On this week’s show, Karl discusses even though the stock market has been volatile in 2018, it’s essentially gone nowhere. How do you navigate in that type of environment? Karl explains.
Karl Eggerss: Hey welcome to the Eggerss report. It’s your investing playbook. My name is Karl Eggerss. Telephone number here is 210-526-0057, 210-526-0057. Our website Eggersscapital.com, E-G-G-E-R-R-S capital.com. Some of you like to call and ask questions or need to meet with us for one reason or another and you like to use the old-fashioned telephone, some of you like to use the inter-webs and click on buttons and listen to the podcast and go read article so we got a little bit of both for you. We still have a telephone. I don’t know how much longer are we going to be using telephones. But, we do have telephone still and we have a telephone number. Most of you probably don’t have home phones anymore, but we do have an office phone. So, again 210-526-0057. If you want to go to the website, go check it out. If you just want to skip all the articles and just need help, there’s a green button on there. You click on that. Contact us, we’ll reach out to you. If we can answer question for you, we’d love to do that.
Well, we had kind of a busy week, didn’t we, in the markets. We had of course yesterday we had the jobs report which was kind of we had the big job report in January that started the whole correction, the stock market correction. It was too good. It was, “Oh no we’ve got inflation. The Feds are going to have to raise interest rates. Oh my gosh!” This one was ho-hum, “Okay. It was fine. No big deal.” Now the president was like, “Hey we went under 4% unemployment.” 3.9, finally broke the 4%. So, jobs markets doing fine. Not hot enough to I would say cause a panic that they’re going to just jacket rates really aggressively, but that is still the concern which we’ll talk about in a minute, but the jobs report was really what yesterday was about.
Then we had the Federal Reserve who didn’t raise interest rates this week, but looks like they’re likely to do it next meeting in June. So, where does this leave us? Well, we saw the stock market kind of languishing around and then we started we broke the 200 day moving average once again and as soon as we did, what happened? The volume picked up, stocks went down, the Dow was down about 400 points on Thursday at one point. It didn’t feel like to us. We had our guns ready to go. We had a hand on the holster because we have some cash sitting there. We’re ready to buy the flush and we’re going to talk about what kind of environment we’re in right now.
So, we were ready but we didn’t quite get that capitulation, oh my gosh, this panicky situation that we’ve seen in previous months, but it was selling off. It reversed pretty methodically. Went back up and finished even on the day. So, we recovered a 400-point drop. Then Friday morning, of course, we got the jobs report. We see the market down probably 100 points or so at the open and finish up over 300 points. So, where does this leave us? Well pretty much still not a lot of movement kind of trend less if you will. In fact, if you look at what was working this week I mean the Dow was flat on the week. I think the NASDAQ was up over a percent.
So, technology which is another thing we’re going to talk about had a good week. So, the best performers this week were technology stocks, oil, energy … hey energy is your new leader right now in this market but technology is not giving up the reins just yet. Semiconductors which got hit really hard. They peaked in March and they went all the way down. They lost about 15% and they came fighting back this week up almost 3%. Technology about 2 1/2 in general but you saw oil up 2 ½%, the gas exploration production company is up almost 2%. Gold miners did well this week. So, those were your big winners on the week.
On the flipside, what got hit? Pharmaceutical stocks, some country ETFs like Brazil and Mexico down over 5%. Mexico is pretty interesting because it had a nice … if you go look at Mexico technically and we made good money on it after the election when all that melees was happening with Mexico and Trump, we made good money by buying that fear, but if you look at from November until now Mexico was bouncing off this trendline for multiple times and it broke it on Thursday and into Friday. So, Mexico’s having a tough time along with Brazil. Biotech, down about 3%. Again, some of these things breaking these trendlines. So, you have something that looked really good technically. You have some things that are breaking down technically. Biotech looks to be breaking down healthcare, pharmaceuticals having a tough go of it here aerospace and defense.
By the way, if you want to get some of these technical pictures, if you go to my Twitter account at Karl Eggerss or if you just want ETFs, we have @etfcharts is that the Twitter feed. We posted a picture of how really we might see aerospace and defense had one last stand here. It bounced off of the 200-day moving average and its February lows are 2018 lows on Friday. So, it’s holding there but watch aerospace and defense still an expensive area. Telecom, got beat up this week. Consumer Staples, they really look awful probably due for a little bit of a bounce but Consumer Staples XLP would be your ticker. Remember, a lot of people reaching for yield the last few year so that’s where you would get them as not really tied to the economy, you get good dividends but they’ve been hit lately since the market’s been struggling.
Let’s talk about those tech stocks for a minute. We actually sold some tech stocks early in the week and our dividend plus portfolio. Locked in some really nice gains we’d had for the clients that are in that particular strategy and have been for a while. We sold Intel and we sold Apple. Of course, Apple made big news this week because not only did they come out with earnings where iPhone sales disappointed the 10 and so forth but they’ve got services. So, you got a hardware company that is trying to transform themselves into not just relying on hardware, because hardware say what have you done for me lately type of business and so there’d saying, “Hey, we got all these other things and it’s doing well.” Look, they’re buying back 100 billion of stock. Good things, right? Not an expensive company.
Then on Friday, Warren Buffett reveals or late Thursday night that … by the way, we bought another 75 million shares of Apple and so Apple had a good week. Here’s a couple of things that are interesting about it. By the way, when we sell something, it’s not that we don’t necessarily like it, we just want to optimize our dollars. We think there’s better deals out there right now than tech. Tech could be handing the reins over on leadership to other things. Now it hasn’t yet. In fact, it came back with a roar this week, but when you look at Apple in particular, you have a company here that is doing fine. Hasn’t really done a lot of I would say wow innovation.
Now it may be a little bit of a silly statement, they’re doing some unbelievable things with phones and tablets and everything else, but again, they haven’t come out with something that people are dying to have in a while and they probably will, but it is an increasing dividend stock. It is a good solid company. It’s not really expensive. It’s fine but I’m seeing a slow gradual, potentially slow and gradual rollover where the stock is basically if you look at things like for those that are technical the relative strength index, it’s been making lower highs for months. In fact, you can go back to last spring, a year ago. Apple has not made a higher RSI level in over a year and yet the stock is at an all-time high right now.
So, I think it could be and it’s just again possible two things. It could be rolling over and number two, what if it just went down to the bottom end of its range over time. It could fall $40, $50. I think Apple could be $130 stock. If you a draw trendline from let’s say 2012 until now, it’s hit this point. You could draw a line on top of it. This is the third time. So, if it’s in this kind of channel, it’s at the upper end. Again, it doesn’t mean I hate it and certainly if I was shorting stocks, this wouldn’t be one of them, but I do think that you could see this pullback. Remember, Apple lost 50% of its value back in 2012 into 13. It’s had big pullbacks before, 15 into 16 it lost about 30%. So, it could do that again. If it went down to where I think it could, you could see a 20% to 30% drop and then I’d be buying it again. So, it’s one of those types of companies but certainly it rescued technology this week for sure.
As far as Intel’s concerned, Intel just had this phenomenal run that we’ve participated in. Look, from the middle of 2017 until recently, Intel’s up about 60%. So, we simply took profits and are looking at other areas that we think are cheaper or have more upside. That’s it. Doesn’t have anything. I would say there’s anything dangerous with Intel, it’s just again some of the stocks of have gone a little vertical. I think in this environment where you have a bull market that is being questioned, you have to examine your portfolio and really understand what you own and it’s a risk reward question you have to answer. So, could it be a mistake to have sold Apple and Intel? Maybe. It could be. That doesn’t mean the things that we put the money into aren’t making money either. So, you just have to look at all that, but they certainly rescued technology this week.
As far as the overall market is concerned, we’re looking at this thing and like I said we either want one of two things to happen. So, we’ve talked about in the last few weeks that we had raised some cash in some of our strategies, not a tremendous amount but more than we’ve had in a while. We’re sitting here and waiting for either some of our longer-term indicators or I should say medium-term indicators to give us the sign that things are clear. So, we want to see volatility ease over time that we have some model set up to where it will show us that. When it happens, we get the clear sign that okay things are calming down.
On the other end of the spectrum, if the stock market falls because volatility picks up dramatically and it’s too much and there’s almost panic in the streets, that would cause us to buy in a strange way you may be asking, “Why would you want that?” Well because that means prices are falling off to where it’s just a great deal. I thought on Thursday we might be getting that. Had we had been down 400 points on Thursday and we were down another 400 points on Friday, you would had seen us put some money to work. I think that’s the way you have to look at this market right now. As we transition into this topic on where we are, we certainly from a technical standpoint the 200 day moving average is what everybody is talking about and we’ve been getting lower highs. The Dow Jones has had four lower highs since the top of January and yet we’re holding steady on the lows.
The Dow Jones for all intents and purposes you know the lows been around 23,900 and we’ve been holding firm. So, if you picture a triangle or a wedge of cheese sitting down, we’re coming to the end of that where it’s at the point and something’s going to give. Either we break up or down. That’s what everybody’s waiting for, but maybe instead of looking at it that way, it’s more of a box. So, take out the January highs because really the run we had in December and the selloff we had in January into February, you take those out because it was very frothy. It’s going very fast and then it sold off almost too fast. You take that out, we’ve kind of been just moving sideways now. We’re in this box. I think it warrants looking at some trades, looking at some things that you maybe want to rotate into. I think I may mention last week in our aggressive strategy had a nice trade in on steel stocks as a basket ETF. Locked in profits on that, moved into some banking stocks.
Same thing. I mentioned Apple and Intel. Taking profits there, moving that money into some other areas. Then on top of that, just using cash and the stock market back and forth a little bit. So, don’t go crazy and we’re not talking day trading but we are saying maybe in this particular arena, where we are right now, this place that we are right now maybe it warrants a little more activity, because you’re having almost manufacture gains. So, when the markets go down to where things are a little oversold, you add. When they go up to a little overbought, you sell. I think that is happening with some of these programmed algorithms and these computer systems which is why we can’t get going one way or the other. If you’re sitting on a pile of cash, you want the stock market to fall and you’re just not getting it.
On the flip side, if you’re a permeable and you think the market should always go up and you are always invested, you’re saying, “Get going. I’m tired of just moving sideways.” I think as people see that, they’re fading it. So, they’re fading the big moves down and they’re fading the big moves up. So, either you can just be more patient which is totally fine or with a piece of the portfolio kind of do the same where when you have a fat pitch, take it. Again, when things feel like “Okay, we’re out of the woods now.”, maybe they’re not. Look, we’ve been getting as we’ve been mentioning great earnings, great earnings.
So, what’s the deal? Why are we not seeing the stock market just race higher? It’s interesting because when you stand back and look at it objectively and some of you have to admit you may not be objective when you look at the market, you may think there’s all these reasons it should go up and you always think that way or depends on who the president is or we have too much debt in this country, all of these things. It makes you have a view of the market based on that when sometimes you have to separate the stock market from these other things going on.
So, when you stand back and look at it, you say, “Wait a second, unemployment below 4%, granted maybe the numbers are fudged a little bit but they are going down. Employment is doing well. People are saying they can’t find enough good workers right now.” I heard a report today that some companies are having to toss out drug test because too many people are coming in with … they won’t pass the test because of marijuana so they’re saying, “Well, we just won’t do the test.” It’s one way around the test is just to eliminate it I guess.
So, we’re hearing about workers saying that. We’re hearing about input costs are going up. There’s some inflation going on. People are starting to get raises. We’ve got an economy that’s still growing fine and interest rates are still held at bay. Remember 3% on the 10-year treasury. Uh oh here we go and what happened? They came back down a little bit this week. So, things are good. Earnings by the way are growing over 20% from a year ago. So, we sent a newsletter out our clients which we do once per month and we titled it “Is that all you got?” which is kind of I don’t know if they said something like that in a Rocky movie. We did something that they would say in some kind of boxing movie. You’re sitting, you’re like, “Come on hit me.” Boom. “Is that all you go? Come on, a little more.” It’s as if investors aren’t impressed.
Now as far back as I can go which was 1993, the percentage of S&P 500 companies that have beaten their earnings estimates was over 80%. So, you’re talking four out of every five stocks in the S&P 500 or I’ll do the math for you, 400 companies approximately have beaten their earnings estimate. That’s the highest that we’ve ever seen going all the way back to ’93 as far back as the stat goes, and yet the market is like yawn, “Is that all you got?” So, why is that? Well, we know number one that obviously investors look forward not backwards and earnings are backward looking and things get ahead of themselves and the stock market tends to be a good forward-looking indicator in like what’s going on.
So, does this mean investors are worried about something coming up in the next few months? I would say, yeah, I think they are. I think investors and I’ve been saying this for weeks, I think investors there’s this tug of war on Wall Street. You heard the Federal Reserve this week say they’re not raising rates but we’re still planning on it. There’s some question about “Is this as good as it gets in terms of earnings and the economy?” Are we at peak earnings? Is this as good as it gets? It’s going to start rolling over little bit and so you have a slowing economy at the same time the Federal Reserve is raising rates, which I’ve been telling you that would not be a good situation.
That’s not happening yet because we don’t have proof in the future that all of this is going to slow down, but if it does and the Fed is hell-bent on raising rates, they could invert the yield curve which they are saying we don’t want to do that but they could because they control one half of it, they control the short-term rates. Long-term rates are controlled by you and I, buying and selling treasury bonds, but if they did that, that could be a problem. Stocks and bonds wouldn’t do very well. We’ve been seeing some inflationary indicators picking up, percolating. Look at commodities which we love that area.
Look at commodities right now. Wage growth, picking up a little bit. We hear all these companies. If you’ve been listening or reading some of the commentary from these corporations reporting earnings, they’re all mentioning tariffs, input cost going up, can’t get enough of this, can’t get enough of that, but things are costing more. There’s good business going on and the cost of doing that business is going up. I hear from people that own trucking companies that they’re raising their prices. We know lumber is going bonkers. All these different things are a sign that there is good stuff going on but that stuff cost more. Could we be entering a period where maybe the cost keep going up but the economy because it’s going up slows down in the Fed keeps raising rates? That’s a bad combination. So, that is the tug of war we have which is to me a worse case scenario would be a stagflation, stagnant economy with inflation. It’s a possibility but it certainly not a foregone conclusion just yet.
Now when we stand back and again as we did earlier and say, “Where are we? Are things good or bad?” Look, the leading economic index, the basket of economic indicators was released as of the end of March recorded an all-time high. Now this indicator was all the back to 1958 and every recession, not some of them, every single recession we’ve had, the leading economic index has rolled over months in advance of the recession. It just hit an all-time high. So, again, you look at that and say “Okay, if we’re worried about a recession, shouldn’t that LEI be falling?” The answer is yes. It’s not. It’s at its highest level ever.
Earnings, again, they’re going. I think fact said they have risen in the first quarter by 23.2% from a year ago. That’s the highest earnings growth we’ve seen since the third quarter of 2010. Another positive and an important one is that the number of stocks advancing in this market versus the ones declining are also near all-time highs. So, generally that indicator tends to roll over prior to the stock market rolling over. So, again, we’re not seeing any of that.
Now, what about the negatives? Well, the economic cycles long in the tooth. This is the second longest period without a recession. So, are we due for a recession? Absolutely. Do I see one right now? No, I do not, but we are seeing the yield curve flatten which is again for those that don’t know short-term rates are going up and long-term rates aren’t. So, the spread between them is very tight. That signals that investors are beginning to worry that we have a tough economy in the months ahead.
Now it’s not inverted and there’s a difference between inversion where the short term is literally higher than the long term and just it tightening. Remember, if long-term rates go below short-term which is called an inverted yield curve, that’s a problem because banks would have a difficult time making money. They’re paying you hypothetically 3% on a CD and then you say, “I’d like to borrow some money please.” They say, “Oh yeah, we’ll lend it to you at 2%.” That math doesn’t really work. So, again, we need to watch that over the next few weeks and months.
The other thing is we’ve got some good things coming out and yet the market doesn’t seem to be reacting very favorably. I mean denuclearization in North Korea kind of a big deal and yet the stock market still 7%, 8% off its highs. What’s the deal with that? What’s strange about it, remember 2017, rocket man, everytime someone was mentioning, it was like trash talking amongst these guys with nuclear weapons and the market would ignore it and just go up. It’s very strange. Now we have the opposite and the market is yawning. So, kind of strange but it is a good lesson that sometimes the news while it made sometimes drive short-term movements in the stock markets, it really shouldn’t. It really should be about interest rates and the economy and earnings. So, given all of this, we ECM, Eggerss Capital Management, we’ve made some tactical adjustments in some of our strategies and that’s where we are right now.
So, one other big news topic this week was the Tesla Earnings Call. We have no position in Tesla. I think it’s probably the most polarizing company right now on the earth. When I say polarizing, it’s because there’s some people who think it’s the greatest thing since sliced bread and this is going to be $1,000 stock. It’s sitting at $294 right now. Then there’s others that are like they’re burning through cash and they’re going to go to zero. There’s been other companies like this that have failed. Then you have people that say, “Yeah, but look at Elon Musk, he’s the next Steve Jobs. Nobody’s like him.” Very interesting stuff. I kind of can see both sides of it and I don’t have a position in it. I think it’s a great trading stock. I don’t know if it’s a stock to own for the long term because they are burning through cash, but his post earnings call that Elon Musk was on was pretty unique.
So, essentially, he comes on and he’s talking about things and there’s a point in which they give their statements and then if you’ve ever been on an earnings call, the analysts are on this conference call. I’ve been on a few. I’ve asked some questions. Basically, they will say, “Yes, Karl Eggerss with Eggerss Capital Management. So, tell me about your profit margins.” So, people were asking questions like that. Elon Musk got frustrated and cut people off and said, “You know what? We’re going to start doing YouTube instead of this.” He told people, “If you don’t like volatility, don’t own our stock.” Just very kind of a pompous, berating some of the analyst and granted apparently some these analysts are always negative anyways so some of them had it coming to them, but very interesting. It was a little refreshing because he was pretty transparent saying, “Look, we have a volatile stock and we’re not worried about this, but if it’s too volatile, don’t even own it. Let’s move on to something else.” So, that was a big, big topic.
For those of you who either own or are interested in it, I’ve always felt like this is a company that is not an automobile manufacturer. This is a company that is a battery manufacturer and is trying to perfect that. They’re almost using the cars to keep them in business while they do more R&D and get batteries in homes and other things. A very interesting company. I’ve never driven one but I understand that maybe … some people believe it may be the best car built. If look at it technically where it is right now, it’s not an easy chart. I would say it’s not scream and buy right here, but it’s very volatile. I guess if anything it’s kind of been moving sideways for a while now and maybe it’s on the lower end of its range but it’s been making lower highs the last few months. If it does go back up to where it’s been, you’re talking from where it is right now, it could have 25% in it and still be stuck in the sideways pattern.
So, interesting company and polarizing again given the CEO. He mocks people that say they’re going bankrupt. I don’t know if you saw his April Fools’ Day joke with him basically laid out on the side of the road look like he was passed out. I mean just strange stuff. Of course, he’s got multiple companies so you know it’s just interesting. Let’s just put it that way. It’s an interesting situation and I don’t know where it’ll end up. I think it is one of those stocks though that if it gets beaten up, you buy it. If it starts running too much, you sell it. I think it’s one of those stocks or if you say, “You know what? I’m going to take a chance on this guy.” You just have a small part of the portfolio in there. Let me know if you own it and if you do, tell me why you own it.
What specifically are you looking at? Obviously, it’s a … I don’t want to say it’s a unique company but it’s very expensive to make these cars. They’re losing money on some of these. Look, you have to sell a lot of these cars. It’s a very expensive car to put together. They got different models and they want to go into semi. So, we will see, but that was certainly a newsmaker this week. I would say the Fed was probably still trump that if you will this week, because again, they hold the key.
Remember the report that came out yesterday, the jobs report, had it been way hotter than expected, could we have seen a whole another January situation where the market was “Oh my gosh, the Fed’s going to raise rates.” but it was a Goldilocks type of jobs report? Therefore, I think initially the market looked at it and stocks kind of sold off and then they thought, “You know what? This isn’t bad. This is a pretty good jobs report. Nothing to scare the Fed. The Fed doesn’t have to be urgent and raising rates and so up we went.” There were some rumors yesterday that there were some big institutions out there covering their shorts, doing things like that in the middle the day which was why we saw some of these stocks turnaround. Really start on Thursday the middle the day and continued into Friday. So, the biggest things that really drove stocks this week was to me the Federal Reserve.
All right, that’s going to wrap it up. Hey, don’t forget eggersscapital.com. If you need any help, you can always call us too at 210-526-0057. Again, if you need help in analyzing your Social Security, looking at how to maybe increase your income in retirement, can you retire, education funding, retirement planning, Roth conversion analysis, investment analysis, all those different things, we’re glad to help you with. So, you can always give us a call or jump on the website and we’ll be glad to help you. Don’t forget to share this with your friends. We are on iTunes. We’re on Spotify. We’re on Stitcher Radio, Pandora and of course you can listen to us straight on the site or subscribe to it so it comes right in your inbox each and every week. We thank you for your feedback. Take care everybody. Have a great weekend.
Speaker 2: This show is for entertainment only. Any information provided by the host, guest and the station should not be deemed as advice. Your investment decision should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.