Hong Kong Summerfest

361 Capital Market Commentary | June 17, 2019

Imagine a peaceful protest in which one-third of the adult population hit the streets. Well organized, well behaved and they even cleaned up after it was done. Incredible.

The Fed’s summerfest begins this week as the Fed meets to look at past data and place bets on how quickly the trade wars will slow the U.S. economy. While the market has moved to bet on 75-100 basis points of rate cuts over the next 18 months, few think that the Fed will cut this week. It’s more likely they will be setting out the punch bowl for next month’s FOMC meeting, and then the stock market is looking to grab a cup or two and go crowd surfing.

The other area of market anxiousness surrounds the upcoming G-20 meeting and whether or not Trump and Xi will have time to tango over their trade conflict. Earlier in the month, expectations were building for a potential deal when the two met. But now both sides are backpedaling suggesting that the meeting may only reach a decision to have another meeting. So clearly, neither side is in a rush to hurry a deal no matter how bad the negative impacts are to their economies or citizens.

The markets are in a summer mood. The corporate newsflow is light and volumes are low. This week is Fed week. Next week is G-20 week. Then we will ramp news flow activity into the Q2 earnings season. So far, the negative pre-announcements are elevated as compared with the past. But this should be expected given the uncertainties and higher costs surrounding global trade. We will continue to watch and to react to every economic data point. To date, the forward-looking items are showing more cautiousness than bullishness. Your defensive coordinators should be in control of the portfolio right now. Even a quick glance of the sector performers in this market will tell you how cautious the breadth is. Watch, read and wait for the next set up. It may be a better time to protect capital than to reach for capital.

The market says that Fed Funds rate cuts are coming…

 

But probably not this week.

The fed funds market pricing gap to the last published fed dot forecast is the widest since these dots have been published

The G-20 table is already being set for an Un-Happy Meal…

 

“I think the most that will come out of the G-20 might be an agreement to actively resume talks,” Mr. Ross said in a phone interview Sunday. “At the presidential level they’re not going to talk about the details of how do you enforce a trade agreement.”“The most that might come is new ground rules for discussion and some sort of schedule for when detailed technical talks might resume,” said Mr. Ross…

At the Paris Air Show, Mr. Ross said Washington would continue to push for trade terms more favorable to the U.S. and urged Beijing to return to the negotiating table.

“The Chinese are the ones who precipitated the crisis;, they’re the ones that will have to end it by letting us know we’ll go back to where we were,” he said.

(WSJ)

Carl Quintanilla Tweet
(@carlquintanilla)

Morgan Stanley suggests the Fed could lower rates to Zero if U.S./China does not resolve itself…

 

Escalation is US China trade tensions may lower us 10 year yields to 1.75% in 2019
(@DeltaOne)

If the White House’s goal was to send the world into a global economic slowdown, then slowing down China would be the first step toward success…

 

China Industrial Production YoY

(WSJ)

And the U.S. Auto industry cannot be happy with this strategy…

 

Ford Sales in China Plunge

The New York Fed’s Empire Manufacturing report showed a significant slowdown…

 

Business activity took a sharp turn downward in New York State, according to firms responding to the June 2019 Empire State Manufacturing Survey. The headline general business conditions index plummeted twenty-six points, its largest monthly decline on record, to -8.6. New orders receded, while shipments increased modestly. Unfilled orders fell, and delivery times and inventories moved slightly lower. Labor market indicators pointed to small declines in employment and hours worked. The pace of input price increases was little changed, while selling price increases slowed. Indexes assessing the six-month outlook indicated that firms were less optimistic about future conditions than they were last month.

(NYFed)

Empire Manufacturing New Orders Index M/M Change
(@bespokeinvest)


Is the ISM Manufacturing headed for the mid 40’s?

 

DEUTSCHE: “The incoming data shows that the trade war is having a much bigger impact on business hiring and capex decisions than the consensus thinks.”

Empire State Mfg survey and ISM Manufacturing
(@carlquintanilla)

Morgan Stanley analysts see plenty to worry about…

 

Morgan Stanley Business Conditions Index (SA)
(@DriehausCapital)

And the ‘number geeks’ at global corporations are expecting a recession by the end of next year…

 

Most CFOs expect a recession next year

(Isabelnet)

One of the largest semiconductor firms in the world reported last week. It was not good news…

 

AVGO CEO Hock Tan tweet

Negative pre-announcements now have the upper hand…

 

78% of SPX companies have issued negative EPS guidance for Q12019

(Factset)


The ‘size’ factor rubber band has stretched way beyond normal…

 

The Leuthold Group notes that Mid Caps, Small Caps and Micro Cap stocks have fallen to their lowest relative strength versus Large Caps in this decade…

SP Small Cap 600/MidCap 400 - Total Return Relative Strength

…And on a valuation basis, Small Caps are now trading at a 10% P/E multiple discount to Large Caps.

 

Ratios, Leuthold Small Cap to Large Cap
(@LeutholdGroup)

Congrats Raptors. Buy Value?

 

Dinosaurs killing off the Silicon Valley team on its last legs would be very 2019


Software companies are great growers, but there is little room for misses from this group…

 

Software stock valuations stand near the highest level since 2000
(Goldman Sachs)

Does this mean that Facebook is now a ‘sin’ stock?

 

When the S&P 500 ESG (Environmental, Social, and Governance) Index underwent its annual rebalance after markets closed on April 30, 2019, several notable companies were removed, including Wells Fargo, Oracle, and IBM. However, the largest component to be dropped was Facebook.

A day before its exclusion, Facebook held a weight of 2.5% in the S&P 500 ESG Index. At that time, Facebook was the fourth-largest company in the S&P 500, the parent index for the S&P 500 ESG Index, with a weight of 1.9%.

(Indexology)

Facebook's SP DJI ESG Dimension Scores

On a risk-adjusted basis, Defensive investors have crushed it in 2019…

 

Sure Technology stocks are +24% YTD, but REITs are +22%. And Staples +17%. And Bond investors are killing it in a 2-3 handle Treasury yield environment.

Market Performance: 2019 YTD absolute and risk-adjusted returns
(Goldman Sachs)

Last week the markets were broadly higher as risk outperformed…

 

Market Returns 6-14-2019
(6/14/2019)

Much more diverse returns among the U.S. sectors as Semis and Biotech got hit, while Defensive sectors outperformed…

 

Sectors 6-14-2019

(6/14/2019)


If you are a geek of the financial markets, then you are watching Gold closely right now…

 

Gold Continuous Contract
(@LMT978)

Want to earn big returns and never pay taxes?

 

Now is the time to build a list of your favorite zombie companies. When the economy rolls over and credit tightens up, the zombies will meet their machetes. If you are short the company and it goes to zero, there is no need to make an offsetting trade to cover them and you won’t realize a tax gain. Good luck finding this investment strategy in an ETF. RAAAAUUUUGHHHH!

The Bank for International Settlements, the global bank that serves central banks, says low rates are fueling the rise of “zombie firms,” which don’t earn enough profit to cover their interest payments and survive by repeatedly refinancing their loans.

Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s. Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials and labor.

These, then, are the trademarks of the fat and slow world: larger corporations, declining competition and fewer start-ups, which together undermine and slow economies already hindered by falling growth in the working-age population.

(NYTimes)

Pay close attention. Bill Joy has found a better and safer approach to storing power…

 

What’s the simplest way to describe what’s different about this approach to batteries?

In a normal battery, you have some ingredients, like lithium or alkaline, and a separator, like a piece of cloth that you put between them. Then you pour in a liquid so that the ions can move around. Bad things happen with liquids. Films form, things go into [the] solution and run around and react with each other—you have safety issues like the battery catching fire. To be solid instead of liquid is something people have been striving for for 100 years. But in this battery, you have no liquid. You have just a plastic, a polymer, that replaces the liquid, so it’s solid. It’s a pretty big difference from a chemistry standpoint. It also turns out that this polymer just happens to be essentially a fire retardant material. So when you build batteries with this polymer, you don’t have a safety problem.

(Wired)

HBO’s Chernobyl is an incredible mini-series…

 

Visiting it’s Exclusion Zone is not something I would ever recommend. If you want to study nuclear fallout, go to Hiroshima instead. Also, much better local cuisine.

“The number of visitors increases every day, every week, by 30, 40, now almost 50 percent,” said Victor Korol, the head of SoloEast, a company that gives tours of the site. “People watch TV, and they want to go there and see the place, how it looks.”“In May 2018, we had 1,251 visitors. Last month, we had 1,860 — a 48 percent increase,” Mr. Korol said.

According to figures from the State Agency of Ukraine on Exclusion Zone Management, tourism to Chernobyl has been growing quickly over the past five years. In 2014, a spokeswoman said, the site had 8,404 visitors; in 2018, that number was 71,862. In May 2019 alone, she added, the site had 12,591.

Joe Ponte, managing director of Explore, a company that focuses on adventure travel, said that passenger numbers for the firm’s five-day Discover Chernobyl tour had increased fourfold since the mini-series aired in May

(NYTimes)

Chernobyl

Ride ’em while you got ’em…

 

@victoriouscake: BCG on electric scooters: “roughly 35% of all personal trips are less than 2km, and 75% are less than 10km.” OK, that said, the economics currently don’t work, since the time to break-even is 3.8 months.. but the scooters only last for 3 months. #yikes

E-Scooters Are Not Yet Profitable

Good luck trying to look this cool on a scooter…

 

@KCAlfredPhoto: Just rolled by #FooFighters sound check at Petco Park and saw this guy rolling by.

KC Alfred Tweet

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