-year yield is 3.0% or earnings are “too good,” then I say let them. I’m ready to buy the dip… at some point.
The market is obviously very skittish even as equities climb off the worst levels of the morning. Earnings from Boeing blew away Wall Street consensus, and the stock is indicating higher, but everyone is now waiting on the conference call where someone will invariably ask if this is the “high water mark?”
That’s a reference to the Caterpillar conference call where the CFO sank the stock and market with that observation. I think there was an overreaction. The company is usually cautious, and the street was already looking for smaller gains in subsequent quarters. That being said, this morning a small firm lowered its rating on Caterpillar to Neutral.
- Operating margin 12.3 from 10.0%
- Commercial airplane profits $1.51 billion +73%
- Defense and Space profits $649 million +18%
- Global Services $644 million +3%
- Free cash flow $2.7 billion
- Operating cash flow $3.1 billion
- $486.2 billion backlog
- Earnings $14.50 (high end) street $14.09
- Op cash flow $15.5 billion prior $15.0 billion
- OM (commercial airplanes) 11.5 prior 11.0
There are several other earnings report we are combing, for the most part, the initial numbers and reaction is positive. But, now the market must survive the Boeing call, and let’s see where crude oil goes after inventories are released.