September 19, 2024
What You Need to Know Today:
Even long-term China bulls are throwing in the towel on Chinese stocks
With Chinese stocks looking at an unprecedented fourth consecutive losing year, even some of Wall Street’s most conspicuous China bulls are throwing in the towel.
Over the past two weeks, long-standing China bulls UBS Global Wealth Management, Nomura Holdings, and JPMorgan Chase have all downgraded the country’s stocks. And there’s a growing consensus that China will fail to meet its economic growth target of around 5% this year. The money NOT flowing into China has made this a good year for stocks in India, Japan, and Taiwan.
Big downward revision in jobs locks in September interest rate cut by the Fed, puts November cut in play
Monthly employment reports overstated the number of job created by the U.S. economy by 818,000 in the 12 months that ended in March 2024, the Labor Department reported on Wednesday, August 21. That revision, part of the annual process that reconciles job reports derived from monthly surveys with state records, says that employers added about 174,000 jobs per month on average during that period, down from the previously reported pace of about 242,000 jobs. That’s a drop of about 28%.
A soft landing–good for the economy but, I worry, maybe not for stocks
No doubt about it. A soft-landing would way better for the economy than a poke in the eye with a sharp stick. No big spike in unemployment. Decent growth in real personal incomes. Controlled and relatively low inflation. Real interest rates falling–slowly–from their current historically high levels. It would be a huge positive achievement if the Federal Reserve could engineer a soft landing after raising interest rates to slow the economy and cut inflation and then beginning to reduce interest rates to make sure that growth didn’t slow too much or too quickly. A huge positive the economy. I’m not sure, however, that an economic soft landing is quite so big a positive for the stock market.
Recession fears? Nevermind says Goldman Sachs
Economists at Goldman Sachs have lowered the probability of a U.S. recession in the next year to 20% from 25%, citing this week’s retail sales and jobless claims data. If the August jobs report set for release on September 6 “looks reasonably good, we would probably cut our recession probability back to 15%, where it stood for almost a year” before a revision on August 2, the Goldman economists said in a report to clients on Saturday. And that would unwinded the recession fears that sent stocks plunging at the beginning of the month.
China’s stocks get riskier as data flow stops
Starting tomorrow, Monday, August 19, China’s stock exchanges will stop releasing daily data on overseas fund flows. The move means that investors won’t be able to track flows into and out of China’s $8.3 trillion market comes as all data so far point to China’s first yearly outflow from equities in 2024 since 2016. foreign funds have steadily withdrawn money from the market, taking the year-to-date tally to negative as of Friday. The move is intended, it looks like, to prop up the market by reducing volatility induced by short-term data and turn investor focus to longer-term indicators. I doubt that’s how it will work
Saturday Night Quarterback says, For the week ahead expect…
I expect cash flows to favor a continued recovery rally. One thing that happens in financial markets when central banks get set for a major change in policy direction is that cash flows from re-positioning of speculative and trend-following strategies can drive big moves in market volatility. And that’s exactly what we’re seeing now. Besides the unwinding of yen carry positions that led to selling of dollar-denominated assets, the two-week sell off that ended last week saw the biggest unwind in U.S. equities since the Covid-19 panic. And now this unwind looks to be over, Which means this cash will be going back to work in U.S. stocks. The action is taking place in trend-following quant funds.
Special Report: 7 Steps to Protect Your Portfolio While You Still Reap Market Gains: Step #5 Bet on a very hot summer
I think that rather than trying to hedge market or sector direction in the 2024 market, I’m going to look for plays on the long side that will gain even if the market goes nowhere or tumbles, In other words, in financial jargon, I’m going to look for sectors and stocks that are uncorrelated with market direction rather than looking for sectors and stocks that are anti-correlated (where my gains depend on a downturn in the market.) That’s the logic with Step #5 today. Go long natural gas ahead of what is shaping up as a really, really hot summer.
Live Market Report (20 minute delay)
Please Watch My New YouTube video: Hot MoneyMoves NOW Tech worries
Today’s Hot Button Moves NOW video is Tech Worries. In my last video, I suggested the normal advice of “go away in May” may be valid again this year because of the revenue patterns I’m seeing in the technology sector, especially tech/consumer stocks, like Apple (AAPL). On May 2nd, Apple beat $1.50 expectations by reporting $1.53 a share. Revenue also beat at $90.8 billion (Wall Street expectations had it at $90.3 billion.) iPhone revenue was at $45.96 billion, down from $51.33 billion in 2023. The stock went up by about 6% after the report, even though it was a modest beat of already lowered expectations. Apple also announced an increase to its dividend of $.25 a share and a buyback program of $110 billion. CEO Tim Cook announced plans for the iphone to add AI in the future as Apple catches up with the use of AI at competitors such as Samsung. This promise of a wonderful future, combined with a modest beat, was enough to boost the stock. This is just one more example of a pattern I’m seeing in the sector currently where technology companies make vague, date-less promises of bigger and better things to come, with very little tangible proof or actual products. Investors are being asked to pay as if these are growth stocks, when in fact these promises may never come to fruition. The market is trying to extend a rally but “Go away in May” may be the safer bet.
Saturday Night Quarterback says (on a Sunday), For the week ahead expect…
I expect surface quiet but important movement in the lower depths of the financial markets. The week ahead lacks in obvious market-moving events and reports. There’s a smattering of earnings with Disney (DIS) on May 7 and Toyota Motor (TM) on May 8. But nothing from the likes of Apple (AAPL) or Microsoft (MSFT). A few speeches from Federal Reserve officials–Fed governors Lisa Cook on May 8 and Michelle Bowman on May 10. But no Fed meeting. No testimony from Fed chair Jerome Powell. But deep in the workings of the bond market, this will be a big week. The Treasury will auction $112 billion in Treasury paper.
The jobs data doesn’t tell us what the Fed is thinking about rates and inflation–so the market guesses
The U.S. economy added 175,000 jobs in April, the Bureau of Labor Statistics announced on Friday. That was the smallest number monthly new jobs in six months. The unemployment rate ticked up to 3.9%. And traders tried once again, to get ahead of the data. Concluding that slower job growth, meant the Federal Reserve would be more likely to cut interest rates sooner–in September, say, rather than November or December–bonds rallied and yields fell. The yield on the 10-year Treasury dropped 7 basis points to 4.5%. The yield on the 2-yer Treasury, which had been flirting with 5% earlier in the week, fell to 4.82%. Stocks climbed with the Standard & Poor’s 500 up 1.26% and the NASDAQ Composite gaining 1.99%. Trouble is that these moves were the exact opposite of gains and losses earlier in the week.
Please Watch My New YouTube Video: Go Away in May?
Today’s video is Go Away in May? Historically, the months between November and May were much more profitable than the months from May to November. The saying “Go away in May” came from that distribution of returns, suggesting investors should get out of the market during the less profitiable May to November period. This advice holds particularly true for tech stocks, which have very clear seasonal revenue patterns. For example, in March of 2023, Apple (AAPL) earned $1.52 per share, in June earnings per share went down to $1.26, in September they went back up to $1.46 and then the company blew it out in December to $2.18. While this isn’t indicative of the entire tech sector, it’s a good example of this seasonal pattern, especially for technology stocks with big consumer businesses. So what about this May? I’d say, you can probably “go away”–but maybe a little late than usual. NVIDIA’s (NVDA) earnings come out on the 22nd of May and will likely be giant. Current Wall Street estimates have earnngs per share at $5.14, up from $.88 a year ago. After that,the technology sector is relatively quiet. The next big tech event to look out for is Apple’s Worldwide Developers Conference in June, which could result in “buzzy” tech announcements about AI. After that, I don’t see a lot of reason to be overweight technology and I’ll look to take some profits. I think this amounts to a modest Go Away in May call.
Brookfield Renewable pops on Microsoft supply deal
Microsoft will buy more than 10.5 GW of clean energy from Brookfield Asset Management and its Brookfield Renewable affiliate (BEPC), the companies announced on Wednesday, May 1. Shares of Brookfield Renewable were up 5.13% today, May 2, on the news. I added Brookfield Renewable to my Dividend Portfolio on March 26, 2024. The shares are up 10.82% since then as of the close on May 2. They pay a dividend of 5.52%.
The Fed walks a very, very fine line on inflation and interest rate cuts
On Wednesday, May 1, the Federal Reserve decided NOT to cut interest rates at its May 1 meeting. That was the decision expected by the financial markets. And Federal Reserve chair Jerome Powell tried his best to keep traders from speculating that the Fed would actually raise interest rates, rather than cut them, in the remainder of 2024.
Special Report: 7 Steps to Protect Your Portfolio While You Still Reap Market Gains: Step #5 Bet on a very hot summer
I think that rather than trying to hedge market or sector direction in the 2024 market, I’m going to look for plays on the long side that will gain even if the market goes nowhere or tumbles, In other words, in financial jargon, I’m going to look for sectors and stocks that are uncorrelated with market direction rather than looking for sectors and stocks that are anti-correlated (where my gains depend on a downturn in the market.) That’s the logic with Step #5 today. Go long natural gas ahead of what is shaping up as a really, really hot summer.
Happy May Day!! More bad news on wages–for the Fed anyway
The employment cost index (ECI), which measures wages and benefits, increased 1.2%, the most in a year, after rising 0.9% at the end of 2023, according to a report from Bureau of Labor Statistics on Tuesday, April 30. The increase was greater than projected by any economist in Bloomberg’s survey of economists.Compared with a year earlier, the ECI, the Fed’s preferred measure of employment costs, climbed 4.2% after a similar annual increase in the fourth quarter.
Please Watch My New YouTube Video: Quick Pick Autoliv
Today’s Quick Pick is Autoliv Inc (ALV). Autoliv makes auto safety equipment from seatbelts to newer products such as driver assistance and lane keep. They have a 45% global share of the global auto safety market with growing penetration in China. (China is now about 22% of sales). With a 40% market share in China, the company has room to grow, especially as China exports more and more vehicles. As Chinese car exports grow, so too will Autoliv’s sales of safety products. Chinse cars for the domestic market include 2-3 Autoliv products. Cars for the export market include 4-5. Autoliv just announced earnings on April 25 which beat estimates by about 18% with about a 70-80% increase in earnings year over year. Morningstar calls the stock fairly valued, I think that’s an underestimate. The price to sales on the stock is currently at 0.97 and the trailing 12-month PE is 19.17, and the forward EPS is at 13. The shares also offer a 2.1% dividend yield with a buyback yield of 4.7%. Free cash flow is rising (up $170 million last year) even while the company is investing more in China, India, and Vietnam. Autoliv has also shown a solid increase in operating margin in the most recent quarter from 5.17% to 7.4% and management is hoping to drive that up to 10%. I’m adding the shares to my Jubak’s Picks Portfolio.
It’s Fed Day on Wednesday…Yawn
Drum roll, please. The Federal Reserve interest-rate-setting body, the Open Market Committee, meets Wednesday afternoon and is expected to do…nothing. The CME FedWatch Tool puts the odds of a rate cut at the May 1 meeting at 3.9%. Odds of cut aren’t much better for the June 12 meeting-7.9%–or the July 31 meeting–22.2%. It’s not until the September 18 meeting that odds get to something like even with the FedWatch Tool showing odds of a cut at 44.8%. With the November meeting odds that the Fed will cut climb to 57%. In my opinion, December is the month for the first cut. But the fact that the Fed won’t move on interest rates tomorrow doesn’t mean that the U.S. central bank will do absolutely nothing.
Watch My New YouTube Video: Hot Button Moves NOW:CMG
Today's Hot Button Moves NOW video is Chipotle Mexican Grill (CMG). There are two reasons to buy and one reason not to buy. The reason not to buy is valuation. Like many stocks right now, CMG is at an extreme valuation after a long run, making it susceptible to a...
Saturday Night Quarterback says, For the week ahead wonder…
With a Federal Reserve interest rate cut now not looking likely until December, earnings are the only game in town when it comes to supporting this market. Or moving stocks higher. So far earnings have come through with surprises running slightly above the 10-year average. But it looks like the quarter is still on a path for a very modest 3.5% growth in earnings for the Standard & Poor’s 500.
Today’s PCE inflation numbers reinforce yesterday’s PCE inflation bad news
Yesterday we had a report of core Personal Consumption Expenditure for March that showed core inflation ticking up to an annual rate of 3.8% from 3.7%. Core inflation, if you remember, looks at prices after excluding more volatile food and energy prices, The reasonable conclusion was that inflation was remaining stubbornly higher than the Federal Reserves % target. And that the first cut to interior rates from the Fed wouldn’t come until December, instead of July or September. Today we got the report on all-items PCE inflation.
Now it’s one interest rate cut and not until December
How views on interest rates have changed since the start of 2024. Then, in January, the consensus view called for as many as six interest rate cuts from the Federal Reserve in 2024 for a total of 150 basis points in cuts to the Fed’s benchmark interest rate. Today, after a dip in first quarter GDP below a 2% annual rate and an uptick in core PCE inflation, the markets are pricing in just 33 basis points in rate cuts and quite possibly no cut until the Fed’s December 18 meeting.
Good news from Google (Alphabet) today–no repeat of yesterday’s Meta problem
After the close today, Alphabet (GOOG) reported revenue of $80.5 billion, easily beating the consensus projection of $78.7 billion. Earning per share came in at $1.89 versus expectations for $1.50 a share. And none of the worries before the news turned out to be problems. Advertising revenue rose 13% to $61.7 billion. Ad revenue for YouTube–an area of worry rose 21% to $8.09 billion. Subscriptions, platforms and devices revenue jumped 18%.
Please Watch My New YouTube Video: NOW I’m Worried About Stocks.
Today’s video is NOW I’m Worried About Stocks. Investors and analysts have shown a willingness to pay for vapor in the last couple of days. The market reaction to two companies, Tesla (TSLA) and Apple (AAPL), has made this clear me.. Tesla’s earnings were terrible at $0.45 a share, below the expectations of $0.52 and revenue was down 50% year over year. However, the stock was up the day after earnings thanks to expert spin from CEO Elon Musk. He announced that Tesla will move ahead with the Robotaxis and full self-driving cars but it will also advance plans to produce a $25,000 car to enter the lower end of the market and compete with China. Although the company previously waffled on offering a more affordable Tesla, Musk was now suggesting it may be available at the end of 2024 or early 2025. When asked for more specifics, Musk declined to offer a definitive date on any of these promises. Wall Street ate it up and jumped on the spin that Tesla will be selling a more affordable vehicle “soon.” At this point, these are totally imaginary revenues from a car that has no release date and a full self-driving technology that doesn’t fully exist yet, and investors are saying they’re willing to pay for it? What worries me here is that in the market paying for spin has become normal because stocks go up on spin. Even if the product is “vapor,” investors are willing to get in on the stock bump associated with the announcement of imagined prospects. Similarly, Bank of America recently predicted Apple (APPL) is going to go up 36% soon because the company will announce its plans for adding AI into the iPhone. This is speculation on an announcement, not of the product itself, but on the prospect of an announcement. Bank of America is likely right on this, but I’m not willing to pay up for this speculative announcement without a tangible product or date and it concerns me that the market IS willing to do that. I understand the spins and the anticipation but the reaction and willingness to buy on vapors isn’t a sign of a healthy market.
PCE core inflation climbs even as U.S. GDP growth drops to 1.6% in the first quarter
U.S. economic growth slowed in the first three months of the year, the Bureau of Economic Analysis reported today. Gross Domestic Product (GSP) grew at an annualized rate of just 1.6%. That’s a big retreat from the 3.4% annual rate in the fourth quarter of 2023. Just as important as the drop in the growth rate itself is the reason for the decline.
Round #2 of big Treasury auction today
One down and billions more to go.
Yesterday’s big auction of 2-Year Treasury notes saw rock solid demand that let the day pass without a big, destabilizing drop in prices and a jump in yields. Today, in Round #2, the Treasury is set to auction off $70 billion in five-year notes. So far, at least, the sale looks like it will see solid demand again. Though, can I say, You ain’t seen nothing yet? Treasury is likely to increase its monthly issuance of the seven main notes and bonds (not including TIPS) by nearly 60% in 2024 to $354 billion in August 2024, from the $222 billon it issued in July 2023, according to “Neutral Issuance” scenario in the presentation by the Treasury Borrowing Advisory Committee.
AT&T beats on earnings as churn steadies and subscriber numbers rise
Today, April 24, before the market open, AT&T reported first quarter earnings that beat the Wall Street consensus. The good news came from strong growth in its mobility and consumer wireline connectivity businesses, which make up about 80% of the company’s total revenues. AT&T (T) added 349K postpaid phone subscribers in the quarter, above a consensus estimate of 303,539, according to Bloomberg. Prepaid churn was 2.77% compared to 2.73% in the year-ago quarter. Remember that if you own AT&T, you own it for the dividend, currently 6.73%, and the possibility that the company will increase its payout.
Visa beats on earnings as worldwide payments volume climbs by 8%
Tuesday, April 23, after the market close Visa (V) reported adjusted net income of $2.51 a share. That ws 7 cent a share more than the consensus of estimates from Wall Street analysts. Earnings rose 7% year-over-year in the quarter. Revenue climbed 10% from a year prior to $8.8 billion, also exceeding Wall Street estimates
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