25 Jun Capital 19 Catch-Up – Jun 25

The major indices racked up their third week of gains last week, with the likelihood of an impending interest rate cut trumping tension in the middle east. There are impressive milestones in the offing if they can manage another positive week this week, which will result in the best June Dow performance since 1938, and the best S&P500 June performance since 1955.

In June 1938 the Dow jumped a spectacular 24% in just one month. The US at the time was recovering from the Great Depression, but the recovery had stalled and there were concerns that the economy would fall backwards. However, in April Franklin D Roosevelt, in his second term as President, managed to get $3.7 billion in new spending passed through Congress, which went on to kick the economy back into gear again and send the stock market skyrocketing.

Quadruple Witching

History seems to be against another weekly gain this week however with last Friday being quadruple witching. Quadruple witching refers to a date where we see stock index futures, stock index options, stock options, and single stock futures all expiring on the same day.  It generally results in higher levels of trading volume and increased volatility, although things were pretty calm on this particular Friday.

Over the last decade, markets are down 40% of the time in the weeks before and after such an event, resulting in an average loss of 0.34% in the week following a quad witch. But don’t worry, the March witching is considered to be the worst offender, with the June event historically bringing in better numbers.

For last week the Dow managed a 2.4% gain over the five sessions, only being beaten by the NASDAQ which picked up 3%. The benchmark S&P500 index was the laggard, rising 2.2% for the week.

After an initial bump at the market open on Tuesday, where ECB President Mario Draghi signalled his own potential rate cuts and bond buying programme, equities stayed flat for two sessions in anticipation of the FOMC meeting on interest rates. And just as expected rates were kept on hold, but with Chairman Powell giving away strong hints that a cut is being strongly considered in the near future.

According to Jerome, or J-Po as the kids like to call him, the Fed is “closely monitoring” the various trade disputes the US is fighting on multiple fronts and will “act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective”.

G20 Summit

That means all eyes will be on the G20 summit in Japan later in the week, where Trump and President Xi have agreed to meet to discuss the ongoing trade war. The results of which will determine whether we see the major indices break through all-time highs and continue their solid run for 2019.

It’s obvious to all that there won’t be a resolution to the dispute this week. The differences and the hostility they hold towards each other are too great to surmount at this point in time. However, what Wall St would love to see is some sort of compromise, an agreement to “work together” in the future. A glimmer of hope that things may get sorted out in time.

What we definitely do not want to see is either side playing hardball, thereby creating a standoff or indeed an increase in hostility. In reality, we won’t see anything real achieved until the tariffs themselves start to bite the respective economies. It’s then we’ll see some real action taken. Until then it would be great for them to play nice and say the right things. Is that too much to ask? We’ll know by the end of the weekend which way it’s going to go.

Oil prices jump with US and Iran tensions

Last week was also notable for increasing tensions between the US and Iran. Pressure has been building between the two nations ever since Trump pulled out of the 2015 Iran nuclear deal claiming it was “defective at its core”. In the last month, we have seen the US enforce bans on Iran oil sales, declare the Islamic Revolutionary Guard a terrorist organisation, and send an aircraft carrier with B-52 bombers on board into the region as a show of force.

Iran has since been accused of attacking oil tankers and oil installations in the Gulf. And last week admitted to shooting down a US drone, although there are disputes about where the drone was located at the time of the shooting.

The US came close to sending a few missiles their way over the weekend, with sanity prevailing at the last minute with Trump stating it would be an over escalation. The tension will remain however as the two nations show no signs of backing down.

As a result, oil futures were up more than 10% from the middle of last week. I suspect that there could be more jumps where that came from. You can take advantage of a rising oil price by buying a futures contract – the symbol for US sweet crude is CL. They also have options to make it easier and more cost-effective for the retail investor. Ask your advisor for help if you need it. You could also buy an oil ETF such as CRAK, BNO, or DBO.

Of course, you’ll need to be careful of holding companies in your portfolio that need to use oil in their day to day operations. Transportation companies always see costs increase when the cost of petrol increases. As do the airlines of course. Retailers and the food industry also suffer from higher transportation costs. It will certainly pay to keep an eye on the oil price in the coming weeks. And getting a position in oil may prove to be a handy hedge.

Flooding affects Food Industry

The food industry had other concerns this week as flooding in the Midwest threatened to wipe out crop production. It’s planting time in the food zone and millions of acres are likely to go unplanted for the season meaning a shortage in the months to come. Soybean and corn futures have been soaring while food producers such as Tyson Foods (TSN),  and Sanderson Farms (SAFM) fell heavily during the week.

Tech News

Software provider Adobe (ADBE) surprised the market on Wednesday with revenue increasing by 25% in the second quarter. Company leaders advised an increase in user growth on its cloud apps coupled with overseas growth helped achieve the successful result.

As we’ve mentioned before subscriptions are a great way for companies to lock in a guaranteed source of ongoing income, and Adobe has managed to successfully transition into this area and away from merely being a seller of software. The developer clocked gains of 8% in the two sessions following the earnings announcement. They are now up 22% so far in 2019.

It was a tougher week for the weed stocks, as Canadian marijuana leader Canopy Growth (WEED.TO) disappointed investors with widening losses and slowing Canadian sales. Management is hoping to rectify their financial situation with more stores opening up in Alberta and Ontario in the near future, which have previously been slowed down by government red tape. WEED was down 7.61% on Friday but is still up 62.7% for 2019.

We also had another stock market debut last week, as technology company Slack (WORK) listed directly on the New York Stock Exchange on Thursday. Shares rose 50% on their first day of trading, finally closing at $38.62.

Slack is an extremely well-known company on the US scene. They provide communication software that lets work colleagues interact with each other on a group basis. Much like using Whatsapp instead of traditional email. The benefit is that the collaborations are kept for all to see, thereby providing a historical record of work teams to company management. Over three-quarters of all companies with over 10,000 employees are already using Slack.

They are yet to turn a profit, but as we have seen many times over, when you have a massive subscriber base the money will soon flow. For the moment it’s all about taking advantage of their dominance and increasing usage as quickly as they can. They currently have over 95,000 paying users and many more free users. But the big boys are already intent on stealing these users with Microsoft (MSFT) and Facebook (FB) introducing copycat products.

Interestingly Slack avoided going down the IPO path, thereby bypassing the opportunity to get financial backing from big investment firms and attracting investors on a traditional roadshow. You need to have deep pockets to fund the listing yourself, and the move looks to have paid off. CEO Stewart Butterfield who owns 8.4% of Slack is now a billionaire, on paper at least, with the value of his shares hitting $1.5 billion. He was previously known for creating photo app Flickr and selling it to Yahoo for $20 million. Not bad for a bloke who supposedly grew up in a log cabin without electricity or running water.

The week ahead

The week ahead will mostly be focussed on the G20 summit which begins on Friday and continues into Saturday. The dinner date between Trump and Xi be the highlight of course. Other than this we’ll have inflation data for Europe, which will tell us more about what the ECB plans in regards to further stimulus. And on Friday we’ll have the personal consumption expenditure data which is an important inflation indicator in the US.

FedEx (FDX), Bed Bath and Beyond (BBBY), and Nike (NKE) lead the list of earnings this week. FedEx is always an interesting bellwether stock because it relies on the success of retailers to be successful. A strong retail sector means lots of packages being sent. It will also be interesting to see whether the trade war and tariffs have had an impact on Nike’s business. Homebuilders KB Home and Lennar Corp also report, in an industry which does well in a period of falling interest rates. A miss on earnings and a falling share price here could see a possible buying opportunity for the potential rate cuts ahead.

Take a look below for a more detailed look at earnings and data in the week ahead.

Have a great week everybody.

Cheers, Paul.

Earnings:

• Tuesday: FedEx Corp (FDX), KB Home (KBH)
• Wednesday: Bed, Bath, and Beyond (BBBY), Conagra brands (CAG), National Beverage Corp (FIZZ), Lennar Corp
• Thursday: Nike (NKE)
• Friday: Constellation Brands (STZ)

Economic Data:

• Tuesday: Case-Schiller home prices, Consumer confidence, New home sales
• Wednesday: Durable goods orders, Core capex orders, Advance trade in goods
• Thursday: Weekly jobless claims, GDP revision, Pending home sales
• Friday: Personal income, consumer spending, core inflation, Chicago PMI, Consumer sentiment