The market is patiently waiting for the Fed rate announcement on Wednesday.

Weekly Statistics

Friday Statistics

Investors waiting for an actual rate cut could be waiting for a while. Despite the futures showing three cuts likely for 2019, the Fed will most likely wait until after the G20 meeting to see if there is any progress on the Chinese trade agreement. If there was a breakthrough at the meeting, there would be no need for a rate cut because the global economy and the markets would begin to rise again. If there is no agreement it is likely headlines could worsen with additional tariffs and a rate cut would then be justified.

Trump had warned that he would raise tariffs on $300 billion in additional Chinese goods if President Xi did not show up at the G20 and schedule a meeting with him. As I wrote last week that put pressure on Xi not to show up because coming to the meeting would look like he was acquiescing to Trump. That would be seen as a loss of face in China and a reason why he could stay home.

Late in the week, President Trump, changed his tune saying it would not make any difference if Xi showed up on not, the negotiations would continue and eventually we would have a deal. That was a complete turnaround and clearly somebody pointed out the implications of his prior warning.

As of Saturday, there was no word on whether Xi would attend or whether there would be a meeting if he did attend.

President Trump's time is running short. It could take months to conclude a deal with China and the trade war is weighing on the US economy. Trump will want to run on the strength of the economy in 2020 and that means he has to conclude a deal with China ASAP so the economic pressure eases. This is the primary reason we are likely to see a deal over the next couple of months. The longer the war drags on he is likely to grasp at anything that is offered and claim a big win just to put the problem behind him. If he wins reelection, he can restart the negotiations with nothing to lose and everything to gain. China is well aware of the US election cycle and that probably factored into their recent walk away from the talks. They know the longer they drag it out the better chance of a favorable outcome.

After five days of strong gains the Dow remained stuck in a consolidation range for the entire week while we wait on the Fed. The Nasdaq had rebounded 8.5% from the June 3rd lows and spent the entire week in consolidation but support at 7,775 held.

Friday had a flurry of good economic news that would suggest continued patience by the Fed. The retail sales for May came in with a 0.5% gain but there was good news from April. The previously reported -0.2% decline was revised to a +0.3% rise and a whopping 2.8% gain for the last three months. March was revised higher from a 1.7% rise to 1.8% gain.

May gains were led by a 1.1% rise in electronics and appliances and a 1.1% gain in sporting goods and hobbies. Non-store retailers posted a 1.4% rise. Motor vehicles and parts, general merchandisers and food service all posted a 0.7% gain. Food and beverages were the only loser with a -0.1% decline. Core sales, excluding food and energy, rose 3.2% over the last 12 months.

Analysts had expected weaker sales because of the impact from the floods in the Midwest. However, the storms in the South may have offset the losses elsewhere. The flaw in that theory was only a 0.1% rise in building products. Since we know there has been a surge in rebuilding in the South, that probably offset the lack of sales in the areas that are still flooded in the Midwest.

Industrial production for May surged 0.4% and easily beating the 0.1% estimates and -0.5% decline in April. Unfortunately, below average temperatures in May caused a spike in utility production of 2.1% and invalidated the supposedly good data. On the plus side motor vehicles and parts rose 2.4%. High tech production rose 0.4% and manufacturing managed only a 0.2% gain. This report was ignored. I continue to believe utilities should not be included in this data.

Business inventories for April rose 0.5% and matched estimates after posting a flat reading for March. This was a three-month high after a 0.85% rise in January. Manufacturing inventories rose 0.26%, retail inventories 0.53% and wholesale inventories rose 0.82%. Motor vehicles and parts dealers inventories rose 0.8% after a -0.6% decline in March.

Consumer sentiment for June declined from 100.0 to 97.9. The present conditions component rose from 110.0 to 112.5 but the expectations component declined from 93.5 to 88.6. Five-year inflation expectations declined from 2.6% to 2.2% and the lowest on record. Some 40% of respondents commented on the tariffs as a reason for their falling sentiment. That is up from 21% in May.

The Atlanta Fed real time GDPNow forecast for Q2 spiked from 1.5% to 2.1% growth based on Friday's economic reports. That should be good news but with everyone expecting a string of rate cuts, it could actually be bad news. The White House NEC head was on CNBC saying they expected 3+% growth for the rest of the year. If that is the case, then why would the Fed want to cut rates. Clearly, it is only because of the tariff implications. However, if the economics continue to improve then we are missing real evidence of a tariff drag and the Fed will be reluctant to cut. Since the market priced in the three cuts the prior week with the 8% gain, that suggests the Fed guidance on Wednesday is going to be very important.

There is a 99.3% chance of rate cuts by year end. One is almost assured depending on the G20 outcome. Two are more than likely but three would be evidence of an economic disaster. With each cut the potential for future cuts declines and that should eliminate the third cut option after September. Currently the futures are suggesting a cut in July and another in September. If this outlook changes it would be market negative.

The important reports for next week are the three housing reports and the Philly Fed survey. However, the market will focus on the FOMC announcement more than anything else. Powell's press conferences have been direct and to the point. He will be interrogated by the press so there is the potential for a foot in mouth event. If he says anything that sounds like "data dependent" or "open to rate adjustments later in the year" the market is going to choke. His comments two weeks ago prompted the 8% rebound. If he tries to walk back those comments, we could see another decline.

Hedgeye Cartoon

Only four S&P companies have not reported earnings for Q1. The final forecast is for 1.6% earnings growth. That is up from an expected 2% decline earlier in the cycle. Revenue rose 5.6% with 57% of companies beating estimates. There have been 77 guidance warnings and 22 guidance upgrades.

The highlights for this coming week are Adobe, Oracle and Red Hat. Jabil, La Z Boy, Kroger, Darden Restaurants, Winnebago, Carmax and Canopy Growth round out the field.

The one earnings report that tanked the market on Friday was Broadcom (AVGO). CEO Hock Tan said, "We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers. As a result, our customers are actively reducing their inventory levels, and we are taking a conservative stance for the rest of the year." He was referring to Huawei which bought $900 million in chips from Broadcom in 2018.

They cut their full year revenue guidance by $2 billion to $22.5 billion. They reported earnings of $5.21 that beat the estimates by 3 cents. Revenue of $5.5 billion missed estimates for $5.69 billion.

The problem is that all the chipmakers feed off each other. Everyone makes chips that fit into devices made by others. With Huawei on the endangered species list, all of those parts to go into the various devices made by Huawei are now oversupplied and it is not like there are a dozen other companies just waiting to buy those specialty parts.

The decline in the chip sector had knocked about 3% off the Semiconductor Index. The $SOX had rebounded 33% from the December lows, fell 17% from the April highs as Chinese tariffs increased and was rebounding again until the earnings guidance this week. Broadcom's news was just the punctuation on the declines of the last several days as tariff worries increased. The warning by the largest supplier of the group was the death knell for the rebound.

Lululemon (LULU) reported earnings of 74 cents that beat estimates for 70 cents. That was up from 55 cents in the year ago quarter. Revenue rose 20% to $782.3 million and beat estimates for $756.1 million. Same store sales growth rocketed 14% and easily beat expectations for 11%. On the conference call they said they saw growth in all areas but a 26% increase in its men's business was a highlight. E-commerce sales rose 35% and sales in China rose 70%.

They raised guidance from $4.48-$4.55 to $4.51-$4.58 for the full year. They raised the revenue guidance from $3.70-$3.74 billion to $3.73-$3.77 billion. This was a killer report and 21 of the 34 analysts that cover the company raised their price targets. The new average price target is now $191.71 and represents a 10.2% rise.

In a major change of direction, Duluth Holdings (DLTH) reported a loss of 23 cents compared to estimates for 22 cents. Revenue of $114.244 million rose 14% and narrowly beat estimates for $114.07 million. That was their 37th consecutive quarter of revenue growth. Shares traded higher by 5% on the news. Unfortunately, the gain was short lived. Shares collapsed more than 10% on Friday.

The gain in revenue came from new store openings and not organic growth of existing stores. The 23-cent loss was 21 cents more than the 2-cent loss in the year ago quarter. These results compare to a profit of 64 cents in Q4. While revenue may be rising, earnings are not, and the shares were hammered.

Beyond Meat (BYND) was downgraded by JP Morgan on Tuesday and shares fell hard. The decline was brief, and the rally resumed almost immediately. On Friday shares spiked 12% intraday on news that their competitor Impossible Foods was having trouble meeting demand at White Castle and Red Robin. Impossible is working with Burger King on a possible nationwide release and this is sucking up all available product. This is actually good news for both companies. Rising demand in new markets and restaurant chains shows the consumer has accepted this meat substitute.

I was in a National Grocers (NGVC) on Saturday. The Beyond Meet burgers were sold out and there were six shoppers standing by the empty shelf talking about what they were going to substitute. I was also planning on buying some for my own taste test, so I asked the group if they had tasted them yet. Four of the six had eaten them before and were buying again and the other two were first timers like me. I live in the mountains 60 miles outside Denver and not a geography where you would expect fake meat to be flying off the shelves. Given the cost at roughly $3.25 per patty they better be really good, or I will not be buying them again.

The world's largest airplane is for sale for $400 million. It has only flown once. The plane was designed by the late billionaire Paul Allen, of Microsoft fame. The idea was to ferry rockets to high altitudes and then launch them into space. By using the Stratolaunch ferry the stress on the rocket would be less and it would require less fuel to reach space. This eliminates the need for launch towers and all the ground-based support facilities.

Initially, Stratolaunch was going to launch its own custom designed rockets but that idea died with the company approaching SpaceX, Blue Origin and others about launching their rockets. They currently have a contract to launch one rocket for Northrup in 2020 and contracts with Orbital ATK. The plane has a 385 ft wingspan and uses six Boeing 747 engines.

Richard Branson is said to be interested but he wants a big discount. You can't just buy the plane. You have to buy all the support facilities and staff to make it work. Therefore, the purchase comes with a hefty monthly expense. A buyer would need deep pockets to keep this company going. Branson has reportedly offered them $1. Branson offered British Airways $8.30 to buy the Concordes and continue flying them rather than scrap the fleet. British Airways declined the offer.

Corn futures hit a five-year high as flooding in the Midwest caused delays in planting. The Department of Agriculture revised corn production estimates to a four-year low. Rain is still falling, and the long-term forecast is for additional weeks of rain. Not only are fields impassable but grain storage bins, processing facilities and railroad access is underwater. Corn rose to $4.5325 per bushel on Friday. As of Friday, only 83% of the expected 2019 crop had been planted compared to the five-year average for 99% at this point in the season. Only 60% of the expected soybean crop has been planted compared to the 88% average for this week.

Blue Apron (APRN) surprised investors on Thursday after the close when it announced a 1 for 15 reverse split. The split was effective after the close on Friday. Shares fell 16% after the announcement. Prior to the split there were 100 million Class A shares outstanding. There will only be just over 6.7 million shares on Monday. The 96.4 million Class B shares will be reduced to 6.4 million.

Normally a reverse split is a last gasp attempt at rescuing the stock. However, by inflating the stock price back over $5 it opens them up for shorting once again. The company said its paying customers had declined -30% from last year and 50% down from two years ago. The company had received a delisting notice because the stock was under $1 for a period of 30 days.

I am sure you have noticed the absence of meal kit ads on radio and TV in recent weeks. The fad has burned out and participation is falling. People have decided they don't want to spend $25 a person for an ice chest of raw food and then spend 30-45 minutes preparing it only to end up with a mediocre meal. Most working consumers can't cook fancy food and stay at home moms have too many people to feed to justify the expense. Most people who can afford to spend $25 a plate for a meal want it to be served at a nice restaurant with a glass of wine. I am sure these types of services will linger for some time but the declining trend at Blue Apron is being repeated all across the space.

Meanwhile, privately held Sun Basket closed another round of funding with a $30 million investment. That brings their total up to $125 million. This company has a niche. They offer curated means that are paleo, vegan, vegetarian and others. These are meals you can't just run down to the local restaurant and order. They are only targeting the 100 million consumers who are primarily well off millennials and want healthy food. Therefore, Sun Basket can charge more for their meals and potentially make a profit. They have grown at a compounded growth rate of 80% over the last three years.

Crude prices spiked only slightly after two more tankers were attacked in the Persian Gulf. In prior years having six tankers attacked over a period of several weeks would have sent crude prices over $100. However, the current market is so over supplied there was only a minor blip.

With Venezuela practically out of the oil business and Iran only able to export a portion of their production you would think the excess production would have been eliminated. That is not the case and OPEC is struggling to even schedule a production meeting for the end of next week. Multiple countries are not currently planning on attending and the group cannot even settle on a date even though late next week was slotted on the calendar.

Russia is making noises about resuming production and leaving the OPEC+ group that has held 1.2 mmbpd off the market for a year. Saudi Arabia is promising to prevent another inventory glut, but the facts are not in their favor.

The IEA cut its forecast for global demand growth for the second consecutive month. The June report predicts 1.2 mmbpd growth for 2019 compared to 1.3 mmbpd in May and 1.4 mmbpd in April. They are basing their forecast on the rapidly slowing global growth, specifically in China.

In Q1 oil demand in the OECD declined 600,000 bpd year over year but rose in non-OECD countries by 850,000 bpd. World trade growth has declined to its lowest level since the financial crisis.

With a resolution in China trade discussions they expect demand growth to return to 1.4 mmbpd in 2020. At the same time US production is expected to rise 1.3 mmbpd and non-OPEC supply growth is expected to rise 2.3 mmbpd.

Refinery utilization finally spiked to the high for the year ahead of the July 4th holiday driving season. This should produce a significant decline in inventories for next week.


The markets slipped into a holding pattern ahead of the FOMC meeting on Wednesday. Investors do not expect a rate cut but they are afraid Powell will try to walk back his prior comments that juiced the market two weeks ago. That worry is likely to keep the gains muted until after the press conference. Normally the Tuesday before an announcement is positive regardless of what rate news is expected. This could be one of those Tuesday's where negative expectations keep everyone on the sidelines.

The Chinese trade headlines are likely to increase as we move closer to the G20 meeting. If the White House was smart, they would be quiet and not let the tweets get in the way of a deal. It is impossible to tell how the press and the Chinese will respond to any sporadic tweet. Sometimes positive tweets can be interpreted incorrectly depending on the bias of the reader. It would be best for a quiet period, but I doubt that will happen.

The S&P managed to close over 2,872 but the index could not push over 2,900. The 50-day at 2,873 is now support along with that prior resistance. The 2,945 level is the prior high and the target for any sustained move higher.

The Dow resistance at 26,191 was rock solid and the index held its gains while it consolidated. The Dow is poised to catapult over that resistance on positive Fed news. The overbought pressures have been relieved. Home Depot has been shooting up like a SpaceX rocket for the last two weeks and added more than 20 Dow points on Friday. McDonalds is making new highs on no news. United Technology is recovering from the post announcement decline but it has a way to go. Walmart and Merck are also making new highs. This is a case of the haves and have nots offsetting each other in the index and keeping it from posting gains. The 26,191 level is the one to watch.

The Nasdaq is still suffering from the FANG stocks. However, Facebook pulled out of the crowd on Friday to lead the big cap gains. There was some discussion in the press whether Zuckerberg knew about the privacy issues before it happened and that prompted another round of analyst discussion.

Current resistance is 7,857 followed by 7,900. Support is holding around 7,775. The chip wreck was a major drag on the tech sector on Friday.

AVGO, CSCO and APPL each erased 5.8 Nasdaq points on Friday with TXN and INTC erasing 3.4 and 2.1 points respectively.

The Russell rebounded on Thursday but gave it back on Friday. The Russell was the biggest loser for the day. The index was facing a cluster of moving averages and they are also congregated right at the 1,550-resistance level. This should be nearly impossible to cross unless there is a sudden flurry of headlines or the Fed confirms its dovish stance.

I am neutral on the market until after the G20. The Fed is not likely to move before the G20. That could be market negative on Wednesday depending on how they say it and the tone of the press conference. There is a real battle of appearances shaping up for the G20. Trump and Xi will both want to give the appearance of strength and resistance to the other. At the same time, they both need a deal. There could be a breakthrough but there could also be a break down with a new round of tariffs. I would refrain from being overly long and be prepared to go to cash if the G20 kicks off the summer doldrums.

Enter passively and exit aggressively!

Jim Brown

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