Pro Perspectives 2/7/20

February 7, 2020

As we end the week, let's take a look at the state of the big "disruptors" following Uber's earnings report yesterday.
 
It was a little less than a year ago that Lyft IPO'd.  And Uber went public about a month later.  Based on the first day trading of Lyft and the early indications on how Uber would be priced, the ride sharing industry was being valued at an absurd 14 times the size of the traditional rental car industry.  As I said last year, "Lyft and Uber, dumping shares on the public at a combined $140 billion plus valuation, may mark the end to the Silicon Valley boom cycle."

When Lyft went public, Silicon Valley VCs were dumping a company on the public that was doing $2 billion in revenue and losing $1 billion.  Today the company does $3.5 billion and losses $2.6 billion.  

When Uber went public it was doing $11 billion in revenue, and losing $4.2 billion. Now it does $13 billion in revenue and loses $8.7 billion.  

In both cases (Lyft and Uber) we had over-hyped "hyper-growth" companies with slowing revenue growth and widening losses.  Now, less than a year later, the growth continues to slow and the losses continue to widen, and the two companies are worth $85 billion, not $140 billion — in a stock market sitting near record highs.  

The era of paying $1.60 for a dollar of revenue, and then turning back to Silicon Valley for another injection of cash is over.   

The question is, will Wall Street pick up where Silicon Valley left off, funding business models (the "disruptors) that are monopoly hunting/designed to destroy the competition with predatorial pricing?  Unlikely.  More unlikely:  Washington allowing it to happen.  

Pro Perspectives 2/6/20

February 6, 2020

On Monday, we talked about two markets to watch that would likely dictate the sentiment in global markets in the coming days:  Chinese stocks and the Chinese currency (the yuan).

Both opened the week with a big gap down.  But both have since been recovering nicely, driven by the policy response of the Chinese central bank, by the direction of the Chinese government.   

Here's a look at Chinese stocks, up 7% from the Tuesday lows …

Indeed, this has translated into higher global markets, and less fear about a draconian outcome from the coronavirus.

With that, low rates, expanding global central bank balance sheets and a fundamentally solid economy, U.S. stocks are back on record highs.

Supportive of that, we continue to get positive surprises in fourth quarter earnings.  Global manufacturing data (the concern of last year) is bouncing back, following the U.S./China trade deal.  And we're going to get another big jobs number tomorrow.
 
With the impeachment circus now over, and the pandemic threat softening, will Trump turn toward the next pillar of Trumponomics:  infrastructure.
 
It seems unlikely.  In Tuesday's State of the Union address, he only made one mention of it.  And he was urging Congress to pass a transportation bill that's been on the table since mid-19.  This is a fraction of the spend of the $1-$2 trillion deal he was negotiating with Congress two years ago.  Perhaps he's looking to give less and get more of what he wants out of an infrastructure spend.  That would mean infrastructure will be addressed after the election. 

Pro Perspectives 2/5/20

February 5, 2020

As we discussed yesterday, the elaborate measures China took on Monday and Tuesday to shore up the economy and financial markets were a big deal, not just for Chinese markets but for global financial markets. 
 
They articulated their response in a document titled, "Strengthen Confidence and Join Forces to Foster Effective Financial Support for Epidemic Control and the Real Economy."  You can see it here.  This document laid out the coordinated effort in China, under the direction of President Xi, and was explicit in their confidence and efforts to become the "put" for global markets.  So far, mission accomplished.  

If there's one thing we know from the events of the past decade (post-financial crisis), with $3 trillion in currency reserves, a pegged/artificially weak currency, and with global trade partners unwilling to poke the bear, they can print yuan and fund whatever they need or want to. 

In early 2009, when commodities were crushed under the weight of a global credit freeze and demand destruction, China came in as the big buyer, "building strategic stockpiles" (as it was described in a Bloomberg article at the time).  Commodities bounced sharply from the lows …

Despite a global economy that was still sucking wind for the years following the failure of Lehman Brothers, oil went from crashing to from $147 to under $30, to running back up to $100/barrell …

With the above in mind, as I said yesterday, I suspect they turn to the beaten-down commodities markets next and start stockpiling cheap commodities again.

Here is what that broad commodities chart looks like now …

Pro Perspectives 2/4/20

February 4, 2020

In the face of a pandemic threat, yesterday we talked about the two spots to watch in the coming days that will dictate broader global market sentiment.

One was Chinese stocks.  The other was the Chinese currency (the yuan).

It turns out, it was the yuan, overnight, that set the tone for an explosive rally today in global stock markets.   

As we discussed, the currency is where we see China's perception on how economically damaging they perceive the coronavirus to be.  Weakening the yuan has been the go-to tool for priming exports and pumping up economic activity in China for three decades.  When things get bad, expect them to weaken the yuan. 

After weakening the yuan more than 1% on Sunday night, to above the 7 yuan per dollar level (a big psychological level), the expectation was for another adjustment lower.  But the Chinese central bank reversed course, and reset it back under 7.00. That was a signal.

It may seem like trivial adjustments in the currency, but what China does with the yuan is (and has been) a major policy signal.  Importantly, they accompanied this with another injection of liquidity into the system.  This adds up to a quarter of a trillion dollars pumped into the financial system since Sunday, to keep credit flowing and to (in their words) "keep ample liquidity in financial markets."  

So, with a ban on shorting Chinese stocks already in place, and a war chest of capital at the disposal of state-owned banks and brokerages, what do they do with all of that cash?  They go on a buying spree, to stabilize not just domestic markets, but global markets. 

This massive buying interest was clear across Asian stock markets very early in the session overnight.  It was unabated, and that carried on through Europe and the U.S.  What is behind the big surge in Tesla, up 44% in two days?  Likely a huge, relentless buying wave from China, which has forced the short sellers to run for the doors (exacerbating the move).   

So, does this move in the currency overnight reflect optimism about the coronavirus outcome?  Maybe.  What it does signal is that China can, and is willing to, print unlimited money to (in their words) "prop up" the financial market.  My guess is that they turn to the beaten-down commodities markets next and start stockpiling cheap commodities (again, as they did in 2010).

Pro Perspectives 2/3/20

February 3, 2020

The Chinese stock market re-opened overnight, after being closed for a week, for the Lunar New Year.  That holiday week just happened to coincide with the outbreak of the coronavirus. 

So, heading into what was promising to be a disastrous day for Chinese stocks, the Chinese government got in front of it with large intervention — injecting $174 billion into the markets (adding to bank liquidity).  That gave the banks a deluge of cash with which they undoubtedly became buyers of stocks — helping that effort, the Chinese government suspended short selling.  And we got this big 9% gap down on the open, and drift higher.   

Meanwhile, the Chinese government moved the value of the yuan back above 7 yuan per dollar (the orange line rising represents a weaker yuan, stronger dollar). 

These two spots (stocks and the yuan) will likely dictate the sentiment in global markets in the coming days, unless there is new news on the trajectory of the pandemic threat.  The extent to which the Chinese government walks down the value of the yuan will be a good gauge as to how economically damaging (and uncertain) they perceive this health crisis to be.  

Because of this chart …
China's economy, the second largest in the world, has already been running at recession-like economic activity, before the outbreak. It's hard to imagine that number not plunging considerably in Q1, despite the massive liquidity injection.  CNBC said half of China is shut down, and those parts accounted for more than 80% of national GDP last year. 
 

Pro Perspectives 1/31/20

January 31, 2020

We end the week and the first month of the year, with continued unknown on how the coronavirus will play out. 

And tonight is the formal exit of the UK from the European Union (the famed Brexit). 

With that, there continues to be de-risking in markets. 

Let's take a look at some charts as we head into the weekened …

Here's a look at UK stocks.  The FTSE is up 25% from the 2016 Brexit vote.  It is now, as of today, trading below the 200-day moving average.

 

Here's a look at U.S. stocks…

It was last Friday that we had a sell-off into the weekend driven by a spike in coronavirus fear, which created this technical reversal signal for stocks.  As I said, even with the very positive fundamental tailwinds for stocks, that technical signal was hard to ignore.  And that signal has worked thus far.  We now have a break of this trendline, which represents the rise in stocks following the verbal agreement on trade between the U.S. and China back in October.

We have a similar line that has given way in German stocks. 
So, we close the week with global stocks looking bearish.  U.S. yields are just above 1.5% — this is getting near the level in yields marked by major inflection points for the global economy over the past seven years: the potential Italian and Spanish debt default in 2012, the Brexit vote in 2016, and the ugliest moment of the U.S./China trade spat in August of last year.  
 
That said, this level of uncertainty isn't showing up in the VIX, which trades at just under 19.  Investors aren't paying up for hedges. 

Pro Perspectives 1/30/20

January 30, 2020

Today, the behavior in stocks and interest rates had market participants contemplating a significant drawdown in stocks, and the onset of panic surrounding the pandemic threat.

By the end of the day, with stocks climbing well off of the lows, the focus has shifted to the four trillion-dollar giants (Microsoft, Apple, Google and Amazon) – two of which crushed Q4 earnings estimates today.

So, we have Q4 corporate earnings that continue to look strong.  And that supports the data on the economy, which is good — a very strong consumer with an outlook for improvement in investment, government spending and better (post-trade war) exports. 

But with numbers rising on the coronavirus, we have an overhanging risk. 

Sound familiar?   

Think about all of the events along the way over the past ten years: the near global economic apocalypse, there was Cypress, Greece, the near defaults of Italy and Spain, the debt ceiling sagas, government shutdowns, Russia/Ukraine, threats from North Korea, the Ebola scare, an oil price crash, Brexit, trade war and more.

 
All of these were threats that carried the potential of huge negative, and global, consequences.
 
But throughout, what mattered most, for the economy and for markets, was globally coordinated intervention, mainly in the form of monetary policy. The central banks were in charge. They were promoting growth and stability through QE and through an explicit commitment to act against shocks.  Amazingly, that continues to be the case.   

Pro Perspectives 1/29/20

January 29, 2020

The Fed held steady today on rates, as expected.  What about the balance sheet?

In their December communication, the Fed said it would continue expanding the balance sheet,  at least through January (this month).  Today, they extended that timeline through "at least the second quarter of 2020."   

Since September, the Fed has gone from shrinking the balance sheet, to expanding it at the fastest pace since the early days of the financial crisis.  Stocks have gone up. 

But more importantly for stocks, than just the Fed's actions, has been the broader reversal of the global liquidity (from contracting, to once again expanding). 

Remember, the gut punch for stocks was December of 2018, when the ECB ended its QE program, and the Fed continued to telegraph a smaller balance sheet.  That signaled the reduction of global liquidity.  And stocks didn't like it.   Prior to that, the ECB and BOJ has been offsetting the Fed's balance sheet reduction.  When the ECB thought that they too could step away, that's when global markets became unsettled.  

Bottom line, global central banks (led by the Fed) are back in the mode aggressively promoting growth, and playing defense against any potential shocks.  And for the Fed’s part, they’ve made it clear that they are staying in this position until they see significant and sustained inflation (above their 2% target).  This, even though the very risk that put them in this position has since cleared (i.e. the dark clouds of an indefinite trade war).

  

With that, the bubbling up of the pandemic threat, going into this month’s Fed meeting, probably made Powell’s job a little easier to defend their stance today. 

Pro Perspectives 1/28/20

January 28, 2020

Yesterday we talked about the prospects of the "coronavirus narrative" giving way to the power Q4 earnings.  

That was the case today.

Remember, we're in the heart of fourth quarter earnings, with 35% of the S&P 500 reporting this week.  And the tech giants are leading the way.  We heard from Apple and Ebay after the bell today (both beat).  We hear from Microsoft, Amazon and Facebook tomorrow. 

Overall, the table has been set for earnings beats.  As I've said, never underestimate the appetite of Corporate America to lower the expectations bar when given the opportunity.  They did so in their third quarter calls, taking advantage of the global uncertainty surrounding trade.

And now we're getting about seven out of every ten companies beating Q4 estimates.  And with a trade deal now papered, the outlook expressed in these Q4 earnings calls is as good as we've seen from corporate America since early 2018 calls, which followed the big corporate tax cut.    

With the focus turning toward earnings, we looked at this big trendline support yesterday in stocks.  

As you can see, we did indeed get a nice bounce from this line. 

And with that, we had a fall back in the VIX from what is relatively subdued levels, for what has been scrutinized as a pandemic threat.  

Pro Perspectives 1/27/20

 

January 27, 2020

On Friday we talked about the rising pandemic scare, and the related bearish technical signal that formed on stocks, as we headed into the weekend.

With that, the likelihood of more coronavirus headlines going into the weekend was high, and therefore the likelihood of a tough to start to the week for global markets was high.  Indeed, global stocks open the week down big.  U.S. stocks have now given back the gains on the year (up 3% at one point).  And the VIX (the fear gauge) is rising, albeit fairly modestly so far (from 14 to 19).  Gold, same thing (rising but fairly modestly).

This market behavior suggests what’s probably a rational response to the coronavirus risk to the global economy (i.e. a risk, but a low risk).  Remember, back in 2014, when fear spiked about Ebola, the stock market got hit for about seven percent in six days.  The VIX spiked from 14 to 31.  But stocks recovered the losses in just seven days.  The VIX returned to “pre-scare” levels within days too.  For more insight into stock market behavior and historic pandemics and pandemic threats, here’s some interesting 2006 research from Fidelity when bird flu was spreading (link).

So, in this current case, stocks are again being sold for non-company specific (non-fundamental) reasons.   That typically is a gift to buy at cheaper prices (i.e. to fade the risk-aversion move in markets).  But how much cheaper?

Let’s take a look at some charts …

We have some interesting technical levels already developing in key stock markets.

U.S. stocks end the day on this big trendline that represents the recovery that has been driven by 1) the handshake on a U.S./China trade deal back in October, and 2) the Fed and ECB’s return to balance sheet expansion.

German stocks sit on a similar trendline …

What could overwhelm the coronavirus theme?  Earnings.  And we have a big earnings week ahead – 35% of the S&P report this week.  Apple reports tomorrow after the close.  And then Wednesday, we get Microsoft, Amazon, Facebook and Visa, to name a few heavyweights.