361 Capital Market Commentary | December 16th, 2019

That gust of wind you felt last week was the rush of the markets caused by the China and North American trade deals, a Conservative landslide in the U.K., and the Fed announcing that they are going to the beach for the entirety of 2020. With these three big items checked off of Santa’s list, the markets and their elves can now go on holiday to hit the beach, snow, movie theater or to wherever your kids might pull you. I wouldn’t expect much in the way of big news until January which implies that the recent good cheer should continue to float global equities and bond yields higher. What a difference twelve months makes.

Have a great winter holiday and I’ll write to you again in January. As our last edition for 2019, we wish you a very happy holiday season. My next briefing will be January 6, 2020 and I will be hosting a webcast reviewing 2019 and providing an outlook into 2020 on January 9. Register Now. And thanks for reading.

What a week for the markets…

@Schuldensuehner: Global stocks have gained whopping $3.7tn in mkt cap this wk, pushed by $2tn Aramco IPO, as investors digest 2 pockets of risk relief, Brexit & Trade, and consider what might be next catalysts for upside in a mkt that has already risen $16tn ytd & total mkt cap 98% of global GDP.

Global GDP

We have the workings for a Chinese trade deal – Phase One…

On Friday, the U.S. and China announced that they agreed to an 86-page text detailing the first phase of a broader trade agreement. It will involve reduced tariffs in exchange for more Chinese purchases of American farm goods such as soybeans and pork as well as commitments on intellectual property, forced technology transfer and currency markets.

Critics and supporters of the China agreement will have to wait a few more weeks until they can analyze the fine print. It’s expected to be signed by Lighthizer and his counterpart, Vice Premier Liu He, in early January in Washington and released publicly then.

While it will take months or maybe years to assess whether the deal actually works as advertised, some opponents were quick to judge it, arguing that the president had sold out because the limited agreement doesn’t resolve all the big issues.

Lighthizer acknowledged to reporters Friday that “a huge amount” is outstanding and has to be resolved in future negotiating phases. But the hardest thing was to get the first deal on paper, in his view.


After last week’s FOMC meeting, it looks like the Fed is about to take a year-long sabbatical…

Critically, the Fed dropped the reference to “uncertainties” in the outlook. This indicates that they are much more confident in the outlook, apparently believing they have now done enough to keep the economy on track. This suggests that the bar to another rate cut has edged higher from last October. They really need a “material” change in the outlook to take rates down another notch.

At the same time, however, the bar to a rate hike is still even higher. The dot-plot revealed that all but four meeting participants expect rates to remain unchanged in 2020; the remaining four expect only a single hike. Remember there was a subset of members opposed to any rate cuts so they would be looking to reverse sooner than later. Overall, there is virtually no expectation that the Fed needs to consider reversing this year’s rate cuts anytime soon. Rate hikes are anticipated in 2021 and beyond, but that is simply too far off to be very relevant at this point. In some sense, this is really just an artifact of the models; given persistently low unemployment, the models will forecast higher rates to stave off inflationary pressures.


2019’s surprise market gains were caused entirely by market expansion…

This can’t happen for a second year which means 2020 earnings are going to have to bust a move higher.

Tweet from @alphahub

The market is betting on a rebound, but we will need to see analysts raise earnings more than current expectations, now that the two big trade deals are completed…

@EarningsScout: A re-acceleration of $SPY EPS growth is in the 2020 forecast. Stocks are discounting this into prices.

Actual & Estimated Quarterly S&P 500 EPS Growth

Looking at the sector returns from the recent low shows us where the markets want to bet on future earnings gains…

• Healthcare gets a win from a friendlier than expected Washington D.C.
• Financials win from higher interest rates and a steeper yield curve plus improving global trade dynamics for their customers.
• Technology and Industrials win on easier global trade and lower costs of goods sold.
• On the other side, REITs and Utilities lose out as interest rates move higher and defensive stocks are handed lumps of coal.

S&P Sector ETFs

Semis will continue to win big with the China trade deal in motion…

SMH - VanEck Vectors Semiconductor ETF

And so U.S. stock valuations move back to pricey levels…

S&P 500 NTM P/E
(@Goldman Sachs)

The S&P 500 has again become very heavily weighted toward its Big 5 (AAPL, MSFT, GOOGL, FB, AMZN)…

Cumulative Weight of Top 5 Names in the S&P 500

Another way to look at the strength of the U.S. mega-caps is how big they’ve become versus all other global equity markets…

Tweet from @TN

J.P. Morgan still likes stocks but is suggesting a portfolio slide over to foreign markets…

Tweet from @carlquintanilla

Maybe this is the start of a new economic trend which could help spark international equities…

Global Manufacturing PMI
(Thompson Reuters)

Also helping foreign markets would be a new trend lower in the U.S. Dollar…

@kkernttb: $USD pretty big breakdown last week

$USD US Dollar Index

Speaking of recent bad trends…

The Dogs of the Dow strategy (buying the top 10 of 30 DJII stocks with the highest dividend yields at year-end and holding them for next 12 months) failed in 2019, declining by -7.0% YTD compared to the DJIA up 23.0%.

(Sanford Bernstein)

Here’s another bad trend for anyone who might be a buyer of Health Insurance…

So, I guess that we are winning if our renewal came in at less than +20%?

US CPI YoY: Health Insurance

Home buying interest remains in a very positive trend…

@HoyaCapital: Buyer Traffic at the highest level on record.

Homebuilder Sentiment

In fact, so positive that there is not enough housing stock to satisfy the demand…

Existing-home sales rose 1.9% in October from the previous month to a seasonally adjusted annual rate of 5.46 million, the National Association of Realtors said Thursday. Economists surveyed by The Wall Street Journal forecast a 1.5% rise…

A lack of inventory has helped drive up home prices up this year. At the current sales pace, there was a 3.9 month-supply of homes on the market at the end of October, according to NAR estimates, a lower supply than the same time last year.

“The buyers are coming back, but the lack of inventory is pushing up prices, in my view, way too fast,” said Lawrence Yun, the trade group’s chief economist.

The median-sales price for an existing home in October was $270,900, up 6.2% from the previous year. That was the strongest price appreciation since June 2017, according to the NAR.


The tight inventory and rising prices are being caused by Americans moving less…

But if you ask me, one hasn’t really experienced life until they have moved four times in 12 months.

Let's Stay Together

Demographics suggest that the housing markets should have a tailwind for twelve more years…

After that, it will get more difficult.

Tweet from @DemographChris

Or, if you own a home near a fracking oil basin, the housing market may already be very challenging…

Fracking has made the U.S. the world’s top oil producer, buoyed the national economy and helped the country become a net exporter of crude and petroleum products for the first time in decades. But the rapid production growth of recent years is waning as shale companies, many of which have struggled to make money, focus on profits over expansion to satisfy unhappy investors.

“The boom time is done at this point, unless oil prices go up significantly,” said Michael Plante, senior economist at the Federal Reserve Bank of Dallas.

Already, that shift is taking an economic toll. National nonresidential fixed investment—which tracks spending on software, research and development, equipment and structures—fell at an annualized rate of 2.66% in the third quarter and 1.01% in the second quarter, due in large part to declines in oil and gas spending, according to the Dallas Fed.

Spending is expected to decline further next year. North American shale investment, or spending on drilling and fracking, is forecast to fall about 6% this year, then tumble another 14% in 2020, adjusted for inflation, according to energy analytics firm Rystad Energy.


Revenue per available hotel room in oil producing regions

If college kids are asking you for advice about the future job market, show them this chart…

Global Generation Capacity Addition Mix

Amazon’s next big thing…

Morgan Stanley says Amazon Logistics is now delivering half of its packages (mostly focused on urban areas). Now imagine the impact to other logistic companies if Amazon started to use is network to deliver non-Amazon packages.

AMZNL Delivered Packages

Boardrooms of money-losing companies just became much more emboldened by the ongoing learnings of WeWork…

The outside board directors, all of whom had decades of experience in business and finance, voted for years to approve decisions by Mr. Neumann that paved the way for WeWork’s near collapse. Some of them had potential conflicts of interest themselves.

The directors on the board let Mr. Neumann personally buy stakes in buildings that he would lease to WeWork. They gave him long-term voting control of the company in 2014, and allowed him to sell and borrow more than $1 billion against his WeWork stake. They approved hundreds of millions of dollars for acquisitions of tech companies that were viewed by top executives as wasteful spending, with little relation to WeWork’s core business.

The end result didn’t just blow up $39 billion of the company’s value, roughly the value of Delta Air Lines Inc. It was a watershed moment for Silicon Valley. For years, investors salivated over all-powerful founders who promised disruption and demanded control. After WeWork’s spectacular flameout, investors have grown skeptical of the model.


Chinese Arsenal fans and Colorado Avalanche and Nuggets fans will now share one thing in common: complex VPN home networks to be able to watch their favorite teams…

English Premier League soccer team Arsenal Football Club Plc faced an immediate backlash after one of its star players made critical comments about the treatment of the Uighur minority in China.

China’s state-run CCTV pulled a live broadcast of Arsenal’s match against Manchester City over the weekend, despite the club’s attempt to disassociate itself from the remarks. Instead, it aired a prerecorded game between Tottenham Hotspur, Arsenal’s local rival, and the Wolverhampton Wanderers. Manchester City beat Arsenal 3-0 in the Sunday match.

The retaliation following the comments from Arsenal’s Mesut Ozil highlights the risks of running afoul of China’s political sensitivities. Citizens on social media platforms have been swift to criticize companies and individuals perceived to cross the line when it comes to China’s policies.


Sports TV

Any GoT fan will like this interview with Peter Dinklage in The New Yorker…

Peter, any thoughts on how “Game of Thrones” ended?

[He stares blankly.]

Let me ask you this: Did you follow the fan response?

No. Well, everybody’s always going to have an opinion, and that means an ownership. It’s like breaking up with somebody. They get upset. I can’t speak for everybody, but my feeling is they didn’t want it to end, so a lot of people got angry. I feel like what [the showrunners] Dave [Benioff] and Dan [Weiss] did was extraordinary. This happens. Monsters are created. And you don’t see it coming. We vote them into office. You look the other way. So for everybody to get upset because they loved a character so much and they had so much faith in that person—there were signposts all along the way for that character.

You’re speaking, of course, about—spoiler alert—Daenerys Targaryen, who took a bit of a fascist turn.

Yeah. But that’s because of what was happening all along. It added up to something. There are people who’ve named their children Khaleesi. You’ve just got to maybe wait till the series finale before you get that tattoo or name your golden retriever Daenerys! I can’t help you! I’m sorry. She went mad. She was driven to that, and she’s a victim as well in terms of how she was treated. She went through it, and she came out angry, as a lot of us do.


Bill Gates is out with his holiday reading list…

Many of us at 361 Capital highly recommend “Why We Sleep” as one of the more important books that you will ever read. Now if we could only do better at practicing what we have read.

Tweet from @BillGates

Now that is a great last place challenge!

Tweet from @lainehiggins17

Finally, if you are a parent you will enjoy this Macy’s parody children’s clothing ad from the weekend’s Saturday Night Live…

Kids Jackets from Macys

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