17 Sep Capital 19 Catch-Up – Sep 17

Wall St continued to rise last week as optimism over trade negotiations helped buoy investor spirits. The Dow closed the week out with an 8-day winning streak which it hasn’t seen in over a year, while some mixed trading days saw both the S&P500 and the Nasdaq throw in a few small losing sessions.

All up, over the five sessions, the Dow led with a 1.6% gain. The S&P500 made 1%, The Nasdaq eked out 0.9%, while the Russell 2000 (Small Cap Stocks) was the week’s best, producing a healthy 4.9% gain for the week.

Small Caps have been serial underperformers versus large cap over the last 12+ months but this week was vastly different. Since small cap is inherently more risky than large cap, this kind of move demonstrates a “risk on” approach from investors.

Thawing tensions between China and the US

Normally we only see “risk on” at the start of a rally higher. This is vastly different to the expectations of recession we have been hearing for some time. Markets rarely do what one expects and we would listen very carefully to this risk on signal. Rather than fearing a recession, perhaps now is the time to load up for the next leg higher.

Thawing tensions between China and the US was the primary factor for the week’s movements. On Monday China offered to buy more US agricultural products if there was a delay in tariffs and if the ban on Huawei could be lifted, and on Wednesday released tariff exemptions on a list of US products.

The US reciprocated with a 2-week tariff delay of their own in a “gesture of “goodwill”, with Trump adding he would perhaps consider an “interim trade deal” although it is not his first preference. Then, China rounded out the week by exempting certain US agricultural products from additional tariffs including pork and soybeans.

So, is the love fest between the US and China real this time, or is it just more “fake news”? We’ll find out over the next few weeks as negotiations continue leading into the planned meeting in Washington on October 1. I’m still pricing in the chances of the meeting actually happening at 50/50, so let’s cross fingers that both sides are willing to come to the table and hash something out.

Cannabis Stocks

Speaking of hash, Aurora Cannabis (ACB) reported earnings last week and despite an impressive improvement across the board it failed to impress shareholders. Production levels were up 920% to 57,442 kilograms of cannabis, while sales increased by 629% to 36,628 kilograms. But while the marijuana supplier continued to increase sales and production it is still burning through an enormous amount of cash.

ACB also missed its own reduced guidance. Earnings were down CAD$11.7 million when they had accounted for a loss of only $4.1 million, but it was still much improved on the $36.6 million loss in the previous quarter. That stock dropped more than 9% following the earnings and analysts are still mixed over whether a buy at these cheaper levels is warranted. You can get a better idea of the industry from Capital 19’s buying guide found on the following link:   https://capital19.com/category/investing-in-the-cannabis-industry/

Apple

It was also a big week for Apple as they held their annual hardware event in Cupertino California. We saw the annually upgraded iPhones – the iPhone 11, 11Pro, and 11 Pro max – with enhancements in processing power and camera systems the major improvements. There were also new versions of the iPad and the Apple Watch on display.

Product margins were an interesting talking point with prices coming in the same as, or in some instances cheaper than, last years models. It’s getting harder and harder for Apple to continue increasing their premium prices when they are already much higher than their competitors. It seems they have finally found the limit to which consumers are willing to pay for premium devices, especially when competing products have improved to the extent they have. I think it’s a positive move for Apple. Cheaper prices will mean more users, and more users mean more customers using Apple’s services – which you would know if you have been reading the Catch Up for any length of time – will be the company’s core business in five years time.

Case in point is the Apple TV Plus streaming service which was announced on Tuesday. It will attempt to take on the likes of Netflix (NFLX), Amazon Prime (AMZN), and the upcoming Disney Plus (DIS) in the streaming wars. It has started out by undercutting all of its competitors by a couple of dollars a month and offering a free year’s subscription to anyone purchasing a new iPhone, iPad, laptop, desktop, or Apple TV. It’s called playing the long game. Getting as many users as you can early on, and racking up the price later when they can’t do without the service. It’s a smart move when the quality of the TV offering Apple can provide will take time to grow.

Apple gained more than 6% over Wednesday and Thursday before moving 1.94% lower on Friday following a downgrade from Goldman Sachs (GS). The Goldman analysts have always been Apple bears and the reason given for the downgrade – regarding accounting methods for the Apple TV Plus service – seemed a stretch. Ignore the GS recommendation and buy Apple on the great dips such suggestions provide.

The big banks also had a fine week with all of the major players joining in on the action. Yields on the 10-year bonds jumped 30 basis points over the week which helped buoy the financial sector. Bank of America (BAC) gained 9%, while Citibank (C) and JPMorgan (JPM) both made more than 6%.

One of the big talking points of the week was the move out of defensive stocks and into growth stocks. It coincided nicely with the improvements made in trade relations and highlights that investors were willing to take on a little more risk in their portfolios when there are less global concerns. Check out the graph below from Bespoke Investment Group showing how the best-performed stocks in the year to date dropped in price throughout the week while the worst-performing gained almost 7%. The shift is fascinating.

It will be interesting to see if the trend continues into this week. I’m guessing it will all depend on developments in trade talks and of course the FOMC meeting which occurs on Wednesday.

The Federal Reserve is still a 90% chance of cutting rates by .25 if the experts are to be believed. What Wall St really wants to see, however, is what the fed plans to do about interest rates for the rest of 2019. Jerome Powell’s press conference following the decision, along with the release of the dot plot projections which shows where each voting member stands on future moves, will be crucial to this. Two members voted against the last rate cut believing the economy wasn’t weak enough to justify the move. A few more joining them this time around could throw a curve-ball to expectations.

Other than the Fed rate decision it’s a fairly quiet week ahead. Earnings reports are thin on the ground with only a few weeks remaining until the end of the quarter. FedEx (FDX) will be an interesting one and could be considered a bellwether for retail stocks and the economy as a whole. Analysts are expecting earnings per share of $3.18 and $17 billion in revenue.

During its last report, it stated slowdowns in Europe and Asia had hurt business, and you would imagine that little changed in the following three months. The trade war raged on and even intensified, while European manufacturing outputs continued to slow. The company also lost two important contracts with Amazon who have chosen to set up their own delivery business. The impact of this is estimated to be around 1.3% of total annual revenue. I suspect FedEx might find itself under pressure this week.

Data wise, other than the FOMC announcement, we have Housing starts, the Philly Fed, and home sales. A fairly bland week overall. You can have a look below for the full list.

Hope you have a great week.

Cheers,

Paul.

Earnings:

• Tuesday: Adobe (ADBE), Autozone (AZO), FedEx (FDX)
• Wednesday: Rite Aid Corp (RAD)
• Thursday: Darden Restaurants (DRI), Micron Technology (MU)
• Friday: CarMax (KMX)

Economic Data:

• Tuesday: Industrial Production, Capacity Utilisation, Home Builders index
• Wednesday: Housing starts, Building permits, Fed announcement, Jerome Powell press conference
• Thursday: Weekly jobless claims, Philly Fed survey, Current Account deficit, Existing home sales, Leading economic indicators
• Friday: None