Markets around the world continue to slump from slacking data amplified by the FED decision not to hike rates. The cautionary tone is morphing into something more sinister or dreadful as the global recession fears will not go away.
It's one thing to talk about the transitory nature of potentially importing deflation; however, it's another issue altogether if our so-called moat around America doesn't save us. On that note, it continues to be the business side of the economic equation that's not living up to its potential.
Moreover, sitting on cash and waiting was fine during the downturn, but the extraordinary caution to date sends ominous signs, underscored with big news from Caterpillar (CAT).
Perhaps the most important proxy for the global industrial world is Caterpillar. The company lowered its revenue and announced it will lay off as many as 10,000 through 2018. This news shouldn't be a surprise given all the data from around the world, including China. I think this could linger for a couple years is a yellow, or perhaps a red flag.
Technically, major indices held at key support points and a few buyers emerged, but the five- day chart is pretty ominous. The trend of lower lows and highs doesn't reverse until Dow closes above 16,400.
DJIA
Yes, the market is marking time, but the bias is decidedly to the downside and at some point, the damn bursts, unless…
Yellen to the Rescue
For years, the bears told the world that the market would crash when the Fed hiked interest rates and here we are as the bears are making a lot of money because the Fed keeps up accommodation. No rate hike countered the notion the economy was fine and the Fed is independent of Wall Street. Of course, at this stage of the game, even investment professionals want to see higher rates for various reasons. Not the least of which is a report card on the economy, no hike rate =an F grade.
Last night, during a speech at the University of Massachusetts, Janet Yellen reiterated her determination to hike rates this year and that it should make the market feel better.
A couple days ago, Morgan Stanley (MS) released a report that said Americans were beginning to spend money in a "dumb" manner; insinuating that money is being sloshed around and that people are feeling wealthy. I couldn't disagree more. I have to wonder if the Morgan Stanley team bothered to come out of their ivory tower or if this was a collection of observations made at the Hamptons. People are not splurging.
There is some discretionary spending, but nothing dumb. However, people are spending on certain brands they have come to love and appreciate. Apple (AAPL) and Nike (NKE) are the two names that people around the world spend more money on because of innovation, loyalty, and great marketing. Last night, Nike posted a great earnings report that sent shares soaring.
Nike
- Beat by $0.15
- Beat on revenue, up 5% as reported and 14% constant currency
Global Revenue Constant Currency | Revenue | Change |
North America | $2.36 million | +9% |
Western Europe | $1.12 billion | +19% |
Central Europe | $238 million | +32% |
Greater China | $599 million | +36% |
Japan | $122 million | +47% |
Emerging Markets | $670 million | +23% |
I want to note that the bottom line was also positively impacted, with even more sales outside the United States where the company isn't punished for its success. This is a major component to the offshoring debate and notion of a trade war with global consumers as those in China and Mexico.
Nike shares poised to open at an all-time high, not only because of great execution, but also because of guidance that speaks to the notion that the global consumer is tapped out or afraid to loosen the purse strings.
The company announced future orders +9% with the strong dollar and +17% constant currency. Here's the breakdown:
Global Revenue Constant Currency | Estimate | Actual |
North America | 11% | 15% |
Western Europe | 14% | 22% |
Central Europe | 14% | 16% |
Greater China | 17% | 27% |
Japan | 13% | 26% |
Emerging Markets | 3% | 6% |
People around the world love Nike, Apple, and pay more than they have to for sneakers and smart phones, but they need to work up the food chain to washers and dryers, building materials, and motor cycles.
That's going to take greater confidence and clearing this deflationary scare.
Today's Session
This morning, we got a read on the health of the US economy. Gross Domestic Product (GDP) grew 3.9% in second quarter instead of the estimated 3.7%. According to the Commerce Department, an increase in consumer spending and somewhat stronger business investment were the primary factors for the upward revision. However, looking ahead, some economists surveyed anticipate that GDP will slow in the third quarter to 2.5%.
Highlights of the report include:
- The main engine of U.S. growth, consumer spending, rose 3.6% vs. an earlier 3.1% estimate.
- Business investment in structures was revised up to 6.2% from a 3.1% increase.
- Home construction climbed at a 9.3% rate vs 7.8%.
- Inventory values, which adds to GDP, grew by $113.5 billion, down from a prior estimate of $121.1 billion.
- Exports rose 5.1% and imports increased 3%.
- As measured by the PCE price index, inflation rose at a 2.2% annual rate, unchanged from the previous reading.
We like the action in the futures so far, but are not taking the bait. We want to pounce at higher levels with a more sustained move.