May 10, 5:00 pm EST

We end the week with continued stalemate on a trade deal.  Given that trade talks will continue (despite the tariff escalation), it’s not considered a “no deal.”  That’s a relative positive for markets.

As we discussed, as long as Trump will keep the door open, the Chinese will keep talking, and will (in the meantime) protect their exports by weakening the currency.  The yuan is now trading at its weakest level since early January, when trade talks were re-opened after a month long stalemate.

Now, let’s talk about the Uber IPO today …

It didn’t go well for Silicon Valley.  Uber started trading publicly below the range they expected, and instead of getting a huge opening day “lyft”, it traded down on the day.

We’ve talked quite a bit about the IPOs coming from the Silicon Valley hype machine.  Lyft got it all started, and here’s what that chart looks like now…


With this above chart in mind and the performance of Uber today, let’s revisit an excerpt from my note from last month …

Pro Perspectives – April 16, 2019

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.

As we know, Lyft was valued as high as $25 billion when it started trading publicly.  Some paid a $25 billion valuation for the privilege of owning a company that did a little over $2 billion in revenue, while losing almost a billion dollars — with slowing revenue growth and widening losses. It has now shed about $9 billion in market cap in thirteen days.

Uber is on deck.  Uber filed its S-1 this week.  In this public disclosure document, we find a company that has privately raised $24 billion, valued at $68 billion in the private market, that has been thought to float shares at as much as $120 billion valuation.  This is a company that (like Lyft) also with slowing revenue growth and widening losses.  Losses?  The S-1 shows a swing from $ 4 billion loss in 2017, to a near $1 billion profit in 2018.  But if we back out the a couple of unusual items (like the gain of a divestiture of some foreign businesses and an unrealized gain in an “investment”) the company lost $4.2 billion on $11 billion in revenue.

As we discussed last month, the hyper-growth valuations on these perceived hyper-growth companies, are unlikely to get hyper-growth at this stage.  That will be a problem for those taking the bait on the IPO.”

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April 4, 5:00 pm EST

The slowdown in China spooked global markets late last year, and have since spooked global central banks. 

Given the current recession-like growth in China (6%ish), and the prospects that it could keep sliding, especially if a U.S./China trade deal doesn’t materialize, the major central banks in the world have positioned for the worst case scenario.

In the process, we may have discovered the real drag on the Chinese economy.

Here’s the latest look at the Shanghai Composite, up 33% since January 4th (which not so coincidentally is the day the Fed walked back on its rate hiking path).

Maybe the easiest message to glean from this chart, and that turning point, is that the biggest culprit in the China slowdown has been the Fed, not tariffs.

Here’s how the Dallas Fed put it in a report from October 3rd (which happens to be the high in stocks, the day stocks turned):

Emerging economies have suffered a general decline in forecast GDP growth, and inflation rose in a handful of countries. The tightening of monetary policy in advanced economies, both through rate hikes and other policy actions such as forward guidance, results in capital outflows from emerging economies with low reserves relative to their foreign debt.”  

Higher U.S. rates has meant a stronger dollar.  With the economy moving north, the dollar moving north and rates moving north, global capital flows to the U.S. — and away from riskier emerging markets.  It’s not that the U.S. economy can’t handle a 3.25% ten-year yield or a 5% mortgage rate in the domestic economic environment.  It’s the EM world that can’t handle it (at the moment).

China has responded to the growth slowdown with an assault of monetary and fiscal stimulus.  But the most powerful stimulus appears to have been the move by the Fed to stand-down.

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