Stocks and Ski Lifts

361 Capital Market Commentary | February 18th, 2020

The S&P 500 wasn’t the only thing climbing to highs last week. Colorado ski lifts were also busy carrying those who were out for the long weekend. Some of our most popular resorts have had twenty feet of snowfall this season which means all of the bowls are open for epic adventurers. If you are headed out for Spring Break soon, enjoy the conditions. Our head trader, Jason, can point you to the best bowls for your next trip.

Helping the big stock index last week was the fear of COVID-19 continuing to ebb and Chinese cities beginning to move again. Apple gave us the first (of likely many) corporate updates on the China situation last night and it only clipped the stock 2% today. For a large company with 20% of sales and 70% of product sourcing inside of China, the small move in Apple tells you that the markets are looking past this virus and want to continue owning the stock for the longer term. It also doesn’t hurt that the Chinese government continues to cut interest rates and flood the market with liquidity. Goldman Sachs even got into the game over the weekend by upgrading its rating on Chinese equities for their 11.3x forward P/E multiple.

Expect further volatility in economic data and company datapoints as everyone works through the China shutdown. If China gets back to business soon, there might only be a shift in demand from Q1 into Q2 – Q4. This is what the equity markets are betting on now which is why there has been so little impact in stock prices. Of course the high prices in Treasuries and low prices in crude oil prices tells us that we are not fully out of the woods yet.

Daily net new cases and a rising recovery rate continue to give the markets hope that the worst is behind us…

@bespokeinvest: Update on global Covid-19 case, death, and net case growth as well as deaths & recoveries as a percentage of cases.

Death and Case Count

And Gavekal’s analysis of the WHO data suggests the virus will have run its course by mid-March…

Projected Number of New Cases

Apple updates investors on their China business…

Expect more of the same from other China-exposed multi-national corporations. For Apple, about 20% of their sales are in China. But more importantly, about 70% of their products are sourced from China.

Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated. As a result, we do not expect to meet the revenue guidance we provided for the March quarter due to two main factors:

The first is that worldwide iPhone® supply will be temporarily constrained. While our iPhone manufacturing partner sites are located outside the Hubei province — and while all of these facilities have reopened — they are ramping up more slowly than we had anticipated. The health and well-being of every person who helps make these products possible is our paramount priority, and we are working in close consultation with our suppliers and public health experts as this ramp continues. These iPhone supply shortages will temporarily affect revenues worldwide.

The second is that demand for our products within China has been affected. All of our stores in China and many of our partner stores have been closed. Additionally, stores that are open have been operating at reduced hours and with very low customer traffic. We are gradually reopening our retail stores and will continue to do so as steadily and safely as we can. Our corporate offices and contact centers in China are open, and our online stores have remained open throughout.

(Apple Inc.)

Technology stocks, growth stocks, and thus the Nasdaq, continue to lead the markets higher…

Even China is recovering quickly from its sharp January drawdown.

Asset Class Performance

Two-thirds of the year to date S&P 500 returns are coming from the top four stocks by market cap…

Top 4 Stocks by Market Cap

Of course if looking only at Q4 earnings, then maybe the mega cap tech gains are justified…

FAAMG account for 18% of S&P 500 market cap and 14% of S&P 500 earnings. During the fourth quarter, these 5 stocks posted an average earnings surprise of +20%, compared with just 4% for the average S&P 500 company. FAAMG also grew EPS by 16%, compared with 0% for the S&P 500 excluding these five stocks. Mega-cap earnings strength contrasts with small-cap earnings weakness. The Russell 2000 experienced a 7% earnings decline during the fourth quarter, as many smaller firms posted weak top-line growth and had difficulty absorbing rising wages and other input costs. The Russell 2000 has lagged the S&P 500 by 175 bp since the start of earnings season (+1% vs. +3%).

(Goldman Sachs)

Supporting S&P 500 EPS Growth

The mega cap giants are now adding nearly two full multiple points to the valuation of the S&P 500…

YARDENI RESEARCH CHART OF THE DAY (COD): During the 2/14 week, the FAANGMs had a combined market capitalization of $5.7 trillion, doubling since late 2017, and accounting for a record 20% of the total market cap of the S&P 500. Their collective forward P/E is around 35. As a result, the forward P/E of the S&P 500 is about 19 with them and 17 without them. In other words, the FAANGMs are currently adding a record 2 percentage points to the S&P 500 forward P/E.


Forward P/E Ratios

Maybe as expected given the new highs in stocks, new corporate buyback announcements have trailed off versus previous years…

@DriehausCapital: Announced buybacks off to a much slower start then we’ve seen in the last 5yrs. Jan came in below $10B, vs. an avg. of ~$50B the prior 4yrs. YS #DriehausAlts

Buyback Announcements

The beating of active by passive continues…

As another $4.0b leaves U.S. Mutual Funds while $8.8b goes into ETFs last week.

Domestic Equity Fund Flows
(Goldman Sachs)

And as active AUM moves to passive AUM, Growth stocks continue to gain on value stocks…

Tweet from @charliebilello

Meanwhile, even active portfolio managers remain more focused on growth stocks than value stocks…

FMS positioning vs. history
(BofA Global Fund Manager Survey, 18 February 2020)

Which also explains why value stocks continue to cheapen…

Value is Extremely Cheap

Apple+Microsoft now equal 1.3x German DAX…

Tweet from @Schuldensuehner

Is anyone paying attention to the JOLTs data?

Tweet from @BittelJulien

The breakdown looks to be focused on manufacturing, mining and retail…

Manufacturing Mining and Retail

Good news for bond owners is that a meltdown of job openings typically leads to lower inflation…

Meltdown of Job Openings

But Linette will remind you that the printing press cannot run on high forever…

@lopezlinette: This country is being so foolish, you almost have to laugh.

Significant Support from Fiscal Policy at the Moment

Some bad news for fixed income investors is that your bond yields are now negative after inflation…

@LynAldenContact: The 10-year U.S. Treasury note now pays a firmly negative real yield (green line below). Specifically, it’s the fifth-lowest real yield in the past 50 years. Uncle Sam thanks you for your charitable donation.


One reason bond yields are so low is that EVERYONE wants them right now…

@Schuldensuehner: Feeding bond bubble: Bond funds experienced biggest weekly inflow ever w/$23.6bn, annualizing almost $1tn in 2020, BoA has calculated while Mexican Central Bank makes it 800 interest rate cuts since Lehman bankruptcy. Sizeable $12.5bn equity inflows too, annualizing record $443bn

Feeding Bond Bubble

So when the world gives you Coronavirus…

Take those lemons and go get a cheaper mortgage.

Freddie Mac 30 Yr Fixed

Everybody’s doing it…

MBA US Refinancing Index

The Euro is collapsing which will add a headwind to U.S. manufacturing competitiveness…

@allstarcharts: the collapse in Euro continues $EURUSD


European financials are lifting their heads off of the pavement after a difficult decade…

@RenMacLLC: European Banks breaking out, but not yet on a relative basis. We still view this as incrementally positive overall. #banks #degraaf

Europe 600 Banks Price EUR

Their valuations are cheap but what is the catalyst?

Tweet from @DriehausCapital

John Roque is also watching the 20-year breakout in European stocks…

Tweet from @WolfeDailyHowl

One reason for the increased risk appetite in Europe is in this chart of Greek bond yields…

Tweet from @Schuldensuehner

This massive move in yields has occurred even as Greek financials remain a mess…

Thank you Germany. Thank you France. Thank you Sweden, and all.

Tweet from @charliebilello

Speaking of bad finances, The Star Tribune reminds us why energy stocks have been left behind…

“As of the end of 2018, so this number is a little bit old, we’ve spent about $1 trillion in U.S. oil shale and we’ve returned about $700 billion to the companies in the form of cash flow for a whopping, negative 38% cash-on-cash return,” James C. West, partner and oil-services industry analyst for investment firm Evercore ISI, told me last week.

“We have a shale business … that’s been massively overcapitalized. That’s of course changing now, with limited access to capital,” he said.
Way too much capital also went into the oil-services sector, West said. Nonexistent returns on dollars invested had a predictable effect on stock prices.

Up until 2014, the value of oil producers in the stock market more or less tracked the price of oil. But that year was as good as it ever got for shale oil investors. Oil production has increased since then, with last year the biggest output so far for North Dakota, but the value of the companies doing that work has mostly gone sideways or down.

The total return to shareholders in the sector in the last decade was effectively zero, Evercore ISI analysts pointed out in January, vs. about 300% for the S&P 500. Meanwhile, the 15 CEOs they tracked among oil-producer companies, as a group, collected about $2 billion in pay.

Investors and industry analysts have been demanding the leaders of oil companies to take what they have come to call “the pledge.” That’s a promise that they are going to live within their means, pay back their loans and generate market-rate returns on the capital investors have given them.


Mike Bloomberg is going to win the 2020 election…

While Pete and Amy will still be future leaders of the Democratic party, this election has lined up perfectly for Mayor Mike. In looking through the recent polls and their current momentum, it is difficult to see where anyone outside of Bernie and Mike get over 15% of the Democratic vote in a majority of the individual states, meaning these two candidates will clean up the bulk of the delegates on Super Tuesday and beyond. This will leave the rest of the candidates to join with Mike or Bernie at the convention and we already know how that will turn out.

For the final round of ‘Survivor: POTUS’, it will be a loud and ugly Times Square street fight with Mike winning the White House. As the below N.Y. Times article illustrates in detail, Mr. Bloomberg has spent billions to try and make the world a better place. And for the millions of people who have been helped by his billions, they will return the favor in the form of votes on November 3rd.

Overall, I would expect the markets to be happy with a Bloomberg presidency as we know him well from his 10 years as the Republican Mayor of New York City and we use his trading and communication systems daily. But there will be plenty of investment ramifications to think through as Forty-Six takes office. Good news for Healthcare, Education, Infrastructure and Foreign Trade. Difficult news for the Smoking, Coal, High Frequency Trading and the Swamp (Washington D.C. lobbying). Sit back and enjoy the final rounds of this race.

In all, Mr. Bloomberg has spent at least $10 billion on his charitable and political pursuits. The vast majority has gone to philanthropy, for causes that reflect his personal interests and passions, including $3.3 billion to his alma mater, Johns Hopkins University.

But The Times’s examination — based on a review of years of campaign and nonprofit tax filings, as well as interviews with more than 50 people who have benefited from his support — illustrates how deeply that philanthropy is entwined with Mr. Bloomberg’s political preoccupations. In fact, in 2019, the year he declared his presidential candidacy, Mr. Bloomberg’s charitable giving soared to $3.3 billion — more than in the previous five years combined. His campaign disclosed that total in response to inquiries by The Times, but the donations were not itemized and most of it does not fall under public disclosure requirements.

Mr. Bloomberg has probably spent more from his personal fortune on his presidential campaign than any politician in American history. And while there have been political megadonors like the casino tycoon Sheldon Adelson, philanthropic giants like Bill Gates and self-funded candidates like Ross Perot, never before has one presidential hopeful combined the influence and reach of all three…

The range and reach of Mr. Bloomberg’s spending, experts say, cannot but play to his advantage in the presidential race.

“The fact that he can call in all these favors, all over the country — a normal person can’t do that,” said Adav Noti, chief of staff at the Campaign Legal Center. “A normal person will never be able to do that.”


Mike Bloomberg

A reminder to get your deep sleep each night…

A research team at Boston University led by Laura Lewis, assistant professor of biomedical engineering, took note of experiments that linked lack of sleep to Alzheimer’s and set out to learn why that is…

The researchers discovered that the magic happens during the deep sleep phase, also called non-REM sleep. During deep sleep, they observed, all the neurons in the brain begin working in sync, something that doesn’t happen any other time in our lives. Neurons turn on and off, sort of like tiny little light bulbs, and when they all turn off at once, suddenly the brain needs less oxygen in the same way turning off all the lights at once cuts electricity consumption. Because the brain needs less oxygen, it therefore needs less blood, so blood flow to the brain slows for that moment that the neurons are all off. The lack of blood allows for cerebrospinal fluid, a clear liquid that surrounds the brain, to flow in. Then it flows out again, taking with it toxins such as beta amyloids that naturally accumulate in the brain and can lead to diseases like Alzheimer’s. It turns out that our deep sleep is filled with these “slow waves” of cerebrospinal fluid flowing in and out of the brain and washing away toxins each time, sort of like a washing machine.

There’s no way to activate this process except by deep sleep, and deep sleep only occurs over several hours–you can’t get there during a “power nap.” (Napping is still very worthwhile, though, because it benefits your health and productivity in many other ways.)


Finally, we have so much snow. Come and melt some of it…

Tweet from @Brittany_Boyer

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