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The Morning Call--$2 Trillion In Infrastructure Spending; That's The Ticket

|Includes: Apple Inc. (AAPL), ADP, CHRW, GLD, PEP, TLT

The Morning Call

5/1/19

The Market

Technical

The Averages (26592, 2945) inched higher, with the S&P finishing above its all-time high (2942) for a second day. However, volume remains low and breadth mixed---not the kind of action I generally associate with a challenge of a significant resistance/support level. The Dow remains below its comparable level (26656). If the S&P remains above that high (the upper boundary of its short term trading range) through the close today, it will reset to an uptrend and clear the way for a move to the upper boundary of its long term uptrend (~3191).

On the other hand, as I continue to point out, there are factors that would suggest some near term consolidation before that occurs: (1) the VIX voiding its very short term downtrend notwithstanding, it continues to reflect a very high level of investor complacency, historically a sign that portends lower stock prices, (2) the April 1st gap up open still needs to be closed and (3) the Dow has yet to successfully challenge its all-time; historically, it is almost impossible for one index to break above a key resistance level and continue to advance without confirmation from the other.

The VIX was up a penny, again, a little unusual on a day when a major index is challenging a key resistance level, so far successfully. However, It could certainly go on to challenge the lower boundary of its short term trading range and perhaps even the lower boundary of its long term trading range (its all-time low). But those are mere points away. So, I am not sure just how much downside there is (how much further investor complacency can be stretched).

The long bond was up 5/8%, making this the third bounce off of the lower boundary of its very short term uptrend---a potential sign of lower interest rates.

The dollar was down on decent volume, managing to close one of the two gap up opens. Its chart remains quite positive.

GLD was rose 3/8 %, but its chart remains broken. Its 100 DMA and the upper boundary of its very short term downtrend represent overhead resistance.

Bottom line: the S&P ended above its all-time high but once again on poor volume, weak breadth and no confirmation from the Dow. Still a challenge is a challenge; and if it holds 2942 through the close today, it opens the way to the upper boundary of its long term uptrend.

Lower rates (TLT), higher gold prices (GLD) and an unchanged dollar does not suggest economic strength.

Tuesday in the charts.

S&P Shrugs Off Googlepocalypse As China 'Green Shoots' Die

Fundamental

Headlines

Yesterday’s stats were mixed: March pending home sales and April consumer confidence were better than anticipated; month to date retail chain store grew at the same pace as the prior week; the April Chicago PMI and the February Case Shiller home price index were disappointing.

The latest data on Q1 S&P earnings as of the close Monday night: 77% beat profit estimates; they are currently 0.7% higher than 2018 Q4 which is much better than consensus; and revenues are up 5% versus 2018 Q4. So, the trend here remains upbeat versus projections.

Overseas, Chinese numbers turned negative---the April Chinese manufacturing and nonmanufacturing PMI’s as well as the small business manufacturing index came in below estimates. However, the Q1 EU flash GDP growth was above expectations.

Other developments:

  1. senior US and Chinese negotiators completed the next round of talks on Tuesday, accompanied by only a modicum happy talk out of Trump et al. In fact, in a speech yesterday, acting White House Chief of Staff Mulvaney sounded notably downbeat about the prospects. That said, I don’t believe anything these guys say anymore.

  1. Trump and congressional democrats agreed that a $2 trillion infrastructure plan would be a jim dandy thing to do. There were few details; we taxpayers will get the gory details later. On general principal, I think that infrastructure spending is a plus. It is, after, all an investment in America. On the other hand, it comes at the same time the budget deficit is running at a $1 trillion annual rate and exploding entitlement spending is in woeful need of reform.

So, on the surface that number seems awfully big. However, there are plenty of factors that will determine how fiscally irresponsible it is [assuming it ever gets passed]: the timeframe over which the money is spent; how much of it will be pissed away on ‘environment studies’ and other nongrowth aspects versus actually building something; how much of it will go to projects similar to the Obama ‘shovel ready’ offerings; how much of it will just be more handouts. At this point, we know nothing but the headline number. Beware of politicians bearing gifts.

https://www.zerohedge.com/news/2019-04-30/democrats-agree-2-trillion-sweeping-bipartisan-infrastructure-plan

Bottom line: still no support in the US macroeconomic numbers for that 3.2% Q1 GDP report, though earnings season continues more upbeat than anticipated. On the other hand, the only economic data bright spot in the world over the last month has been China but yesterday’s stats raise questions. So, while I have the yellow light flashing on a potential upgrade in my outlook, the more data I get, the more confused I get.

A China trade deal and a $2 trillion infrastructure program could have a positive effect on cyclical growth and profit growth; ‘could have’ being the operative words since we are clueless on details.

Still, the Fed/monetary policy remains, in my opinion, the key to Market direction; and at the moment, there is every reason to think that it will continue to let the Markets tell it what to do. Further, the combination of easy money with a trade deal and massive government spending (if they were to occur) would likely be a heady mix.

News on Stocks in Our Portfolios

PepsiCo (NASDAQ:PEP) declares $0.955/share quarterly dividend, 3% increase from prior dividend of $0.9275.

Apple (NASDAQ:AAPL): Q2 GAAP EPS of $2.46 beats by $0.10.

Revenue of $58.02B (-5.1% Y/Y) beats by $620M.

C.H. Robinson Worldwide (NASDAQ:CHRW): Q1 GAAP EPS of $1.16 beats by $0.02.

Revenue of $3.75B (-4.6% Y/Y) misses by $230M.

Automatic Data Processing (NASDAQ:ADP): Q3 Non-GAAP EPS of $1.77 beats by $0.08; GAAP EPS of $1.73.

Revenue of $3.84B (+4.1% Y/Y) misses by $70M.

Economics

This Week’s Data

US

Month to date retail chain store grew at the same pace as the prior week.

The February Case Shiller home price index rose 0.2% versus expectations that it would be unchanged.

S&P/Case-Shiller Home Price Index: Annual Gains Continue to Decline

March pending home sales were up 3.8% versus consensus of +1.1%,

The April Chicago PMI was reported at 52.6 versus projections of 59.0.

Chicago PMI Drops in April

April consumer confidence came in at 129.2 versus estimates of 126.0.

Consumer Confidence Improved in April

Weekly mortgage applications fell 4.3% while purchase applications were down 3.7%.

The April ADP private payroll report showed an increase of 275,000 jobs versus expectations of 180,000.

ADP's Zandi Admits April Employment Gains "Overstates Economic Strength"

International

Other

New give away: A proposal for the government to bail out underfunded pension plans.

Federal Lending to Insolvent Pension Plans Is Code for Bailout | RealClearMarkets

The world’s fastest growing economies.

World's Fastest Growing Economies

What I am reading today

New battery storage technology could alter the politics of climate change.

An Unexpected Current That's Remaking American Politics

The importance of checking your work.

The Errors That I Don't See - Of Dollars And Data

Nobody gets out alive.

Nobody Gets Out Alive

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Disclosure: I am/we are long aapl, adp, chrw, PEP.