2019 Mid-Year Outlook - Looking Back At 1H19 Forecasts, See 'Risk On' Into 2H19

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Includes: BA, GBT, TWTR, VICR
by: Grinder Capital
Summary

2019 Mid-Year Outlook - Looking Back at 1H19 Forecasts, See “Risk On” Into 2H19.

Our revised forecast for year-end S&P 500 Index has increased to ~3,200, in part, higher estimated 2019 S&P 500 earnings, now $173.00 vs. prior $165.00.

During the second-half 2019, we see a more accommodative Federal Reserve and anticipate U.S. Dollar weakness.

Provideour thesis for second half 2019 picks; Long: GBT, BA, VICR, and Short: TWTR.

Introduction

Our 2019 Outlook highlighted our views on equity markets, The Fed, U.S. Dollar, CAPEX/Share buybacks, GDP growth, and S&P 500 earnings/Index targets. In our Mid-Year Outlook, we review our prior assumptions and provide our updated outlook for 2H19.

Our updated global economic outlook recognizes the increased forecasted recession concerns in 2020, reflected by the Federal Reserve Board’s Yield Curve Analysis. Our forecast implies recession risks may be weighted towards the second half. Changes in Federal Reserve policy, since the beginning of the year, have proven to be more dovish than projected. At the beginning of 2019, the market was looking for no cuts but has now shifted towards 3-4 cuts in the next 12 months. This action may provide some near-term reduction in short term yields, which may or may not, reverse the current flat 10yr/3yr yield curve.

Our views related to potential future Federal Reserve policy actions have been revised from our initial outlook of no cuts. We now anticipate 2-3 Federal Reserve rate cuts in 2019. The introduction of “quantitative tightening”, and the December rate increase, continue to work through the global economy. In our opinion, a more proactive Federal Reserve is needed in the near-term, but this would also require the current Board to admit that prior policy may have been too aggressive. Historically, this is not something prior Federal Reserve Board members have been willing to do. Given the slowdown in global growth, a more aggressive near-term policy may assuage investors’ concerns, and revive global liquidity, which was negatively impacted by prior rate increases. What remains unknown is how the Federal Reserve may allocate projected cuts. In recent public comments, President Williams, New York Fed, and Federal Reserve Vice Chairman Clarida, suggested the potential for a more aggressive Fed policy at the upcoming July 30-31 meeting. These comments were quickly walked back on Friday, July 19, but not before the market priced in a >55% chance of a 50bps rate cut at the July meeting, per Bloomberg. Given these statements occurred the day before the Fed commentary blackout period, we see a Federal Reserve which may be boxed into a 50bps cut. If this occurs, the Fed may be on hold for the rest of 2019. Else, the Federal Reserve may cut 25bps at the next three meetings.

Our original forecast implied some weakness in the U.S. Dollar during 2019 due to slower U.S. growth. We don’t see that as an actual driver of recent weakness in the U.S. Dollar. Our outlook conviction for a weaker dollar has increased, as we see a Federal Reserve remaining accommodative, putting pressure on the currency. Recent comments by President Trump, publicly pushing the Federal Reserve to lower rates, may be tied to a lower U.S. Dollar. There has been some chatter beginning to emerge “talking down the dollar” in some fashion from key economic figures within the White House. In our view, a lower dollar could be positive for global U.S. corporations and may put further pressure on China in the trade war. It has been reported the Chinese government is attempting to weaken their currency to offset current tariffs.

Our outlook for CAPEX/Buyback during the second half has been revised to expect further buyback acceleration, increasing dividends, and likely declining year-over-year growth in global CAPEX.

In our opinion, investors may want to look at allocating some assets to international, non-U.S. based companies, or gaining exposure to new rapidly growing emerging markets, such as Vietnam, through ETFs. We are now less sure, than our prior outlook, for when a narrowing in the long-term valuation gap amongst emerging markets, versus established economic countries, will occur. While there is more uncertainty in the near-term than initially anticipated, we continue to see a long-term shift in future global growth towards emerging markets, compared with more established global economies.

We have revised our 2019 S&P 500 earnings estimates higher, now forecasting $173.00, compared to our prior outlook of $165.00 (an increase of 4.8%). A more accommodative Federal Reserve in the second half 2019, along with easier year-over-year comps for many companies facing challenges from global trade tensions, suggest improving growth trends.

Our 2020 S&P 500 earnings estimates increased to $190.00 (prior $185). We see favorable prospects emerging for the first half of 2020, with expectations for estimated second half 2019 growth transitioning into 2020. Consensus Wall Street estimates for 2020 S&P earnings have increased to $184.87 compared to the prior forecast of $174.60 (increase of 7.4%).

Our revised outlook for a year-end target on the S&P 500 Index increased from our prior outlook of ~2,800. We now believe that the S&P 500 Index will close ~3,200 at year-end, offering 7.5% upside from the July 19th close of 2,976.61. Our revised S&P 500 year-end target is an increase of ~14% versus our prior forecast of 2,800.

We provide our thesis for long investment ideas in: GBT, BA, and VICR, along with our short investment idea TWTR.

Revisiting Prior Projections, Updating Outlook

Prior Outlook: 2018 Equity Market Declines Suggest Fear of Negative Growth in 2019, We See a Less Dramatic Outlook

Those that ascribe to the theory of a pending near-term recession, typically incorporate two or more potential 2019 Fed rate hikes, anticipate no meaningful conclusion to current trade tensions with China, and are expecting a meaningful slowdown of global growth."

“Our outlook for U.S. GDP Growth in 2019 of ~2.50-2.75% is slightly higher than the current consensus forecast of ~2.60%, based on the midpoint of our range”

Updated Outlook: Recession Fears Subsided, Stronger 2019 GDP as Trade/Global Growth Headwinds Offer Easier Comparable

We believe prior recession fears in early 2019 have shifted lower. Per data from the Federal Reserve (Cleveland) and Bureau of Economic Analysis, the Yield-Curve Predicted GDP Growth chart has remained stable, still suggesting future GDP growth levels ~2.50% in 2019, with 2020 GDP growth estimates closer to ~2.30%. The 2020 GDP growth estimate from the OECD (2.28%) suggests the U.S. will materially outpace other regions such as Europe/Japan, with only Canada in ~2%+ range.

Source: OECD website

Our prior expectation for 2019 U.S. GDP of ~2.50-2.75% may have been slightly conservative at the mid-point (~2.625%), however, we now see higher U.S. exports than current consensus (based U.S. Economic Forecast), due to a return of shipments for Boeing’s 737-MAX, and stronger consumer spending environment, supported by rising wages/employment. These changes raise our full-year 2019 GDP target to 2.75%.

During the second half a potential positive catalyst, from the impact of global tariffs, and concerns over slowing global growth, may provide easier year-over-year comps. While consensus GDP growth forecasts have not shifted materially since entering 2019, the probability of a recession, calculated from the Federal Reserve Board’s Yield Curve Analysis, has almost doubled in 2020 since early 2019. Current Federal Reserve estimates suggest we are only a “stone’s throw” away from predicative recession levels reached during the late 1990s and the financial crisis of ’08-’09. Investors should continue to monitor the probability of recession data, but we see the potential for outsized investment returns before this signal “flashes red.”

Our updated global economic outlook recognizes the increased forecast recession concerns in 2020, reflected by the Federal Reserve Board’s Yield Curve Analysis. Our forecast implies recession risks may be weighted towards the second half. Changes in Federal Reserve policy, since the beginning of the year, have proven more dovish than projected. At the beginning of 2019, the market was looking for no cuts but has now shifted towards 3-4 cuts in the next 12 months. This action may provide some near-term reduction in short term yield, which may or may not, reverse the current flat 10yr/3yr yield curve.

Prior Outlook: Market Odds Imply Zero Rate Hikes in 2019; Federal Reserve Suggesting Two, But May Back Off

We believe the Federal Reserve will likely need to back down from their current rate hike forecast of two further hikes in 2019….We also anticipate that the Federal Reserve will likely slow or postpone the unwinding of the balance sheet at some point in 2019."

Updated Outlook: Accommodative Federal Reserve, Suspension of “QT” in Second Half, Offers Global Markets “Fix” for Liquidity

Our view regarding the Federal Reserve and its policy outlook for 2019 has changed slightly from the beginning of the year, as we now know the Federal Reserve will be much more accommodative with monetary policy.

This accommodation would likely also include what we believe will be a suspension of quantitative tightening or “QT.” In our opinion, the initiation of quantitative tightening significantly increased the impact of the rising rate environment of 2018. In our opinion, the actual impact from Federal Reserve rate increases were likely higher than estimated. We viewed the rolling off of the Fed’s Balance sheet as a potential additional 25bps cut, effectively making the headline raise of 25bps seem minimal, while effects on global liquidity were potentially seeing a rise of closer to ~50bps.

Based on current Federal Reserve estimates, we believe the committee continues to underestimate the significant deflationary environment we currently live under, due to the globalization of workforces and new technology, such as AI, which can help improve productivity and keep pricing lower for end users. We estimate Core PCE inflation data will continue to remain under the Fed’s long-term target of 2% for some time.

With the near-term collapse of the Phillips Curve theory (lower unemployment creates inflation) and the limited inflation created by lower, and negative global rates, current economists working at global central banks likely struggle with the current economic environment, as it hasn’t transpired in line with historical trends. While we believe this misunderstanding could lead to more global stimulus in the mid-term, which may propel assets in the coming years, it also should cause a pause given the potential future costs of mid-term missteps. Investors should not feel a false sense of security from global central banks continuing to creatively create higher levels of global liquidity. We don’t believe lower for longer is a case for economic prosperity, even with the ever-changing global workforces and economy.

Source: FOMC

Our views related to potential future Federal Reserve policy actions has been revised from our initial outlook of no cuts. We now anticipate 2-3 Federal Reserve rate cuts in 2019. The introduction of “quantitative tightening”, and the December rate increase, continue to work through the global economy. In our opinion, a more proactive Federal Reserve is needed in the near-term, but this would also require the current Board to admit that prior policy may have been too aggressive. Historically, this is not something prior Federal Reserve Board members have been willing to do. Given the slowdown in global growth, a more aggressive near-term policy may assuage investors’ concerns, and revive global liquidity, negatively impacted by prior rate increases. What remains unknown is how the Federal Reserve may allocate projected cuts. In recent public comments, President Williams, New York Fed, and Federal Reserve Vice Chairman Clarida, suggested the potential for a more aggressive Fed policy at the upcoming July 30-31 meeting. These comments were quickly walked back on Friday, July 19th, but not before the market priced in a >55% chance of a 50bps rate cut at the July meeting. Given these statements occurred the day before the Fed commentary blackout period, we see a Federal Reserve which may be boxed into a 50bps cut. If this occurs, the Fed may be on hold for the rest of 2019. Else, the Federal Reserve may cut 25bps at the next three meetings. An additional catalyst, beyond just rate cuts, may be needed to spur economic growth, such as a tempering of global trade wars, or increasing profit outlooks for S&P 500 companies.

On a longer-term basis, we put forth our unique view of the Federal Reserve and its future potential impact. Investors should be paying close attention to new appointments at the Federal Reserve. It is our opinion President Trump is looking to nominate new Fed governors who are supportive of limiting the Federal Reserve and moving the U.S. dollar back to an asset-backed currency which is supported by gold. If this were to play out in the coming years, we would anticipate the Federal Reserve would no longer have a material impact on the U.S. economy, as rates could theoretically be moved to zero. Given on our longer-term view of what may transpire in future years with the Federal Reserve, based on future potential appointments, investors may want to look at allocating some assets to gold.

Prior Outlook: Expecting “Strong Dollar” to Weaken in 2019, Creating Potential for Second Half 2019 Tailwind for Global Companies

“…we do believe the U.S. dollar index will likely end lower than the recent close of ~96 by year-end 2019. Our forecasted decline in the dollar during 2019 is predicated on our view of a more dovish Federal Reserve relating to future rate hikes, and projections for slower U.S. growth in 2019. We see the potential for the U.S. dollar index to trade towards the high 80s, or low 90s, by year-end.”

Updated Outlook: See Fed Rate Cuts, and Potential “Currency Wars”, pushing the U.S. Dollar Lower, In line with Our Prior Forecast

In line with our prior outlook, we continue to believe that the U.S. Dollar Index will close the year below the ~96 level. Given developments in the first half of 2019, we are more confident in our prior view. Our increased conviction is based on our view the Federal Reserve will remain accommodative, putting continued pressure on the currency.

Second, our view is President Trump has been publicly pushing the Federal Reserve to reduce rates, in an effort to lower the U.S. Dollar relative to other global currencies. There has been some chatter beginning to emerge “talking down the dollar” in some fashion from key economic figures within the White House. In our view, a lower dollar could be positive for global U.S. corporations and may put further pressure on China in the trade war. It has been reported the Chinese government is attempting to weaken their currency to offset current tariffs.

Prior Outlook: Corporate Cash Likely Allocated Towards CAPEX and Executing Buybacks in 2019

As we enter 2019, we would anticipate executives being more willing to execute prior buyback authorizations following the worst stock market December performance since the Great Depression…we would expect buyback levels to be more in-line with estimated CAPEX investments in 2019, which would be a shift from the significant divergence in allocation of capital between CAPEX/Buybacks in prior years.”

Updated Outlook: Where in the World is CAPEX? Buybacks Continue, Suggesting Higher Returns Than Future Investment

Our prior outlook for stock buybacks has been correct, and our view stock buybacks continue to see a high allocation of corporate free-cash-flow, remains unchanged. Our prior 2019 CAPEX forecast has been incorrect YTD. We believe that global CAPEX spending has suffered as a year-over-year growth remains weak. We do recognize that technology, and CAPEX-lite companies, have impacted growth levels since 2008. In addition, some companies may be classifying some long-term investments under R&D due to various accounting rules, or the interpretation of how it may be classified either on the balance sheet, or income statement. We remain concerned regarding the sacrifice of future investments thru CAPEX spending, for near-term benefit achieved by utilizing free-cash-flow for buybacks. We believe dividends offer a stable return to investors and were present when CAPEX levels were much higher in the early 2000s, however following the financial crisis in 2008, we believe future innovation has been underinvested globally as it relates to global CAPEX growth.

Our outlook for CAPEX/Buyback during the second half has been revised to expect further buyback acceleration, increasing dividends, and likely declining year-over-year growth in global CAPEX. We see CAPEX investing as a much better tool to spur global economic growth versus the current financial engineering being employed by global central bankers.

Source: S&P Dow Jones Indices

Prior Outlook: U.S. Valuations Not Expensive, But Ex-U.S. Valuations Provide Significant Discount

Given the potential for higher, or more stable growth levels in Emerging Markets during 2019, due in part to our forecasts of a lower U.S. Dollar, we see the potential for equity multiple expansion in Emerging Markets, as seen over the last few years in U.S. Markets.”

“We recommend investors begin looking towards allocating a higher portion of their investment assets towards emerging and non-U.S. based companies. We anticipate Brazil, Russia, and China will likely be key regions driving non-U.S. growth in 2019. While we don’t see the U.S. as overvalued currently, we do see the opportunity for multiple expansion in Emerging Markets, which could help enhance returns with only minimal growth necessary in year-over-year earnings.”

Updated Outlook: U.S. Valuations Remain Reasonable, Emerging Markets Offer Longer-Term Opportunity Given Gap in Multiples

U.S. Valuations remain in-line with historical valuations while emerging markets have not yet closed the valuation gap present since 2009. Based on data from Yardeni Research the current forward P/E for emerging markets is 12x compared to the U.S. S&P 500 at 17.4x.

Our prior expectations, which anticipated a narrowing of the valuation gap, was impacted by slower than anticipated growth rates in key emerging markets. The “BRIC” countries have seen steady growth projections, albeit with some variations in each market. With China/India accounting for the majority of emerging market growth, and current trade tensions believed to be slowing growth in China, we wonder how overall emerging market indices will generate outsized returns in 2019 or narrow valuation gap with U.S. markets.

In our opinion, investors may want to look at allocating some assets to international, non-U.S. based companies, or gaining exposure to new rapidly growing emerging markets, such as Vietnam, through ETFs. We are now less sure, than our prior outlook, for when a narrowing in the long-term valuation gap amongst emerging markets, versus established economic countries, will occur. While there is more uncertainty in the near-term than initially anticipated, we continue to see a long-term shift in future global growth towards emerging markets, compared with more established global economies.

Source: Yardeni Research

Source: Schroders Investments

Prior Outlook: 2019 Consensus S&P Outlook Suggests Double-Digit Upside from 2018; “Doom and Gloom” Nowhere to Be Found – See Market Mis-Priced Entering 2019, in an Opposite Manner to 2018

….end-of-year target on the S&P 500 across most major investment banks is currently 2,984, which would imply a year-over-year price gain of ~20%. With the current S&P earnings estimates implying year-over-year growth of ~7.5%, there would need to be significant outperformance of current 2019 earnings per share estimates with some expansion in forward multiple to potentially reach the current average Wall Street strategists’ 2019 end-of-year forecast. As of today, the average S&P 500 end-of-year forecast would assume ~17x 2019 estimated earnings.”

“We believe the current average annual end-of-year targets for the S&P 500 may prove a bit aggressive. We see the index price likely rising to ~2,800 by the end of 2019, equaling a year-over-year index price return of ~10-15%,…which we view as an above-average year for investor returns. We see little in terms of market multiple expansion during 2019, but expect higher economic growth, and thus, higher corporate earnings growth than is implied in the current S&P 500 2019 estimated earnings of ~$175/share.”

Updated Outlook: Increasing S&P 500 Earnings Estimate; Easier Comps in Second Half 2019, Higher Earnings, and Accommodative Fed

We were conservative in our estimated outlook for 2019 S&P 500 year-end close, but the “doom and gloom” Wall Street narrative, earlier in the year, has not yet materialized. Our prior year-end target of 2,800 was well surpassed after only a few months into the year. As of July, with the S&P 500 index up over 20%, we undershot.

During the first half 2019, stock prices saw some multiple expansion, while prior consensus earnings estimates for the S&P500 have increased versus the beginning of 2019.

Essentially all S&P 500 sectors continue to trade above their 5yr and 10yr averages, excluding Energy, Industrials, Health Care, and Financials. Current forward 12-month P/E ratios have increased for all sectors since early 2019.

We have revised our 2019 S&P 500 earnings estimates higher, now forecasting $173.00, compared to our prior outlook of $165.00 (an increase of 4.8%). A more accommodative Federal Reserve in the second half 2019, along with easier year-over-year comps for many companies facing challenges from global trade tensions, suggest improving growth trends.

Our 2020 S&P 500 earnings estimates increased to $190.00 (prior $185). We see favorable prospects emerging for the first half of 2020, with expectations for estimated second half 2019 growth transitioning into 2020. Consensus Wall Street estimates for 2020 S&P earnings have increased to $184.87 compared to the prior forecast of $174.60 (increase of 7.4%).

Source: Grinder Capital, and I/B/E/S data from Refinitiv

Our revised outlook for a year-end target on the S&P 500 has increased significantly compared to our outlook at the beginning of 2019. We now believe that the S&P 500 will end the year at 3,200, offering 7.5% upside from the July 19th close of 2,976.61. Our revised S&P 500 year-end target is an increase of 14% versus our prior forecast of 2,800.

Based on recently updated Wall Street Strategist estimates, compiled by CNBC as of July 15, 2019, our new year-end target would put us near the high-end of forecasts and above the median. We believe that our prior conservatism entering 2019 may have been impacted by the negative market ramifications of December 2018. We still see too much pessimism in many narratives across Wall Street with an economy on the edge of significant liquidity injection and prospects for higher annual S&P 500 earnings.

Assuming our new estimated earnings for 2019 of $173.00, and a year-end index target of 3,200, our implied multiple for the market would be 18.5x. While this may be above historical levels, given the continuous global central bank interventions, and what we believe may be an improving U.S. economic growth outlook, and lower rates, which we see as a basis for higher than historical forward P/E multiples.

Source: CNBC.com

Prior 2019 Investment Ideas: Long: GBT (YTD: 35.3%), PAGS (YTD 143.57 %), and DBD (258.14%), HWKN (YTD 5.62%) – Short: ANET (YTD -35%), and XLU (YTD -16.07%)** Pricing data from Sentieo (January 2-July 19, 2019)

Investment Ideas: Long: GBT, BA, VICR Short: TWTR

Our investment ideas listed in our 2019 Outlook offered solid returns year-to-date, even with negative returns in recommended shorts in ANET (Arista Networks) and XLU (Utilities ETF). We would remind critics our recommendation to short ANET was based on the premise that MSFT (Microsoft) would potentially buy networking company MLNX (Mellanox), which could damage the significant relationship between ANET and MSFT, but we’re willing to take the hit even as the M&A angle didn’t materialize. We have exited prior long recommendations DBD (Diebold Inc), PAGS (PagSeguro) and HWKN (Hawkins Chemical). We continue to recommend GBT (Global Blood Therapeutics) as we believe the company’s Sickle-cell anemia drug could be a significant market opportunity.

Long Ideas:

GBT (Global Blood Therapeutics) Company’s recent results for its once-a-day pill for sickle cell disease boosted levels of oxygen-carrying hemoglobin in roughly half of the patients treated in a Phase 3 clinical trial, likely allowing for the company to file accelerated approval for the treatment in the U.S. for leading therapy Voxelotor (GBT440). In early December the company received notice from the FDA that it agreed with the company that TCD (transcranial doppler flow) is an acceptable primary endpoint for Accelerated Approval of Voxelotor in a post-approval study. In its first-quarter earnings release, the company noted they had completed the pre-NDA meeting with the FDA and announced the agency's agreement to a rolling submission for Voxelotor for the potential treatment of sickle cell disease (SCD). We believe GBT offers investors the potential for significant upside given the estimated market size for sickle-cell disease, or potential take out offers in future periods. We would note investing in biotech companies can see significant volatility and additional risks due to reliance on government approvals, drug pricing, or reliance on one or two key drugs/therapies, and future market share. However, given GBT has passed Phase3 trials for Voxelotor, and received approval for TCD as a primary endpoint, we believe a portion of that risk has likely passed for GBT. (GBT IR Website)

BA (Boeing Co.) Following two tragic crashes associated with Boeing’s 737-MAX plane, the market removed ~$50-60B in capitalization from March 1, 2019 through May 31, 2019, based on our calculations. On July 18th, Boeing announced the company would take a ~$5B charge for costs associated with the 737-MAX global grounding. We believe the uncertainty relating to cost from global grounding and when its 737-MAX would return to service, created significant downward pressure over the last three to four months. Following the reduction in market capitalization, almost 10x the current estimated cost, the valuation of the company at closing levels of $377.36 on July 19th, 2019, remains undervalued in our view. With a dividend yield of ~2%, a more visible timeline provided by Boeing as when it expects the 737-MAX to return to service (early 4Q19), a multi-year backlog, and technically breaking out of major resistance (~$373.50), we believe shares could be undervalued by as much as 50% over the next 12-16 months. We anticipate a potential reignition of the company’s share buyback program with the announcement of second-quarter earnings on July 24th, 2019. If this were to occur, we see the momentum back in Boeing’s sails. Based on our analysis Boeing presents a significantly undervalued long-term investment. (BA IR Website)

VICR (Vicor, Corporation): VICR designs, develops, manufactures, and markets modular power components and power systems for converting, regulating and controlling electronic current. The company’s main source of revenue, as of today, is within its historical Brick Business Unit. Vicor is seeing increasing design momentum in servers, supercomputing, and AI accelerators, which are estimated to enter production later this year. An industry transition within Cloud Data Centers, from12-volt to 48-volt is gaining momentum, with Google pioneering the initiative to convert from 12 to 48-volt racks. This industry transition presents an opportunity for Vicor to broaden its exposure to leading global Cloud Providers. It is our view a new opportunity may be emerging for VICR within its Advanced Products segment. Given its ability to evenly distribute high levels of power, Vicor has publicly discussed working with a leading GPU company, who has deep penetration in supercomputing/AI markets. The company noted in its first-quarter 2019 earnings call, production supporting this customer would begin in second half 2019.

While Q2 demand for Advanced Products remains weak, our penetration of servers, supercomputing and AI accelerators is gaining momentum with major design wins for NBMs and Lateral Power Delivery solutions entering production in the second half of this year. We're also seeing early traction for our Vertical Power Delivery systems. Owing to their superior power density, lateral and Vertical Power Delivery solutions are the solutions of choice for high-performance demanding processor applications, but figuratively AI accelerators.”

We see our estimated growth opportunities supported by the company’s recent investment in its new 85k square foot addition to its current facility. Per the company, this will allow for the addition of manufacturing lines to meet forecasted requirements through 2021. We see Vicor offering the potential to significantly ramp EPS through second half 2019, through 2021. The company could also become viewed as a potential takeout target for either its current GPU customer, which may provide a competitive advantage relative to other market competitors, or another larger semiconductor company looking to benefit from the technology in current or future product lines. (VICR IR Website)

Short Ideas:

TWTR (Twitter, Inc.): We recently entered a short position in shares of TWTR. Our thesis on Twitter has less to do with DAUs (Daily Active Users) or increased advertising revenues, but more with the fact that we see Twitter as the next social media target by Washington D.C. A recent cause for concern was the recent banning of a tweet made by Texas Governor Abbott, leading Abbott to call Twitter officials to his office. In our opinion, this event is one of many events which may create a tidal wave of inquiry into the company by conservative politicians. In the past, many D.C. politicians, on both sides of the aisle, have previously swatted down claims of Twitter being unfair to conservative voices. But the recent backlash against social media companies has been more bi-partisan than any other issue. Following investigations, and potential future regulations being discussed about fellow social media giants Facebook and Google, we don’t see a path forward for Twitter to avoid increased scrutiny which may negatively impact future operating earnings or create distractions to executing. Year-to-date shares have increased ~28% as of July 19th, 2019 close. Given the limited impact Twitter has faced from D.C. regulators we believe the future narrative of the company will be less focused around financial metrics, but government concerns or regulations. Given the current views of President Trump, and an increasing outcry from his supporters regarding Twitter’s treatment of conservative voices, we see more, not less, regulation for Twitter in the coming years.

Conclusion

Our Mid-Year Outlook suggests improving near-term economic growth, accommodative global central banking policy, and the prospect for easier global comps in the second half. We also see continued forecasted weakness in the U.S. Dollar, offering positive tailwinds for global U.S. based companies during 2019. We believe this may create a “risk-on” environment during the remainder of 2019, and into the first half of 2020.

We have increased our earnings outlook for the S&P 500, along with our year-end Index target of ~3,200. We still see long-term value in emerging market equities but see outsized returns over the mid-term more likely in larger established global markets.

We continue to monitor the Federal Reserve Board’s Probability of Recession Calculated from the Yield Curve Analysis, where indicative levels have moved higher, but not yet at levels of recent periods of excess reached in the early 80s, late 90s, and before the financial crisis of ’08-’09.

In conclusion, we believe investors should begin to allocate a higher percentage of assets towards equities. We see potential for an additional ~7.5% return for the remainder of 2019, based upon our updated year-end target on the S&P 500 of 3,200. As of today, we anticipate that this environment could spill into the first half of 2020.

Investors should utilize our Mid-Year Outlook as a tool in their own overall research process. Grinder Capital is not recommending investors buy or sell securities based on this report. Investing involves risk.

Disclosure: I am/we are long BA, GBT, VICR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are long BA, GBT, and VICR. We are short TWTR.

Investors should utilize our Mid-Year Outlook as a tool in their own overall research process. Grinder Capital is not recommending investors buy or sell securities based on this report. Investing involves risk.