Super Bowl of Earnings, Fed and Employment!

Super Bowl of NFL is just a week away when Patriots would be appearing 9th time since 2001 and Rams will be playing their first since moving to City of Angels! Who would win? It's match up between experience vs youth. Patriots' quarterback Tom Brady (age 41) and head coach Bill Belichick (age 66) have been playing/coaching football before their respective counterparts Rams' quarterback Jared Goff (Age 24 - Cal graduate. Go Bears!) and head coach Sean McVay (Age 33) were even born! In a way it's representation of today's society including corporate world. When it comes to which team I support - I am split. I stayed in New England for one year so would like to see Patriots win. But then Rams is now California team with quarterback from UC Berkeley (my alma mater). So I am just going to enjoy the game and let the best team win! But before we get to Super Bowl Sunday, let's look at this week's Super Bowl of economic events starting with earnings.
This week can easily be called as Super Bowl of earnings when 114 S&P companies are reporting representing maybe close to $4-5 Trillion market cap. The companies span across almost all industries but most important earnings to watch are:

• Monday: Caterpillar 
• Tuesday: Apple, AMD, Amgen, Biogen, Pfizer, 3M, Verizon
• Wednesday: Alibaba, Microsoft, Facebook, AT&T, Tesla, Visa
• Thursday: Amazon, GE, UPS, Mastercard
• Friday: Exxon Mobil, Chevron, Merck

These companies are who's who and can really provide where world economy is heading so watch out for their guidance. In addition to these earning reports, there are two critical events:

• Wednesday: FOMC meeting conclusion and guidance on direction of interest rates. 
• Friday: Employment report. Due to shutdown (glad it's over for now), the numbers may be little skewed but should show unemployment steady at 3.8%

With so many events, what should one do when it comes to investing in markets? If you take long view, markets are still about 10% below all time high (even after rising nearly 13% since its recent low on Christmas eve). As I wrote in "Third Year is The Best", things will be ok in 2019 and one can tiptoe in the markets depending on his risk/reward profile.

Enjoy the Super Bowl of earnings and actual Super Bowl!

/Shyam

The Antidote for Four Horsemen of the Markets!

About 15 months back, I wrote bog Four Horsemen of the Markets about what could end the good times markets were having (back in 2017). Other than taxes, all other three (Fed, Earnings and Trump) played a role in market turmoil exactly one year later producing worst December since 1931. Looks like I was year earlier! Now that scenario has played out, let's look at antidotes for Four Horsemen of markets (for references to Four Horsemen, read on wikipedia and my blog)
Markets have recovered half of their losses after reaching low on Christmas Eve and playing the theme of Markets take steps going up and take elevator coming down. Let's look at the antidotes which would keep markets chugging along potentially reaching all time highs in 2019 again!

FED and Interest Rates: 
Fed did act as horseman and played its role for Q4 turmoil by declaring its intentions of raising interest rates almost like autopilot. No one including President Trump liked it and Fed also realized that it may have gone beyond what it intended to convey. New year brought some dovish tone from Fed including chairman Powell. Now instead of saying "autopilot", they are saying policy of interest rates would depend on various economic factors. So now markets are feeling that Fed is on its side and interest rate hikes are either done or max 1-2 hikes are in front of us!

Earnings:
While most people believe that we are reaching peak of longest bull market and peak earnings, no one expected company like Apple giving major negative earning warnings. While some of the Apple problems are specific to company (high-priced iPhones, incremental innovation in iPhone and no new must have products/services in sight), some of the signs were also indications of slowing economy in China and results of trade war. After Apple's bombshell announcement, surprisingly earnings season has been relatively good. Especially banks have been producing record earnings and energy companies are also on mend. There were also major M&A in biotech means big bio/pharma companies seem to be confident about their earnings. That leaves Tech outside Apple. In next two  weeks, we will hear from Microsoft, Alphabet, Facebook and most importantly Amazon. Most of them should announce reasonably good earnings and forecasts.

Trade War or Truce:
NAFTA became USMCA without much fanfare. Now most important is US-China trade discussions and deal it may produce. This has potential to change the world trade landscape for next decade and hence markets are so fixated on these negotiations and react wildly (up or down) depending on any news coming out of these discussions. Initial rounds seem to be going well. Another round is coming up end of month. Hope both sides agree to amicable deal and announce by middle to end of Feb to avoid "Truce" becoming "War". Given the sensitivity of this deal, both sides are extending hand. Even though US has stronger hand, US presidential election cycle would motivate President Trump to do the deal and declare victory.

GDP:
China is slowing closer to 6%. India is entering into election cycle and GDP would be closer to 7%. US will be around 2% (even with shutdown entering into 5th week. Rgarding shutdown, its whole another topic to write about) and EU (due to Brexit mess) would be around 1-2%. So overall world GDP growth is slowing down maybe by 50-100 basis points compared to 2018. Slowing down is better than entering into recession as feared just few weeks back. So as long as first three antidotes work, world GDP would still be growing in 2019 which should be good for employment and markets.

So if you believe these antidotes would work and looking for investments (many people ask me for specific stock tips), check out my new year blog "BEST of 2019". Many of those recommendations are up by double-digit but there is still some upside left!
/Shyam

Third year is Best!

You may have heard the terms "Third time is the Charm" or "Third time's lucky". All of these terms have some meaning. For example, "Third time's lucky" has its origin in 19th century hanging in which one would be freed up from hanging if he survives third attempt. So how does this relates to "Third Year is Best"? 2019 is third year of Presidential term and based on historic data,  this is the best year for markets. Since 1950, markets are up 100% of time in third year. On an average  they are up by close to 15%. Check out WSJ article on this! General theory is that first two years Presidents spend on fulfilling difficult campaign promises as done by Obama with Health-care reform law and Trump did with tax reforms. In third year, President gets into campaign mode in first term and "Leaving Legacy" mode in 2nd term and start focusing on economy. The major policy changes in first two years start playing out in third year. In addition, based on recent history, third year also brings post mid-term political changes creating "divided government". That means President has to work with other party to run the government and hence consensus building takes center-stage. It won't feel that way given government shutdown but at least now both party leaders are talking and most likely shutdown will be over early next week. So would "third year is best" play out for 2019? Let's look at some of the factors:

• Markets have reset themselves from all-time highs of summer 2018 and are at reasonable valuation. The froth has almost gone!
• Employment is still close to all time low and labor markets are healthy
• With inflation in check, Fed can afford to wait on raising interest rates
• Economy seems to be at equilibrium with GDP growth of around 2-2.5% and inflation at 2%
• Trade discussions with China will get into high-gear in Jan and given risks to both US and Chinese economies if trade talks fail, both parties would be willing to extend hands for handshake after Chinese new year in Feb.
• Brexit deadline would be extended to give more time for reasonable deal (or no Brexit at all)
• While Apple's earning warning was bad (even though it was expected given warnings from Apple suppliers), it won't be like 2000 or 2008 when there were flood of earning warnings. We will know in next couple of weeks.

So all factors seem to indicate that "Third year is BEST" could live to its historic expectations!

/Shyam

"BEST" of New Year 2019!

Happy New Year to all. Finally 2018 is over and hopefully new year of 2019 would bring some much needed calm and sanity to the world of politics, economy and markets! 2018 ended as worst year for investing since great recession of 2008. While I have written about 2018 to be similar to 1998, it turned out to be worse than expected. Looking back at my recommendations at start of year, it turned out to be one of the worst year of recommendations. Let's take a look at it briefly.

• Overall returns were negative high double digit percentages (compared to negative 6.2% for S&P). 
• Only 6 out of 18 recommendations did better than market
• Best performers were NTNX, RGNX and QURE
• Worst performers were SN, NLNK and GE. The last one (GE) was real surprise. I never expected GE to be down by 57% in 2018.

So overall it was quite dismal performance. It would have been better to just invest in S&P instead. But that was last year. The Q4 market turmoil has left many stocks at "discounts" and I cannot resist the temptation of coming up with my 2019 list of 20 recommendations. In the world of acronyms, let's call 2019 theme of recommendations as "BEST" - Biotech, Energy, Streaming/Social/Semi and Technology! And here are the recommendations:

• Biotech: NKTR ($33), VKTX ($7.50), CRSP ($28), CELG ($64), XBI ($71)
• Energy: RIG ($7), OAS ($5.5), ECA ($5.7), XLE ($57)
• Social/Streaming/Semi: FB ($130), NFLX ($260), DIS ($109), MU ($31), AMD ($18), ROKU($30)
• Technology: AAPL ($155), MSFT ($100), ZUO ($18), WDC ($36), AMAT ($30)

Let's see how these BEST recommendations do in 2019. It will all depend on how markets do and that depends on following factors:

• Direction of US interest rates 
• US/China Trade 
• GDP growth of world economy
• Regaining of Trust by tech companies (especially FANG)
• Establishing confidence in banking/financial institutions (that it's not 2008/2009)
• Sanity to world political landscape

If 2018 indeed mimics like 1998 or even 2008, there is silver lining since both 1999 and 2009 had 20% plus returns! Here are my market predictions:

• 1-2 more Interest rate hikes by FED. 
• 10 year treasury would hover around 2.75 to 3.25
• US GDP growth: 2 to 2.5%
• US unemployment rate: 3.5 to 4.5%
• S&P by end of 2018: 2750 to 2850

Happy New Year!

/Shyam