Market Insights & Analysis from Kramer Capital Research

When Everyone Else’s Sell Signal Means “Buy”

This was the week everybody discovered the yield curve and how closely it’s linked to recession risk. I don’t know where these people were hiding over the past year.

The middle of the curve started getting tight last August. Segments started inverting on Dec. 3. We discussed it at the time. A few weeks later, stocks rallied.

Since then, bond rates have been stacking up in the opposite direction we normally expect in a healthy economic environment. If anyone on Wall Street was concerned, you couldn’t hear it over the biggest bull run in recent memory.

When those bulls finally ground to a halt, it wasn’t the yield curve that bothered them. Trade wars were on their minds when the S&P 500 fell 7 percent in May and then printed another 7 percent decline in the first week of August.

Now that trade tension has receded again, people who need an outlet for their anxiety are fixating on new ticks on the yield curve. Yes, the curve has seen better days. 

But right now I’ve got to ask every investor I meet: Why is this tick so different from all the others we’ve logged and forgotten over the past year? 

And throughout the trade wars and everything else, does the investment environment today look better or worse than it did a year ago?

Because unless the future looks worse than the past, selling the stocks that you bought back then is either an irrational act or an admission that your initial logic was wrong. 

Rewind to 2018

A year feels like an eternity when you’re in a rollercoaster market every day. But let’s compare 2018 to now for an objective sense of whether stocks truly have run as far as they can.

Last August, top-level forecasts suggested that the U.S. economy would grow 2.4 percent this year. That outlook has cooled only fractionally. We’re probably tracking 2.3 percent growth now.

It’s not hard to see why. The unemployment rate was 3.8 percent then and it’s 3.7 percent now. Consumer confidence remains at its highest level in two decades. 

Corporate performance looks as robust as ever. A year ago we expected the S&P 500 to deliver 10.3 percent growth in the coming calendar year (which was 2019 back then). Now, despite all the shocks and questions, we’re looking for 10.9 percent in 2020.

If you bought the economy last August, I’m still waiting for a coherent argument for why it’s time to sell. 

Everyone on Wall Street, everyone at the Fed and all the private prognosticators have had a year to digest what the twists in the yield curve mean. Their forecasts are in line with mine.

Remember, the trade war was already hot a year ago. Product lists were circulating and 25 percent tariffs on all Chinese imports were on the table.

On that front, the only thing that’s changed is that corporate executives have had a year to pivot their supply relationships to minimize the threat to their margins. 

Revenue for most companies hasn’t gone over any kind of cliff, either. Unless you’re Apple Inc. (NASDAQ:AAPL) or one of about a dozen semiconductor manufacturers, business is actually pretty good.

Earnings haven’t declined much. Interest rates are about where they were headed last August, right before the Fed tightened in September. 

The only difference there is that a year ago we were braced for 2-4 more rate hikes on the horizon. We’re now looking for 2-4 rate cuts.

Catch the Curve, Lose Your Nerve

Of course, these are all just forecasts. It’s easy to imagine a scenario when the economy gets a whole lot worse without any real warning. 

A year from now the growth we anticipate today could evaporate, leaving us in recession territory despite all the Fed’s best efforts and corporate executives’ boldest contingency plans. Is it possible? Yes. 

Is it likely? Nobody who is watching the economy and not the yield curve can see the signs. Is it inevitable? No.

Meanwhile, investors follow the best forecasts we can. We anticipate the likely path our companies will take and plot out contingencies of our own if that future doesn’t actually play out as planned.

That 10 percent earnings growth we saw coming for 2019 a year ago never really happened. It was simply too hard for the market to avoid the drag from big exporters like Apple. 

And as a result, stocks didn’t get the fuel they needed to go anywhere but sideways. The S&P 500 is up less than 2 percent over the past year. Looking back, the index had no reason to rally.

But looking forward, the year-over-year comparisons improve, especially with more relaxed interest rates on our side. Any drag on the economy we see in the next year will be met with relief. 

As of today, it looks like that’s enough to get the growth wheels rolling again. If not, we simply have to roll with the market we have. 

And I’ve got to say, some areas of the economy are still growing too fast for the forecasters to keep up. Over the past year while the S&P 500 nudged up 2 percent, my GameChangers exit scored above 15 percent. 

The curve we were watching was the growth curve. Let the yield curve follow its own path. Day by day, we’re in the market to make money.

CANNABIS CORNER: BIG NAMES IN THE WRONG BUSINESS 

The Big Cannabis cultivators are expanding fast in a dynamic industry, but I’ve steered clear of most of the stocks for an extremely simple reason.

The companies are great. Some of the stocks are broken. And it’s revealing that the Big Cannabis group is down 27 percent since I started the Marijuana Millionaire Portfolio for Turbo Trader subscribers. 

We’re in the strongest name in the group, but even it is having a hard time this week after two of its competitors delivered 2Q19 results somewhere between disastrous and disappointing.

Canopy Growth Corp. (NYSE:CGC) is nominally the heavyweight here, which is why it’s so ominous that sales actually declined from quarter to quarter. 

Admittedly, raising the top line 245 percent from last year is an achievement. However, while Canopy sold 1,200 kilograms more cannabis in 2Q19 than it did in the previous quarter, it booked $4 million less in revenue.

Reading between the lines, Canadian recreational demand is starting to plateau, which means that cultivators like Canopy that built up a lot of production capacity are on the verge of flooding the market.  

This is still a commodity industry. Supply needs to match demand or else prices will decline. Canopy somehow harvested 41,000 kilograms of fresh supply and sold about 25 percent of that on to the retail market.

I’m not surprised the stock is down 14 percent this week, pulling the group down with it. After all, Tilray Inc. (NASDAQ:TLRY) effectively confirmed the bad news.

The company managed to boost its sales at a steep price last quarter, realizing close to 30 percent less per every gram of cannabis it sells into the retail market. That’s not what I like to see.

Shareholders weren’t happy either. The stock is down 21 percent this week. Of course, we aren’t there in Turbo Trader. Our Big Cannabis play is barely bruised.

But I picked it explicitly because it isn’t like the other names in the group. It’s got a much more defensive business model, so it stays under the radar when stocks like Canopy and Tilray are flying. 

Now, however, it’s the best pure play in Cannabis Country. 

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