Break Time

Break time.  US Stocks took a rest today, trading up as investors digested Friday’s bitter-pill selloff.  Manufacturing may be on the mend and crude oil keeps falling down a slippery slope.

N O T E W O R T H Y

• Build it and they might come.  But then again, they might not.  This morning the Institute for Supply Management released its Manufacturing Survey and it came in at 50.9 beating expectations.  The number was up from last month’s 47.8 but what is most notable is that the number is above 50 which means that it is expanding, or pointing towards growth.  This was the first reading above 50 in six months.  The increase was driven by the demand components of the index which includes new orders and production and were likely driven by the signing of the Phase One Trade Deal. Great news, indeed. Unfortunately, the side responsible for that demand going forward might be a little preoccupied over the next few quarters fighting a global health crisis.  China just can’t seem to catch a break – as its struggling economy was just beginning to gear back up to full throttle, the Coronavirus broke out putting the brakes on any acceleration.  Recall that the Chinese economy was already reeling prior to the emergence of the trade war with America.  They were in the midst of massive deleveraging as the government sought to wind down a state sponsored construction bubble.  A horrible swine flu destroyed a good portion of domestic pork production and Chinese citizens are expecting… demanding more as the country continues to flourish. Hey, nothing comes easy. Speaking of easy, what about that Phase One Trade deal, that “enormous” opportunity for US Farmers and businesses alike.  It is no secret that many economists and China experts had their doubts that China would be able to meet the aggressive trade targets agreed to in Phase One.  One of my worries as the spread of the Coronavirus began to play out was that it would impact China’s ability to make all of the “massive” purchases which were agreed upon. Tonight, WHILE YOU ATE DINNER, it was reported that China was seeking some flexibility on its trade commitments.  China hopes that the Administration would be lenient in light of the emergence of the global health crisis.  I am not a betting man, but I am pretty sure that the odds are not in favor of forgiveness.  But you never know.
• Bad is good, when you like to speculate.  One of my favorite lawyer friends is famous for saying: “ This is not Sesame Street, it’s Wall Street!”  Sorry Mr. Hooper and Oscar!  Traders are not known for their compassion during market hours and this last week supports that narrative.  When news of the outbreak of the virus emerged, it is only logical that airlines and leisure associated with China were hit.  That was not speculative, it was just a rational response to a market event.  Tokyo-based medical supply manufacturer Kawamoto saw its stock surge by +479% year to date… they manufacture surgical masks.  Not kidding. In the US, both Honeywell (HON) and 3M (MMM) both produce similar masks and they have not been able to escape the markets’ downswing in recent days, though they have both announced that they are ramping up production of the products in order to meet a potential spike in demand. Any PR is good and “it’s just business”, so you can’t blame them.  Yesterday morning I wrote about Gilead speeding up approval for a new antiviral drug (called remdesivir) being tested in Wuhan.  The stock was up by +5% today… the symbol is GILD… it was their biggest gain in two years. GlaxoSmithKline (GLXO) is developing a Coronavirus vaccine, though it won’t be ready for at least 18 months. Its stock was only up +0.37% today, but keep your eye on it. How do traders capitalize on China’s woes?  The most obvious way is to short (sell now buy back later hoping that the price will go down in the interim) China.  You can do that by shorting or by buying put options on the iShares MSCI China ETF (MCHI), though you won’t be the first to the party.  The short interest (that is the number of shares which are speculatively sold short) is the highest in eight years!   Important note:  I don’t recommend that you short the ETF or any other security for that matter as it is highly risky and most often, a losing venture.  What about something easier like hoping that the Fed will have to cut rates in response to the outbreak.  According to Fed Funds futures there is now a 76.8% chance of a rate cut by the FOMC’s July meeting. Just a week ago that probability was only 48% and there was even a 5.3% chance of a hike.  That should be good enough to keep the stock bulls satisfied for at least a little while.  Can you tell me how to get to Sesame Street?

THE MARKETS

Stocks got a reprieve today and traded up as hopes that the containment efforts would limit the economic damage.  The S&P500 traded up by +0.73%, the Dow Jones Industrial Average climbed by +0.51%, the Russell 2000 advanced by +1.12%, and the NASDAQ Composite Index climbed by +1.34%.  Bonds climbed slightly and 10-year treasury yields climbed by +2 basis points to 1.52%.

NXT UP

– Factory Orders are expected to have grown by +1.12% in December compared to the prior month’s drop of -0.7%.

– Durable Goods Orders are expected to have increased by +2.4%, in line with prior estimates.

– This morning, Sirius XM, ConocoPhillips, Simon Properties, and Ralph Lauren will be amongst those announcing before the bell. After the close, we will hear from Allstate, Disney, Snap, Ford, and Prudential, amongst others.

daily chartbook 2020-02-04