AM Brew, May 20th 2022

China is leading the news this morning, as the Chinese cut a key mortgage lending rate by 15 basis points in response to a slow housing market. Equity futures are up 1% across the board, but China's move doesn't seem that bullish to us, as its a small cut and the Fed isn't close to mimicking.

Weakness in Crude Oil over the last 2 days has almost completely reversed course:

We strongly believe that energy is the most controllable input in the inflation equation. Once inflation is under control, the Fed will improve liquidity, and we have started to watch energy more than usual, as we believe that energy is the inflation input easiest to control. The Fed already slowed housing with their rate increases, and these rate increases have also dampened some aggregate demand, but too many rate increases could be devastating - the Fed knows this. Thus we are watching crude carefully because if crude can inch down, then things improve everywhere: transportation, utility costs, raw material costs, food costs (lower fertilizer etc.). If crude were to approach $130, we would be terribly bearish, unless stock & bond prices get too cheap.

One of our stocks we mentioned yesterday, FootLocker, guided to the high end of the range. It looks like FootLocker will earn closer to $4.50 instead of $4.00, and, as we mentioned yesterday, its true earnings power is considerably higher. A lot of really good franchises are trading a lot cheaper. Today we will be investigating JCI, which is a powerhouse in HVAC & building security. JCI is kind of a stealth way to play the global warming and defund-the-police-social-unrest trends. Although JCI's balance sheet isn't the greatest, its a growth company with a strong market position, throwing off considerable and consistent free cash flows while the dividend occasionally rises and the share count falls. JCI trades at $52 and will earn $3 - analysts expect $4.35 in 2024 - if this happens, the stock will go back to the $80 level. JCI was not interesting at $80 in January, but its the same company $30 cheaper today. Jerome Powell can't do much to stop airconditioning.

Yesterday the S&P was having difficulty holding the $3900 level and a re-test of the $3850 low-range was looking possible. The market avoided that but we would be cautious entering the weekend - the trading action still looks like 3 steps backward with 1 step forward.

Today's option expiration could be behind some of the recent market action, as the 11 million open S&P Put options is the highest non-quarter-end expiry since covid in April 2020. Bloomberg is arguing that the options expiration effect is most pronounced when vol is low. Make your own conclusions, but we don't think that this particular option expiration is going to change the huge amount of fundamental bad news out there (with recession fears being the largest). Monday scares us in the 3 steps back today is forward market:

More convingly, Bloomberg is arguing that month-to-date equities are down a lot and bonds, as defined by the Bloomberg US Agg Index, are actually flat on the month, thus they opine that there should be a reallocation from fixed income back to equities.

Bitcoin & ETH are up 4% today, as risk-on is catching a nice bid. Tether also announced yesterday that they were fully backed and that they were moving away from commercial paper and into treasuries. The possibility that Moore Cayman Accounting, a legitimate accounting firm, has been duped is a real possibility. That said, it appears that Crypto has put the Luna debacle behind it and a short-term run on Tether is unlikely.

Deere missed quarterly revenue estimates but their full-year earnings guidance was strong, Deere shares are down -4% in pre-market action. Interestingly enough, Bloomberg is reporting that Deere missed the revenue estimates but MarketWatch is reporting that Deere exceeded revenue expectations. Go figure.

ROKU is now Cathie Wood's largest holding. We took a quick look at ROKU just now and its not your typical Cathie-guaranteed-drop-of-60%-within-4-years stock. ROKU is now cash generative, its balance sheet is solid, and it appears to be growing as revenue every quarter is higher than 6 months earlier (seasonality in the December quarter means its tough to look at sequential numbers). A quick look at Cathie's largest holdings is a mixed picture but even Robinhood appears to have generated cash in a few solitary quarters. ARKK is ok for very short-term and nimble trading but remember that ARKK has not seen large redemptions and is always a candidate for the classic run on the bank.