Extend and Pretend – June 1, 2018

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Extend and Pretend

Italy’s political transition to an “anti-ECB” stance, along with Trump’s proposed tariffs on industrial metals emanating from Europe, Mexico, and Canada, had markets reeling early in the week. Leading in the loss department were the banks, European debt markets, and dividend paying stocks (i.e., the Dow and Dow Transports). Treasuries and the NASDAQ (i.e., the FANGs) served as the go-to assets amid the storm. I presume investors feel the growth story behind FANG stocks is impervious to just about anything because they have yet to disappoint. It seems that today’s market is filled with investors who believe they are entitled to a rally simply because the market is open. Amazon, for example, sports a P/E of 259. If its sales and profits were to double from here (putting them on par with Walmart), the stock would still have a P/E of 130. That’s 6.5 times Walmart’s P/E – again, for what would be the same level of sales. This fact implies that Amazon could lose up to 80% of its current market cap and still be fairly valued. In any case, stocks here in the US didn’t spend too much time lamenting Italy’s and/or Trump’s policies, and the indices recouped much of their losses by the end of the week – predominantly on the back of some undeservedly hyped economic data.

Late last year, we had hurricanes Harvey, Irma, and Maria. Then there were the fires in California. Fast-forward to today, we have had heavy rains in Texas, Maryland, Florida, and Alabama, two tornados, a cold-snap in the mid-west, and a volcanic eruption in Hawaii. All that to say I’m not surprised to see data suggesting that folks are spending more (up 0.6% in April) or that manufacturing has experienced an uptick. But what the media didn’t talk about was that the savings rate fell by 2.8% in the same month – which implies that there has been a good amount of forced/emergency spending (on repairs in this case). Aside from this, pending home sales slid in April by 1.3%, total vehicle sales fell in May by 1.5%, and jobs (non-farm payrolls) added a better-than-expected 223,000 – also in May.

I’d like to say that we’re closer to some semblance of reality in these markets, but the uptick in the economic data will cause favorable interpretations to be spun. That will buy the bulls a little more time to swim in that river in Egypt (denial, if you missed that clever turn of phrase) and fuel the ongoing party in stocks. Meanwhile, the spread between the 2- and 10-year Treasuries narrowed by two basis points to 43.0. Oil fell for another week on news that the Russians intend to ramp up production, and the dollar fell a bit despite the flight to quality in Treasuries. The metals finished mixed, with platinum and palladium the only ones to finish with gains – of 0.67% and 1.66%, respectively. Next week, we’ll have Apple product introductions, Tesla’s annual shareholder meeting, Trump-Abe, and the G-7.

Best Regards,

David Burgess
VP Investment Management
MWM LLC

2018-06-01T16:21:43+00:00

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