Market, a la Juice
An 'almost everything was up' day… The tailwind for stocks… News in the oil market… The seeds for future outcomes are being planted today… Whitney's prescient call on Nike…
This is the market, juiced...
With the now-cemented backdrop of a stimulative Federal Reserve, already-expensive valuations (like U.S. large-cap stocks, as Dan Ferris wrote last Friday) are getting richer again... and inflation (or growth) expectations are rising as we see bond yields heading higher.
Yes, the major U.S. stock indexes have cooled versus their significant spike in the day after last Wednesday's "Fed cut" announcement... and mega-cap tech stocks sold off in late summer. But long-term market trends are still up.
Take, for instance, an indicator we haven't mentioned in a while... which speaks to market "breadth," or overall health...
Around 60% of stocks listed on the New York Stock Exchange ("NYSE") are trading above their 200-day moving averages, a simple measure of a long-term trend.
That number is not so extreme that it suggests the market is entirely punch-drunk like in early 2021. At that time, more than 90% of these stocks were trading above long-term trends, suggesting "down" was the most likely next direction for the market – which ultimately happened in 2022.
But after 2024, in which at least 50% of NYSE-listed stocks have traded above their long-term trend nearly all year, I wonder how long the current good times can last.
Well, the answer, again, was at least one more day.
It was almost an 'everything is up' day...
The major U.S. stock indexes all finished higher... and most of the S&P 500 Index's 11 major sectors did or were close. The exception was energy, which had its own story today.
Reports say Saudi Arabia plans to increase oil production by the end of the year and is ditching its "unofficial price target" of $100. Anonymous sources told the Financial Times that the "kingdom is resigned to a period of lower oil prices."
Saudi Arabia produces roughly 10% of global crude oil supply.
In reaction, U.S. crude oil prices and Brent crude – the international benchmark – fell about 3% today to around $68 and $72 per barrel, respectively.
U.S. energy stocks, as represented by the Energy Select Sector SPDR Fund (XLE), were down 2%, but the action for most everything else was bullish. The Nasdaq Composite Index led, up nearly 1%, the equal-weight S&P 500 was 0.9% higher, and the benchmark S&P 500 and small-cap Russell 2000 Index were up 0.4%.
Bitcoin is up roughly 2% in the past 24 hours, and gold made another new high above $2,670 per ounce.
Given what we've seen over the past few years, upon examining today's market action, the image of a countdown-to-ignition sequence for a NASA rocket crossed my mind. So, again, did shades of 2020, as the seeds of eventual high inflation were planted.
And so did Dan's terrific encapsulation of the market in his Friday essay, "The Priority Is Survival."
Remember this...
As Dan wrote...
In my past few Friday Digests, I've told you about more than 20 different metrics that show the S&P 500 Index is somewhere between expensive and the most expensive it has ever been in history.
I've repeatedly emphasized that valuation is not a short-term timing mechanism. If it was, our only choice right now would be to sell short stocks aggressively. But reality is complicated, and history has taught us seeming contradictions...
On one hand, rate cuts like we saw this week have often accompanied recessions, bear markets, and financial crises. Low rates happen because investors get cautious, making debt instruments more attractive than riskier equities... in turn lowering borrowing costs at a time of slower or perhaps even negative economic growth.
On the other, the market being ultra-expensive doesn't mean it can't get more ultra-expensive. There's just no practical limit to folks' desire to throw their hard-earned savings at any asset whose quoted price never stops going up. And the bull market of 2009 to 2022 taught folks that falling and ultra-low rates mean stocks are going to the moon and that you can safely buy every dip.
And now that the Federal Reserve has begun what most expect to be a lengthy rate-cutting cycle, folks have (for the moment, anyway) once again lost their minds, abandoned risk aversion, and bought everything. Tech, value, growth, banks, mining companies, silver, gold, copper, platinum, bonds, bitcoin... everything.
It's the risk-off moment of 2024...
It may not end soon... but it won't end well.
Today, the government shared its third and final estimate of second-quarter GDP... and Uncle Sam didn't dampen the mood, reporting 3% annualized growth. However, with pre-recession indicators also triggering lately, we're not proceeding without caution.
Tomorrow brings another round of inflation data – the personal consumption expenditures ("PCE") index. As you might recall, core PCE (which strips out food and energy prices) is the Fed's preferred inflation gauge. But tomorrow's data release will cover August, and we're thinking about what's going on right now. So the PCE report is less relevant for us.
Still, it might matter for stocks. If the data is more or less in line with Wall Street expectations and shows "normal" inflation of around 0.1% or 0.2% a month, I could see the market reacting positively, maybe even taking off.
At the same time, a surprise in either direction could lead to some volatility.
Consensus estimates, according to FactSet, are for overall PCE to be up 0.1% and core PCE to have risen 0.2% for August, with 2.7% year-over-year bumps for both measures.
Notice how that's not 2%, the Fed's supposed goal. As we told you several months ago, that goal apparently changed to the "2% range" without a formal announcement. In other words, the Fed is accepting higher inflation than in previous decades.
Switching gears to another lesson in long-term investing...
Like I wrote last week in an edition titled "A Lesson From the Top" about long-term winner Microsoft (MSFT), this is another example of why the fundamental research we do at Stansberry Research is so valuable...
Folks who read Stansberry's Investment Advisory lead editor Whitney Tilson's free e-letter – Whitney Tilson's Daily – know that he shared a "first look" at a stock he was watching, apparel giant Nike (NKE), back in August.
As he explained then, Whitney was (and is) a big fan of the company and its products. He noted that since Nike went public in 1980, the stock had risen more than 1,000 times through November 2021.
Then, fortunes changed, with Nike shares off 57% from November 2021 through early August this year. This performance caused Whitney to explore whether Nike's stock fit his "favorite type" of buying criteria. As he wrote...
I'm talking about one of a high-quality, long-term-growth company that's down at least 50% – and, ideally, 80% – due to short-term headwinds and/or fixable problems.
When these companies recover, their stocks are often multibaggers – driven by both growing earnings and multiple expansion (i.e., the price-to-earnings multiple reverting to its historic high levels).
Over the years, I've made millions of dollars for myself and my investors betting on the recoveries of companies like Berkshire Hathaway (BRK-B), McDonald's (MCD) (which I discussed recently in my June 5 e-mail), and Netflix (NFLX) (which I also discussed recently in my June 10 and June 11 e-mails).
Whitney examined Nike's financials and was encouraged. However, he said he was inclined to stay on the sidelines because the stock still wasn't "particularly cheap," and Whitney had severe concerns about CEO John Donahoe's leadership.
Donahoe's tenure began in January 2020, and now the company is projecting a decline in revenue and a 21% decline in profits for 2025.
The leadership factor...
This reminded me of one of the fundamentals Whitney has long preached regarding successful long-term investing, particularly if you're researching "beaten down" businesses... You want to know as much as you can about the company's leadership before making an investment decision.
Later in August, Whitney detailed a series of concerns about the Nike CEO – including reports of Nike losing "grasp" in the running market (which we would think would be impossible at an established leader like Nike) and questionable strategy decisions emphasizing direct-to-consumer selling over retail.
That approach worked for a while in the early days of the pandemic as people bought things en masse from home. But then the U.S. economy reopened and customers started returning to stores to buy things like running shoes. Nike lost market share to newer shoe brands like On and Hoka, and the company wasn't showing signs of adjusting its strategy.
As Whitney concluded...
As long as the guy responsible for Nike's woes – CEO Donahoe – is still in charge, I have little confidence that he'll be able to admit his mistakes and fix them. I would want to see a change in leadership – or at least clear evidence that current leadership is on the right track to fix issues.
However, Whitney said he and the Investment Advisory team would keep looking at the company, and if they thought it was a buy, subscribers would be the first to know. Fast-forward to this past Friday, and Whitney wrote in his free newsletter...
As promised, we did more work...
After a deeper look with my team, we concluded there was a compelling risk-reward setup (in particular because Nike was likely to replace its CEO). So we recommended the stock to Investment Advisory subscribers two weeks ago in the latest monthly issue.
In that issue, published here earlier this month, the Investment Advisory team detailed further what went wrong at Nike the last few years. Troubles included the fact that "Donahoe's organizational changes have stifled product innovation and the willingness to take calculated risks." But as the team concluded, a turnaround was possible: "The good news is that these are all fixable problems."
Sure enough, last Thursday, Nike announced that Donahoe was stepping down after a "rocky tenure," as the Wall Street Journal put it...
Nike leader John Donahoe will retire as chief executive next month after nearly five years at the helm, capping a tenure marked by a series of missteps that caused the sneaker giant to lose ground to competitors.
Elliott Hill, who in 2020 retired as the company's president of consumer and marketplace, will succeed Donahoe as president and CEO starting Oct. 14, Nike said Thursday. Donahoe will also step down from the board of directors.
Donahoe took over at Nike in early 2020, and as Covid shifted shopping habits he set out to change the way the company sold shoes. Nike cut ties with longtime retail partners like Foot Locker, DSW and Macy's and tried selling more merchandise directly to consumers...
Nike's focus on boosting online sales led to multiple restructurings that drew the ire of many employees, who felt the company's moves were eroding the culture of innovation that long separated it from the competition. Donahoe conceded that the company misstepped, in part by moving too quickly to phase out retailers.
Nike shares popped about 7% last Friday and are up about 10% from Whitney and our Investment Advisory team's recommendation on September 5 through today's close. Kudos to them on a great call. And now, it's time to think about what's next.
As was the base case of this analysis, Nike has been a world-class business for decades with a globally recognized brand with potential for a turnaround. But as Whitney wrote on Friday, now that his bullish catalyst thesis has come to fruition...
Looking ahead for Nike, my team and I at the Investment Advisory are already doing research and tapping our networks to learn more about the new CEO and what direction he might take the company.
We'll share our latest thoughts with subscribers in our next monthly issue... and these folks will be the first to know about any changes in advice with the stock.
As Whitney said, Investment Advisory subscribers will be the first to know any updated advice on this recommendation and, as always, have first access to all of the best ideas from Whitney and the team behind our flagship newsletter.
If you don't already have access and are interested in starting a subscription, check out this special presentation to learn more. You can learn how to take advantage of a 30-day money-back guarantee to our flagship publication – plus gain instant access to the entire Investment Advisory portfolio of open recommendations, special reports, and back issues.
New 52-week highs (as of 9/25/24): ABB (ABBNY), Agnico Eagle Mines (AEM), Alpha Architect 1-3 Month Box Fund (BOXX), Constellation Energy (CEG), Comfort Systems USA (FIX), Flutter Entertainment (FLUT), Lynas Rare Earths (LYSDY), Meta Platforms (META), Motorola Solutions (MSI), Ryder System (R), Royal Gold (RGLD), Sprouts Farmers Market (SFM), Spotify Technology (SPOT), TransDigm (TDG), Trane Technologies (TT), Vistra (VST), and Wheaton Precious Metals (WPM).
In today's mailbag, more thoughts about a potential workers' strike at U.S. East Coast and Gulf Coast ports... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"While the hourly rate is an issue, I'm told the impact of AI is as big or a bigger concern for the unions. These workers are being replaced by AI and they want to make sure they have language in the contract to prevent that from happening or at least gain some control over the speed (grandfathering) of change.
"If it's just the East Coast ILA [International Longshoremen's Association] unions that strike, cargo can be diverted to the West Coast and moved by truck and rail. You can bet that a contingency plan is already being implemented.
"Where things get really bad is if the ILWU (West Coast unions) decide to strike or slowdown in solidarity with the ILA. Heard a rumor ILA and ILWU are meeting in New Orleans this weekend. That's the nightmare scenario!" – Subscriber Roy E.
"Regarding the food issue, we won't be exporting during the strike, so all of the food we produce here can stay here." – Subscriber Dennis M.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 26, 2024