Positive Action Beneath the Surface
May 25, 2018
The market had another chance to show its grit yesterday, as once again buyers materialized to buy the dip. That’s good news, but still the major indices closed lower. This reflects the fact that outside noise is more than a speed bump for the current rally.
That noise is related to geopolitical risk and the uncertainty over trade negotiations. In fact, yesterday evening we got word that the North Korean regime still desires a meeting with President Trump, saying it’s something that’s in the best interest of the whole world. That development helped stocks early in pre-market trading this morning although we still experienced a bumpy start. Later in the morning, President Trump said that talks have started again with North Korea.
Ironically, I think the worst-case scenario for the market is the status quo that investors and Washington, D.C. have learned to live with. Right now, the unknown continues to distract from great economic data.
I’m loving the action in truckers – in fact, one of my big investment themes centers around these intermodal containers, and the stocks I’ve recommended to my subscribers have been on the move. There is no pure exchange-traded fund (ETF) to profit from the boom in trucks and intermodal, but the iShares Transportation Average ETF (IYT) comes pretty close.
Its top holdings by weight include:
- FedEx (FDX): 14.8%
- Norfolk Southern (NSC): 8.8%
- Union Pacific (UNP): 8.2%
- B. Hunt Transport Services (JBHT): 7.2%
- United Parcel Service (UPS): 7%
- H. Robinson Worldwide (CHRW): 4.8%
- Landstar System (LSTR): 4.8%
- Kirby (KEX): 4.7%
- Kansas City Southern (KSU): 4.7%
- United Continental Holdings (UAL): 4%
I am also a big fan of the smarter and wealthier consumer theme, although investors need to know there will continue to be distinct winners and losers in retail.
That actually brings me to the earnings conference call, which has become the most important job of management at publicly-traded companies lately. The tirades going on – like what we’re seeing with Elon Musk – means instant selling, and it also means that one wrong word can erase three months of amazing business execution. The CFO at Caterpillar (CAT) – a company that I love – learned that one the hard way.
And yet, yesterday morning a conference call actually saved L Brands (LB) after a terrible earnings release. On the other hand, it sunk Best Buy (BBY) after a great one.
Reversals to Watch
As trading slows down and we head into the long holiday weekend, there are two intriguing reversals I’m watching. The first is in the 10-year bond yield, which is now back under 3%. Some are reading that as anticipation of weaker growth ahead, though I’m not convinced.
I’m also keeping an eye on oil prices, which are getting slammed on reports that Saudi Arabia and Russia are considering production increases in the second half of the year. Wester Texas Intermediate (WTI) crude is now below $70 per barrel, which it needs to hold as a psychological support point.
The market continues to swing on headlines, although the tone has certainly been better, even as investors continue to look for the next catalysts. Most importantly, great American companies in great industries with great management – the stocks we invest in – continue to move higher.
Keep in mind that the market is closed Monday for Memorial Day. I hope you have a happy and safe weekend to kick off summer. Let’s all take a few moments to remember those who have given their lives in service to our country.