Mar 30, 2023
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“Russia has sold us a sucked orange… has therefore done wisely in selling the territory and islands which to her had become useless.” – New York World, 4/1/1867
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After the Nasdaq 100 closed at the highest levels since Powell’s Jackson Hole speech last August, investors are looking to close out the quarter on a positive note. A bunch of economic data just hit the tape, and there weren’t a lot of big surprises. Initial Jobless Claims came in slightly higher than expected (198K vs 196K) while Continuing Claims came in modestly below forecasts. The final read of Q4 GDP was revised lower by a tenth of a percent to 2.6% from 2.7%. One piece of bad news was Core PCE which was revised up to 4.4% versus forecasts for a reading of 4.3%. The market reaction to the news has been muted with only a slight ding to the positive tone in futures and a slight upward move in interest rates.
When news surfaced that Secretary of State William Seward had negotiated to purchase Alaska from Russia on this day in 1867, “Seward’s Folly” was widely ridiculed in the press and the public as a waste of money for land that was nothing but ice and frozen dirt. By the late 1800s, Alaska’s main trade of fur had been largely depleted due to overhunting that resulted in the near extinction of sea otters. Also, other minerals couldn’t be mined because of the climate conditions in the area.
Little did anyone know at the time how rich the Alaskan territory was in terms of oil and gold and that advances in mining would make these resources more accessible. In terms of oil alone, according to the Department of Energy, Alaska produced an average of 437K barrels of oil per day last year which works out to roughly $35 million! Seward’s $7.2 million purchase of Alaska translates to $146 million in today’s dollars, so even after adjusting for inflation, the amount of oil that comes out of the ground in Alaska every five days is more than enough to cover what the US paid for the entire state!
There are two important investment lessons that investors can take from “Seward’s Treasure”. First, the largest returns don’t usually come when you’re following the crowd (think tech’s performance so far this year and sentiment towards the sector heading into 2023). Second, no matter how bad an investment may look in the short term, the more time you are willing to give it, the better it will likely look down the road.
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Mar 29, 2023
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“Anyone who isn’t confused really doesn’t understand the situation.” – Edward R Murrow
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50 years ago today, the United States officially withdrew from Vietnam ending what was at the time the longest war in US history and easily the least popular. Five decades is a long time, but it’s also hard to imagine how quickly things can change in that time or even shorter.
You don’t need to look at the back of an electronic device or a tag of clothing to realize that China has long been considered the factory to the world. However, beginning under the Trump Administration, China has, for numerous reasons, been losing its allure as a place for companies to source production and manufacturing. That trend was only exacerbated by COVID as shattered supply chains, strict COVID-zero policies, and the desire of companies not to have all their production eggs in one basket all resulted in what has become a wave of diversification. China still remains the dominant global manufacturing source for cheap production, but other countries in the region have picked up share.
Enter Vietnam. The chart below shows the relative strength of the MSCI China ETF (MCHI) versus the VanEck Vietnam ETF (VNM). From 2013 right up through the end of Q1 2020, Chinese stocks handily outperformed China, but right when COVID hit, that outperformance came to a screeching halt. Within a year after the onset of COVID, it became clear that China would maintain its strict COVID policies, investors and manufacturers looked elsewhere. For the next year, Vietnamese stocks crushed Chinese stocks on a relative basis. Over the last several months as China has reopened, some of the outperformance by Vietnam has reversed, but the momentum of Chinese stocks in the years from 2013 through 2020 is a broken trend.
Closer to home, Mexico has also been a winner in the wave of global manufacturing diversification. While it doesn’t have the manufacturing infrastructure of China, for certain applications or sectors, Mexico has been able to pick up share as companies save on the costs and time of shipping and can more easily oversee operations. Given that Mexico’s economy is also one-fifth the size of China, a ‘little’ loss of share in China goes a much longer way in Mexico.
The shift in Mexico’s fortunes has clearly been reflected in the performance of Mexican stocks, especially relative to China. Like the chart above, the one below compares the relative strength of the MSCI China ETF (MCHI) to the MSCI Mexico (EWW) over the last ten years. Again, right up to and in the very early days of COVID, China handily outperformed Mexico, but early in the pandemic, the attractiveness of Mexico started to improve, and in the span of just over two years, Mexico has erased pretty much all of China’s outperformance from the prior eight years. Looking at charts like these is it any wonder that China was quick to pretty much drop all of its COVID restrictions in the last few months?
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Mar 28, 2023
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“If you want total security, go to prison. There you’re fed, clothed, given medical care, and so on. The only thing lacking… is freedom.” – Dwight D Eisenhower
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You couldn’t really ask for a more sleepy morning in the markets as futures are basically unchanged. S&P 500 futures are up less than a point, the Nasdaq is indicated to open down less than two points, and the Dow is indicated to open up by less than a point as well. Treasury yields are higher with the 10-year yield up by 4 basis points (bps) to 3.57% while the 2-year yield is up by 7 bps and back over 4%.
We could see the market wake up later on today with Wholesale Inventories at 8:30, the FHFA House Price Index at 9:00, and then finally at 10, we’ll get Consumer Confidence and Richmond Fed. The Richmond Fed report will be the fifth and final of the five Fed manufacturing reports that are reported each month, and like the rest of them (which showed no growth), it is expected to come in negative, although not as bad as February’s reading.
Investors can’t seem to make up their minds as to where stocks should go from here, how the bank crisis will play out, and whether the FOMC’s next move will be a rate hike, a rate pause, or a rate cut! Think about it. How often is it that credible arguments can be made for any of those three decisions? With that uncertainty, is it any surprise that the S&P 500 is sandwiched right between its 50 and 200-day moving averages (DMA)?
Even as the S&P 500 shows the characteristics of an indecisive market, there’s more dispersion at the sector level. Of the eleven sectors, seven (shown below) closed yesterday below both their 50 and 200-DMAs.
On the upside, the only two sectors above both their 50 and 200-DMAs are Communication Services and Technology (below). That leaves just one sector – Industrials (XLI) – which, like the S&P 500, is sandwiched between those two averages.
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Mar 27, 2023
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“Sitting here in limbo, waiting for the dice to roll.”– Jimmy Cliff
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Andrew Jackson once said that he had always been afraid of banks, and the market echoed that sentiment for the last several weeks, but this morning, they’ve put those fears aside. A deal from First Citizens Bank to acquire the assets of SVB Financial coupled with the fact that there were no other major headlines of trouble over the weekend here or in Europe, specifically with Deutsche Bank, has futures firmly in positive territory to start the last trading week of the first quarter. The economic calendar is quiet today with the Dallas Fed Manufacturing survey being the only report scheduled for release (10:30 Eastern). In Europe, the major equity indices are all up by more than 1%. It’s a good start at least!
For the equity market, we’re kicking off the last week of the quarter in a bit of a limbo period as the S&P 500 closed out last week modestly above its 200-day moving average (DMA) after briefly breaking below it during the trading day Friday. That was a moral victory for bulls, but it came just a day after it failed to close above its 50-DMA on Thursday after briefly breaking through it to the upside.
Given the pre-opening strength in equities and lack of new stresses in the financial sector, treasuries are selling off this morning, especially at the short end of the curve as the two-year yield is up close to 20 basis points (bps) and inching towards 4%. Crude oil is back above $70 per barrel, and gold is down 1.5% after failing to hold the $2,000 level last week.
Within the S&P 500, it was a broad rally last week as nine of eleven sectors (even Financials!) finished the week in positive territory. The only losers were Real Estate and Utilities which were both down close to 2%. On the upside, it was an interesting mix as Communication Services and Technology led the way higher (so surprise), but right behind those two sectors, Materials and Energy both also rallied over 1%.
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Mar 24, 2023
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“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford
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They’re starting to drop like flies. The dragnet on global banks has moved on to Deutsche Bank (DB) this morning as the stock trades down over 10% following a sharp decline yesterday as well. Given the tendency of the bank to always find itself right in the middle of any issue related to banking troubles, it’s almost surprising that it didn’t happen sooner. There only potential catalyst for the decline in Deutsche Bank stock this morning is a report that suggests that the language in other CoCo bond documents gives regulators discretion to write down the value of those bonds. The fact that central banks worldwide have been happily hiking rates amid global bank runs hasn’t helped the situation.
Credit default swaps (a relatively illiquid market) for Deutsche Bank have surged to a four-year high this morning as investors poke at the bank’s stock and bonds for any evidence of underlying problems. Defenders have cited the bank’s healthy common equity tier one capital (CET1) ratio of 13.4% and the fact that the ratings agencies had been recently upgrading the bank’s credit rating, but for now, the bank’s reputation is all the probable cause the bank vigilantes need.
The trouble in European markets has made its way over to US markets as bank stocks are all trading lower, crude oil is down sharply, and treasuries are as popular as a Taylor Swift concert ticket. There have been some wild moves across financial markets in activity that has been anything but orderly. The two-year Treasury market is a perfect example where 20 bps daily moves in yield, while previously uncommon, have become the norm. Just over two weeks ago, the two-year yield was over 5%. This morning, the yield is at 3.56%. Who’s running this market? Ticketmaster?
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Mar 23, 2023
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“These contradictions are not accidental, nor do they result from ordinary hypocrisy: they are deliberate exercises in doublethink” – George Orwell
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In foreign relations, a policy of strategic ambiguity can often be effective. Conflicting messages regarding responses to a potential action leave all actions on the table and keep the parties involved guessing regarding any reaction you might have. The US has been employing this strategy with respect to China and Taiwan. Over the years, various officials have repeatedly given conflicting messages regarding how we would respond to a Chinese invasion or if Taiwan sought to declare independence. By doing this, it keeps China from invading under the threat of a US military intervention, but by also supporting the one-China principle, Taiwan has refrained from declaring independence from China. It may not be a long-term answer, but in the short term, it maintains the status quo.
One area where a policy of strategic ambiguity may not be as effective is in the handling of a banking crisis. Within the span of under 30 minutes yesterday, we saw the heads of the Federal Reserve and US Treasury give somewhat conflicting signals regarding the US banking sector. At 3 PM Eastern, Treasury Secretary Janet Yellen told a Senate Committee that she is not considering a broad increase in deposit insurance at US banks. Besides the fact that she made somewhat contradictory remarks just a day earlier, her statement seemed to be the complete opposite of FOMC Chair Powell who said just a few minutes later in his post-meeting press conference that the Fed has the tools to protect depositors and is prepared to use them in order to safeguard deposits. Given the conflicting signals, most rational investors would not stay put thinking that there is a good chance their deposits are safe, they would step on the gas and get out of dodge!
The conflicting signals given by Powell and Yellen yesterday certainly didn’t instill a whole lot of confidence on the part of investors, and that helped spark a sharp late-day sell-off in equities towards the close. From the end of Powell’s press conference through the closing bell, the S&P 500 sold off more than a full percent to finish right near the lows of the day.
Powell made another subtle shift in his messaging yesterday. While he has tended to kick off prior speeches lately with an adamant anti-inflation message (remember Jackson Hole), that wasn’t in yesterday’s speech. Instead, he used the opportunity to highlight the ‘decisive’ actions taken by the Federal Reserve and Treasury to address and contain the crisis and keep the banking system ‘sound and resilient’. If you thought the omission of the anti-inflation message was a sign of a more dovish Powell, though, he tried to dispel any notions of that when he closed out his press conference with the statement “I mentioned with rate cuts, rate cuts are not in our base case. And you know, so that’s all I have to say, so.” Always keep them guessing!
Our Morning Lineup keeps readers on top of earnings data, economic news, global headlines, and market internals. We’re biased (of course!), but we think it’s the best and most helpful pre-market report in existence!
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