Time To Reinstate The Virtuous Cycle Of Consumer Optimism And A Booming Economy

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Posted: Oct 31, 2018 11:02 AM
Time To Reinstate The Virtuous Cycle Of Consumer Optimism And A Booming Economy

So, the market had a good day on Tuesday, in part to reports of Consumer Confidence being at the highest level since September 2000. However, my question is why we have stopped believing we can’t be more confident. I’ve pointed out many times how confidence used to trade in lockstep with the stock market, and both peaked in early 2000.

Both took a swan dive over the next few years and lingered. Eventually, the stock market made its way to new highs. It got hammered again, and has once again rallied to new highs, up 150% from the tech bubble peak. Consumer Confidence still hasn’t taken out its high point from that period. 

  • October 2018: 137.9
  • June 2000: 144.7

I continue to wonder what happened to America, the land of rose-colored glasses. We are afraid to be too optimistic.

There is no doubt that it’s been a rough patch for investors. The nation has been embroiled in the longest war in history in the Middle East and a burgeoning war of ideology at home. We get excited, and our hopes are dashed.  ‘Woe is me’ is the order of the day; however, that could be changing. Despite the harsh division within the country, I believe the continued economic strength could see confidence actually break out to new record levels.

Yesterday, the Conference Board of Confidence saw several signs of a new paradigm:

  • Present Condition: 172.8 from 169.4
  • Expectations: 114.6 from 112.5
  • Jobs Plentiful: 45.9% from 44.1%
  • Jobs Hard to Get: 13.2% from 14.1%
  • The Differential is the Widest Since January 2001

Consumers say they are ready to buy big-ticket items such as automobiles and homes in the next six months.

Consumers expect income gains over the next six months, 24.7% from 22.5%.

Tailwinds

According to the Conference Board, this report confirms there will be strong growth into early 2019.  

Now, if we can embrace optimism that was once the cornerstone of America, we can take this economy to levels we also gave up on a long time ago. It’s truly a virtuous cycle where optimism spurs the economy, which spurs optimism.

Better Breadth

Well, the market fended off a few tries at tripping into the red, which eventually sparked buying into the close. Most of the news (economic and companies) was positive, which got some sideline cash to make a move. Market breadth was like a Bianca last week, except for 52-week milestones.

NYSE

  • Advancing issues 2,098 - Declining issues 899
  • Up volume 3.7 billion, down volume 1.3 billion
  • New 52-week highs 28 - new 52-week lows 337

NASDAQ

  • Advancing issues 2,079 - Declining issues 996
  • Up volume 1.9 billion, down volume 737.1 million
  • New 52-week high 18 - new 52-week lows 226

After the close

The earnings parade continues, led by Facebook  (FB), which posted mixed results, and watched shares drop as Zuckerberg talked about several transitions, but the stock bounced on spending guidance.

(FB)

Red Flags

  • Marketing costs: 14% of revenue from 11.3%
  • Operating margin: 42% from 50%

3Q 2018  

Key Metrics

DAU (million)

Revenue (billion USD)

2018

2017

2018

2017

Rest of World

470

433

$1.3

$1.1

Asia-Pacific

561

476

$2.4

$1.8

Europe

278

274

$3.3

$2.3

USA & Canada

185

185

$6.7

$5.0

Beats and Shares Rally

  • FireEye (FEYE) beat $0.04
  • Concho Resources (CXO) beat $0.03
  • eBay (EBAY) beat $0.02
  • Whiting Petroleum (WLL) beat $0.31

Miss and Shares Lower

  • Electronic Arts (EA) missed on revenue
  • Shutterfly (SFLY) missed on revenue

I like that Communication Services was the best performer with Facebook (FB), Netflix (NFLX), and Alphabet (GOOG) lagging – that probably changes today.

S&P 500 Index

+1.57%

Communication Services (XLC)

+2.73%

Consumer Discretionary (XLY)

+1.50%

Consumer Staples (XLP)

+1.98%

Energy (XLE)

+2.33%

Financials (XLF)

+1.73%

Health Care (XLV)

+1.07%

Industrials (XLI)

+2.06%

Materials (XLB)

+2.29%

Real Estate (XLRE)

+1.66%

Technology (XLK)

+1.12%

Utilities (XLU)

+0.39%

Portfolio Balance Changes

20 equally-weighted positions

We have had an overweight in materials for some time, and yesterday they exploded to the upside:

  • Vulcan Materials (VMC): +17.5%
  • Martin Marietta Materials (MLM): +8.3%
  • Sherwin-Williams (SHW): +4.9%
  • Mosaic (MOS): +2.7%

The Materials Sector (XLB) is still the biggest loser in 2018, down 16.2%, and in my mind, it is very much oversold. Ironically, a mixed Congress could see movement on infrastructure, which would be huge.  Even without capital projects, budgets are increasing, and 2019 should be a different story.

XLB 

Communication Services

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

2

3

1

1

1

1

Industrials

Materials

Real Estate

Technology

Utilities

Cash

2

4

0

2

0

3

 

#Ask Payne? October 30, 2018

I got an avalanche of questions, click here to get yesterday's #Ask Payne?

Today’s Session

General Motors (GM)

The company crushed consensus estimates on revenues of $35.8 billion (street $34.8 billion) and earnings $1.87 (street $1.25).  As much as so many wanted to see the company fail, as negative proxy for the trade war, the company performed well in China, where the auto market is slumping, and absorbed the $400.0 million in higher commodities cost because of a strong American consumer.

  • 695,000 vehicles sold
  • $36,000 average selling price (record)
  • +$800 year to year
  • +$4,000 above industry average
  • North America EBIT $2.8 billion margin 10.2%

GM Revenue Trends

North America

International

Financing

2018

$27.7

$4.6

$3.5

2017

$24.8

$5.6

$3.2

 

Additional earnings beats

  • YUM brand (YUM)
  • Estee Lauder (EL)

Lower on Earnings

  • Kellogg
  • Anthem

Boyz to Men

I have to say, watching after hours trading in Facebook (FB) during the conference call was a major step in Mark Elliott Zuckerberg maturation process.  The hits were huge, but the call was more of a kitchen sink of admissions, including the need to increase headcount 45% in the past year to 33,606 to not only seize on opportunities, but to deal with current controversies.

There was a $38 billion reversal as the call moved along, and shares, which initially plunged $5.00, rallied up $11.00. 

I’m reminded that Tesla shareholders saw their fortunes surge in back to back earnings calls where Elon Musk behaved himself.   We are now seeing mavericks learn to approach industry norms with creative destruction but handle the business side like CEO’s rather than renegades.   To a degree, Reed Hastings will have to do this on his next call as well, as the CEO of Google/Alphabet, where internal controversy is flaming.

ADP Jobs Report

Employment data from ADP comes in well above Wall Street consensus at 227,000 versus 189,000.

  • 4,000 mining
  • 17,000 construction
  • 17,000 manufacturing

It’s a monster report that once again underscores the strength of the economy, particularly in higher paying professions.

Equity futures actually improved after the release, which is important.  We should want the market to root for, and positively react to good news, even with the Fed lurking in the shadows.