Was I Wrong About Powell, Or Just Wrong
I am not going to go through the many reasons why Powell should have resisted cutting right now. Jay Powell basically closed off all rational discussion of holding rates at yesterday's Humphrey-Hawkins testimony. Polite commentators will say that Powell gave in to what the market clamored for, or that there is no inflation, so why not? But in the realm of history when cooler heads will reflect I fear they will conclude who the real master that Powell is serving. Damage to the notion of Fed independence will hopefully be temporary.
My overriding mission is to take chances and give you ideas, so that you, my loyal readers, will find opportunities you can use to make profits. Sometimes the market will make a fool out of my efforts, and that's to be expected. I would like to think that I wouldn't make a mistake on someone's strength of character. Usually, I am safe because I assume that "character" is something that you find in novels. Most people will prioritize expediency, self-preservation, personal enrichment first and then the remainder goes to personal dignity and character. I would like to think still that Jay Powell is one of the rare ones who is the epitome of professional gravitas who cares about the Fed as an institution, prioritizing free markets and financial health of the economy. So the only conclusion is that I am wrong, that I just don't get it, and I am mistaken.
To the extent that I could have peered into the soul of Powell or analyze the macroeconomic conditions to predict the actions of the Fed, I was wrong. The happy news is Powell must not see ANY chance of recession even into 2021. A position that I can agree to. It is the only justification to (IMO) waste a 0.25 cut. So let's party like it's 1999.
The VIX Plummeted
The VIX fell +6% to 13, and in the premarket, it is around 12.95. This is signaling a strong level of complacency that one would associate with the Fed Put once again. I suspect that the VIX will fall further over the rest of the month. That means the rally should accelerate at least to the end of the month. I said this before when the VIX is down that hedging is cheap. Consider near-dated put spreads for your largest holdings. The best way to do that is to find ETFs that cover as many of your stocks as you can. I would concentrate on the high-beta cohort since they could be the most vulnerable to any tape bomb, like a Trump tweet on trade. You could also long-spread the VIX and VXN (the Nasdaq 100 volatility index), but put on some hedges.
FOMO (Fear of Missing Out) Rally is full-on
Market participants who have sat out the market rally will realize that we have a good chance of seeing the S&P close decidedly above 3,000 (as predicted). At this point, the chatter will be that we may just breech 3,100 over the next few weeks. The Dow will break out to new levels as well and that could very well pull in the hapless retail investor that always comes to the party too late. So let's dance while the music is playing, but keep an eye on where the fire exits are.
The New eRetail Group
I want to define this new cohort; they understand DTC (Direct to Consumer). They offer customized product or curated or small batch to a highly targeted audience. Of course, most of all, they occupy the eRetail space and yet know how to foster a personal connection. So here is the list: Etsy (NASDAQ:ETSY), Chewy (NYSE:CHWY), FarFetch (NYSE:FTCH), Revolve Group (NYSE:RVLV), RealReal (NASDAQ:REAL), and Stitch Fix (NASDAQ:SFIX). I would put Pinterest (NYSE:PINS) on this list since I believe that it will pivot to a retailing strategy. So why now? Well, in a world where new money is going to come back to the market and that many of these names are brand new IPOs which will also attract new investors, I think it's a great time. One could argue that Lululemon (NASDAQ:LULU) and eBay (NASDAQ:EBAY) belong on this list, or even Amazon (NASDAQ:AMZN), but I want to concentrate on the new I think as I said these names will attract new fast money right now. The consumer is going to have an extra jingle in their pockets as well, and these names appeal to the fastest growing part of the consumer population.
Delta (NYSE:DAL) has fantastic earnings, what slowdown?
In what can only be described as superlative results, with quarterly earnings of $2.35 per share, DAL's revenue during Q2 jumped 8.7%, while earnings soared 32% year over year. June revenue growth broke a Billion Dollars. The company's results were bolstered by a domestic load factor - the KPI of demand - that surged to a record 89% - Q2 revenue $12.5 billion and operating margin 17.1%. DAL sees $2.10 to $2.40 per share earnings for Q3 against a $2.18 estimate. Full-year $6.75 to $7.25 earnings, with $4 billion in cash flow, $3 billion to be returned to shareholders, and div 15% to $0.40 per share. What does this mean?
DAL probably continues to new highs, having broken out of a consolidation phase that has lasted for years. But more generally this points up to the strength of the consumer. DAL had a 10% leap in premium ticket sales, which is a notable change for consumers known to scour the web for the cheapest ticket. Results like this baffle me as to why we are cutting rates at this point, but it is what it is. My job is to talk about what is, and hopefully see a bit ahead to what will be and not what the financial world should be. I think the transports, in general, should liven up. Goldman Sachs upgraded FedEx (NYSE:FDX) to a "Conviction Buy"; maybe there is something to that. It seemed like a risky call yesterday, but now I am reconsidering.
Trim, Trim, Trim
I said that last week I wanted you to prepare to start trimming. Yes, I see a superb rally for the next few weeks, but that is precisely when you should start taking profits. Once you develop the discipline of selling when the stock market is rising, especially if and when the market is taking off, it becomes the easiest thing, especially when compared with the market is selling off. We need to fight greed and recency bias. The recency bias, in this case, is when stocks are rising, our expectation is that it will keep rising. So what I mean by trimming is to cut each position winning or losing by 3%. Obviously, brand new positions should not be cut. The main thing is to start trimming, building cash with an eye towards building back the 25% to 35% cash reserve.
What Could Go Wrong?
Frankly, I have no friggin' idea at this point, to quote Porgy and Bess "Summertime.
And the livin' is easy...Fish are jumpin'.....Your daddy's rich...And your mamma's good lookin'"
It's blue skies right now, and this is the most dangerous time. The market is fixing to be blindsided, so that's why you should be hedging when it's cheap. So go long, but start trimming especially names that are not working over the next week or so. If they aren't working now, they may never work, and trim your winners; start small, but start. If you go long, definitely pay for it by selling something else.
All this hand-wringing is for traders and speculators. For long-term investors, sit back and clip your dividends.