The Morning Call--Why free cash flow is better than earnings

 

The Morning Call

 

5/12/26

 

The Market

         

    Technical

 

            Monday in the charts.

            https://www.zerohedge.com/markets/oil-stocks-gold-bitcoin-iran-peace-deal-hopes-plunge

 

Summary: Stocks decoupled from the angst in the Middle East (fragile ceasefire, mulling military action) once again today with a big short-squeeze lifting Small Caps (not tech-led today) as oil prices and bond yields rose in sync (along with VIX). Gold, Silver, and Crypto were also higher as the dollar drifted lower from overnight highs. “An agreement remains elusive and risks remain elevated,” said Mark Haefele at UBS Chief Investment Office. “Both sides remain under pressure to conclude a deal.” It's not going according to plan for Trump...

 

            Monday in the technical stats.

            https://www.barchart.com/stocks/momentum

            https://www.barchart.com/stocks/market-performance

            https://www.barchart.com/stocks/sectors/rankings

            https://www.barchart.com/stocks/signals/new-recommendations

 

 

            The Market remains in a feeding frenzy.

            https://www.zerohedge.com/markets/market-remains-feeding-frenzy-upside-goldman-partner-warns-price-action-has-whiff-2000

 

Summary: Call skew has gone vertical. CTA is fully long. Vol control is still mechanically supportive, though given we keep realizing volatility to the upside it’s unclear how much incremental buying they’ll actually contribute.We live in a structurally higher volatility market now…and I think one where owning gamma will continue to pay. Underneath the surface you are still seeing signs of fracture in the consumer and breadth is basically back toward the lows again. Let’s hope memory prices keep going up…because the energy situation still feels very far from resolved.

 

            Options extremes mean increasing fragility.

            https://www.zerohedge.com/markets/options-market-has-flipped-top-goldman-trader-warns-gammaskew-extremes-mean-increasing

 

Summary: when dealer gamma and skew become this extreme, markets can also become more fragile than they initially appear because so much stability is already embedded in positioning. The market has gone from pricing fragility to pricing durability in an exceptionally short period of time – and the options market is reinforcing that shift almost daily through long gamma positioning and historically complacent skew levels. That does not necessarily mean the rally ends here, but it probably does mean downside hedges are materially cheaper than the broader macro narrative currently implies.

 

            Self-fulfilling surge is stocks is nearing a breaking point.

            https://www.zerohedge.com/markets/self-fulfilling-surge-stocks-nearing-breaking-point

           

Summary: The melt-up phase of the stock market is in full swing, driven by flows and headlines. At the same time, the intensity of the ascent brings a potential sharp reversal closer. “The simple, winning investment strategy has been ‘long AI, short macro.’ It’s clearly not that simple, but spring is here, and optimism is in the air, with all the usual anxieties that things could go wrong,” says Chris Iggo, chair of the Investment Institute and CIO for AXA IM Core, BNP Paribas Asset Management. “We must remain sensitive to worst-case-outcomes – more expected disruption to energy flows, higher prices, non-linear macro effects if supply is significantly impacted,” Iggo says. “Stagflation, as a narrative, sits alongside debt unsustainability, excessive equity valuations, and the demise of fiat currencies as cataclysmic ‘might happen’ outcomes.”

 

            Tech valuations approaching nosebleed levels.

            https://talkmarkets.com/article/documenting-the-rally-1778520185

           

            The melt up.

            https://awealthofcommonsense.com/2026/05/the-melt-up-2/

 

    Fundamental

 

       Headlines

 

              The Economy

 

                        US

 

The April small business optimism index was 95.9 versus predictions of 96.1.

 

                          April existing home sales rose 0.2% versus consensus of +2.1%.

                          https://bonddad.blogspot.com/2026/05/existing-home-sales-prices-and.html

 

                                                  April CPI was up 0.6%, in line; core CPI was up 0.4% versus +0.3%.

                                                  https://www.zerohedge.com/personal-finance/us-consumer-prices-are-rising-their-fastest-3-years

 

                        International

 

March Japanese household spending fell 1.3% versus estimates of +0.6%; the March preliminary lading economic indicators index was 114.5 versus 114.6.

 

The April German CPI was +0.6%, in line.

 

The May EU economic sentiment index was -9.1 versus expectations of -20.0; the May German economic sentiment index was -10.2 versus -19.3; the May German current conditions index was -77.8 versus -77.5.

 

                        Other

 

                          Latest Q2 GDP nowcast.

                          https://www.capitalspectator.com/nowcast-points-to-steady-us-growth-in-q2/

 

                          Hassett versus reality.

                          https://talkmarkets.com/article/hassett-gdp-growth-north-of-four-north-of-five-north-of-even-six-percent-1778516499

 

            Iran

 

              The US’s biggest miscalculation on Iran.

              https://talkmarkets.com/article/the-uss-biggest-miscalculation-on-iran-1778273623

 

            China

 

              China locked and loaded for a fight with Trump.

              https://www.nytimes.com/2026/05/11/business/trump-xi-economic-warfare.html?unlocked_article_code=1.hlA.FJH7.O_CQzsXnuBuv&smid=url-share

 

            The Financial System

 

              KKR invests $300 million in struggling private credit fund.

  https://www.bloomberg.com/news/articles/2026-05-11/kkr-injects-300-million-into-struggling-private-credit-fund?accessToken=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJzb3VyY2UiOiJTdWJzY3JpYmVyR2lmdGVkQXJ0aWNsZSIsImlhdCI6MTc3ODUyMDg5MywiZXhwIjoxNzc5MTI1NjkzLCJhcnRpY2xlSWQiOiJURVVCRzNLSzNOWTkwMCIsImJjb25uZWN0SWQiOiJCMzFCNTRDQTI3MTE0NjAxOUQxMURCN0IxRUM4NTE2MyJ9.2FzSSVSmG0a1zRDudnxozjv1RM4PNmPYwHwI3ZpPPR

 

 

              The Milken Conference---blissful ignorance.

  https://www.ft.com/content/383df7c6-7111-49df-82ef-899bbdb3e419?accessToken=zwAAAZ4EO8qVkc84PffGcRFJ39OC74mbvbPkGQ.MEUCIQDJj9zk0hT2I-EFIy4BjlRn1BaUTC8Q4eZM4MsRQdP6HAIgKsKYc8ifx0YW8pxn5WRQW9RWYKEbR520Q3GYRQ-GArw&sharetype=gift&token=25f64fab-e232-4abd-8af1-1cb8808fd8e2&syn-25a6b1a6=1

 

 

     Investing

 

            The S&P is no longer a diversified index.

            https://www.apollo.com/wealth/the-daily-spark/top-10-companies-account-for-34-of-profits-in-the-sp-500

 

            Stable jobs + hot inflation + no rate hikes = bullish stocks.

            https://www.carsongroup.com/insights/blog/stable-jobs-hot-inflation-no-hikes-bullish-equities/

 

            The argument against a commodity super cycle.

            https://www.advisorperspectives.com/commentaries/2026/05/11/commodity-supercycle-enemy-bull-thesis

 

            Counterpoint.

            https://talkmarkets.com/article/the-dollar-is-screaming-inflation-and-hard-assets-are-confirming-it-1778520679

 

            An important factor in dividend growth investing.

            https://www.advisorperspectives.com/commentaries/2026/05/11/billionaires-know-investing

 

            Why free cash flow is better than earnings.

            https://talkmarkets.com/article/why-free-cash-flow-is-better-than-earnings-1778521490

 

    News on Stocks in Our Portfolios

 

 

 

What I am reading today

 

            Then why are you poor?

            https://www.realclearmarkets.com/articles/2026/05/11/then_why_are_you_poor_what_academic_finance_still_doesnt_get_about_markets_1181850.html

 

 

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.

 

 

 

Monday Morning Chartology

 

The Morning Call

 

5/11/26

 

The Market

         

    Technical

 

There is just no quit in this Market. The S&P was up for the week, making a fourth gap up open on Friday. The technicals remain ‘full steam ahead’ with the S&P (1) making another new all-time high, (2) above all three DMAs and (3) in uptrends across all timeframes. The technical question in my mind is how long can this sprint higher last without a correction?

 

 Clearly, the stock market is brushing off any worries related to the destruction of the Middle East oil infrastructure and the accompanying surge in oil prices as well as the problems in the private credit market. I am not sure if  (1) this is a buy-the rumor-sell-the-news situation, (2) investors correctly believe that earnings growth will continue at its current pace irrespective of the damage being done by the destruction of the Middle East oil infrastructure and I am wrong to be worried or (3) investors incorrectly believe earnings growth will continue at its current pace irrespective of the damage being done by the destruction of the Middle East oil infrastructure I am right to be worried.

 

Color me clueless. But the longer that the economy continues to perform and the Market smokes, the more likely the answer is behind door (2).

 

As an aside, this weekend the number of ads by trading apps popping up on my iPad outnumbered those for chair tai chi. Historically, when the trading frenzy reaches the point where Wall Street (?) is chasing $20 brokerage accounts, the end is not far away.      

 

As you know, I approached this upside move cautiously---which couldn’t have been more wrong. Nonetheless, I am loath to chase this upswing, especially with (now) four gap up opens sitting below. The only good news in this trading error is that a number of stocks on my Buy List have remained within buying parameters. So with any retreat, I can make a delayed entry.

 

 

 

Upside panic.

https://www.zerohedge.com/the-market-ear/spot-vol-upside-panic

 

Summary: This no longer feels like a normal bull market. It increasingly feels like a reflexive momentum event driven by upside panic, call chasing, and fear of missing the melt-up. Vols have remained rather well bid over the past few weeks. NDX volatility has actually risen alongside the rally in May, with the VXN catching strong bids even into Friday, effectively an “inverse” weekend effect. Investors are increasingly entering must-show tech exposure mode, and the easiest way to express that is through upside call chasing. That’s very late-stage behavior.

 

The Market’s feedback loop will self-destruct.

(3) The Market’s Feedback Loop Will Self-Destruct

 

 

 

 

 

 

TLT rallied modestly last week, bouncing off the lower boundary of its very short term trading range. However, it remains below all DMAs and in downtrends across all major timeframes. With stagflation the likely result of the destruction wrought on the oil infrastructure and a spendthrift government, I am hard pressed to think that bond prices are going to improve markedly.

 

           

 

 

 

 

 

Gold remains in a very short term downtrend marked by the top and now two lower highs. I am watching to see if it makes a second higher low or continues its downward momentum. The good news is that it remains in uptrends across all time frames. Confusing the issue is that it now has a gap down open overhead and a gap up open below.

 

Technicals signal that the gold, silver, miners rally is over.

https://talkmarkets.com/article/gold-silver-and-miners-amid-new-levels-of-absurd-1778263058

 

 

 

The dollar tried to rally, failed and could not challenge its 50 and 200 DMAs (both remain resistance) and now challenging its 100 DMA to the downside. The good news is that it now has three gap down opens overhead that need to be filled. That said, I continue to believe that the macroeconomic backdrop of the US economy (rising inflation) suggests a low to lower dollar.

 

 

 

 

 

            Friday in the charts.

            https://www.zerohedge.com/markets/peace-hope-ai-hype-sink-crude-dollar-lift-gold-stocks-week

 

Summary:  An incessant stream of AI/Chip-deal headlines (combined with strong/hyped earnings/outlooks), and increasing hopes of a US-Iran peace-deal (ceasefire stability / product shortages?) pushed stocks higher as oil sank this week. Bonds were caught in the middle - going nowhere (even with today's firm jobs data). Gold gained ground as the dollar dipped (more Yentervention) and bitcoin ended up for the 6th week (major ETF inflows). The simple passage of time will cause dealers to start to sell even if the market remains up here (charm).

And likewise, if tensions in the Middle East don’t pick up and implied vol falls, dealers will have to sell down their hedges (vanna).The core idea here is that implied volatility is set to have continued contraction as we approach OPEX and as traders wait for NVDA on 5/20. NVDA 5/20 also lines up with VIX expiration on 5/19 making that a great mark for volatility to expand. Until then, peace deals, even if just alleged, should continue to keep traders' minds off of tail risks. These are the mechanics, but the takeaway is: intense speculation in a very narrow part of the market rarely ends well.

 

 

Last week in the charts.

https://bilello.blog/2026/the-week-in-charts-5-7-26

 

                Friday in the technical stats.

            https://www.barchart.com/stocks/momentum

            https://www.barchart.com/stocks/market-performance

            https://www.barchart.com/stocks/sectors/rankings

            https://www.barchart.com/stocks/signals/new-recommendations

 

Monday morning setup: US equity futures are off a touch as the US/Iran failed to consummate a deal, which is boosting Energy commodities and bond yields. Still, stocks have withstood the resulting increase in oil prices and higher bond yields as the market remains focused on the memory/semi stock bubble. As of 8:00am ET, S&P and Nasdaq 100 futures are down fractionally as Trump and Iran rejected each other’s latest peace proposals to end the 10-week conflict as the two sides struggle to maintain a fragile ceasefire. In premarket trading, semis are bid again after surging to a record high on Friday, Mag7 are mostly lower as early action points to Defensive positioning with Energy plays acting as a long hedge. European stocks are lower, reversing earlier gains in Asia, there driven by the AI Theme / Memory as Korean indices added 4-5%, and were briefly halted at the +5% trigger. Bond yields higher across the world on fears of an oil-driven inflation shock and expectations of central banks tightening monetary policy. The 10-year Treasury rate rose four basis points to 4.39%. The dollar edged 0.1% higher, while gold dipped below $4,700 an ounce. In commodities, the Energy complex is leading but WTI remains below $100/bbl, and off session highs, silver is outpacing gold as base metals are bid, and Ags are mixed. Today’s macro data focus is on existing home sales (10am ET) before kicking off a data-heavy week highlights by CPI, PPI, and Retail Sales. Fed speaker slate empty for the session.

 

    Fundamental

 

       Headlines

 

              The Economy

 

The US stats tilted to the positive side last week with the primary indicators also upbeat (two plus, one neutral, none negative) and no inflation measures. Overseas, the data was slightly positive with no inflation readings.

 

We still aren’t seeing any significant economic effects of the Iran war and the turmoil in the private credit market in the US numbers. The only explanation I have is that the enormous AI spend is offsetting these negatives; and there appears no end is sight for that factor.

 

There were a couple of new (negative) developments in private credit market. So after a couple of weeks of seeming calm, it appears that this problem is not going quietly into the night. Still, most of the analysis (which I have linked to) suggests that while there will almost surely be some negative fallout, it is unlikely to reach the order of magnitude of the great financial crisis.

 

Bottom line: the economy is performing above my prior expectations (‘muddling through’) and will likely continue to do so given (1) US energy independence, and (2) the level of AI spend. So I am stepping up my economic growth forecast. On the other hand, the lack of price data last week notwithstanding, I remain firmly convinced that above average inflation is part of our near/intermediate term future.

              https://wolfstreet.com/2026/05/07/construction-spending-on-data-centers-factories-chip-plants-powerplants-office-buildings-boom-at-one-end-bust-at-the-other/

 

                        US

 

The May consumer sentiment index came in at 48.2 versus consensus of 49.5.

https://www.advisorperspectives.com/dshort/updates/2026/05/08/michigan-consumer-sentiment-falls-further-to-another-record-low

 

                        International

                       

                          April Chinese CPI was up 0.3% versus expectations of -0.1%.

 

 

                        Other

 

                          A deep dive into last Friday’s jobs report.

                          https://bonddad.blogspot.com/2026/05/april-jobs-report-reversals-in-2025.html

 

                          China rebalancing the oil market.

  https://www.bloomberg.com/opinion/articles/2026-05-08/iran-war-china-s-invisible-hand-is-rebalancing-the-oil-market?srnd=homepage-americas&sref=loFkkPMQ

 

Summary: China has slashed its oil imports by about a quarter from prewar levels, making more crude available to the wider market and reining in oil benchmarks.

The country's state-owned oil companies have been reselling some of their oil cargoes to European and Asian rivals, suggesting surpluses, and tanker-tracking data estimates China is buying just 8.2 million barrels a day of crude from overseas.

The import drop is not fully explained, with possible factors including weaker economic activity, increased use of coal-to-chemicals, and running down hard-to-track inventories of semi-finished plastics and other chemicals.

 

 

                        Iran

 

              Overnight news.

                          https://www.zerohedge.com/geopolitical/very-wide-gap-between-us-iranian-positions-tehran-blasts-white-house-unreasonable

 

 

            Fiscal Policy

 

              Government debt crosses above 100% of GDP.

              https://thedailyeconomy.org/article/us-debt-crosses-100-of-gdp-for-first-time-since-1946-and-this-time-its-different/

 

            Inflation

 

              Inflation is the real story.

              https://www.carsongroup.com/insights/blog/the-labor-market-is-holding-up-but-inflation-is-the-real-story/

 

            Tariffs

 

              Rule of law 2, Trump 0

              https://www.wsj.com/opinion/donald-trump-section-122-tariffs-court-of-international-trade-6890d273?st=hpiCkB&reflink=desktopwebshare_permalink

 

            Gold

 

              Deutsche Bank on gold, the dollar and the monetary future.

              https://www.zerohedge.com/markets/return-history-deutsche-gold-dollar-monetary-future

           

     Investing

 

            How not to invest in times of uncertainty.

            https://behaviouralinvestment.com/2026/05/05/how-not-to-invest-during-times-of-uncertainty/

 

            Earnings revisions are very (too?) optimistic.

            https://www.zerohedge.com/markets/earnings-estimate-revisions-are-very-optimistic

 

            Junk bonds outperforming.

                https://www.capitalspectator.com/geopolitics-inflation-and-a-bond%e2%80%91market-surprise-in-favor-of-junk/

 

            The shift in savings is good for stocks.

            https://giftarticle.ft.com/giftarticle/actions/redeem/78df9824-fa7c-44e3-810f-cdf106655db5

 

            Wall Street’s wisest man.

            https://jasonzweig.com/wall-streets-wisest-man/

 

            The latest from BofA.

            https://www.zerohedge.com/markets/michael-hartnetts-new-favorite-market-sector

 

Summary: Hartnett then adds that "materials also are the candidate to pair in an optimal bubble barbell strategy of long “hubris” (AI & chips today) & long “humiliation” (out-of-favor, distressed cyclical plays lifted by final bubble surge in nominal GDP, e.g. EM in ’99 internet mania, oil in ‘07/’08 subprime/China bubble).: The BofA strategist concludes that materials, consumer, China, UK are all unloved potential pairs with chip mania; but humiliated bonds won’t work... As for AI Big 10, we are now at peak bubble levels, accounting for 40% of S&P 500 market cap, close to peak concentration levels for Nifty Fifty in ‘70s, Japan in 80s, internet in ’90 (but not railroads in 1880s). 

 

 

    News on Stocks in Our Portfolios

 

 

What I am reading today

 

            America’s future: a conversation with Ray Dalio.

            https://www.nytimes.com/2026/05/07/opinion/american-empire-future-ray-dalio.html

 

            Ancient settlement discovered; re-writes North American history.

            https://www.zerohedge.com/political/ancient-settlement-older-pyramids-discovered-rewrites-north-american-history

 

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