November 2018 Newsletter

Investors long the markets will be happy to see the end of the month of October. The month has seen a swift downside move from highs on October 6, 2018 down to ending the month in correction territory. The market has had a lot of headline risks flashing for several months now but markets in our opinion have become complacent and have steadily risen until the recent slide supported by fiscal policy, mainly tax reform and strong corporate earnings. Consumer sentiment has hit 18 year highs at the same time that household debt reaches record levels. The U.S. labour market remains strong and the unemployment rate remained unchanged at 3.7% (Canada 5.8%).

The consumer confidence number was the strongest level in 18 years. At Cavu Investments we don’t put much weight in the strong consumer sentiment that we point out comes at a time when consumer household debt reaches it’s own highs. It is our view that consumer sentiment is a lagging indicator of a market that is in it’s last stages. We see seasonality as a support to the markets into year-end but we feel that the early October highs reached will not be seen for some time as too many headwinds and risks will persist. These risks include U.S. treasury bonds continuing to climb as the Federal Reserve continues to tightening forcing central banks around the world to also tighten monetary policy at a time when global growth shows signs of slowing and softening.

We continue to sell and advance a defensive posture into year-end selling into strength that should present itself after the November 6th mid-term elections.

With oil beginning the month at lows around $63 a barrel we are adding to our energy positions in (BP) BP PLC. BP reported a third quarter profit , the highest quarterly result for the energy company in five years. With oil at lows we will add to our positions in (BP) and (RDSa) Royal Dutch Shell.  ► BUY LONG (BP) UNDER $43   ► BUY LONG (RDSa) UNDER   ♦ Both energy giants paying 5.7% dividends.
We continue to add to (TBF) as a defensive play on rising rates. ► BUY LONG (TBF) UNDER $24
Store Capital (STOR) is our long hedge against our standing short positions in mall REITs that will be under more pressure if and when we enter an inevitable and long overdue recession sometime in 2019. ► BUY LONG (STOR)  UNDER $29 ♦ 4.3% dividend
(IP) International Papers is to be bought on weakness as a play on growth in e-commerce and a resilient indebted consumer that continues to spend. IP beat on both top and bottom line numbers for Q32018. We will short the retail sector ETF ( XRT) against our IP adds as a hedge and a belief that retail will show signs of slowing from highs in early 2019. ► BUY LONG (IP) UNDER $45   ► SELL SHORT (XRT) ABOVE $48.50

Market Tailwinds:

1.) Any positive talks deescalating the trade and tariff barriers                                                between the U.S. and China.

2.) Continued strong corporate earnings growth

3.) Strong seasonality period including strong market outperformance after
mid-term elections.

4.)  Corporate buy backs

Market Headwinds:

1.) An escalation in tariff and trade tensions between the U.S. and China.

2.) Continued global growth slowdown abroad and in domestic markets.

3.) Rapid rise in interest rates and an aggressive Fed

4.) High consumer debt, Corporate debt and off balance sheet government debt

Markets are finally beginning to diverge with the NASDAQ underperforming the US indices in the month of October. We believe the S&P will drift up post the U.S. midterm elections with our forecast year-end target of 2825. Here is a look at what the S&P has done over the last year.

December 29, 2017    January 26,2018     April 2, 2018       October 3,2018
2673.61                             2877.87                      2581.88                   2925.51

October 29,2018         October 31, 2018
2641.25                            2711.74

(December 28, 2018)
(2825.00)