Market Comment May 2018

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Science is thoroughly on the side of the guy in the case below, experiences trump stuff:

“How should I deal with my wife who is the complete opposite of frugal and refuses to listen to anything I have to say?” this disgruntled husband asked Reddit. “My wife thinks I’m obsessed with money. However, as an accountant I have a pretty good idea where our finances are going and I think we will be in a great spot within the next 10 years.” This man is starting early: He’s only 25. “I want us as a family to have the money to go places, do things and enjoy life,” he adds. “I like to have a cushion so if something comes up ...we can do it no questions asked. I’d rather spend money on experiences and enjoying life. My wife, on the other hand, wants new cars, big houses and stuff. I feel she doesn’t understand how expensive things are.”

‘I want to enjoy life and go places — my wife wants new cars and big houses’ - MarketWatch

Very relevant question, the best earnings quarter in a quarter century fails to lift stocks. Why?

By at least one measure, corporate earnings are the best in nearly a quarter-century. However, the stock market is not enthused! Rather than rally on the back of upbeat results, the main equity benchmarks have sulked lower. According to Thomson Reuters I/B/E/S, of the 343 companies, or about 70%, of S&P 500 members that have reported earnings to date, 79.9% have reported earnings per share that were above analysts’ expectations, putting the season on track for the highest earnings beat rate on record, going back to 1994.

Why the stock market is unimpressed by the best first-quarter results in 24 years - MarketWatch

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• One of the best newsletter we've seen, must read from Hayden Capital, especially relevant for investors in JD.com
• And another good one, from Markel

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We're looking at this, can the upward trend hold?

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This is a bit worrying..

The iPhone maker's plan to return up to $100 billion to its shareholders marks the largest share repurchase program announced this year. But Cramer pointed to five other companies — Amgen, Oracle, Microsoft, Boeing and UnitedHealth Group — that have also announced huge buyback programs, only to be brushed off by market-watchers. "It's like people don't even notice, which is why I feel compelled ... to point out some of the best ones," Cramer said. "So let's talk about the biggest, most impactful buybacks we've seen."

Cramer: Don't ignore these giant stock buybacks or you'll miss out

Market ignoring the one big benefit from the tax cuts..

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"The bounce could be a few weeks away. We don't think we are any more than two months away," said Harvey, noting that's when second quarter earnings season kicks off. Harvey sees strong earnings reports ultimately pulling the market out of its rut. He characterized 2018's violent market sell-offs as "classic textbook" in a Federal Reserve tightening cycle. "When the Fed tightens, you usually see the curve flatten. When the curve flattens, you have a price adjustment. The price adjustment in the equity market is 5 to 10 percent," he added. Harvey's S&P 500 year-end target is 2950 — a 10 percent gain from its current levels. He views this environment as a buying opportunity, and added that he's partial to technology and financials. Yet Harvey urged investors to be deliberate with their choices.

A bounce could boost stocks in just weeks, Wells Fargo predicts

Good to know some still see a bounce in stocks on the back of the best earnings season in a quarter of a century. And apparently we have to go into value stocks:

Ernesto Ramos of BMO Global Asset Management expects Citigroup to benefit from higher trading revenue because of increased stock-market volatility and expanded net interest margins as rates rise. Ernesto Ramos of BMO Global Asset Management helps manage funds that follow value and growth strategies. He says value may soon win out over growth after years of underperformance.

Here’s a powerful argument for favoring value stocks over growth stocks - MarketWatch

Last week, the Chicago Board Options Exchange (CBOE) responded to a research report into manipulation of  the monthly settlement of the VIX, sometimes referred to as the stock market’s fear index, and attempted to assure participants that the process was not rigged. “The academic paper’s analysis and conclusions are based upon a fundamental misunderstanding about how VIX derivatives are traded and settled,” the CBOE wrote. I was an author of the research paper. The CBOE’s most recent response has left my "fundamental misunderstanding" still very much unresolved.

Does the VIX Need Fixing? Sure Looks That Way - Bloomberg

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Interesting stuff

And with oil now creeping towards $70 per barrel, its rising price may actually be good news for the airlines this time around, Morgan Stanley says. "There has been a level of debate amongst investors around the implications of higher oil on Airline shares, and in our opinion, higher is a good thing," analyst Rajeev Lalwani told clients last week. "This is because it instills: 1) Pricing and capacity discipline; 2) Financial constraints on costs and capex; and 3) Margin and multiple expansion." For every $10 per barrel increase, airline margins can contract 1-2 percentage points, the bank estimates. Because fares tend to move in step with fuel prices, airlines will have reason to raise fares again and "recapture the 5-10 points of lost pricing from recent years."

Oil prices have been screaming higher — and that's actually good news for airlines this time around | Markets Insider

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With unemployment below 4%, the question of how low it can get without sparking wage and price inflation is more relevant than ever. Unfortunately, our understanding of this problem hasn't improved, as this useful article shows:

Another monthly jobs report, another growing chorus worried that we might be employing too many people and we should hold back the economy lest it overheats. It was announced Friday that 164,000 new jobs were added in April, and the unemployment rate reached 3.9 percent. It has been 18 years since unemployment was under 4 percent. As unemployment continues to fall, people wonder, how low could it go? And what if it gets below the dreaded “natural rate of unemployment” that economists like to talk about?

The ability of unemployment to predict changes in inflation is essentially zero over the past 20 years, they found. As a result, there’s no ability to predict a range, much less a rate, of natural unemployment. They conclude that the “50-percent confidence band in 2014 ranges from 4.3 to 6.1” for the natural rate of unemployment. That estimate range is so vast it simply can’t guide policy.

The April jobs report reopens an old debate: how low can unemployment go? - Vox

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Some more interesting news:

China’s $42 trillion financial sector is set to open up to the world like never before. To deliver on longstanding pledges and help stave off the threat of tariffs from U.S. President Donald Trump, Chinese officials have set a June 30 deadline to ease ownership and business restrictions for banks, securities firms, asset managers and life insurers.

China's About to Give Global Finance the Chance of a Lifetime - Bloomberg

And indeed, Chinese bonds (unlike American, at the moment) are already popular:

Foreign investors increased their holdings of onshore Chinese bonds by a record last month, as the debt posted the biggest advance in more than two years. Overseas investors purchased net 66.4 billion yuan ($10.4 billion) of the securities in April to bring the total holdings to an unprecedented 1.15 trillion yuan, according to data from the China Central Depository & Clearing Co. That was the biggest increase ever for data going back to 2014, and more than triple the net purchase of 20.7 billion yuan the previous month...  Chinese bonds had their best returns since December 2015 last month as interbank liquidity improved and inflation concerns eased, while most other major markets saw losses as central banks prepared to unwind stimulus.

Global Funds Boost Holdings of Chinese Bonds by Record in April - Bloomberg

Google is at the center of a "Battle Royale" with Amazon, Facebook and Apple, says Dan Ives, chief strategist with GBH Insights. "This is really a pivotal conference to put their stamp on AI. Google wants developers to bet on them and their platform but the developers need to see compelling product capabilities and roadmap before they believe in the Google gospel," Ives said. It's no coincidence that Google CEO Sundar Pichai referred to Google as an "AI-first company" during last month's earnings conference call.

Is Google's AI effort ready for primetime? - Business Insider

Learn from the master in three easy tips distilled from decennia of wisdom:

Buffett's track record is unparalleled. From 1965 to 2017, Berkshire Hathaway's rising market value generated a 20.9 percent annual return compared to S&P 500's 9.9 percent, resulting in a cumulative gain of 2,404,748 percent versus the market's 15,508 percent return. CNBC researched Buffett's strategy combing through decades of Berkshire Hathaway meeting transcripts using the Buffett Archive to find his best wisdom and strategies for the average investor. Here is what we found.

Warren Buffett’s three best investing tips explained

All of the following are terribly expensive though, but perhaps Cramer is onto something:

Cramer listed seven data companies that he believes "offer the best opportunities for trading," referring to them as "Cloud Kings." "I genuinely believe that we are early on in sophisticated cloud adoption that can harness these companies' tools," Cramer noted.  The seven companies cited by Cramer are Salesforce.com Inc.  (CRM - Get Report) , Workday Inc. (WDAY - Get Report) , ServiceNow Inc. (NOW - Get Report) , Splunk Inc. (SPLK - Get Report) , New Relic Inc. (NEWR - Get Report) , VMWare Inc. (VMW) , and Adobe Systems Incorporated (ADBE - Get Report) .

Jim Cramer Says 'Cloud Kings' Are a Better Bet Than FANG Stocks Right Now - TheStreet

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Bit of a surprise this, oil is off 3.5% on the Iran nuclear deal decision, but there are rifts in OPEC:

Iran, faced with a possible restoration of U.S. sanctions, came out against higher oil prices, signaling a split with fellow OPEC member and political rival Saudi Arabia, which is showing a willingness to keep tightening crude markets. A “suitable price” for crude is $60 to $65/bbl, Amir Hossein Zamaninia, deputy oil minister for international and commercial affairs, said in an interview Sunday in Tehran. Oil Minister Bijan Namdar Zanganeh said earlier in the day that Iran supports “reasonable” oil prices and is not an advocate of costlier crude.

Iran opposes higher oil prices, signaling divide with Saudis

Interesting, Buffett lives forever, his code is broken:

Berkshire Hathaway’s annual meeting last weekend highlighted Warren Buffett’s special touch as an investor. But with each passing year, some investors wonder what will happen to Berkshire Hathaway’s BRK.B, -0.42%  stock performance once the legendary investor, now 87 years old, is no longer at the helm of the company. Fret not. And if the stock falls, you should buy. I say this because of an academic study several years ago that, in effect, “broke” Buffett’s secret code. The study, titled “Buffett’s Alpha,” was written by three principals at AQR Capital Management, each of whom has strong academic credentials: Andrea Frazzini, David Kabiller and Lasse Pedersen. The study derived an investment formula that, if mechanically followed over Buffett’s five-decade career, would have replicated his fantastic returns.

Warren Buffett will live forever, as researchers have cracked his code - MarketWatch

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Bulls have been baffled as the three pillars of the stock rally going into 2018 (record earnings, global synchronous economic expansion, contained inflation) have been turned 180 degrees into peak earnings, a global economic slowdown, and a pick-up in inflation. Bulls turned apoplectic when earnings came out even better than expected. And guidance was better than expected. Even capital expenditures were better. Buybacks and dividends increased more than expected. But nobody seeed to care. Indeed, the bears have successfully seized on a potent "stew" of issues. 1. The Fed is raising rates. 2. Numerous geopolitical issues are creating distractions, including battles with China over trade, the Mueller probe and the uncertainty about what the U.S. will do with regard to the Iran nuclear deal. 3. It is turning into a seasonally weak trading period. "Sell in May" is the old saying. On top of that, the mid-term election cycle is a time when stocks traditionally drop.

Investors are buying the beaten-up stocks