I Hate Being A Bear, But The Fed Is Just The Beginning

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Includes: CLDR, CRM, DOMO, FCX, MLNX, NVDA, RTN, SPLK, TSLA, UTX
by: David H. Lerner
Summary

The market looks great right now, shrugging off the entire downtrend of May.

If the Fed starts cutting the way the market is demanding now, what ammunition will it have for when the recession really comes?

As the month progresses, we will see less corporate buybacks.

Merger Monday means healthy stock market.

June, Not May, May Well Be the Cruelest Month

The market looks great right now, shrugging off the entire downtrend of May. Shouldn't we all put the bear-suits back in the closet? Not so fast. Here's why:

  • Powell has reassured the market, but the Fed needs to be there for the real economy. If the Fed starts cutting the way the market is demanding now, what ammunition will it have for when the recession really comes?

  • In fact, the Fed can do plenty without changing short-term rates. Powell could sell its supply of 10-year bonds to juice the yield curve, adjust bank reserves to encourage lending, change margin requirements to encourage stock buying, and coordinate with the Treasury to favor long-term bond issuance.

  • Next week is the June Fed meeting, not a word about cutting rates in any fashion will be mentioned. Powell will stand pat. The market won't like that.

  • President Xi referred to Trump as his "friend" last week. The market looks on this as favorable. I suspect that Xi wants to butter Trump up because he is not going to go back to the "90% done" negotiating position. The Chinese negotiators will demand some concessions, even cosmetic to give Xi "face". The Chinese have no intention of moving the negotiations along. They have decided that their best move is to run the clock and get as close to the November elections as possible in the hope that Trump will cave so that he can claim a win. The truth is, that IS their best move. What they are miscalculating is that Trump loves being "Tariff Man" and that trade wars helps his campaign. There is a better than 50/50 chance that Trump will walk from negotiations and put on new tariffs on the next 300 billion. Maybe Xi doesn't even show up to the meeting in Osaka, in case Trump walks away from Xi at the G20.

  • As the month progresses, we will see less corporate buybacks. Actually, you won't see it. There is no formal process requiring corporations to announce that they've stopped buying, but we will see it in more volatility. In fact, we may already be seeing it. Corporations cannot buy their own stocks a few weeks before going into earnings season which will start July. Summer trading volume slows down anyway, and if the market is vulnerable, a lack of corporate buybacks will magnify the volatility to the downside.

  • We should start hearing warnings from corporations that see they will miss earnings. This has not been an issue since earnings have been doing great quarter after quarter. This quarter has been showing a sharp slowdown in growth and that may have caught some companies by surprise

  • Earnings projected to be about $168 for the S&P for 2019 is not super visible, the chart and just common sense tell me that stock market participants have created "Overbought" conditions. I would not be surprised if the market turns on the bulls (can't believe I'm a bear) before the week is out. I think analysts will call that $168 in question. If it's lower, it means that the S&P is trading above 17 times, that is rich for the markets right now. Let me be clear, I think the S&P will meet that earnings estimate and even beat it by year-end. I am talking about "visibility".

  • Regulators are attacking the stock market's heart, the best and biggest champions of America's economy, the large-cap technology stocks. That can't be good for the overall market

  • This morning the market is thrilled on the news that Mexican Tariffs are not going to happen. Remember the 11th commandment: "Buy on the Rumor Sell on the News." Sell this news.

On June 5th, I asked you to sell 30% to 50% of the positions that I recommended when the S&P broke 2,750. I am asking you to cut another 30% of those positions. I am not telling you to sell ALL spec positions. If you have names that are still developing like Tesla (NASDAQ:TSLA), hold on to those. What I want you to do is maintain the 25% to 35% cash horde right now. Trim other positions, and again, when I say trim, I am saying sell 3-5-10 shares of each position, or 3% to 5% of positions if you have a sizeable trading account. Please keep your long-term and short-term accounts separate. And for goodness' sake, don't you dare sell long-term positions. You add to LT, NEVER sell. Got it?

In summary

Please go back to my June 4 note, and see the names I recommended. They are all up significantly if you bought on my recommendations and are now up 5% to 15% or more, please don't be a pig. Take some profits...

Merger Monday Means Healthy Stock Market

One of our internet names, Tableau (NYSE:DATA), last mentioned with other big data names I like on June 7 is being bought by Salesforce (NYSE:CRM) at a huge premium. I think this floats Splunk (NASDAQ:SPLK), Domo (NASDAQ:DOMO), and Cloudera (NYSE:CLDR). I would buy these names even in the face of the coming sell-off this week and going into July.

Other big merger announced is United Technologies (NYSE:UTX) and Raytheon (NYSE:RTN) merging. UTX is busy spinning out Otis and Carrier. This combo is very exciting. It does point up to the overall health of the stock market and also why I hate being a bear right now. We are NOT going into recession or going have a long-term bear market. Just get ready for some real turbulence in the short term. That's all.

Pay Attention to Insiders

Insider Activity: Freeport-McMoRan (NYSE:FCX) Director buys almost 1.7 million dollars worth of stock on June 6. I say, let's keep an eye on further insider buying in the materials space. I am not sure I am ready to say buy FCX based on this activity, but they don't call it "Dr. Copper" for nothing. This is a very old moniker, but what it used to mean is that when the price of copper goes up, that is a harbinger of renewed economic growth. You can't build a home, a car or a plane without copper wire. This is one for the bulls (Yay!).

Here is another really interesting purchase; a Director of Mellanox (NASDAQ:MLNX) is buying 2.2 million shares. We all know that MLNX is being acquired by Nvidia (NASDAQ:NVDA). Maybe he is playing acquisition arbitrage, his purchase price was $110.54. This means a few things: A) the merger is likely a done deal, with China approval soon to be visible. B) The full premium is not expressed at this $110 level (the offer price is $125). Obviously, C) This deal is likely to close soon otherwise the time value of money would justify the arbitrage premium.

Be careful out there. The time to buy is when everyone is selling. Keep your wallet on your hip.