A Tale of Two Trades

A tale of two trades.  Stocks had another mixed close yesterday as investors clamored to jump on the next big thing.  Bonds had a difficult day as investors continued the exodus into battered down equities.  

MY TWO CENTS 

1.  Who gives a shift?  Markets have been experiencing a number of significant shifts under the surface.  If one observed this week’s market action from a high level it would appear that all things are normal.  Stocks go up and bonds go down and vice versa.  The lack of any significant news this week has left traders to their own devices.  By lack of news I mean status quo.  Brexit is still going to happen just maybe next year, the trade war is still on and affecting both the Chinese and US economies, and the Fed is still expected to cut rates next week.  So what does one do in this vacuum?  Rotate, of course.  Pulling back the surface of the market shows a major shift occurring in which investors are shifting capital out of bonds causing yields to rise rather quickly.  The rise in yield is helping banks regain their footing after falling for most of August.  Banks have a better chance of making money when yields are higher.  The selloff in bonds has also been accompanied by a selloff in equity bond proxies.  Those would be REITS, Utility Stocks, and high dividend stocks.  OK, no real surprises yet.  Where is all of the shifted capital going?  For quite some time, that capital would have gone into momentum stocks.  Momentum stocks would be those that performed the best in the prior six months.  That group almost always includes technology stocks, but also consumer discretionary, and a handful of recent high flyers.  This week’s market action includes a shift into value stocks.  Those are stocks that can be best described as being… well… cheap.  In yesterday’s session the S&P500’s worst performing stocks outperformed its best performing stocks.  There is no telling if this rotation will continue, but one thing is for sure.  When investors load up on value stocks, they are usually hunkering down for the long haul, hoping to gain some insulation from volatility, or even a down turn.

2.  Sharing the pain.  In the absence of any significant news on the macro front, investors have been focusing on another favorite theme from earlier in the summer: IPO’s.  I have been reporting on the unfortunate demise of the proposed IPO from WeWork.  The once highly anticipated public offering of the office sharing / real estate company attempting to pose as a tech company completed its most recent private financing at a valuation of $46 billion.  When the company initially announced its intention to go public, it was proposing a valuation of $45 billion.  Once potential investors realized that the company had lost billions of dollars, the real scrutiny began to heat up.  By last Friday, WeWork’s bankers lowered their valuation expectations to a reported $25 billion, most likely in response to weak demand in the pre-roadshow.  Earlier this week rumors began to circulate that the company would temporarily scrap its IPO in order to reevaluate strategy.  The IPO is not quite dead yet as the company pledged to make some governance changes to address some investors’ concerns.  The drama continues.  All of this leaves one wondering if the market for high flying unicorns has peaked.  After all, the most highly anticipated IPO of the summer, Uber, left investors disappointed with poor stock performance.  The now-public company must bear all of its formerly private finances which have exposed the difficulties in growing revenue and being profitable in the so-called gig economy.  Uber and its competitor Lyft rely on a large temporary work force which, up until now, have been paid as contractors.  California has advanced a law requiring those workers to be treated as employees rather than contractors which will significantly increase the companies’ costs of service.  Uber’s stock is down by -25% from its IPO price, which is probably on the mind of potential investors in WeWork’s IPO.  WeWork’s most recently reported target valuation was $15 billion, -67% lower than its last private financing valuation making the -25% loss in Uber look a little less painful.

THE MARKETS

Stocks closed mixed yesterday as investors rotated assets out of bonds and tapped into value stocks.  The S&P500 traded up by +0.03%, the Dow Jones Industrial Average advanced by +0.28%, the Russell 2000 jumped by +1.23%, and the NASDAQ Composite Index slipped by -0.04%.  The small cap Russel is where most values could be found while the tech heavy NASDAQ is heavily weighted in momentum stocks.  The contrasting performance of those two indices in yesterday’s session is further evidence of the style shift.  Bonds continued their pullback yesterday and 10-year treasury yields climbed by +9 basis points to 1.73%.

WHAT’S NXT

– The Bureau of Labor Statistics will announce the Producer Price Index,  which gauges prices charged by producers prior to hitting the retail channel.  The  PPI Excluding Food and Energy is expected to have grown by +2.2% year over year, compared to last month’s reading of +2.1%.  The month over month growth is expected to be +0.2% compared to last month’s decline of -0.1%.

– Wholesale Inventories are expected to have increased by +0.2% month over month same as the prior month.

– The Treasury will sell $24 billion 10-year notes.

daily chartbook 2019-09-11