Intel, Defense Are Bright Spots as Market Descends Into Ugliness

That was a nasty day for U.S. financial markets. Thursday was the day that the “ugly stick” made its way out of the closet and simply dinged everything it touched. Prices for crude oil futures soared. Brent peaked at nearly $102 per barrel, while the sweet West Texas stuff apexed above $93. Fortunately, those prices have meandered their way back in a bit overnight. The man in the darkened window sees those prices at just about $98 and below $90 as the coyotes and bobcats hunt the neighborhood.

Yields were higher, too, as bond traders prepared for those higher energy prices to force a re-acceleration of both producer- and consumer-level inflation. That increases the likelihood that the Federal Reserve Bank’s Federal Open Market Committee will feel pressure to increase short-term interest rates by September. Hence, the yield paid by the U.S. 10-Year Note ran up to 4.7% while the U.S. Two-Year Note paid 4.36% on Thursday. Those yields have also come in overnight, but ever so slightly. Bond traders are concerned.

Then there were stocks. At the index level, stocks were kicked in the pants on Thursday. It was not just the inflationary fears stoked by oil prices. It was not just the higher cost to borrow, though that does matter greatly. It was earnings. Though earnings season is off to a great start, both Alphabet (GOOGL) and Tesla (TSLA) hurt the stock market on Thursday with their respective Wednesday evening releases.

Alphabet posted a nice enough quarter at the headline level, but huge capital spending on the development of its artificial intelligence program forced the quarterly free cash flow print into the red for the first time since Cain killed Abel. Alphabet not only posted negative free cash flow, but the firm also increased its forecast for full-year capital spending.

Tesla (TSLA) on the other hand, simply had a sloppy quarter. Tesla also suffered from negative free cash flow but also suffered from margin compression as the firm’s headline performance fell short of Wall Street’s expectations and margins fell sharply from the year ago period. All of this made for a less than optimistic bowl of soup for investors all taken in on Thursday. The S&P 500 surrendered 1.21% for the day while the Nasdaq Composite was slapped around for a loss of 2.15%.

That Put All Eyes on Intel

Gang, Intel (INTC) did not disappoint. It crushed both top and bottom-line expectations while providing better-than-consensus guidance for the current quarter. Data center/AI-driven revenue was up 59%. The foundry business showed improvement. This helped stabilize markets overnight after what had been a tough session on Thursday.

What to Do….

When seas get rough, we pull out our basic five-paragraph order. It’s a guide to not just the markets but taking on life itself:

• Understand… Everything is done for a reason that can be easily explained. Deliberate movement in stressful situations reduces the possibility for human error.
• Identify… Take the time to spot areas of weakness, perceived threats, and especially targets of opportunity.
• Adapt… To all changing and changed environments. Become what is required to succeed when and where it is required. This is how you’ll defend yourself. This is how you protect those you love
• Overcome… Find a way. Surrender is not an option. Retreat? Stand and fight. Even in the face of persistent failure, find your inner resilience. Guts and brains are both important. Guts are more important. Without guts, brains are near useless.
• Carry On… Hand the ball to the ref. No spiking the football. Victory? Defeat? Continue on with your mission. Slow is smooth. Smooth is fast. This is the way.

Danger Still Lurks

The problems pressing on financial market performance have gone nowhere. Wear your helmet. Buckle your chinstrap. Change your socks. Three sources of potable water. Rations. Ammo. You’ve got this. Stay vigilant. There are still snakes in the grass and snakes in the grass can always surprise. There are gators in the shallow water and they want to eat your pup.

On Thursday, the U.S. hit 60 economies (80+ countries) with new duties of at least 10% as the Trump administration tries to rebuild the tariff wall that was knocked down by the Supreme Court earlier this year. Countries that have laws on the books meant to combat forced labor were hit with a 10% tariff, while those without such statutes were slapped with 12.5% tariffs.

These new levies went into effect at 12:01 a.m. Eastern time on Friday, as the temporary tariffs that had been in place, expire. Goods covered by separate national security tariffs such as steel, aluminum, autos and auto parts, won’t be subject to the new tariffs. Certain agricultural imports, fertilizers and energy products will also be exempt.

U.S. Pres. Donald Trump said that he is considering a “massive attack” on Iran to push the nation to negotiate a peace deal. In an interview with Axios, the president mentioned that he was “close to making a decision” on these attacks that would be “bigger than ever before.” The president added that Iran isn’t ready to make a deal and “they haven’t received enough pain yet.”

On Thursday, CENTCOM announced that there had been a 13th consecutive night of strikes inside Iran intended to degrade that nation’s ability to strike at civilian commercial vessels in the Strait of Hormuz. Pres. Trump warned “That from this point forth, any and all damages done to Ships, Cargo, or anything related thereto, will be paid for by Iranian Money that the United States has in its possession, and controls.”

There is a rough $2 billion worth of Iranian funds currently frozen inside U.S. borders. A much larger portion is frozen in other countries and is prevented from being transferred by U.S. sanctions. Total estimates vary. Total frozen Iranian assets likely run from at least $24 billion to possibly as much as $100 billion.

At Least We Have Defense…

The large defense contractors are hot. Both Lockheed Martin (LMT) and RTX (RTX) led that group and the industrials at large in a northerly direction on Thursday after reporting impressive earnings. We covered LMT in depth here earlier.

Interesting Chart

“The future ain’t what it used to be.”

– Baseball Hall of Famer and D-Day veteran Yogi Berra

Readers will see that the S&P 500 broke below the lower trendline of our Ascending Triangle on Thursday. Is this a big deal? Possibly.

Keep in mind that while trading volumes were up day over day, those volumes were still light. That makes the resultant price discovery less meaningful technically. So is the Ascending Triangle broken? Not if we expand the timeline for its closure…

Neat trick? You bet….

“It ain’t over ’til it’s over.”

– Baseball Hall of Famer and D-Day veteran Yogi Berra

Economics (All Times Eastern)

09:45 – S&P Global Manufacturing PMI (July-Flash): Expecting 54.5, Last 53.9.

09:45 – S&P Global Services PMI (July-Flash):
Expecting 51.3, Last 51.2.

10:00 – New Home Sales (June): Expecting 610K, Last 580K SAAR.

11:00 – Kansas City Fed Manufacturing Index (June): Expecting 11, Last 19.

1:00 p.m. – Baker Hughes Total Rig Count (Weekly): Last 588.

1:00 – Baker Hughes Oil Rig Count (Weekly): Last 452.

The Fed (All Times Eastern)

Fed Blackout Period.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: AXP (4.41), HCA (7.49), SLB (.51), VZ (1.27)

At the time of publication, Guilfoyle was long INTC, LMT, RTX equity.