Week Ending September 18th, 2020

As I have been suggesting for the last few weeks, once we have a vaccine or news about any successful vaccine being tested, for virus, the high flying tech stocks should melt down which benefitted a lot from work from home and stay at home scenarios. Tech stocks continued to fall last week. Also the investors felt like FED’s monetary policy was becoming less effective in supporting the recovery. Powell suggested that committee doesn't see any hope of raising rates till at least 2023. Powell also repeated his call for stronger fiscal response to help the recovery. I think Fed left a lot of questions unanswered which caused the uncertainty in the investors’s minds such as what do they mean when Fed says ‘moderately high inflation over 2%”.

Economic readings released last week were consistent  with improving consumer conditions, including initial jobless claims falling to the 860000(seasonally adjusted), lowest since March, retail sales increasing for the straight fourth month, University of Michigan’s sentiment index rising to 78.9 in September, the highest reading since march this year.

Ofcourse fundamentals govern market performance and valuations, but I think economic conditions such as fiscal policy, tariffs, de globalization and economic recovery from the pandemic, depend much more on the election results this time. Also I am looking at new agreements being made with Israel by Arab countries which is a good signal for middle east and the whole world. But I think there are tensions brewing under the hood, which may escalate as they depend a lot upon next US administration.

Developing countries are falling behind in terms of economic recovery, compared to North America and Europe by wide margin. The developing countries need to progress on economic recovery front for the world to remain on growth trajectory.

Lastly I think we should have banned Tik Tok, like commerce department banned ‘we chat’. I think United States can survive well without Tik Tok, as China has been surviving without Facebook and Twitter for last many years.

Week Ending September 11th, 2020

Technology heavy Nasdaq composite ended the week in correction territory, as it went down more than 10% from all time high it reached on September 2nd. Energy stocks also suffered as crude oil went below $40 per barrel.People are saying that there is no specific  catalyst behind the decline and there are multiple factors working behind the screen such as highly stretched valuations and lack of any progress on new stimulus bill etc.

Also AstraZeneca paused the trials of its leading coronavirus vaccine candidate which also electrified the negative sentiment in the market.

Although unemployment rate has improved substantially from 15% in April to 8.4% in August but the new jobs created in August rose by 1.4 million, lower than 1.7 million in July and 4.8 million in June. It appears that the new job gains will be incremental. As per US congressional budget office, unemployment rate will not drop below 6% until 2024. The economic recovery will take time to bounce back to pre covid levels but the asset prices had already factored a much quicker recovery .

I think the market is over leveraged and steepness of the rise in asset prices has been unbelievably sharp. I believe in the remaining time till election, we will be experiencing volatility in terms of pullbacks and bumpier ride than smooth run since March. As I believe companies are in the ‘thinking’ mode, as election holds the answers for tax rate change if any, fate of globalization, tariff wars etc. Moreover companies will be looking for answers on corona vaccine front before making decisions on new projects.

Week Ending September 4th, 2020

As I have been warning against insane tech valuations (very hot momentum names specially ) for last few weeks, tech stocks started the decline on last Thursday. Although SP500 and Nasdaq are in the positive territory for 2020, but Dow went negative for the year.

Some are blaming SoftBank and novice traders for the plunge but I think it was triggered by better than expected initial jobless claims reported on last Thursday & non farm payrolls report on Friday. As I have been talking about a scenario for few weeks (on my blog Sophisticated Investor), “what happens after we have successful vaccine”. I think last weeks plunge was a glimpse of what may happen once we have a successful vaccine. The unemployment rate went to 8.4% in August from 10.2% in July. Moreover the weekly new claims keep on sliding down, it points that healthy recovery of some sort is going on.

If the economy is recovering, I think it is prudent to sell tech stocks(take profit) who have benefitted a lot from the ‘stay at home’ or ‘work from home’ scenario. I think majority of the investors made the mind to sell tech on Thursday. Moreover it was a very steep run upwards in the recent 3-4 weeks without any change in fundamentals.

It has to be seen if the decline continues in the weeks to come. I believe as novice investors took margin loans to trade stocks, this recent plunge may force those investors to wind up some more of their tech positions & value bets too. I think there are chances for the  tech stocks to continue their downhill ride.

Also demand for treasuries waned last Friday after the release of payrolls report. US 10 year treasury yield went up again to 0.72% on last Friday after dropping to 0.62% on Thursday last week.

I believe in the coming weeks that leadership will rotate between asset classes and sectors a lot as economy is showing signs of a comeback and new corona virus cases have been falling in United States. Another test is on the road, as fall is around the corner, if US economy does not get hit with new big outbreak of coronavirus in the fall, stocks in general will keep on outperforming guided by new leadership of stocks, low interest rates and fed’s backstop etc. While I expect volatility to shoot up as we are anticipating historic election results.

                 Week Ending August 28th, 2020

Stocks continued to grind higher on positive news from vaccine front and fed’s policy change. It was a historical week, fed finally changed its approach towards inflation target. For the last 10 years fed has been undershooting its inflation target of 2 % despite quantitative easing programs and expanding economy. Powell suggested last week that Fed will allow inflation to overshoot its 2% inflation target to balance the periods in which it under shot its target. It implies that fed will keep interest rates close to lower bound for long time.

I feel like what else fed can keep on doing on monetary front, I think fed has exhausted its tool kit to a great extent. The only other game is fiscal policy which is highly dependent on the election this year. This new policy will favor adding more money to equities and will keep zombie companies afloat for longer. I don't know any other way to spur inflation if disruption of the business models is going on, cheap products keep pouring in from countries where labor is cheap and corporations don’t like unions.

Other aspect is highly expensive tech sector. Big US companies are dying to buy Tik Tok if media reports are true. I don't think it serves the long term interest of shareholders. Every 6 months we have a new app and every 2-3 years we will have 30-40 billion dollar worth apps to fight for. This is absolutely running after fads.

The valuations are made by taking fanatic assumptions of future revenue which may never be realized if there is a new better fad in near future. It is human nature that every generation will be interested in new ways to amuse itself and prove itself superior. It will be a surprise to see corporations keep on doing well far into future when unemployment is more than 10%.

I would ask retirees not to jump the boat now, by buying more equities specially tech now to quench their yield thirst.

                   Week Ending August 21st, 2020

Growth stocks performed more than value stocks and pushed Nasdaq higher last week. SP500 edged passed its pre-pandemic record reached in February 2020. Apple became the first company to reach US$2trillion market cap in the history.

Stocks got off to a good start after reports showing increases in housing starts and permits in July. Also the existing home sales in July rose much more than expected while the weekly initial jobless claims rose to 1.1million after dipping below 1 million in the previous weeks.

The national daily new cases of corona virus continue to fall. On Wednesday, Federal Reserve’s minutes from its July meeting were released, which showed less assurance of further monetary stimulus and downbeat outlook for the economy.

I think the record high stocks and indices do not mean that the underlying fundamental problems have gone away. The housing market is in stark contrast to the labor market. Fundamentally its hard to digest that SP500 is at its pre-pandemic level while the unemployment rate has gone to 10% from 3.5%. I think the fundamental theories are not at play right now but eventually they will be.

I think it was not a bad experience for investors who followed “make hay while the sun shines” even though they understood the disparity between stock prices and economy. But let's see how long the investors keep on watching the shinning sun on the horizon.

I only mean to say that economic recoveries take time if we look at history  But the stocks moved much much higher in the absence of new positive information if we believe the pre-pandemic “normal“ as the real normal.

Week Ending August 14th, 2020

The Major US stock Indices ended the week in green again. Dow Jones Industrial Average’s 1.8% weekly gain led the market followed by SP500’s 0.6% for the week ended August 14. Nasdaq’s weekly performance was flat though. Value stocks continue to perform as rotation is underway after the outperformance of large growth stocks in recent months.

Investors sentiment was boosted by

• Downward trend of new coronavirus cases 

• Russian vaccine news to some extent, but the enthusiasm waned after many experts raised questions about lack of extensive testing used by Russia.

• Initial unemployment claims fell more than expected and moved below one million for the first time.

• University of Michigan’s measure of sentiment  ticked upward

• CPI for July surprised to the upside ,calling for higher inflation expectations in future.

Current Congressional negotiations around another round of stimulus have stalled. US Senate went into recess until September 8 while US house of Representatives is already on recess. The lack of any progress will affect the economy negatively, as extra $600 weekly unemployment benefit expired on July 31, and the application deadline for PPP loan expired on August 8th. I think we will have only one round of stimulus before election only . As there will be October the only month left before Election.

Moreover I don’t think people should take economy as “modern quick start engine” which will fire without any lag after a major shock. Economy will take some time before it fires on all cylinders. Investors should bring down their 2021 expectations from US companies. And super flying large growth stock will be the first  to fall once we have vaccine of some sort.

I think Angry Bears need to re-evaluate their shorts. Angry Bears should keep their eyes open and try to stay put.

Week Ending August 7th, 2020

US stocks recorded solid gains last week. The catalyst for these gains is hard to find as always, apart from slowing number of new coronavirus cases. Labor market data showed initial jobless claims rose only by 1.2 million in the week ended August 1st, which is slightly better than the previous weeks numbers. Also it was reported on Friday that Non Farm Payrolls increased by 1.76 million in July 2020 and the unemployment level fell to 10.2%. So this July report showed that although economy slowed down due to resurgence of new cases, but it has not reversed its course.

As expected President Trump issued an executive order this Saturday to continue the extra unemployment support for millions of Americans as negotiations between Democrats and Republicans failed on Friday. Trump authorized the $400 a week in additional unemployment benefits with the Federal government providing 75% of the those funds.

Trump added to the worries of Chinese tech firms by banning US transactions of TikTok and WeChat. I think actions against Chinese firms have been a new political strategy of Trump. I am not a professional political advisor but it feels like these measures are being used to elevate Trump’s image in US rather than punishing Chinese firms, as evident from the lack of any firm and immediately effective measures.

If we look at Big tech companies of United States, they are silent about China and Hong Kong. It has to be seen if China takes retaliatory actions against US by banning Apple or TSLA products in China etc which seems highly unlikely. We need to understand that Big tech companies act like sovereign states and have the capacity to negotiate with countries. These tech companies do not belong to a particular nation rather they are nation states in themselves. 

Moreover last week, I discussed the possibility of development of successful vaccine before Christmas and a possible meltdown of tech stocks which benefitted from the stay at home and work from home scenarios so far. I think it is a feasible scenario and tech investors should be aware of that.

Week Ending July 31st, 2020

Last week was very busy as investors were bombarded with a lot of fresh data including earnings reports, 2nd Quarter US GDP, initial claims and Fed announcements. Large and growth stocks continued to outperform as big tech firms like AAPL, Alphabet, AMZN and FB  had blown quarterly results Energy stocks Chevron & ExxonMobil recorded declines due to steep 2nd quarter losses. Industrials and material stocks also declined.

The big tech companies continue to profit from change in consumer behavior due to the pandemic. I still think Tech trade is very crowded , although these large tech companies have strong balance sheets with lot of cash and huge growth potential. And we should cut our exposure to tech. Chief executives of AAPL, AMZN, FB and GOOGL appeared before congress to make their case against their alleged monopolistic  policies. I think investors don’t take these testimonies very seriously nowadays as congress lacks the will to act. Even if we believe that Congress will break these big companies into small separate firms or something like it, I think these new separate entities will emerge far bigger than they are today.

AAPL announced the 4 for 1 stock split on last Thursday, I think if the momentum keeps its current pace into the rest of the year, AAPL will double its valuation by year end. Moreover the Robinhoods are out there to quench their thirst with fresh AAPL juice coming out of the split.

It was reported that US GDP contracted by 32.9% in the 2nd quarter which was already being expected by investor community. Initial claims stayed above 1.43 million in the week ended July 25.

Fed kept the federal funds rate unchanged at 0.00%-0.25% and extended  the lending facility through the end of this year. Jerome Powell pledged that the Fed would use its full range of tools to support the economy and reiterated that course of recovery would depend on the trajectory of virus. It is very difficult to fight the fed and go against it right now, as Fed will keep pumping money into the financial system. It makes me think sometimes that are investors are not calculating the huge risk premium associated with risk assets they hold in the backdrop of high unemployment levels and very low growth projections in the extended future. Ofcourse there are pockets of market which are benefitting from the pandemic, specially tech stocks, but what will happen when we all would have passively or actively acquired immunity against virus.

Millions of Americans are still waiting for stimulus checks while democrats and republicans fight over liability protection and extra unemployment benefits per week.

Week Ending July 24th, 2020

The stocks started the decline on Thursday as the rotation out of growth stocks into value stocks continued last week. Moreover it was reported on Thursday that 1.4 million people filed for employment benefits which exceeds the previous four weeks numbers. Also investors started looking at stretched valuations last week and decided to cut exposure to technology stocks. As most of the tech giants reported  better than expected results, even then the their stocks tumbled last week.

Moreover the sentiment towards tech was also swayed by the rising tensions between US & China. China retaliated to US’S order of closing Chinese consulate in Houston by asking US to close US consulate in Chengdu. Mr. Pompeo also criticized Chinese leadership while praising the hardworking Chinese people. He just stopped short of asking for a regime change in China. I think this trade war will go for long time even if we have democratic president next year.

I think China has wasted entire four years beating about the bush. I think America Under Trump’s leadership has realized that it is time to change gears now. Still Tech giants are mum about this new escalation as they fear it may disrupt supply chains which pass through China. I think these tensions may escalate further if there is some kind of military incident in the south china sea in the near future. 

I would like to advise that it's not late to allocate some of the funds into European Markets as across the Atlantic, valuations are not that stretched. The stimulus package passed by European leaders shows that European Union has understood the strength of standing together. The European Union has set a precedent which will guide the union in future and as history suggests European states will not take it as one time event.

On the recovery front I think business which received PPP funds have spent all the money so far and these small business are thinking about permanent closures or cutting the labor force permanently while congress is mulling over another stimulus package. As the pandemic has gone worse in the last three to four weeks and it appears that it will take long time for economy to recover. All I mean to say is that the rate of recovery is going to pause for a while before it starts again.

Week Ending July 17th, 2020

The Major Stock Market Indices posted another positive week except Nasdaq as  There was a shift out of growth stocks into value stocks last week which caused Nasdaq composite to pull back from its recent highs.

Major US banks reported last week, several banks reported drop in profits as banks set aside billion of dollars in anticipation of the writing down bad loans. To me it is a sign of protracted recession scenario banks are looking at. 

There was a good news on the vaccine front as Moderna announced on Tuesday that its vaccine had produced high levels of antibodies in all participants. On Wednesday Oxford university announced that its vaccine not only produced antibodies but also killer T cells which may offer prolonged immunity.

On Thursday it was reported that 1.3 million Americans filed for unemployment in the week ended July 11 which is a decrease of 10000 from previous week’s revised level. 

We have not seen a major pull back so far in the recent weeks in the stocks as I think Investors are confident that we will have some kind  of vaccine ready by this year end. And that’s why investors are looking past 6 months from now.

Investors also realized to some extent that earnings of the tech companies will never justify the tech valuations. Thats why investors started looking at value stocks again last week. But still I think there is lack of conviction among the investors. The stock market is looking for direction here. The major driver to me is the vaccine and second would be the election outcome. Trump is loosing more points to Biden as suggested by major polls. 

The US China relations are at a very low point, as both sides move farther away from each other by taking adverse actions against each other like sanctions. More importantly as attorney general Barr suggested, US tech companies want to cooperate with China. I don’t think any major US tech company has issued any statements against China’s actions.

Please cut your exposure to growth stocks a little bit and take some profits. I think it's better to put harvested funds into value stocks now.