On Wednesday evening, I joined Phil Yin on CGTN America to discuss Boeing Earnings, the Fed, Markets and more. Thanks to Phil and Ryan Gallagher for having me on. In the segment I referenced Mel Books famous line, “it’s good to be the King!” from his 1981 film “History of the World part I.” Find out why “it’s good to be the king” and why “competition is for suckers” here:
Here were my “show notes” ahead of the segment:
On Tuesday, I was tentatively scheduled to be on Fox Business. It was pushed back to a later date, but here were my prepared show notes and 2 picks (positions we own from lower levels):
General Market:
A little overbought. A little exuberant. A little due for a pullback, but 1 big problem:
We haven’t brought in the last of the adamant bears (who have been pounding the table short for the full >40% rally off the October 2022 lows).
Once we flip the final holdouts (probably another few percent upside in the indices), we can expect a healthy pullback of 5-7% in Late Feb/March period.
Very hard to get too aggressive short/apocalyptic when we are just breaking out to new highs following 2 years of 0% returns and sideways consolidation:
Avg. Pres Election year returns since 1928 are 11.28%.
Normal election year template:
Source: Fundstrat
Fed Next Step:
Taper the taper (stop aggressively selling bonds on the open market to drain liquidity) PRIOR to commencing first cut in March/May.
Company refinancings at lower rates in back half of year will accelerate earnings expectations particularly for small caps – which have the most leverage and need for refinancing.
TWO POSSIBLE “DOUBLES” FROM LOTS OF COVID TROUBLES
AAP – Advance Auto Parts (still 70% off ATH):
On 11/15/2023, I came on the show with a new position AAP (Advanced Auto Parts):
It was trading at $59.00. It is now up over 13% ($66.85) and we believe just getting started:
Sales up last quarter 2.9% (+1.2% comp store sales).
Free Cashflow was +$148M. Cash balance grew and paid down revolver.
New CEO Shane O’Kelly (formerly ran HD Supply for Home Depot) is delivering on his plan to:
- Sell Canadian Operations (worldpac and carquest).
- Cut $150M in costs. Use $50M for retention of frontline.
- Build US pure play “blended box” professionals and DIY and return to profitable growth.
People at the low end hanging on to their cars a lot longer as OEMs catering to higher end new cars (avg. sticker $48,000). They need parts to keep avg 13yo car running.
*Can be a double+ from these levels over the next 24-36 months.
SWK – Stanley Black and Decker (still ~54% off ATH):
On 9/11/2023, I came on the show to talk about our position in SWK:
It’s up ~5% since and just getting started on the turnaround plan:
-$2B runrate savings by 2025 (ahead of schedule with $875M)
-Grow organic revenue at 2-3x market through innovation (DeWalt, Stanley, Craftsman, etc)
-$360M in free cashflow last quarter.
-Upgraded guidance as COVID inventories worked off to the tune of $1.7B.
-Gross margins re-accelerating from Q4 2022 trough of 20% to 28% last QTR. On target to achieve 35% by 2025.
-Will likely generate ~$750M FCF in 2023 alone (turnaround year).
*Can be a double+ from these levels over the next 24-36 months.
3.4% dividend while you wait.
Markets and Fed
After being bullish since October 2022 (and October 2023) when many strategists were scaring people out of their stocks at the exact wrong time, in last week’s podcast|videocast and note I indicated that with sentiment at heightened levels, it would be “trickier” in the short term. This does not change our 2024 outlook – which Barbara Kollmeyer was so kind to feature in MarketWatch yesterday (click on images to go to original article on MarketWatch.com):
Despite Chair Powell waffling yesterday and implying March cuts were no longer a foregone conclusion, the Fed Fund Futures were still pricing in a 53% chance of the first cut coming in March (as of 9pm last night):
Here’s what the “Fed Whisperer” Nick Timiraos had to say about the FOMC statement and press conference (click on image for original article in WSJ):
Google Earnings
As Barbara referenced in the MarketWatch article, we bought Google and Amazon in Fall of 2022 when you “couldn’t give them away.” They have both had monster gains but we have no intention of selling them in the near term.
Final Thoughts
Last week in the podcast|videocast we discussed a likely 5-7% pullback in late February or March time frame. Could it be early? Possibly, but I wouldn’t count on it. I think we will see more breadth improvement before a short term top.
In the scheme of things, it does not matter as the year should end up nicely (high single digits to low double digits for the indices), but we wouldn’t mind a few more percentage points up first in order to sell some calls against our longs or possibly put on some asymmetric tactical shorts if the opportunity presents itself.
At these levels, it makes more sense to wait it out. If we push higher and finally flip the last few vocal bears (who have been bearish since the October 2022 lows and missed 40%+ since), it will make more sense to make tactical moves. Time will tell, but my experience indicates the “first move” after a Fed meeting is often the “wrong move” – and so far it’s down. We’ll see how it plays out in coming days…
Now onto the shorter term view for the General Market:
In this week’s AAII Sentiment Survey result, Bullish Percent (Video Explanation) jumped to 49.1% from 39.3% the previous week. Bearish Percent ticked down to 24.5% from 26.1%. Retail investors are optimistic.
The CNN “Fear and Greed” dropped from 76 last week to 65 this week. You can learn how this indicator is calculated and how it works here: (Video Explanation)
The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) rose to 84.13% this week from 53.54% equity exposure last week.
Our podcast|videocast will be out late today or tomorrow. Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.
*Opinion, Not Advice. See Terms
