After weeks of gains the market rested before the G20 meeting on Saturday.

Weekly Statistics

Friday Statistics

The first six months of 2019 set some records. This was the best month for the Dow since October 2015 and the best June since 1938. For the S&P it was the best first half since 1997 and the best June since 1955. There has been a lot of months/years since those dates so that should emphasize how strong the market has been since the June 3rd bottom.

With the Trump/Xi meeting somewhat successful the market should be positive on Monday. How positive for how long is the question? S&P futures were up +29 at the open on Sunday evening.

Removing the ban on selling to Huawei should help the chip sector. Not adding additional tariffs should help the overall market. Unfortunately, the result of the meeting was a temporary truce rather than an agreement. There is no path to an actual deal. All the roadblocks are still in place and intellectual property concerns and forced technology transfers are still a taboo subject as far as China is concerned.

The market is moving higher simply because the outcome was not negative. I give the win to China in this round. They got a reprieve for Huawei and gave up nothing. They are still demanding an end to tariffs before they agree to any deal and Trump is not going to give up that card.

China is an expert at the "rope-a-dope" maneuver. If you have 20 points you want to get done, they will fight on each one for months at a time. Once you think you have an agreement on 15 of them, and are pressing on the final five, they will say "those are too harsh" if you want to negotiate on those then we have to revisit the first 15 and the process starts all over. This is exactly what they did to Trump in May. By backing out of the talks with a hard line that the deal was not balanced, and the US must rethink its positions, they effectively nuked a year's worth of talks and reset the board again.

One of the key provisions is that the US wants China to pass laws against intellectual property theft and forced technology transfer. They are not going to do it. That would be the equivalent of asking the US to change its constitution to favor the Chinese economy. IP theft and forced transfer is how China has built its economy. This is a communist country and they are never going to play fair. It is them against the world and they will do anything they can to win.

Investors must decide if they are willing to hold for another three months while the new round of talks progress to yet another stalemate. Or, will they leave the market in frustration ahead of the summer doldrums. I believe they will chase prices despite the lack of earnings and slowing economic growth. The lure of new highs is too strong.

The lack of a disaster at the meeting could provide a temporary lift. Unfortunately, Q2 earnings are fading back to negative growth and that should be a longer term drag. The factor that will overcome everything discussed above is the prospect of a Fed rate cut in July. That is the new rally cry now the China trade problem has been put on the back burner to simmer. China should not be a drag on the market in July. All eyes will be on the Fed instead.

I believe China has decided to wait out the Trump presidency. They know any democratic successor will be much easier to deal with and will drop significant requests in order to be seen making a deal. That means China will try to low key any future talks while investors focus on the Fed.

The Dow traded over 26,828 intraday but had not closed at a new high. The Nasdaq Composite has not made a new high and remains -162 points below that level. The Nasdaq 100 is nearly 200 points below the prior high at 7,845. The S&P closed at a new high at 2,854 but pulled back to 2,941. It is close enough to be at a new high on Monday. The Russell 2000 came to another dead stop at the 10% correction level and is well below the prior highs.

The Russell 3000 was reconstituted on Friday. That is the combination of the Russell 1000 and the Russell 2000. This is the market of tradable stocks. That index is very close to prior high resistance at 1,740 and could generate significant technical buying and price chasing if we were to break over that level.


I cannot chart the A/D line on the Russell 3000. The closest I can come is the NYSE common stock only A/D line. That eliminates ETFs and REITS. The "stock" market is positive with the A/D line at a new high on Friday. That should continue at Monday's open. This is our early warning indicator. If the NYC Stock A/D line begins to fade, then we should be concerned about the health of the market. I do not anticipate that ahead of the Fed. This indicator was strongly positive on Friday due to the reconstitution of the Russell indexes that added about 5 billion shares of extra volume.


On Friday the BEA released the personal income and spending numbers for May. Income rose 0.5% for the second consecutive month and that is very bullish. Consensus estimates were 0.3%. Unfortunately, employee compensation rose only 0.2% with proprietor's income rising 0.8% and leading the categories. Income receipts on assets, which means you sold something, rose 1.6% but that is not repeatable.

The key to consumer spending is real disposable income and that rose 0.3% to match April's gain. Basically, the headline number was bullish, but the components were mediocre. Current 12-month average hourly earnings are 3.1% and that is the slowest pace since September.

Personal spending rose only 0.2% to match April but well down from the 0.8% in March. Spending on durable goods rose 1.6% and the strongest since November. Nondurable goods spending declined -0.2% while services rose 0.2%. This was another disappointing report suggesting the employment boom may be fading because income and spending are slowing.

The second reading of consumer sentiment for June, rebounded slightly from 97.9 to 98.2. The present conditions component rose from 110.0 to 111.9 but the expectations component declined from 93.5 to 89.3. Analysts said falling gasoline prices were to blame for the increase in current conditions.

Note that sentiment has been relatively flat for the last 18 months. There was a big spike after the election, but that excitement has faded.


The worst report on Friday was the Chicago PMI for June, which sank to 49.7 and the lowest reading in more than two years. This was the first reading in contraction territory since August 2016. New orders and order backlogs both declined. This is the chart that is giving the Fed a headache. The GDP and the stock market may be doing well but the economic internals are fading fast. This is why the Fed could cut by 50 basis points in July.

Econoday Chart

Big money is moving into treasuries and the yield on the ten-year has been trading at 2.0% for the last week. This could reverse on Monday.


There are multiple high value reports next week, but nobody will be paying attention. Volume will be nonexistent after Monday/Tuesday when the index trackers will be cleaning up their Russell reconstitution trades. There is roughly $9 trillion indexed to the Russell indexes. Fund managers will check their weightings on Monday based on their buys/sells from Friday and see if the weightings are correct. If not, they will have to buy/sell small amounts of stock to correct the imbalances. They will repeat this on Tuesday after Monday's trade impact is calculated.

This is payroll week and ISM week. Both sets of reports will be important but not likely to be market moving because of the low volume. The NYSE closes at 1:PM on Wednesday and all day on Thursday. That makes Friday almost a legal holiday. Volume is not likely to break 5 billion shares on Friday.

The estimates for both the ADP and Nonfarm payrolls declined from prior months but remain significantly over the low numbers we got last month. The flooding in the Midwest was supposedly responsible for the low counts. We are moving into census season and each report for the rest of the year will be positively impacted by census hiring.

If the Manufacturing PMI is below 50, it could increase chances for a rate hike.


The dwindling earnings calendar did not change the numbers last week. Q1 earnings are still expected to rise 1.6%. However, Q2 earnings are now expected to rise only 0.3% on a 3.8% rise in revenue. We are about two weeks from the start of the Q2 earnings cycle.

There are only a handful of companies reporting next week and only a couple that the average investor would recognize. Those are Acuity Brands and Greenbrier. This is going to be a very slow week for corporate headlines.


The big earnings news on Friday came from Constellation Brands (STZ). The company reported adjusted earnings of $2.21 when excluding the pass-through loss from Canopy Growth. Revenue was $2.10 billion. Analysts were expecting $2.05 and revenue of $2.07 billion. Constellation guided for the full year for earnings of $8.65-$8.95, a 15-cent increase from prior guidance. This excludes any impact from Canopy.

Constellation said sales of its Corona and Modelo Especial beer products were booming. In recent quarters the company has added more Mexican beers and craft bears to cater to rising demand by younger drinkers. Beer sales rose 7.4% in the quarter to $1.48 billion with operating margin rising to 39.3%.

Constellation is selling 30 of its inexpensive wine brands to Gallo for $1.7 billion but retaining the more expensive wines in a "power brands" premium portfolio. The sale is expected to close in the second half of the year.

The CEO said he was not pleased with the loss from Canopy Growth, but he understood they were in a growth phase that required significant capital expenditures. The future is very bright, but we will have to endure some losses to get there. Shares spiked nearly 5% on the news.


On Thursday Dow component Nike (NKE) reported earnings of 62 cents missing estimates for 66 cents. That was the first earnings miss in 7 years. Revenue of $10.18 billion narrowly beat estimates for $10.16 billion. The company said impact from currency valuations was painful. Costs have risen 10% over the last 12 months due to higher marketing expenses.

On the positive side the company said they had seen no material impact from the China trade issues. They guided for revenue growth to accelerate into the high single digits by December. Currently online sales accounted for 30% of revenue and that will top 50% long term according to the company. They guided for earnings to rise 19% in the current fiscal year.

Wedbush reiterated an outperform with a $96 price target. The analyst said they are executing a "solid strategy" and producing innovative products with key initiatives in women's apparel.


Dow component Walgreens Boots Alliance (WBA) reported earnings of $1.47 that beat estimates for $1.43. Revenue of $34.591 billion beat estimates for $34.442 billion. Domestic pharmacy sales rose 2.3% to $26.5 billion. International pharmacy sales declined -7.3% to $2.8 billion. The company blamed adverse currency impact for the decline. The overall earnings declined -23.6% because of weak performance in the UK unit.

Walgreens did report a rise in "branded" drug sales and a rise in the number of total prescriptions filled in the US. The company reiterated full year guidance.

Walgreens has been the worst performing stock in the Dow with YTD losses of 23.4 percent.


You can now buy a real house on Amazon, free shipping included. Since they were added to the shopping site several models continue to sell out. (Source) Specifically, one 172 sqft $7,250 pre-fab cabin is a hot seller. The manufacturer claims it can be built in only 8 hours from the prefab parts. The available tiny homes range from a few thousand dollars to tens of thousands for the larger models. For instance, the 292 sqft, not including the sleeping loft, cabin below costs about $19,000 and two adults can assemble it in 2-3 days. A 1,000 sqft Ecohousemart Timber Home goes for about $40,000.

Does this sound too good to be true? There is a catch. If you live in a colder climate and want insulation, it is extra. You will need a foundation, not included. Despite the extras, buying a prefab home for a mountain lot, mother-in-law residence, guest quarters, pool cabana, etc, has a lot of potential.


Amazon announced the date for Prime Day as July 15/16th this year. Amazon shoppers are expected to spend an average of $507 each, up from $465 in the 2018 sale. RetailMeNot data showed that those shopping on Prime Day will visit an average of 11 other websites throughout the event. This is not just good for Amazon but good for all retailers. Target, Walmart and Ebay have already announced special events scheduled to coincide with Prime Day. Despite the online feeding frenzy, MiQ data projects that parents will make an average of 16 trips to brick and mortar stores during the back to school shopping season.

Rakuten Intelligence reported that during March and April Amazon delivered as much as 45% of its own shipments. That delivery rate is up from 8% in 2016, 20% in 2017 and 30% in 2018. Amazon is rapidly replacing UPS, FDX and USPS as shippers. Amazon has the second largest warehousing operation in the world behind DHL. Amazon manages more than 233 million sqft of warehouse space compared to 248 million for DHL.

Rite Aid (RAD) announced last week they were partnering with Amazon to provide instore pickup locations in more than 1,500 stores. The service will be called "Counter" and will allow consumers to pickup their online orders with same-day, one-day or standard shipping service. Rite Aid is hoping consumers will linger in the stores and buy something Rite Aid offers. RAD shares spiked as much as 36% before falling back. With RAD shares in the mid-single digits this expanded partnership could be the next step in Amazon eventually acquiring the chain and its 2,469 locations. Rite Aid's market cap is only $431 million and pocket change for Amazon.



Apple announced that noted designer Johnny Ive was stepping down from the CDO position. Ive has worked for Apple since 1992 and designed most of Apple's iconic devices. The iMac G3 was the beginning of the rebound in Apple computers. The G4 Cube did not achieve as much success commercially, but it was a breakthrough design. The iPod was a monster hit with the first device released in 2001 with the capability to hold up to 1,000 songs. The iPod was not the first MP3 player, but it rose to dominate the market.

The iPhone was first released in 2007 and Ive and Jobs worked together to change the image of the cell phone. He was also influential in developing iOS 7 and a major upgrade in smartphone operating systems. He also created the MacBook Air in 2008. That revolutionized the laptop market. He is also credited with designing the Apple Watch, iPad and Apple's new spaceship campus.

Apple shares declined on the news but the impact from Ive leaving is likely to be minimal. He is going to operate his own independent design firm "LoveFrom" and Apple will be his primary client.


A headline out this weekend claims US air-safety regulators reportedly found a problem with the 737 in-flight control chip. This could extend the grounding of the planes until the end of the year. More than 500 are parked at storage facilities.

Regulators said a failure in the chip can cause "uncommanded movement" of a flight control on the aircraft's tail and force the nose of the plane lower. During testing it took pilots longer than expected to work through the problem. This problem is unrelated to the initial flaw in the MCAS automated flight control system. A Boeing official said they are shooting for a late September time frame for a full software update to fix the MCAS and this new problem. Once regulators approve the software update it will take an additional two months before planes can begin flying again. In addition, all the pilots will have to be retrained and recertified. Shares declined on the news.


Uber (UBER) rallied more than $4 over the last two days to close at a new post IPO high at $46.14. Option volume was running twice normal as buyers bought calls and doubters bought puts. There have been 2.2 calls bought for every put over the last two weeks.


Tesla (TSLA) could be in for a big move this week. They normally report deliveries for the quarter a couple days after the quarter ends. Analysts are expecting 91,000. Elon Musk has said this could be a record quarter for deliveries. Others are expecting 85,000-87,000. Shares have rallied over the last three weeks on the Musk comments. At this point, even if he meets the analyst estimates, multiple analysts believe this will be as good as it gets.

The company's manufacturing momentum is slowing and the multiple models both announced and in production are a drain on cash flow and capital expenditures. Several years ago, there were projections of 750,000 to one million vehicles a year in the early 2020s. With current production around 350,000 there is almost no hope of reaching those targets. The completion of the Chinese factory will boost production somewhat but another 50-60,000 a quarter is not going to reach those lofty goals. Earnings are now at long term risk as cash burn increases. There are multiple analysts who believe Tesla will either be acquired in a rescue or end up in bankruptcy. There are more than 20 new models of electric cars to be delivered between 2019-2021 and nearly all are cheaper than a Tesla. Competition is going to be fierce and these companies have significantly more money than Tesla. Musk is at great risk of losing Tesla's pole position in the EV race.


Crude inventories imploded last week as refiners get ready for the July 4th holiday. Utilization ramped up to 94.2% as they produced gasoline to flood the system ahead of a week of heavy driving. Also impacting inventories was a sharp drop in imports that accounted for about a 6 million barrel decline for the week.

Crude prices spiked to $60 on the increase in Iranian tensions. Prices dropped $1 at the close on Friday but immediately recovered that in the Sunday evening session. OPEC meets this week to discuss Q3 production targets.

Active rigs were unchanged in total, but oil rigs rose by 4 and gas rigs declined by 4. The $60 oil price may be giving drillers a chance to rethink their plans.





Markets

The S&P futures are up +29 as I type this on Sunday evening. Obviously, we do not know if that will stick through Monday's open or will sellers appear on the spike. We are entering the normal summer doldrum period, so anything is possible. Traders already short ahead of the doldrums are going to have a bad morning.

Headline rallies are normally short squeezes and are not based on fundamentals. Sometimes these squeezes ignite a real and lasting rally but many times they fade out over a couple days and the direction reverses. I would not be a buyer of long positions at Monday's open. Option premiums will be out of sight and you will more than likely be filled at the high of the day and possibly the week.

On the positive side, the S&P is likely to open in new high territory over 2,954. That could trigger some price chasing, but I would be cautious. In the past we have seen rebounds like we had in June end with a climax spike of shorts covering and retail traders buying. Institutional investors will not be buying Monday's bounce.

Multiple analysts have year-end price targets over 3,000 with 3,150 the current high target for 2019. If we were to see a multiday rally appear and break through 3,000, those high targets would begin to be hit and that would be an excellent time for fund managers to take some chips off the table and protect their 2019 gains and their bonuses.


The Dow is poised to open at a new intraday high, but it must close over 26,828 for a new record high. Boeing is likely to be a drag, but Intel, Cisco, Chevron, Exxon, Caterpillar, Apple and 3M are likely to be leaders.

The Dow's decline last week was minimal, and sentiment is still positive despite the weak earnings forecast. A new high close coupled with expectations for a 50-point rate cut, would be a powerful motivating force.



The Nasdaq futures are up +107 and the Nasdaq Composite is still 162 points below its prior high. The chip sector is likely to contribute to Monday's gains thanks to the position reversal on Huawei. The Nasdaq has strong support at 7,859 and strong resistance at 8,164 with Friday's close almost exactly in the middle at 8,002.

Apple should be the biggest impact with increased Chinese tariff concerns off the table for now.



The Russell 2000 was the strongest gainer on Friday, but it was due to the reconstitution of the Russell indexes and the five billion shares of additional volume. It was not because earnings are improving. Nothing has changed in small cap land. These reconstitutions typically lift the Russell for the next two days as portfolio managers balance their positions. That normally means buying a few more shares of the companies added to the Russell indexes. There is no guarantee and there is strong resistance for any continued move higher.


I would not recommend buying stocks at the open on Monday. There is no reason to jump in front of the freight train and get run over with high prices. I am not going to publish the LEAPS newsletter tonight for this reason. I will publish it on Monday. I can almost guarantee you that we will revisit current levels over the next couple of months and possibly lower. Be patient.

Enter passively and exit aggressively!

Jim Brown

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"You cannot cross the sea by merely standing and staring at the water."

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