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Capital 19 Catch-Up – Mar 26

It was a tough time to be a trader last week, as a rollercoaster market traded up, down, and sideways, before culminating in a decent sized pullback in the Friday session. It was the biggest fall for all the major indices since January 3. It pushed all three into the red for the five days with the Dow down 1.3% for the week after falling 1.77% on Friday, the S&P500 finishing down 0.8% after it’s late 1.90% fall, and the Nasdaq losing the most in the final session (2.5%) but losing the least in the week overall with a 0.6% loss.

The Thursday session had seen some of the largest gains of the year as the Federal reserve board took on an extra dovish tone in its monthly rates meeting. But that excitement quickly dissipated as both domestic and foreign occurrences convinced investors that all was not as rosy as first thought.

In the US we had short term rates going above long term rates for the first time since 2007. This produces what’s known as an inverted yield curve, and indicates a general consensus for downward rate movements, potential deflation, and a possible recession. The 10year and the 3-month bonds are one of the closely watched indicators, and when they switched positions on Friday the markets got concerned (see graph below).

 

US Bonds

 

Inversions of the spread between these two have occurred before each of the previous seven recessions. Albeit, a year in advance on average. However, this doesn’t mean that a recession in the US is definitely on the way.

We’ve had two false positives in the past, in 1966 and 1998. We’ve also had governments all over the world, including the US, buying their own bonds as a form of quantitative easing. This has meant the market that these bonds have been trading in has been heavily manipulated. The effect this has on yields is impossible to tell, but when you have governments buying and selling their own bonds it can hardly be considered a freely traded market. At the very least it throws some serious doubts over whether this is still a reliable indicator for picking a recession. It’s a “watch this space” at the moment. We’ll be also keeping an eye on the unemployment rate, which is currently sitting at all-time lows, and the copper price, which are both great indicators.

So, what sparked the drop in yields? It was a raft of global economic data that had traders concerned. Eurozone manufacturing fell to 47.7 in March, from 49.4 in February. It was its largest pullback in five years. Both France and Germany led the way lower after achieving a brief recovery in Feb. the US PMI was also disappointing, hitting a 21 month low of 52.5. It was better news for the housing market though, as new home sales were up 11.8% – an 11 month high.

Over the weekend we saw up to 1 million people marching in London, demanding a second referendum on whether the UK should leave the EU.  As it stands currently the UK will leave the EU on the 12th April, after being allowed an extension last Thursday. And it is looking more likely to be a “no-deal” Brexit unless Prime Minister May can somehow manage a deal, in which case the date will be extended. A further extension is unlikely, and abandonment of Brexit, while perfectly legal, is not preferred at this stage by a majority on either side of parliament. Perhaps the weekend’s rally may change this? Who knows? It has been an absolute shambles from start to finish.

We also saw the Mueller report into Trump’s suspected collusion with Russia end with a whimper. A 22-month long investigation has failed to deliver anything of substance. How it took so long to come up with absolutely nothing astonishes me. The Democrats are ropeable and want to see the full report asap, but this is unlikely to happen and the President is in the clear for the time being. It’s good news for the markets, with the chances of the President being toppled out of the blue much less likely.

In stock news, we had Nike (NKE) fall 6.6% on Friday after it reported disappointing sales in North America for its Converse line of sneakers. A highlight was seeing revenue out of China up 24% which could be good news for the shoemaker in the next few quarters. Tiffany & Co (TIF) had a much better time after releasing their earnings, gaining 3.2% as the high-end jeweller topped profit estimates in the fourth quarter. Hibbett Sports (HIBB) was the standout, however, jumping an impressive 20.29% after sales were better than expected and Wall St enjoyed what they heard from the company’s guidance.

Boeing (BA) staged a mini-recovery early in the week, but it wasn’t to last long. The plane manufacturer fell 2.83% on Friday after Indonesia’s national airline Garuda said it wanted to cancel its order of 49 more 737 Max 8 jets, in a deal estimated at $4.9 billion. Boeing has a further 4000 737 Max planes on order throughout the world, but at this stage, there are no other cancellation requests. Investigators are still looking into the cause of the two crashes with initial concerns focusing on Boeing’s flight control software.

This week on the markets we’ll see the first of the big tech IPO’s that we have been waiting expectantly for in 2019. Lyft (LYFT), the main rival to the dominance of Uber in North America, will make its debut later in the week. The company plan to sell 35.4 million shares with a valuation around the $23 billion mark. That valuation would make it the fifth largest IPO since the GFC. There will be two classes of the stock, class A and class B, with the CEO and President owning 5% of the stock but 49% of the voting shares. A similar structure to Alphabet (who incidentally hold an $870 million stake in Lyft), and one that is quite common amongst the tech stocks on the Nasdaq.

So should you be buying Lyft when it opens up next week? Well, as you can imagine when stock debuts it can be a bit of a lottery as to what it will do in the short term.  You don’t want to pay too much, but it’s hard to know the value of potential. Lyft as a company is growing quickly, it’s revenue doubled last year, while its losses also increased though not as quickly. It increased bookings by 76% in 2018, while rival Uber increased theirs by 45%.

It’s a smaller company than Uber, but without all of the baggage that Uber comes with, i.e. the scandals, the lawsuits, and the stuff ups. So far Lyft has a relatively clean sheet and will no doubt look to expand out of North America into additional global regions. There are always risks, however. There are a host of rivals lining up at the door, there are regulators that are continually attempting to control the industry, while the holy grail of autonomous driving looms large for the company who can crack it first. If the share price takes off early I would more than likely give it a miss initially. It may just keep going, but the chances are there will be a pullback at some stage and that might just be the perfect time to invest.

Earnings reports this week are thin on the ground as the quarter comes to an end. However, we’ll have another of the big pot names in Cronos (CRON) reporting numbers. While leisure wear maker Lululemon (LULU) shows us their quarterly results as well. KB Home (KBH), and Lennar Corp (LEN) are going to keep the homebuilders on their toes. While Matt Jones’s favourite phone company BlackBerry (BB) are somehow still surviving and will report on Friday.

The economic data will focus on Consumer confidence, GDP, and consumer sentiment. You can see the full list below along with a few more earnings announcements.

Have a great week.

Cheers, Paul.

 

Earnings:

  • Tuesday: Carnival Corp (CCL), KB Home (KB), Shoe Carnival (SCVL), Cronos (CRON)
  • Wednesday: Five Below Inc (FIVE), Lennar Corp (LEN), PVH Corp (PVH), Lululemon (LULU)
  • Thursday: Frontera Group (FRTG)
  • Friday: Carmax Inc (KMX), BlackBerry (BB)

Economic Data:

  • Tuesday: Housing Starts, Building permits, Case-Schiller home price index, the Consumer confidence index
  • Wednesday: Trade deficit, current account deficit
  • Thursday: Weekly jobless claims, GDP revision, Pending home sales
  • Friday: Personal income, consumer spending, core inflation, Chicago PMI, New home sales, Consumer sentiment index.

 

 

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