October 25, 2019
As I've said, with the regulatory screws tightening on the disruptors, we may finally be entering the stage where we see the disrupted/survivors, competing, if not beating the disruptors. If the "giants of industry" have moved aggressively to align with the changing economy, they have the distribution, in many cases, to be the ultimate winner.
We're seeing it with Microsoft and Amazon (maybe signs of it).
Remember, thanks to the strategy reset that took place five years ago, Microsoft is part of the duopoly in cloud computing (and taking share). MSFT grew cloud revenue by 59% last quarter. Amazon grew AWS (cloud) revenue at 35%, the slowest rate in the five years. How have the stocks done?
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Microsoft has transformed and become one of two trillion-dollar companies (along with Apple).
Let’s revisit the Walmart/Amazon battle too — another great example. The market has priced Amazon like a runaway monopoly — killer of all industries, especially retail. And the perception has been that Walmart was destined to become another rise and fall story of a dominant American retailer. Sears, Toys R Us and about 70 other retailers have gone under in the last four years. But Walmart has been transforming. Walmart has been aggressively investing in online. They bought Jet.com in 2016, an American online retailer. That same year they took a large stake in the number two online retailer in China, JD.com.
JD.com already has a big share of ecommerce in China. They are number two to Alibaba, but gaining ground due to some clear competitive advantages. JD owns and controls its logistics infrastructure, and does quality control from the supplier to delivery. And unlike Alibaba, JD sources product to its warehouses to fight the counterfeit goods risk – a big problem in China. JD has 500+ warehouses around the country, and they now source product and service customers from one of the more than 400 Walmart stores in China.
So Walmart is positioned well to take advantage of the growth in the middle class in China. Amazon has yet to find its way in China. It has about 1% market share. Add to this, Google came in last year with a $550 million investment to help position JD to challenge Alibaba and Amazon on a global scale. Walmart is still about a third of the value of Amazon, but the gap has been closing (slowly). Lastly, let's look at Netflix and the response underway at Disney. In recent years, Netflix has been thought to be taking over the entertainment industry with its disruptive direct-to-consumer model. Fox responded early and aggressively (thanks the activist investor, Jeff Ubben). They made an aggressive move to build the direct-to-consumer model (taking stakes in Hulu, Star India and Sky). That set the company up as an acquisition target. And now with the Disney acquisition of Fox, Disney is positioned with a dominant duel threat — among the world's deepest and most valuable library of content and the distribution to take it to the consumer. This makes the world's preeminent entertainment company. The result? Disney's valuation has leapfrogged Netflix. Disney now has a market cap of $236 billion. That's twice the value of Netflix now. October 24, 2019 The ECB met this morning and made no adjustment to the plans to restart QE. Why does the ECB matter?
Remember, by the ECB ending it's three-year QE program last December, a stabilizer of global liquidity was removed – an offset to the Fed's QT was removed. With that, a shrinking global balance sheet of the top three central banks in the world proved disruptive for global markets and the global economy. We now have the ECB back in the QE business. And the Fed has not only stopped QT, but is now expanding its balance sheet again. This was Mario Draghi's last meeting and press conference as head of the ECB. This is the man that led the strategy to avert disaster for Europe and the global economy back in 2012. A contagion of global sovereign debt defaults were lining up in Europe. And the second most widely held currency in the world, the euro, was vulnerable to a break-up. To stop the meltdown, Draghi publicly threatened/vowed to become the backstop in the European government bond market. Here's what he said in a July 2012 speech: "the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." The imminent risk was sharply rising yields in the big, dangerous weak spots in Europe: Spain and Italy. Speculators were hitting the bond market, yields were rising to unsustainable levels. Spain and Italy were on the path of default and once one went, the others would fall. The next step would mean these countries leaving the euro, returning to national currencies and inflating away the debt through currency devaluations. It didn't happen because Draghi stepped in. With the statement above, he threatened to be the unlimited buyer of these troubled government bonds, which was enough to purge the speculators from the market. Quickly the yields on those bonds plunged, without Draghi having to buy a single bond. Here's what the chart of those bond yields looks like … |
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Trouble in Europe means trouble for the global economy. So, when the rules aren't working, don't underestimate the appetite of policymakers to change the rules. That's what Draghi did. He backstopped the bond crisis, and later launched QE. The global economic recovery was back on path.
Now, in this post-financial crisis world, as long as everyone's fate is interconnected, there are few, if any, market penalties for what may seem to be desperate, dangerous and profligate actions. With that, we've talked about the prospects of the ECB turning to the stock markets — to become buyers of stocks, to help boost wealth, confidence, hiring, spending and investment. When Draghi was asked today about the options the ECB has to enlarge the composition of the asset purchase program, he ignored the question and went into a long-winded answer about something else. That's the elephant in the room. The WSJ ran a piece today saying the ECB would run out of bonds to buy by the end of next year — proposing equities as an option. October 23, 2019 The European Central Bank will meet tomorrow. Remember, in September, they announced they would restart QE.
We've since had softer euro area inflation, manufacturing and confidence data — and softer manufacturing data, globally. Now, the ECB's decision to get back in the QE business was clearly driven by the downside risks associated with an indefinite global trade tensions and the prospects of no-deal on Brexit. And we now have what looks like a deal on U.S./China trade and Brexit. Problems solved?
No. While potentially dialing down tariffs on China, Trump slapped tariffs on Europe. And while Europe now has more certainty the terms of Brexit, they have to manage the downside risks of the outcome.
So, will they have to up-the-ante? Yesterday we revisited the "bazooka" option for the ECB: buying stocks. Why would they buy stocks?
As we discussed last month, negative rates haven't worked in Europe, because the policies aren't forcing savers into higher risk assets. It's not in their culture to buy stocks. The ECB's explicit presence in European stock markets would reduce the risk premium in stocks, which incentivizes capital flows out of negative yielding bonds and into higher returning stocks. And a higher stock market would go a long way toward driving, confidence, investment and ultimate economic demand. With this in mind, European stocks continue to be the spot to watch. European blue chips have a long way to go to catch up with the peformance of U.S. blue chips over the past decade, and the past five years … |
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October 22, 2019 We've talked about the Brexit deal over the past few days.
The deal that was struck between the UK Prime Minister and EU officials last week, was indeed approved by Parliament today!
However, what wasn't approved today, was the timeline on how long it will take Parliament to agree on how to legislate it. With that, the formal exit of the UK from the EU may happen at the end of month, or may not. The ugly process of law making will likely take longer than nine days, but importantly, this continues to signal that both sides are ready to move on — as we've seen in the case of U.S./China trade dispute. The removal of uncertainty is good for the global economic outlook. But EU officials now have more certainty on what the deal looks like for Europe. With the above in mind, we have a big European Central Bank meeting on Thursday. Remember, last month, the ECB announced that it was going back in the QE business, to start buying assets again in November. Their stated plan, at the moment, is not to change the asset mix from their past asset purchases, which consists of corporate and sovereign bonds. The question is, will the ECB step up the firepower, to manage any increased downside risks associated with the terms of the Brexit deal? As we've discussed here, adding European equities would be the "bazooka" of monetary stimulus for the European economy. Learn more about my premium stock-selection and portfolio service here.
October 21, 2019 We entered the weekend with another big vote due in the UK on Brexit (perhaps a final vote).
What did they do? They delayed it. But the delay came with an amendment that makes a "no deal" Brexit less likely. With that, and with the drama last week in Brussels, it looks almost like Trump's deal with China. It looks like capitulation from both sides in both issues (Brexit and U.S./China trade). Everyone seems to be acknowledging, given the state of the global economy, it's time to move on.
Most importantly, for markets, this looks like we have removed another overhang of uncertainty. Now, where do we look to take the market temperature on the Brexit issue? The British pound, which held up nicely today, despite the delay and the continued debate in UK parliament throughout the day. And, as you can see, the pound has broken the downtrend of the past year and a half.
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The next spot to look for the temperature on a Brexit resolution is German bunds. And yields on German debt are testing a technical trend break from deep negative yield territory, signaling an improving outlook.
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With German yields leading the way, the euro benefits, which makes this chart the next place to look. And the euro is testing a big trend break too.
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With the euro threatening a bullish breakout, and with Trump and China allegedly forming a currency pact, it's no surprise the dollar outlook should be lower. And this chart confirms it, with a breakdown underway.
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If the prospects of a no-deal Brexit and an indefinite trade war have now been removed from the probable scenarios, then the outlook for gold deteriorates.
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As you can see, the trend in gold looks vulnerable here too.
But, if the removal of the trade war threat does indeed unleash animal spirits in the economy, especially with central banks in an ultra-easy stance, inflation could start finally moving…and quickly. Then you buy gold again.
October 18, 2019 UK parliament will vote on a Brexit deal with the EU tomorrow.
Remember, this is a deal based on the 2016 referendum where UK citizens narrowly voted in favor of leaving the EU (52 to 48). That gap would have been wider had it not been for a coordinated campaign by global leaders threatening a draconian outcome. With that, there was public shame associated with voting for the "unknown" over the "known." But when left to the privacy of an individual vote, the people chose the unknown outcome as better than the known outcome. But as we saw with Grexit, Brexit has created leverage. Despite the dire warnings for UK citizens, the reality is, everyone loses if the EU (and other world trading partners) were to turn their backs on the UK. The EU bluffed that it would play hard ball. But as we near the finish line, they have agreed to establish free trade — no tariffs, no quotas. And despite the warning by President Obama (in 2016) that the UK would be put in the "back of the queue" for a bilateral trade agreement, Trump has promised a "big trade deal" by July, following their exit. With the above in mind, a withdrawal agreement has failed twice already in the House of Commons. But given the fragility of the global economy, the state of global trade (with U.S. tariff escalations now including Europe), and the fatigue of the long, ugly Brexit path and negotiations, I suspect we get an approval of withdrawal, with the goal of moving on to the next chapter.
October 17, 2019 In the spirit of dealmaking, after the U.S. and China came to terms on a (limited) deal on trade last Friday, the UK and EU leaders came to a deal this morning on Brexit. The deal will go to a vote in the House of Commons on Saturday. At the moment, the bookmakers in the UK are still showing a better chance that the deal won't be approved on Saturday, and rather the October 31 hard deadline will be extended. We will see. If we look at the currency markets, as a gauge, the response is positive. Both the euro and the pound have been rising all month in anticipation of a deal, as we have been headed toward the impending October 31 deadline. |
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Listening to the press conferences today, the tone of the UK/EU deal sounds much like the tone of the U.S./China deal — both sides (in both deals) capitulating to get it done and move on. It seems that all parties involved have come to the realization that not only is global economic sentiment eroding, it's beginning to show up in the data. And if left to evaporate, it would be very dangerous for the global economy. Perhaps that's why both Europe and the Chinese had the similar comments to make about the respective deals: China's Vice Premier said its about "peace and prosperity for the whole world." The President of the European Commission said today that the deal is about "people and peace."
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October 16, 2019 The start of third quarter earnings season has been overshadowed by macro events thus far (trade and Brexit negotiations), but earnings the numbers have been good. Remember, never underestimate the appetite of Wall Street and corporate America to dial down expectations when given the opportunity. So, we came into earnings season with the table set for positive surprises. And we're getting it. About eight out of ten companies have beat earnings estimates so far, showing year-over-year growth, not contraction. But it's still early. With Bank of America earnings today, we've now heard from all of the big four banks (JPM, BAC, WFC and C). We've seen big positive surprises in the banks from Q4 of 2018 through Q2 (all against dailed down expectations). But the banks have generally not just shown good performance against the low bar of expectations, the year-over-year growth has been strong too. The key contributor has been a strong consumer. So, how did the banks look in Q3? We've had positive earnings surprises Citi, JPM and Bank of America for an average year-over-year earnings growth of 14%. That is strong. Though Wells Fargo was the outlier, missing on expectations, as they took some pain preparing for a new CEO to start next Monday. The earnings strength from the major banks (three of the major banks, in the case of Q3) follows 21% average year-over-year EPS growth from the big four in Q2. Again, the consumer has not faded, despite a nine month public debate over recession cues. And remember, we looked at this chart from Citigroup’s Economic Surprise Index as we ended Q3 … |
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This chart doesn't fit with the earnings expectations/ recession story. Learn more about my premium stock-selection and portfolio service here.
October 15, 2019 After a holiday in the bond market yesterday, markets are at full strength today. And we get to see how global markets digest the trade deal news of last Friday. What was the response? Stocks ripped higher, globally. Yields were on the move, higher. Gold, lower (a signal of de-risking). And we had a broadly lower dollar, which should be in the early stages, following what was described to be a currency agreement between the U.S. and China. While the media is toiling away, scrutinizing the merits of a deal that they never understood or thought the U.S. needed in the first place, the markets are beginning (very early stages) to price in a world where an indefinite trade war concern is removed. Commodities have yet to move, but that is where the biggest wins should come, if this deal does indeed clear the way for fiscal stimulus, structural reform and ultra-easy global monetary policy to drive a boom-time period for the U.S. economy (and a legitimate recovery for the global economy). Add to this, the risks surrounding a disorderly exit of the UK from the EU, appear to be diminishing rapidly. Not surprisingly, with the above in mind, the market that was most clearly positioned for the worst-case scenario for the global economy, is reversing: global interest rates. Below is the German 10-year government bond yield. With global central banks wrongly positioned for an indefinite trade war, market interest rates crashed after the December one-two punch by the Fed and the ECB (the Fed hiked rates and telegraphed continued mechanical tightening and the ECB quit QE). After formally selling 30-year German debt with zero interest back in August, this major benchmark interest rate finally bottomed when the ECB repented for its sins and announced it would restart QE in September. With the hints late last week that a trade deal was in the works, German yields have now surged 16 basis points since Thursday – and nearing a big technical test of the downtrend.
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What about U.S. yields? Remember when everyone was panicked about a recession, being signaled by the yield curve inversion? As you can see in the chart below, the inversion (10y/2y) was short-lived. |
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The plunge in global market interest rates, and the yield curve inversion, were punishment for central banks being ignorant to the risks of a potential indefinite trade war. So, now we have global central banks back in a defensive stance. And now we have a deal that may end the trade war (at least as a front-burner issue). How soon will we see U.S. yields march back toward and above 2%? |
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October 14, 2019 We have a quiet open to the week, with bond markets closed for the holiday in the U.S. This follows the big U.S./China trade deal that was announced in the Oval Office on Friday.
Big? Of course, people are picking apart the lack of detail, skeptical that an actual deal was made. Some are scrutinizing the heavy demands that aren't part of the deal. And of course, at the moment, it's a hand shake. And a hand shake with the Chinese Vice Premier, not President Xi.
With that, there is an overwhelmingly skeptical tone in the media about the prospects of seeing a formal deal, and, in the near term, the influence this "deal" will have on markets and the economy. Much of the skepticism is underscored by the view that Trump is forcing/manufacturing an end to this trade war (i.e. it's not a real deal).
But people are forgetting that Trump started the trade war. And he has maintained enough leverage so that he can finish it (when he sees fit). That appears to be the approach he has taken.
If he says its a deal, and ultimately removes tariffs. Then it's a deal.
And whether it looks great or not, or has big impactful consequences long-term, it clears the overhang of uncertainty, now, that has been weighing on markets and the global economy. With that, we'll get to see what the unfettered power of fiscal stimulus, structural reform and ultra-easy global monetary policy can do for a U.S. economy that already has very solid fundamentals (record low unemployment, record household net worth, record consumer credit-worthiness, a record low household debt-service ratio, well-capitalized banks, low inflation, affordable gas).
That should be plenty of tailwinds for a re-election. And Trump likely turns back to China for the big demands in a second term.
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