“After the monster move we’ve had in the last two weeks, that’s why, on the eve of the big Federal Reserve powwow in Jackson Hole, the averages got slammed. It’s back to reality, and reality can sting.”

“If you remember, after the sudden unwind of the Yen carry trade, the market experienced a sharp decline followed by a remarkable 8-day rebound. During that time, stocks that were performing well surged, and there was hope that struggling stocks would improve once the Fed began cutting rates. However, that was then, and this is now.”

“Since the winning streak ended, we’re entering what I call the “buyer’s remorse” phase. Stocks that had been climbing based on hope alone are now falling hard. Even the prospect of Fed intervention isn’t enough to prevent this decline. The selling might be exaggerated because the Fed is set to speak in Jackson Hole, and Wall Street has already factored in the possibility of a September rate cut—beyond that, it’s unlikely the Fed will announce multiple rate cuts, as some bulls hope.”

“There are also concerns that the Fed might be too late to make a difference, or that traders fear a potential Democratic sweep in November could lead to higher corporate tax rates—bad for earnings—and increased scrutiny on price gouging in supermarkets and drugstores.

I don’t fully buy into the first two explanations. Not everything can be saved by the Fed, as some companies aren’t very sensitive to economic changes. Also, it’s never too late for a rate cut; delays might occur, but the turn is not canceled, except for companies with poor balance sheets. Those companies, burdened with debt, deserve to struggle if they can’t manage their obligations effectively.”

“The third, politics-is-trickier. Before this week, many investors saw President Biden as unfavorable to the stock market due to his pro-labor stance. However, Vice President Harris, coming from California with ties to the tech industry and connections like her brother-in-law Tony West, General Counsel at Uber, was thought to be more business-friendly.

Recent discussions suggest that a Harris presidency might be even tougher on businesses than Biden’s administration. There is a strong focus on criticizing food and drug companies for raising prices, even though the Biden administration attempted to control the prices of some heavily used drugs. Harris’s potential efforts to curb price gouging might face challenges, as large retailers like Walmart and Costco have already done a great job of pushing suppliers to reduce prices to pre-COVID levels.”

“On the campaign trail, Harris might not recognize the distinction between good and bad actors, opting instead to broadly criticize big businesses for taking advantage of the pandemic. These factors might explain some of today’s market weakness, but what concerns me most is a recent prediction from market expert Larry Williams. I respect Larry’s insights and prefer not to contradict him.

“Larry sent us his thoughts on Monday, and he used a term that made me concerned. He said that the rally was “kaput.” Mind you, this was on the eighth day. The word “kaput” has some ominous connotations, right? Especially because we didn’t take out the highs of the averages despite the 8-day win streak. Worse, Larry’s charts showed tough sledding for the S&P 500 next week, led by the most important stock in the entire market—maybe the most important stock I’ve ever seen.”

“Given that the market’s overbought—plus five on the S&P short-range oscillator that I follow—the idea that the rally is kaput has some resonance. It doesn’t help that Nvidia ran up rapidly into the quarter and expectations have gotten out of hand. The stock did a horrible reversal today—just painful to watch.”

“L3 Harris remains strong due to its combination of high-tech and defense, two robust long-term trends. The previous CEO was someone I knew, and while I don’t know the current CEO personally, the company is still solid.”

“I’ll start with consolidated results for the quarter. Demand remains high, and in the second quarter we were awarded over $5 billion in new awards, resulting in a book-to-bill of $1.0, and total backlog of $32 billion. We were awarded a nearly $900 million contract for the delivery of electronic time fuses, which play a crucial role in replenishing our nation’s critical ammunitions inventory. We were also awarded a $1 billion IDIQ contract with an initial task order of $123 million to supply the next lot of multi-functional information distribution systems, jitters terminals to the U.S. Navy, leveraging the unique capabilities of the TDL product line that we acquired last year. Consolidated revenue grew 13% or 1% organically.

Operating margins continued to be strong, expanding to 15.6%, up 80 basis points, reflecting improved operational and program performance across all segments with LHX NeXt cost savings contributing. Chris highlighted our EPS growth of 9% as a result of strong operational performance. I’d like to add that on a pension-adjusted basis, second quarter EPS was up 13% as profitable growth drops to the bottom line. Free cash flow was 714 million for the second quarter driven by increased operating income and improved working capital performance. In the quarter, we repaid a $350 million note which helped reduce our net leverage to 3.2 times down from 3.5 times in the previous quarter. By segment, organic growth within our communication system segment was over 4% from higher production rates and deliveries of resilient communication products.” (Click here to see more…)