Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Thursday, Aug. 1. Swiss National Day. Forgive the singing (podcast only). The Bottom Line segment of today’s podcast starts at (5:43) for listeners who want to skip ahead. Be sure to check out the new ‘Stocks on the Contrarian Radar’ segment at the bottom of this page and (7:39) on the podcast.
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State of Play
Stocks rallied yesterday after the Federal Reserve came through with dovish commentary that speaks to rate cuts at the next meeting. After the close Meta (META 0.00%↑) earnings beat estimates. This was tempered by Arm Holdings (ARM 0.00%↑) earnings, which underwhelmed. As we look at our board of indicators for signs of direction at 0650, things are a bit all over the place:
Stock index futures are pointing to small gains. Nasdaq and S&P 500 are up 0.4%. The Russell 2000 which tracks small caps is down 0.3%. Undoing of that rotation trade?
Bonds are continuing their Fed-fueled rally. The 2-year yield is down another 6 basis points to 4.28% whilst the 10-year is also down 6bps to 4.05% (yields move inversely to prices);
Commodities are mixed. The big move is from copper, which is down 1%. WTI crude oil is up 0.7% to trade around $78.50/barrel;
Cryptos are dropping a bit with Bitcoin down 2% to trade around $65,500.
Today’s Known Events
Now that the Fed is out of the way, the focus can return to earnings:
Apple (AAPL 0.00%↑) and Amazon (AMZN 0.00%↑) are the biggest names to report today, doing so after the close at 1600;
Hershey (HSY 0.00%↑) just reported earnings that fell short of estimates;
Shell (SHEL 0.00%↑) reported an increase of earnings (no analyst estimate here) and that stock is up a bit in the pre-market. More on Shell and oil companies below…
ConocoPhillips (COP 0.00%↑) beat estimates and that stock is moving higher;
Canada Goose (GOOS 0.00%↑) earnings weren’t great but management crucially maintained guidance;
Wendy’s (WEN 0.00%↑) fell short of estimates but the stock is rising for whatever reason;
Crocs (CROX 0.00%↑), Roblox (RBLX 0.00%↑), Ferrari (RACE 0.00%↑), Wayfair (W 0.00%↑), and Shake Shack (SHAK 0.00%↑) are among other companies reporting before the open at 0930;
Others reporting after the close include Intel (INTC 0.00%↑), Coinbase (COIN 0.00%↑), Roku (ROKU 0.00%↑), Square (SQ 0.00%↑), DraftKings (DKNG 0.00%↑), Snap (SNAP 0.00%↑), Cloudflare (NET 0.00%↑), Twilio (TWLO 0.00%↑), and DoorDash (DASH 0.00%↑).
Seeing how it’s Thursday we’ll get initial jobless claims at 0830. Economists who were surveyed expect 236,000 new claims, effectively identical to last week’s 235,000 and right in line with the four-week average of 236,000.
The Bottom Line©️
All systems go for looser monetary policy then. The Fed still needs inflation to play along, but the message was pretty clear. Just be careful what you wish for. There are very rarely soft landings, recessions are almost never mild, and there are almost always unforeseen events that cause pain and dislocation.
Maybe the Fed can thread the needle and engineer this elusive soft landing. For now we’re just talking about returning interest rates to a normal level, not to anything below that. Or at least not yet. But if for any reason the Fed does have to reverse course and postpone rate cuts, that will with 100% certainty cause a massive market freak out.
Of course every dislocation brings opportunities in turn. That brings us to…
Stocks on the Contrarian Radar
It may be time to look at oil majors. The premise here is twofold:
interest rate cuts raise the value of industrial commodities, of which oil is the key one. Oil majors can take advantage of this by passing these costs off to consumers;
the Middle East once again faces regional instability. This has been ratcheted up in recent days, but oil prices (and oil stocks) have been slow to react.
There are really only two US oil majors: Exxon Mobil (XOM 0.00%↑) and Chevron (CVX 0.00%↑). Others are international. The same premise applies.
XOM trades at 13.5x forward earnings, which is slightly below the historical median of 15x. It isn’t expensive on a price-to-sales basis, at ~1.3x. The price-to-book multiple (~2x) is less impressive.
CVX is a tiny bit cheaper by those metrics: 13x forward earnings, 1.5x forward sales, 1.8x forward book. Chevron pays out a slightly larger dividend: 4% versus 3.2% for XOM.
CVX reports tomorrow so it may be worth waiting for that. The gamble is of course if they beat earnings, at which point the stock will rally and the buying opportunity will not materialize.
Perhaps a better option is BlackRock Resources & Commodities Strategy Trust (BCX 0.00%↑), a closed-end fund that holds most international oil majors (including XOM and SHEL). This trades at a perpetual discount to net-asset value and offers a better yield of 6.7%. (Full disclosure: The Contrarian has a small position in BCX).
As you can see these three securities all track each other, with XOM the best performer this year:
There are of course any number ETFs to track oil, oil majors, oil minors, etc. Probably these are all beta plays. But as noted yesterday, beta can be quite powerful if timed right.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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