China Clouds Lifting?

361 Capital Market Commentary | February 10th, 2020

The U.S. stock market is not waiting for the sky to clear. It is marching to new highs at its own beat. Some still fear a coronavirus acceleration, but all this market sees is more global central bank stimulus, lower interest rates and another reason to buy. Just as it has with other global macro shocks, the U.S. stock market is using the virus fears to reload its best stock ideas.

With the Chinese economy basically shut down right now, its pause will cause a ripple to flow through most global economies. The question will be when the factories will restart and when will travel return to and from China’s cities. Most economists are writing off Chinese growth for Q1, while increasing their Q2 and Q3 numbers as they count on a bounce. As it impacts the U.S., it looks like our economy will be affected by a quarter percentage point while the Boeing shutdown might clip another quarter from Q1. So global GDP figures are going to get messy until we put the virus behind us. But for some good news: some near-term cruise ship itineraries are selling for 75% off this week.

It was a good week of economic data, and a decent final week of large cap earnings releases. Both the ISM Manufacturing and the Service data came in better than expected. Jobless claims, the ADP jobs report and the BLS non-farm payroll stat all came in better than expected. This week, the market will focus on Tuesday’s New Hampshire primary which will lead to which candidates will drop out in the Nevada and South Carolina decisions. Fundraising will become a most important item for those who want to stay in the race. For the rest of the week, we will be monitoring a few key earnings releases and the slowdown trajectory of the coronavirus. Friday could be a quiet day as the market gets an early start on the three-day weekend (and many feet of new snow in the Rockies).

The market bounces right back to new all-time highs…

It looks to me like the S&P 500 just ate a big bowl of coronavirus and then pulled an Oliver.

S&P 500 Index

And the strength was broad based…

Weekly Sector Performance

Hedge funds backed up their trucks and bought equities in size on the virus fears…

1. the GS prime brokerage book saw the largest net buying in nearly five months last week
2. Net leverage increased +2.8 pts to 72.3% (92nd percentile)


Net Leverage

(Goldman Sachs)

As of last night, the new number of cases continues to slow…

Coronavirus update, confirmed 40561, deaths 910, recovered 3436 – all on a log scale


Coronavirus Update

However, it is going to be a cloudy first half for luxury goods makers…

As all the stores are closed and Chinese consumers are in isolation.

VIP Customers

Global tourism will also pause this quarter given how big China is to world travel…

Tweet from @TeddyVallee

The markets made it through a difficult quarter of earnings…

Mega-cap S&P 500 companies continued their strong earnings season this week. With GOOGL’s EPS beat this week ($15.35 vs. $12.53 consensus), none of the 14 companies that account for more than 1% of S&P 500 market cap has posted a miss on earnings. BRK.B will be the last of those firms to report. Expected EPS growth for the quarter equals +1.9% compared with expectations at the start of the quarter of -1.4%. As a whole, S&P 500 earnings season has been good, but not spectacular. The frequency of EPS beats (49% vs. 46% historically) and revenue beats (39% vs. 34%) have been close to their historical averages.
(Goldman Sachs)

An interesting earnings observation…

But I wonder how much of the daily performance could be caused by the outbreak of the coronavirus which has an outsized impact on oil prices (affecting energy) and China trade (affecting technology).

Tweet from @bespokeinvest

Earnings estimate trends also infected by the Coronavirus…

@EPBResearch: The estimate for Q1 EPS growth took a sizeable hit this week, most likely due to the impact of the Coronavirus. Very difficult to assess the level of economic damage caused by the Chinese economy grinding to a halt with many unknown variables, including the length of time.

Bloomberg S&P 500 EPS Growth Estimates

One of the best pieces from last week’s jobs data was the continued strong growth in prime workers joining the workforce…

People moving into the workforce helps keeps inflation in check and the economy on its Goldilocks path.

Civilian Labor Force Participation Rate

The shutdown in China is having a very negative effect on both oil and gas prices as inventories build…

Liquefied natural gas is fetching the lowest price on record in Asia, a troubling sign for U.S. energy producers who have relied on overseas shipments of shale gas to buoy the sagging domestic market.

The main price gauge for liquefied natural gas, or LNG, in Asia fell to $3 per million British thermal units Thursday, down sharply from more than $20 six years ago as U.S. deliveries have swamped markets around the world.

As recently as Jan. 15, the Asian benchmark, called the Japan Korea Marker, was comfortably above $5. Around then, fear that the coronavirus outbreak would stall economic activity in the world’s second-largest economy added to other factors already pressuring prices. Those included a mild winter in Asia, ample local stockpiles and increasing deliveries from U.S. gas-liquefaction facilities.


Natural Gas Futures

Making sure that you are paying attention to how big the legal sports betting market is going to be…

If you need ideas, go back and read the Barron’s piece from two weeks ago.


Legal Sports Betting Industry

Another important reminder of how fast global retail internet sales are growing…

Global Retail E-Commerce Sales

And how much more opportunity there will be in the emerging markets to take advantage of this trend…

Population Versus Internet Penetration Rate

All eyes and ears will be on Alibaba as they report this week…

With the company’s concentration in China, the world will be watching to see how they are navigating the coronavirus impact.

Alibaba Group Holdings BABA

“If it ain’t Boeing, I’m not going!”

If the current pause in air travel ends soon, there will be a mad scramble for planes as the summer flying season approaches. Airbus looks to be in a good position to sell everything that it can assemble right now. Meanwhile Boeing is likely writing checks to all of its big customers to keep them from buying European.

Boeing loses its crown to Airbus

The New Hampshire primary is tomorrow…

And it looks like the contest will be a repeat of the Iowa results. If Sanders and Mayor Pete finish 1-2, then the rest of the field will be in a financial bind. Supporters will not throw good money after bad. So this will narrow the race down to the three Bs: Bernie, Buttigieg and Bloomberg.

Who's ahead in New Hampshire?

Which means the Democratic party will need to collectively sit down and decide if they want to win the 2020 election…

The numbers show that as Bernie gains in the polls, so does President Trump’s likelihood of winning four more years. And for each week that passes, and the Bernie vs. the field battles increase, the Democrats will only hurt their eventual candidate. If the Dems want to win they had better listen to James Carville, gather up all the candidates and sit down with Barack Obama, and figure the future of the party before February is over.

Does Sanders Getting the Nomination Help Trump Win Re-Election?

The good news for the stock market is that once the candidates are narrowed, they are going to promise voters and investors everything to get elected…

Dow Industrials Four-Year Presidential Cycle

When the data scientists take over professional sports…

The Game Has Changed

The Game Changers

Finally, this documentary could add years to your life…

So over the holidays I sat down and watched The Game Changers documentary on Netflix. After watching the show, it was difficult to argue against the results of the many individual cases shown. While I already eat very healthy, my docs have been telling me that if I went all plant based, my genetically high cholesterol would improve significantly.

So I gave it a shot for a full month. No meats, eggs, cheese, dairy and ate more of everything else. It was much easier to eat plant based than I thought. Whole Foods, Chipotle, Beyond Meat, Oatly and the plethora of healthy quick service food bars in Denver didn’t leave me starving.

Below are my results. A sharp 30% improvement in the key lipids figures after only four weeks. And this is coming from someone who was already a healthy eater. Imagine how much better the data could be for someone who has a butcher attached to their arteries (and wallet). So, if you are worried about your cholesterol, your vascular system, or your heart, give the video a look and try a two-week test like the firefighters did. And let Arnold & me know your results.


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