Strongest Economy Ever?

Yesterday, the Dow Jones Industrial Average notched its 14^th record close of 2018. All the other major equity indices finished in the red, which is worrisome.

Moreover, my concern with market breadth continues to gnaw at me, and it’s  getting worse.

There were more losers than winners by a long shot.

Fewer stocks are making new highs as more are making new lows.

Volume reflects intensity, and it is clear sellers are more decisive than buyers. It’s a sign negative investor emotion.

Disjointed

The fact is, when the Dow is making new highs but airline stocks are getting hit and tech stocks are struggling and portfolios aren’t looking as rosy, it sends a tinge of anxiety that could feed on itself. 

Adding to this anxiety is earnings season, which is right around the corner. Expectations are high as all S&P sectors are expected to see a strong earnings growth. Overall, the index is expected to see a 21.6% increase for Third Quarter 2018 (3Q18).

Keep in mind, corporate America is on a roll –raking in big-time money.

Second Quarter 2018 (2Q18) Financial Results:

• Revenue: +9.4% with 72.1% beating the Street (historical average 60.0%)
• Earnings: +24.9% with 80.2% beating the Street (historical average 64.0%)
• Third Quarter 2018 (3Q18) Financial Estimates
• Earnings: +21.6%

Guessing and Adjustments

Guessing the top is an old Wall Street habit that actually increases the higher the market goes. Some of the rotation in the market are adjustments that reflect more optimism for multinational companies after a series of trade wins for the administration.

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Year-to-Date

• NASDAQ: +15.9%
• Russell 2000: +7.9%
• S&P 500: +9.3%
• Dow Jones Industrial Average: +8.3%

Summation

The market has had a tremendous run; from time to time, it digests gains. While it’s irritating, the disjointed action in the market isn’t unusual. Moreover, keep in mind that while there is an active search for value and a broad market catalyst, the economic backdrop is remarkable.

Trump Economy

Yesterday, Jerome ‘Jay’ Powell made the following observation about the economy: ‘too good to be true.’

He went on to say that the U.S. economy appears to be in the midst of a “remarkably positive” period that is unprecedented in modern history. 

That is an amazing observation from someone that is not only aware of the economic history of the United States but arguably is the most powerful person in the world when it comes to the economy.

Did Bezos Save or Kill Capitalism?

Yesterday, Amazon (AMZN) announced it was paying minimum wage for employees, even those working part-time. The news probably reflects two realities.

Retaining workers is difficult even in lower skill-set environments.

Jeff Bezos hears the charge of public sentiment against capitalism, of which he has become a symbol, and some deem more of a problem than those old greedy “robber barons.”

The SPDR S&P Retail ETF Index (XRT) got hammered yesterday, in part to the Amazon news because most cannot afford to pay $15.00 an hour. In the top ten holdings, only two traded higher.

Today’s Session

Equity futures have been higher all morning and gaining strength into the open.

Fed’s Epiphany

Yesterday, it was Federal Reserve Chairman Jerome Powell's observation about the economy being "too good to be true," and unprecedented in modern history.

This morning, in London, it was Charles Evans, President of Chicago Fed, saying the “U.S. economy is firing on all cylinders...I expect this good performance to continue over the next few years."

The Fed sees this economy on fire and keeps promising they will not muck it up.  They seem okay with inflation running a little hotter than past Fed policymakers, and they seem to understand the importance of looking out a few years.

This is great news on the economy and for the stock market.

Breaking News

September Job Creation: 230,000 versus Wall Street estimate 180,000

Goods Producing 46,000

• Mining 5,000
• Construction 34,000
• Manufacturing 7,000

Political Capital

I focus so much on good-producing, what I like to call “dirty fingernail” jobs, because it used to be the source of American pride.  While there are lots of ways to work hard, the kind of grind and pride that comes with getting your hands dirty, ultimately for the greater good, was something we used to wear as a badge of honor.

On that note, we were also told to kiss goods producing jobs goodbye. 

• Goods Producing jobs last 21 months 825,000
• Goods Producing jobs prior 21 months 275,000

The economic wizards that said President Trump could never get new trade deals, especially with his heavy-handed approach, are now claiming the new NAFTA deal came at significant political capital.   That’s bunk, but the fact is, delivering jobs to the heartland creates massive political capital.

Lennar

• Revenue $5.67 billion +82% estimate $5.64 billion
• Earnings per share $1.61 vs estimate $1.19
• Homebuilder operating margin 11.6% from 13.4%
• Deliveries 12,613 +66%
• New Orders 12,319 +62%
• New Orders (dollars) $5.1 billion +73%

There is no denying, costs are serious factor, but thus far, it appears not to have hurt sales or orders.  On the contrary, overall average selling price increased year to year with the West surging.