Eyes on the Road and Hands on the Wheel

Eyes on the road and hands on the wheel.  Stocks rambled through yesterday’s low volume session giving traders a chance to contemplate their hidden fears of missing out on a potential rally.  Signs that more and more investors are coming around to the reality that even though the economy may be slowing somewhat, stocks may have some room to grow.

WHAT YOU NEED TO KNOW:

1)  A US Chinese agreement is getting closer.  Sound familiar?  Chinese Vice Premier Liu He is in Washington meeting with Steve Mnuchin and Robert Lighthizer to further trade negotiations.  WHILE YOU SLEPT reports surfaced that they are making significant headway and putting final touches on a deal.  In the vacuum of no other good news, global equities and futures rallied in response to the news.

2)  Brexit is still happening in slow, slow, slow motion.  British parliamentarians are scrambling to find some common ground in their great Brexit debate as PM Theresa May takes back the reigns in the process.  The new news is that it appears that May is warming up to a customs union deal and may bring a fourth proposal to the house reflecting her desire to compromise.  The measure, if passed, would be the least risky of the Brexit alternatives proposed so far.

3)  The blame game in DC continues.  If you have been listening you may have noticed that the Administration has been stepping up the verbal rhetoric on the Fed.  Trump and his economic team have pointed a finger at the Fed stating that the market would be higher and the budget deficit would be lower if not for their aggressive tightening in 2018.  It is true that the government has to pay more to borrow money at higher interest rates but the real reason the deficit has swelled up is increased spending while decreasing income… the tax act of 2017.

THE MARKETS:

In a slow trading session with very little in the way of economic news, investors traded the markets sideways for a mixed close.  Markets are at a turning point in search of some news that can fuel some more upward movement.  News or not, equities are enjoying the benefits of positive upward momentum and trend in the wake of the Fed’s dovish pivot and will view any bit of news through an optimistic lens.  In other words, it would take some pretty bad news to reverse the positive momentum which is now in the equity markets.  The bulls are controlling equities despite the bond market’s ongoing warning cries of impending trouble.  Though bonds have relented a bit in the past few days, longer maturity treasury yields are very low for a bull market.  Yesterday’s sideways move resulted in the S&P500 closing up by +0.002% (we can call that flat), the Dow Jones Industrial Average falling by -0.3% resulting from Walgreens’ bad earnings release, the Russell 2000 selling off by -0.18%, and the NASDAQ 100 climbing by +0.28%.  Bonds traded up slightly and 10 year yields ended the session at 2.47%, down by 3 basis points.  The 3 month / 10 year yield curve did flatten somewhat to +5 basis points but it remains positive, which means stock traders aren’t worried about it… for now.  Lyft, of last Friday’s IPO fame, continues to be a hot topic as other tech unicorns line up to make their IPO debuts in attempts to take advantage of the recent market momentum.  Lyft IPO’ed last Friday at $72 a share and in its first day of trading closed up by +8.74%.  Since that first day the stock has been under pressure closing at $68.97 yesterday, below its initial offering price.  What’s all the fuss about?  Earnings, or a lack of them, and how to justify the company’s implied valuation of $19 billion.  Ever wonder how that $72 a share is justified?  If so, today is you lucky day as it is geek-out Wednesday and I will give you a high level primer on the dividend discount model in the attached PDF.

WHAT TO LOOK FOR TODAY:

This morning we will get ADP Employment change which is expected to show that $175k new jobs were created in March versus last month’s +183k.  This number is a precursor to Friday’s Government issued number, so any big deviations here can move markets.  Later this morning we will get services PMI’s from Markit and ISM.  Markit Services PMI is expected to come in at 54.8 in line with earlier estimates.  The ISM Non-Manufacturing Index is expected to be at 58.0 down from last month’s 59.7.  The weekly EIA Crude Oil Inventory report will come out this morning and will be closely watched as Crude has traded up quite a bit in the past few sessions.  Three Fed governors will speak on a panel today and Minneapolis’ Neel Kashkari will speak as well.  Bond traders will be listening carefully.

daily chartbook 2019-04-03

geek out topic – Stock Valuation