Market Briefing For Wednesday, May 1

May Day connotations range widely; from the 'coming of Spring', to the Workers International Day (heavily observed by communists); or the actual origin which some say was the Haymarket Square Chicago anarchist riots, that demanded an 8 hour work day in the United States (not Russia).  

  

Aside celebrating Spring, May Day (Mayday as a single world) in a modern era synonym, tends to indicate a ship or airplane in distress (most recently Boeing 737 MAX impending doom calls); or possibly 'right now' the Guiado efforts to liberate Venezuela from socialist dictator Maduro's oppressive regime. I suspect the timing of a 'call to arms' to solidify a Constitutionally-based government restoration is less a coup, and more what it is being proclaimed as; a distressful 'Mayday' call for a return to normalcy.

  

Late Wednesday we learned that Maduro had an aircraft and was on the tarmac, ready to 'flee' Venezuela for Cuba. Secretary of State Pompeo is the source, saying Russia called and talked him out of flying to Havana; 'he should stay' (whatever inference that brings about) was their command. Of course this isn't over so the question now is will it be 'May Day'; perhaps a memorable one historically in Caracas, and will Maduro be crying 'Mayday' the international distress call. Whether the Russians (whose planes lately have been ferrying troops and missiles to Caracas) refused to fly him isn't a detail yet known. Perhaps they just want to give it a bit more time. After all this was the preamble: largest protest ever scheduled for Wednesday. 

By the way I'm pleased to see CNN (for once) covering more 'actual news' like the Venezuelan crisis extensively (although they had to slip in Sec'y. Pompeo as well as Bolton criticized the Russians, while Trump mentioned only Cuban interference and support for Maduro... as absolutely true as that is). With the presence of Cuban and Russian troops there (I wonder if it was Cubans that drove those armored vehicles into civilian crowds?); so this is time for Madurro to leave; and nearly every U.S.politician concurs (I am not so sure about a few misguided Washington extreme leftists). This evening's news is less encouraging regarding 'Libertat' for Venezuela. But I wouldn't count-out things reviving again in the morning.  

   

So far, defensive calls to 'arms' in the stock market are really a preparation for a decline; with the market not yet having airsickness from the heights. If it can (as the saying goes) hold onto 'sea-legs' is an open question; but for the moment likely. The market isn't like out-of-control software (algorithmic trading in the market's case, which would not necessarily be 'anti-stall', but tends to react to programmed criteria; so that's how accidents sometimes will occur; but we're not exactly in that mode, yet). If all goes well, and we don't have a 'trade deal' failure with China amidst a fairly benign pullback of the market, that's great; but awareness 'funny things happen on the way to the forum' (to parody an old musical) needs to be kept in mind at these levels.  

  

That's why one wants to be prepared if something normal turned fiercer; in a time when even the choreography is a little tricky to define in-advance; a bit more than usual; because there are contingencies that must fall-in-line, to avoid a May pause-to-refresh becoming something more. China Trade is foremost; of course armed conflict trumps all, should that be encountered with Iran or for that matter, with China. Venezuela is not that degree of risk, but is important and for the moment has some impact on the oil market.  

If it were with China; then Nick Mulvaney's statement today, clearly stating: 'China talk will be resolved one way or another within two weeks'; for sure takes-on much greater meaning. The near-conflicts with the Philippine Navy, not just the US Navy, in the South China Sea, is a clear reminder of the risks with China trying to push claims of hegemony in the region.   

Various other points of concern, or worth observing:

• Bipartisan 'infrastructure' plans (2 Trillion $) are being applauded, with a point made it was not a quid-pro-quo vs. investigations discussion. It is refreshing to see this (of course some Republicans may digress with respect to the merit); while everyone toys with how to 'pay' for it;

• The President has in mind pressure on the Fed to cut rates a full point; and even re-embrace QE (insane); as a way of spurring growth rates (it arguably could provoke the opposite as 'steady as she goes' may really be a better approach;

• Tech stocks (in particular) are really overvalued on valuations; as never have we had companies giving conservative (or even lower) guidance, while their stocks react briefly then go to all-time highs;

• Ignoring news that's unfavorable either means toppy characteristics, or serious confidence that forward results will be much better than even a management expects;

• The foregoing may imply too much reliance on how quickly a transition year in technology correlates with a (potential) trade improvement, with a favorable pullback in valuations;

• My suspicion is (of course assuming we DO get a trade deal; you know the S&P will tank if we don't, and should decline for awhile anyway or at least be sluggish).. my suspicion is lots of money has to be invested in the new technologies, and while a transition arrives; high profitability will be more illusive as it all works thru the technology food chain;

• At the same time this year's rebound and expected sloppiness (that's a minimum suspected coming-up, aside a 'trade deal knee-jerk' reaction), is also ahead of an Election Year; hence pullback not calamity likely;

• Also we have another unique scene going on; where companies doing IPO's often have huge losses and big cash-burn, with zero profitability;

•  that's suggestive that they have no way to fund their growth other than by selling shares to the public (and perhaps relates to serious selling in the post-Expiration lockup periods by insiders trying to monetize earlier investments); so only then do such stocks become less risky;

• The panting enthusiasm by investors (or even professionals) to buy the IPO's (even if they are likely winners in the very long-term) as well as a high tech valuation level, are the nearest bubble-like qualities now;

• Part of this has been the skepticism about upside potential all year by a slew of 'typically bullish' managers (I call them the 'bull-bears'); and that they 'only now' rationalize buying stocks after this projected huge move from December, to me is a warning of increased near-term risk;

• Yes all the skepticism was helpful as I've often mentioned; but loosing steam a bit as more capitulate to bullishness 'now' (this is the FOMO syndrome ... Fear Of Missing Out ... on the part of some);

• Meanwhile a stealth rotating correction has been ongoing for some all the way since February; which means the market is still bifurcated and not anything like a classic universal (or broad-based) blow-off;

• Aside stocks; Oil rebounded Tuesday, pushed higher by crucial turmoil in Venezuela (U.S. is increasingly committed to liberty returning), and also insistence by Saudi officials that OPEC+ production cuts would be extended in the second half of 2019.  

  

 

In sum: the market was defensive in the morning and rebounded nicely; not really impacted (beyond the fast shakeout) by Mulvaney's remarks, or FOMC deliberations, which continue into Wednesday. 'May Day' may be a symbolic intended 'revolutionary' date of 'freedom's restoration' by Guaido's followers in Caracas; but so far it looks too messy to presume all resolves that quickly. Plus Russia, with some troops and anti-aircraft batteries there, has been warned to butt-out and stay back with whatever's forthcoming. IF Russia & Cuba do not butt-out; we wouldn't be surprised if Guaido requests aid in terms of military from friends like Columbia or the United States. Mr. Maduro knows what his fate is going to Havana or remaining in Caracas; per Secretary of State Pompeo (seems we've telegraphed intentions).    

 

  

 

As for Wednesday; we don't expect significant monetary policy shifts nor rate hikes; and believe Trump's call for a full-point Fed Funds rate drop has obvious political implications. It also is indeed true that absent robust future economic growth (we prefer consistent) there's serious U.S. debt-servicing problems ahead (and I'm glad the President noted that even if his main point was to exert leverage on the Fed).   

 

  

 

Caracas P.S.: at Press-time we learn that Lopez, seen earlier with Guaido, has fled to the Chilean Embassy for refuge. We hope for Venezuela's sake that's not indicative of the uprising being repelled; but let's see. If Maduro was so edgy to leave the Country earlier (unless it's targeted propaganda to trigger defections from the military); it should be a sign of his demise.