Who didn’t wash?

361 Capital Market Commentary | January 21st, 2020

A stock market priced for perfection stopped because someone didn’t use soap? Probably not, but until we know more, this new health alert will spike volatility levels and could cool Chinese New Year travel and spending plans. The markets are a bit more concerned today given how quickly the virus spread across Asia and now into the U.S. and Australia. The markets are acting as they normally do which is to sell off the travel and leisure stocks first and then weigh on the global economic growth names as investors judge how long the epidemic will last. For your favorite stocks or strategies, times like this can provide buying opportunities. That said, I probably won’t be heading to Wuhan, China for Spring Break.

The big news last week was the surge in the market leading to new record high prices and valuations. Economic data and corporate earnings releases posted both positives and negatives on the week. New Home Sales were a spectacular surprise but Job Openings was a significant disappointment. And while United Healthcare, Morgan Stanley, Delta Airlines and Kansas City Southern positively surprised in their earnings, Target, Wells Fargo, Expeditors and Boston Scientific disappointed in theirs. But the bottom line is that stocks wanted to go higher and they weren’t going to let any bad news get in their way. But with this recent stretch, increasingly more strategists and seers are calling for a rest and consolidation. Let’s see what happens this week. Will a major slate of earnings push the market further higher, or will this new virus, and higher valuations, put the market down for a pause? Stay tuned and wash twice as long this week.

Word of the week: Coronavirus…

A newly identified virus originating in China killed two more people, infected dozens of others and jumped across the Taiwan Strait, bringing the total number of confirmed cases to more than 300 and prompting authorities across Asia to step up control measures.

The coronavirus, which causes pneumonia-like symptoms, has now killed six people in China, authorities said Tuesday, since it first appeared last month in the central Chinese city of Wuhan.

It has also spread beyond the country’s borders to Japan, Thailand and South Korea. On Tuesday, health authorities in Taipei confirmed the self-governing island’s first case of the new coronavirus, a 50-year-old Taiwanese woman who had been working in Wuhan.

Chinese health authorities acknowledged Monday that the coronavirus is being transmitted between humans, heightening concerns that it could spread quickly as tens of millions of Chinese people travel across the country and abroad for the Lunar New Year holiday later this week.

(WSJ)

And you know it is worth keeping an eye on if the China Global Times is concerned…

Tweet from @HuXijin_GT

Last week the markets ended at all-time highs across the board…

SPX
(@charliebilello)

Can you remember Q1 of 2000?

Tweet from @bespokeinvest

This guy was carrying a lunchbox to school in the Spring of 2000…

Tweet from @gubbmintcheese

So, will we see a string of market downgrades this week by the strategists?

@aaljechin: And on the 11th trading day of the year SPX hit half of Wallstreet’s analysts year end targets.

Year-end 2020 S&P 500 targets

Some caution noted by one of the top market seers at J.P. Morgan…

Tweet from @carlquintanilla

For individual stock price targets, now is the lowest upside to analyst stock price targets in eight years…

Goldman Sachs Research finds that the bottom up calculation of the weighted average upside to S&P 500 (based on individual stock price targets from our analysts) has been a useful guide for assessing the potential for upside in the broad equity market ahead of earnings season. A model based solely on the historical correlation between GS price targets and the S&P 500 performance during the subsequent quarter suggests the S&P 500 trades flat over the next three months. The 7-year average for upside-to-price-target ahead of earnings is +9.4%, the current upside based on our analysts’ stock targets is +3.3% (lowest since 2012).

Weighted average upside to price targets
(@themarketear)

Morningstar’s models show another reason to reduce equity exposures right now…

@HumbleStudent: @MorningstarInc fair value at 7% overvalued, which is only eclipsed by the 2017/18 melt-up top $SPX $SPY

Market Fair Value

The forward price-to-earnings ratio reached decade highs last week…

Scaling Heights
(Bloomberg)

But we must keep in mind that higher multiples are a function of the very low current interest rates and credit spreads…

@MichaelKantro: Expensive and overvalued can be mutually exclusive conditions. The $SPY is expensive due to: 1) low rates; 2) tight credit spreads and; 3) record-low cyclical composition. That doesn’t mean it’s overvalued. Rates and risks, collectively, have never been this low. My 2c on P/Es.

Credit Spreads vs. Interest Rates

Ned Davis Research shows how the market is stretched on a price-to-sales basis…

Standard & Poor's 500 Index
(@Not_Jim_Cramer)

On a near term relative strength basis, the market also shows reason for a pause…

@sentimentrader: More than 27% of the S&P 500’s stocks are overbought (RSI above 70). This is an extremely high reading. When this happened throughout the course of this bull market (2009-present), $SPX usually fell over the next 2 weeks

S&P 500

Ditto on a put/call ratio basis which shows a lack of fear in options market…

CBOE Options Equity Put/Call Ratio Index
(@HumbleStudent)

The megacaps are off and running to start 2020 which will only make it more difficult for active managers to keep up…

Megacaps

And as Small Caps get left behind to start 2020, you can’t help but laugh at this tweet…

Tweet from @NoonSixCap

With a few big earning releases in the books, forward earnings look to be on the rebound which should improve the appetite for stocks…

Tweet from @EarningsScout

This week will be a VERY big week of reports…

Earnings Whispers
(@eWhispers)

If you aren’t already, RenMac’s Friday weekly podcast is a must listen for investors…

Tweet from @RenMacLLC
(@RenMacLLC)

One of the surprises last week was the JOLTs…

Where Manufacturing, Mining and Construction job openings led to a surprising decline.

US GDP vs. Job Openings
(@TaviCosta)

Targets pre-released earnings were also a disappointing data point given how well the retailer had been executing…

Target has slashed its quarterly sales outlook after far weaker than forecast festive sales, ringing alarm bells on Wall Street about the state of US retail as the company had been coping better than most with upheaval in the industry.

Like-for-like sales rose only 1.4 per cent in November and December, the retailer said on Wednesday, an unexpectedly sharp slowdown from the 5.7 per cent expansion recorded over the same period a year earlier. Toys and electronics were especially weak.

The update from Target, which sells a vast range of products from food and toiletries to furniture and kitchenware, raises new questions about US consumer spending — whose strength has underpinned global economic growth for months…

Target now expects like-for-like sales for the quarter to be dragged down to 1.4 per cent, less than half of the 3 to 4 per cent it had previously forecast and well below the 3.8 per cent expected by analysts in a Bloomberg poll.

The results were a “tough miss”, said Brian Cornell, chairman and chief executive of Target. “While we knew this season was going be challenging, it was even more challenging than we expected.”

The figures from Target, which has become a US retail powerhouse with more than 1,800 stores, were particularly concerning as the company is seen as one of the best-performing companies in the sector.

(FinancialTimes)

On the positive side, Housing Starts in December crushed it…

@KathyJones: #Homebuilding activity reaches pre-recession levels in December

Housing starts spike in December to the highest point since 2006

And housing stocks loved the news…

@bespokeinvest: Homebuilders broke out just two days before a blowout report on Housing Starts. $ITB

S&P 1500 Homebuilder Index

Surprised to see the homebuilders and home construction ETFs with > 30% short interest…

@ihors3: ETF’s with the largest Short Interest % Float

ETFs with largest short interest float

If you know anyone in Europe looking for a job, tell them to get to Amsterdam or Rotterdam…

Tweet from @jsblokland

More good news for the global economy (pre-coronavirus), is that the Chinese Yuan is ripping higher…

USD/CNY inverted
(WSJ/DailyShot)

Unfortunately for U.S. farmers, soybean prices are going the wrong direction…

The Chinese trade deal was supposed to get soybean ships moving again but this can’t be the case if soybean prices are headed lower.

CBOT Soybean Futures
(WSJ/DailyShot)

The Wall Street Journal tries to explain…

If China shifts its purchases from Brazil to the U.S. to comply with the new deal, global demand wouldn’t change. Such a shift might push up the price of U.S. soybeans relative to Brazilian soybeans. But Brazil’s soybeans would then be cheaper in other markets, giving it a new advantage outside of China. The result: the gap between U.S. and Brazilian soybeans would likely close, leaving the price of U.S. soybeans little changed.

If the price doesn’t change, are American farmers better off? The answer is yes if they are able to sell more. Right now, at least, that’s not in the outlook. The U.S. Department of Agriculture estimates that American farmers will plant 84 million acres in the 2020-2021 planting year. While that is more than the 76 million acres in 2019-2020, it is less than as much as the 87 million planted the year before.

(WSJ)

As for wheat production, it just hit the lowest level in 110 years…

The last time that U.S. farmers planted so few acres with winter wheat, William Howard Taft was president and the opening salvos of World War I were still five years away.

About 30.8 million acres were planted with winter wheat this season, down 1% from the year before and not much more than the roughly 29.2 million acres that were seeded in 1909, according to the U.S. Department of Agriculture.

Farmers coax far more wheat from each acre than they did 111 years ago, but much of the decline in planted acres has come in recent years, concurrent with Russia’s ascent as the world’s dominant supplier and Midwestern farmers’ turn to more profitable crops, like corn and soybeans.

(WSJ)

US winter wheat plantings, annually

Meanwhile, Railcar loads continue lower due to grains, coal, autos and energy…

U.S. Rail Traffic
(@AAR_FreightRail)

And slowing loan growth is not a positive for U.S. economic growth…

Commercial Bank Lending
(Pictet Wealth Management)

Good news for consumers as natural gas falls below $2. Bad news for the U.S. energy industry…

But the dark side of the boom is increasingly difficult to ignore. Shale drillers are extracting so much gas that it’s overwhelming demand.

Prices briefly dipped below $2 per million British thermal unit on Friday for the first time since 2016. At that level, U.S. producers simply don’t make money. It’s forcing a wave of multibillion-dollar writedowns, layoffs and spending cuts. Still, the industry is powerless to stop a wave of additional gas hitting the market as a byproduct of rising shale oil output in places like the Permian Basin of West Texas and New Mexico. Even exports of liquefied natural gas provide little relief, as the international market is also oversupplied.

“The industry is a victim of its own success,” said Devin McDermott, an analyst at Morgan Stanley. “You don’t just have oversupply in the U.S. — you have oversupply in Europe, oversupply in Asia, and really oversupply across the globe.”

(Bloomberg)

Gas Deflation

New natural gas lows pulling U.S. Energy stocks to lower relative lows…

@charliebilello: Ratio of Energy sector to the S&P 500 at its lowest level in 21 years. $XLE $SPY

Energy Select Sector SPDR Fund

New all-time highs on the below chart will only create more downward pressure on the energy industry…

The past decade was the hottest ever recorded on the planet, driven by an acceleration of temperature increases in the past five years, according to data released Wednesday.

The findings, released jointly by NASA and the National Oceanic and Atmospheric Administration, detail a troubling trajectory: 2019 was the second-hottest year on record, trailing only 2016. The past five years each rank among the five hottest since record-keeping began. And 19 of the hottest 20 years have occurred during the past two decades.

The warming trend also bears the unmistakable sign of human activity, which emits tens of billions of tons of carbon dioxide into the atmosphere each year, scientists say.

“No individual hot year — or hot day or hot season, for that matter — is by itself evidence for climate change. But this hot year is just one of many hot years in this decade,” said Kate Marvel, a research scientist at NASA and Columbia University. “The planet is statistically, detectably warmer than before the Industrial Revolution. We know why. We know what it means. And we can do something about it.”

According to NOAA, global warming has sped up over the past 40 years compared to earlier in the 20th century. The annual global average surface temperature is now increasing at an average rate of about 0.18 degrees Celsius (0.32 Fahrenheit) per decade.

(WashingtonPost)

World's Temperature

Goldman Sachs doesn’t see any cooling in global temperatures…

Global Temps Are Rising
(Goldman Sachs)

Neither does BlackRock who is moving to make ESG a core investment goal…

Laurence D. Fink, the founder and chief executive of BlackRock, announced Tuesday that his firm would make investment decisions with environmental sustainability as a core goal.

BlackRock is the world’s largest asset manager with nearly $7 trillion in investments, and this move will fundamentally shift its investing policy — and could reshape how corporate America does business and put pressure on other large money managers to follow suit.

Mr. Fink’s annual letter to the chief executives of the world’s largest companies is closely watched, and in the 2020 edition he said BlackRock would begin to exit certain investments that “present a high sustainability-related risk,” such as those in coal producers. His intent is to encourage every company, not just energy firms, to rethink their carbon footprints.

“Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Mr. Fink wrote in the letter, which was obtained by The New York Times. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

(NYTimes)

Texas homeowners hope that BlackRock’s actions respond quickly…

It’s a bragging right Texans would be happy to do without: The state was in the path of half of the country’s billion-dollar weather and climate disasters in 2019.

The Lone Star State claimed seven of 14 of the National Oceanic and Atmospheric Administration’s $1 billion disasters last year and is the only state to witness a disaster from each category the agency tracks — drought, tropical cyclone, flooding, wildfire, freeze, winter storm and severe storm.

Last year marked the fifth consecutive year that 10 or more $1 billion weather and climate disaster events impacted the United States.

(HoustonChronicle)

Handouts at Davos this Week?

You know that it is the top of the economy when Pottery Barn is selling $500 disaster ‘Go’ bags for when the global warming induced fires, floods, freezes knock out your power and force you to survive on bagged water and dried foods. But look at the leather on that bag. And it looks like the big winner is Pottery Barn who is sold out of the bags for the next 3 weeks of delivery. Light ’em up Greta.

The Prepster Luxe 3 Day Emergency Bag
(PotteryBarn)

The ‘OK French Boomer’ quote of the week…

Tweet from @johnthejack

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