January 22, 2020

The Making of an Afterthought

The week had already opened with the curious outbreak, in China, of a virus reminiscent of the SARS outbreak a number of years ago. The main difference this time is the media’s call to run for cover because another existential catastrophe is at the brink of reality. Well, the stock market in China as represented by the Hang Sang Index in Hong Kong was at one point dropping over 2.8%. The outcome of course is the correlating impact on our markets and after yesterday’s decline and today’s uncertain recovery, that’s where it’s easy to get the predictions wrong.

First of all, there are many familiar names in the S&P 500 that represent Chinese’s corporations, Alibaba (BABA), Baidu (BIDU) and Yum China (YUMC) are three that are seeing influential selling that could very well have more to do with their strong post trade price rise then with concerns that the Chinese government will be unable to address the health of their country. It might be too early as well to dismiss signals that the Chinese economy is showing signs of vigor, since the government has always had a challenge with the credibility of the data released.

In our domestic markets the earnings season has gotten off to an interesting start. First Analysts are back to their new standard operating procedure. For example, the Analyst as Morgan Stanley downgraded Tesla (TSLA) which has had a strong rally coming out of, and into, the new year. The problem is this is the same analyst that last year suggested that Tesla was capable of dropping to $10 a share at the same time the outlook was kept at a buy with a target over $200. Since then many analysts have caught on to the comfort of downgrading a stock on social sentiment but recommending it a buy based on fundamental analysis. Basically, have one’s cake and eating it too.

On that note Netflix (NFLX) also came out with earnings that as usual are hyper focused on subscription growth. And while that is an important consideration, much of the problem stems from an ongoing challenge from a number of countries, with large consumer populations, eager to launch their own version of Netflix just as we’ve seen challenges to Starbucks (SBUX) and Uber (UBER), both being  carefully upgraded recently, the former for it’s strong balance sheet and wide distribution, that latter on its potential to further disrupt an industry while empowering an army of drivers. And, all while not making a profit as well.

On the economy, the recent rebound in housing starts confirmed that the indicator is a strict follower of the interest rate of the US 10yr Treasury, and so it should be. The Fed is on hold, but the bond market has a mind of its own, responding to changing equity sentiments by inviting defensive investors when the rate is near 2%, and inviting mortgage applications when it drops to 1.5%. This week much is also coming out in front of next week’s first release estimate of GDP in the 4th quarter of 2019. Estimates are ranging from 1.5% to 2.0% reflecting the impact of trade, and some moderation in interest rate sensitive and manufacturing dependent sectors. Buy then there should be a better picture on the holiday sales data.

On a final note, the impeachment process began this week to what appears to be a bit of a yawn. Competing stories on public enthusiasm are keeping the picture uncertain even though there is a high degree on the certainty of the outcome. We’ll have to see; in the meantime, the markets are overbought and the flow of news and data are keeping the broad indexes from going anywhere deliberate. If that could go on for awhile longer, the markets might be able to generate a more confident tone.