Break Those Chains

Break those chains.  Stocks soared yesterday in response to some positive economic data and renewed trade talks between the US and China.  While stocks climbed, bonds took a beating as traders asserted their newfound faith in the US economy.




  1.  The market is always right!  News that the US and China agreed to meet in Washington next month caused equities to trade up prior to yesterday’s open.  Interestingly there was nothing new about the news.  In fact, yesterday marked the second day of solid gains despite tariffs from both China and the US kicked in over the Labor day weekend, worsening the economic picture for both sides.  Yesterday morning, ADP released its private survey on jobs creation and the number indicated that +195k new jobs were created in August, beating expectations by 47k.  The positive news on jobs bolstered the already present rally, but it wasn’t until the ISM Non-Manufacturing Indexwas released at 56.4 beating the 54.0 estimates that yesterday’s rally in stocks really took flight.  The news, though positive, was relatively unremarkable and the rally surprised many analysts.  What was even more surprising was the reaction of the bond market.  I am always pointing to the bond market as the pragmatic twin, always carefully weighing the odds and never overreacting, so when the 2-year note yield climbs as much as +10% in the session, analysts notice.  Yields on the the 2-year note climbed by as much as +14 basis points at one point yesterday, which would be the single biggest move in over 10 years.  In other words: that’s a lot.  Ultimately, the yields settled off their intraday highs, gaining +9 basis points on the day.  The move suggests that traders believe that future economic conditions may not be as bad as previously thought, based on yesterdays numbers.  Or perhaps, traders were tired of being rangebound in stocks and when they broke above the high end of the range, traders moved capital from safe bets (bonds) into risk assets (stocks).  As aforementioned, strong numbers in the services economy are good, but should not be shocking.  Regardless of the reasons, stocks broke out of their range challenging the investment thesis that had prevailed for the entire month of August.  The market IS always right, but tread carefully.


  1.  Downsized unicorn.  It has been an interesting year for Unicorn IPO’s.  Recall that a Unicorn is defined as a privately held company with a valuation of greater than $1 billion (for more information on Unicorns, read my geek-out note on the topic here: ).  Valuations of private companies are somewhat academic and are largely negotiated between venture capitalists and large bridge lenders.  It is only when one of those companies taps into the public market that valuation becomes more critical… and real.  Once professional analysts, and more even more importantly, public investors get their hands on a company’s information the real valuation game begins.  Why did I highlight public investors?  Because they have the power to sell, where private equity investors could not sell (generally speaking).  If public investors believe that a stock is overvalued, they shun the stock causing it to drop and its valuation along with it.  Some notable IPO’s in the past year are ones that represented next-generation business models such as Uber and Lyft, which have been struggling to maintain their IPO valuations.  Uber is trading -27% off of its IPO price, while Lyft is currently -35% off its debut price.  Perhaps the bankers who are preparing to bring The We Company public took note.  Operators of WeWork, the rapidly expanding workplace sharing company initially announced its intention to go public with a valuation of $46 billion.  Yesterday, the company announced that it was slashing its valuation to just $25 billion.  Wow, how did that happen?  As bankers speak with prospective investors, interest has most likely been tepid, which should not be shocking, considering that the company lost $900 million in the first six month’s of 2019.  The bright side is that even at its diminished valuation, WeWork is still considered a Decacorn, the term used to describe private companies whose valuations exceed $10 billion… for whatever that’s worth.




Stocks jumped yesterday, breaking out of August’s trading range, on positive economic data and hopes that the trade issues between the US and China will be solved in a face to face meeting next month.  The S&P500 climbed by +1.3%, the Dow Jones Industrial Average traded up by +1.41%, the Russell 2000 advanced by +1.75%, and the NASDAQ Composite Index jumped by +1.75%.  It was an ugly day for bonds, which pulled back by -0.55% leaving 10-year treasury yields higher by +9 basis points at 1.55%.




– The Bureau of Labor statistics will release its monthly employment situation and Non-Farm Payrolls are expected to have grown by +160k compared to last month’s growth of +164k.  The Unemployment Rate is expected to have remained the same at 3.7%.

– Fed Chairman Jerome Powell will speak today.  This will be the last we hear from the Fed before the black out period that leads up to this month’s FOMC meeting.

– Next week we will get PPI, CPI, Retail Sales, and the University of Michigan’s Preliminary Sentiment for September.


Have a great weekend!

daily chartbook 2019-09-06

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