NATO Summit: America Has Been Getting Played For A Long Time

Well the board market struggled most of the session yesterday with one brief rally attempt early in the session that saw the S&P and Russell momentarily turn higher.

Major Indices YTD

• NASDAQ +11.8%
• Russell 2000 +9.7%
• S&P 500 +3.8%
• Dow -0.1%

The Dow Jones Industrial Average is essentially flat leading many to report “the market is flat” since President Trump began fighting back against unfair trade practices.   That’s not really true, even for the Dow Jones Industrial Average, which is only 30 stocks that depend most on global trade.  The Dow is actually up about 1,200 points since bottoming out on March 23 of this year.  That slide was the result of President Trump declaring war on the global elite at Davos on January 26 of this year.

The Dow chart isn’t that bad, and today’s session will be very constructive for those looking for entry points.  I think a move through 24,809 could attract buyers while 24,920 is the big breakout point where folks might want to act on their buy lists.

Economic Data

Lost in all the hoopla over the tariff battle is the resolve of the market and strength in the U.S. economy.  But we know when Main Street gets healthy, the Federal Reserve gets antsy.   With that in mind, this morning’s Consumer Price Index (CPI) release caused some to worry because the year to year increase climbed to a six year high of 2.9%.

Month to month, CPI came in lower than anticipated at just 0.1%.

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I don’t think this news moves the Fed closer to more aggressive rate-hiking by itself, but if there are additional signs of faster inflation, it becomes part of the argument.

Getting Our Friends to Be Friendly

I think one reason the market is indicating higher this morning is how the NATO summit played out.  Forget the mainstream media that finds fault in everything from this White House. The fact of the matter is America has been getting played for a long time.

The press conference this morning was classic.

There is absolutely no doubt our allies must pay more of their share to protect their continent from old dangers and new dangers.

Readiness Crisis

Not only aren’t our NATO friends and allies not stepping up to the plate on spending, the monies they are using aren’t being applied wisely.  The idea Germany is only paying 1.2% of their GDP is bad enough, but it is made worse when you see what shambles it’s left their military in.   If Russia rolled up with 100,000 troops, I think Germany would fall overnight.

Russia military spending dropped last year from a record high as oil revenue softened.  But make no mistake, Russia is on a mission just like China to rebuild its war-making machine.

By the way, Germany spent $222 billion subsidizing renewable energy from 2000 to 2017, while its declining defense spending has led to a military that's frighteningly unprepared to defend the country.  One could argue American taxpayers paid for a lot of German windmills & solar farms.

Investing & Trading Lesson: Chasing Fundamentals

If it sounds counterintuitive to buy the market higher, for me, it’s about psychology and knowing we have shaken out all the weaker hands. 

Moreover, investors shouldn’t be afraid to chase fundamentals, which is decidedly different than chasing stocks.  This is so important because today I had someone contact my office and say he likes cheap stocks around two to five dollars a share.

Most stocks around two to five dollars a share are overvalued. 

Conversely, most people wouldn’t buy a stock trading above one hundred dollars and fewer would consider a stock trading over one thousand a share.

This brings me to Amazon, which is the perfect example of chasing fundamentals.  I first featured the stock on July 19, 2004, and most recently recommended it June 16, 2017, at $989 a share.  I’ve hiked my target since then from $1,300 to $1,800; but soon, I’ll go to $2,000 or more. 

For those looking for a quick way to assess improving fundamentals, follow consensus earnings. Granted, make sure it’s all apples to apples as companies make acquisitions or spin off businesses.  You could have chased AMZN in April and would be up more than 22%, which beats most money managers.

The buy signal was the ever-improving earnings consensus for the next fiscal year.

There are many other steps in fundamental analysis, but this is a technique that can help you find ideas and begin the journey to dig and learn even more.