Where There’s Smoke

Where there’s smoke. Stocks ended up mostly unchanged on Friday ahead of the three-day break as investors remained unsure about what impact the virus might have on company performance.  Consumers appear to be confident but they might be buying less.

 

N O T E W O R T H Y

 

The numbers beyond the numbers.  Since the Coronavirus outbreak became public, many have focused on the tally counts, investors included.  Seatbelts on, this may sound controversial: for investors, the focus should not be about number of confirmed cases or deaths, it should be about real impacts on their portfolios.  The Chinese government appears to agree with the statement.  Since the outbreak, the news I wake up to each morning (by morning I mean early, early morning, like when it is still afternoon in Beijing) rarely contains statements on Chinese Government activities related to curbing the virus, but instead is full of activities by the central bank (PBOC) to shore up the Chinese economy.   They have been injecting money, lowering rates, forgiving loans, and handing out incentives.  Last week the Government announced that they were going to tap into the country’s strategic frozen pork reserves in order to stabilize food prices.  Yes, China has strategic pork reserves… you can check me on that.  That is not to say that the Chinese Government is not doing anything to contain the virus and heal its citizens, but it is clear that they are trying to minimize economic impact.  Let’s go there for a minute or two.  The country is virtually shut down which means that not only are factories partially or completely shut down, but also consumers themselves are staying home… not shopping.  I have written about auto companies shutting down production lines in other countries due to a lack of Chinese parts inventory.  It goes well beyond the auto industry as China is an integral part of the supply chain of most sectors in one way or another.  Now let’s talk about demand for goods.  With Chinese industry shut down, demand for fossil fuels like crude oil and metals like copper has been reduced significantly, putting pressure on not only commodity prices, but also the companies that produce them.  Metals and mining had a tough 2018 and a rocky ride in 2019 which ended with some optimism as the Phase One trade deal was signed.  A year-end rally and breakout left sector investors hopeful that the rally would bring them back to the recent 2017 highs, or better yet the highs achieved a decade earlier.  Now the Coronavirus threatens those hopes.  China is not the only consumer of natural resources but they are still one of the largest.  On to consumer goods.  When most people think about China, they think of it as a large producer and seem to forget that they are also a large global consumer.  Everyone knows that Apple produces iPhones and components in China, so one would naturally expect the virus to impact Apple’s production, inventories, and costs.  What many investors may overlook is that China is also a large consumer of Apple products. Apple’s sales in China are almost on par with sales in Europe, so Chinese consumers are important to its success.  With consumers locked up in their homes and most Apple stores still closed, one can expect Apple (and many other US companies like it) to be impacted.  In fact, WHILE YOU SLEPT, Apple announced that it would miss its revenue guidance due to the Coronavirus.  As you might expect Apple’s stock fell in the pre-market, down by around -3.2%.  With Apple being a heavily weighted member of the Dow Jones, the S&P500, and the NASDAQ, the indexes will start this morning’s session on shaky legs.  More importantly, investors have been quite sanguine about US equities, largely ignoring the virus’ impact on corporate performance, which is worrisome. When investors get complacent, risk goes up.

 

 

THE MARKETS

 

Stocks closed mixed on Friday as investors watched China carefully. Consumer Sentiment according to the University of Michigan Survey seems to be doing quite well, beating analyst expectations.  Retail Sales appear to be good on the surface, but it is slowing when factoring out volatile product groups.  The S&P500 rose by +0.18%, the Dow Jones Industrial Average slipped by -0.09%, the Russell 2000 Index fell by -0.36%, and the NASDAQ Composite Index traded up by +0.20%.  Bonds climbed on Friday and 10-year treasury yields fell by -3 basis points to 1.58%.

 

NXT UP

 

– Empire Manufacturing is expected to have increased to 5.0 from 4.8.

– This morning Advanced Auto Parts beat and Walmart missed expectations.  After the bell we will hear from Agilent, Devon Energy, Diamondback Energy, Concho Resources, Herbalife, and American Water Works.

– The week ahead will feature another stream of earnings along with housing numbers, regional Fed reports, Producer Price Index, Leading Index, and Markit PMI’s.  Additionally, the Fed will release the minutes from its last FOMC meeting.  Please refer to the attached economic and earnings calendars for details.

 

daily chartbook 2020-02-18

econ numbers 2_18

earnings releases 2_18