US Recession Predictor Is At Its Highest Level In A Decade

The market limped out of yesterday’s session with the rally’s tank on empty, as investors have gotten everything they’ve wanted, and then some:

• The Fed is playing ball, and then some
• US-China trade talks are moving along, and then some
• Earnings came in well above Wall Street consensus, and then some
• Shorts have been squeezed, and then some

Another sign the rally is straining is market breadth, which tightened up more than any session in the past couple of weeks. Considering major indices were higher, weakness under the surface was noticeable. It’s not disappointing in the grand scheme of things.

NYSE

• Advancers: 1,451
• Decliners: 1,489
• Up Volume: 2.0 billion
• Down Volume: 1.6 billion
• New Highs: 150
• New Lows: 10

NASDAQ

• Advancers:  1,563
• Decliners: 1,489
• Up Volume: 1.3 billion
• Down Volume: 923.6 million
• New Highs: 146

New Lows: The S&P 500 is at a resistance point that has knocked down a number of rallies over the past 52-weeks.  I think the index must close above 2,840 for a clear breakout.

Powell - No Thrills on Capitol Hill

Today, Fed Chairman Jay Powell makes the trek to Capitol Hill, which plays out more like Boothill, the famous cemetery outside the legendary town of Tombstone in the old Arizona Territory.

Back on October 26, 1881, there was a famous gunfight there that pitted  Virgil Earp, Morgan Earp, Wyatt Earp, and Doc Holliday against Tom McLaury, Frank McLaury, Billy Clanton, Ike Clanton, and Billy Claiborne.

Today and tomorrow, the gunslingers will be more familiar names of Senators and Congressional Representatives, each trying to ricochet shots off the Federal Reserve Chairman toward their rivals across the aisle. There is no doubt more time will be spent on trying to get Powell to agree with schemes and indirectly diss others.

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Some members might ask about a potential recession, considering the NY Fed US Recession Predicted by Treasury Spread is at its highest level in a decade.

Not All Unicorns Fly

There is a lot of excitement building over a slew of so-called Unicorns (private tech companies valued at $1.0 billion) going public in 2019.Without a doubt, there should be excitement. However, it should be met with an equal amount of skepticism about chasing these stocks once the public can get their hands-on shares.  

It’s easy to forget the Facebook fiasco when the company sucked every nickel out of the public after hiking its IPOs price and share allocation into its May 18, 2012 debut.

The stock priced at $38.00 rallied to $45.00 a share before closing at $38.23.

It was straight down from there, and exactly five months later, shares were changing hands at less than $19.00 a share. The stock hit bottom and it went on a tear, peaking at $210 a share last June. 

In 2017, the most anticipated IPO and largest tech IPO since Alibaba was Snap, which rallied 44% higher on the first day of trading. The stock shifted into a free-fall, dropping from $27.00 a share to $4.82 recently. However, the worst Unicorn of 2017 was Blue Apron (APRN), which opened for trading at $19.25, and now trades at less than $1.50.

Aw, Snap!

Last year was better for Unicorns, but still mixed as the most anticipated names; Spotify, Bloom Energy, and Dropbox were all trading lower than the first print when the public got a bite of the apple.

Lesser known Unicorns are living up to the hype.

The problem is these Unicorns stay private so long, and only privileged investors get to invest in them at much lower valuations. It’s the same thing; people are almost guaranteed to make billions of dollars once the stock goes public and we get a bite at the apple.

Lyft has had 19 rounds of financing going back to 2007. In the first half of 2018, revenues climbed to $909 million as losses increased to $373 million.

It’s an exciting company, but I have no idea if individual investors should buy the stock on the first day of trading. I will know more as that day approaches, so make sure to check in for our special IPO coverage this year. There is a lot of exciting game-changing names ready to make their debut.

After the Close

There was a parade of earnings beats, including Etsy (ETSY), which beat on top and bottom lines and popped 16%. Tenet Healthcare (THC) also jumped 16% on its earnings results. Hertz (HRI) says, “we have tremendous momentum,” as it lost a lot less than the Street was expecting, while Dillard’s (DDS) continues to fight to show there is room for department stores in an Amazon world.

The company shares climbed 11% after posting results that saw strong performance in home and furniture and solid gains in cosmetics, men’s clothing, and accessories. Stores in the eastern part of the country fared best.

Portfolio Approach

Our cash position is at zero, as we added to Healthcare yesterday.  If you aren’t fully vested, please contact your rep or research@wstreet.com.

Today’s Session

Earnings and angst pushed the market lower before the start of trading.

Home Depot

The company posted mixed results, although key metrics are moving in the right direction:

• Transactions 394.8 million +7.7%
• Average Ticket $65.59 +2.5%
• Sales per square foot $414.17 +4.9%

But, the average ticket for full year was higher, up 4.2%. Moreover, comp store sales of 3.2% company wide missed consensus of 4.5% (US +3.7%). 

Management announced a whopping 32% increase in dividend to $1.36 and replaced its existing buyback program with a new $15.0 billion one.  That announcement stemmed the stock selloff, but I think Full Year 2019 comp store guidance of 5.0 against consensus of 4.3% will benefit the shares more than anything else.  

Ironically, full year earnings guidance is well below Wall Street consensus.

There are a number of issues, but the results dovetail exactly with December home sales -1.2%, the worst in three years.

Housing Woes

Housing starts for December declined 11.2% against consensus of a 1.3% decline.  Just like HD, lots of factors, including interest rates, played a roll.  It will be interesting to see fresh data for a bounce.  One problem that will remain is inexpensive inventory.

Additional Earnings

• AutoZone (AZO) revenues of $2.48 billion beats consensus of $2.45 billion as same store sales edged up 2.6%.   Earnings of $11.49 dwarf consensus of $9.97 as gross margin improved to 54.1 from 52.4.
• Macy’s (M) beat earnings consensus by $0.20, but results were mixed at best, as management admitted same store sales were less than hoped.   There was a serious slowdown in December and a big fire that hurt comp sales numbers, but the swoon in tourist spending will remain an issue mostly because of the strong US Dollar.
• Etsy (ETSY) blew away consensus as buyers and sellers on the platform surged.  The stock looks to open at a new all-time high.  By the way, there is a chance ETSY will have a larger market cap than M by the end of the session.
• Smuckers (SJM) crushed it on top and bottom line, and management offered strong full year guidance.  Interestingly, strong coffee and consumer food offset weakness in pet foods.