foxex: Battle in Aisle 4

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Global markets stall. Amazon and Walmart face off on wages and taxes.

Markets Close

Dow
26,143.05 -0.05%

S&P
2,888.32 +0.00%

Nasdaq
7,947.36 -0.21%

VIX
13.02 -2.11%

INV Anxiety Index
99.72 Neutral

US 10-Yr Yield
2.504 +1.09%

Global Markets Stall ahead of Bank Earnings

The selloff that started in Shanghai overnight, knocking 1.3% off Chinese markets slowed by the time it reached South Street Seaport, as investors await bank earnings due out tomorrow. JPMorgan Chase and Wells Fargo are due to report on Friday and will set the stage for the broader market given their exposure to the global economy, U.S. consumers and institutional trading and banking activity.

After rallying for two straight weeks, global markets hit a soft patch this week as investors wait on developments surrounding U.S. and China trade talks, as well as Brexit.

As for Brexit, it appears that the EU has given the U.K. an extension until the end of October of this year to agree upon a plan that would allow it to exercise Article 51 and leave the EU with a deal in place. James has more on how that extension impacted the British pound in our daily chart, below.

Outflows as the Market Rises

The curious thing about the rally of 2019 - one of the strongest we have seen in decades - is the continuous outflow of money from stocks, mutual funds and ETFs. We are about 700 points away from the Dow Jones Industrial's October 2018 highs, but according to data from the Investment Company Institute, retail investors have been net sellers of stocks, mutual funds and ETFs throughout the year.

Why has the Market Gone up, then?

Good question. Some of the market upside can be attributed to stock buybacks, which have been very strong in 2019, continuing the trend from 2018. Institutional buying of stocks, purchases made by pension funds, foundations and large asset managers on behalf of private clients and governments, may be picking up the slack. In addition, large cap tech stocks, including the FAANGs, have rebounded from their December lows, and are dragging indexes like the S&P 500 and Nasdaq, both market weighted indexes, with it. However, if institutions become net sellers of stocks and the mega-cap tech stocks start to fall, look out below.

Uber Finally Files

Uber finally dropped its IPO filing today, setting itself up for a public stock sale that could give the popular ride-sharing company a valuation of $120 billion. That's staggering given that the company posted an adjusted EBITDA loss of $1.85 billion on revenue of $11.27 billion in 2018. Still, there is a lot of enthusiasm behind Uber's IPO, despite the poor performance of Lyft's stock since its debut. While Uber and Lyft compete in ride sharing in North America, Uber is a global brand and has branched into other businesses like food delivery and trucking.

Jeff Bezos Challenges his Company and his Competitors

Jeff Bezos issued his annual letter to shareholders today, which is always an interesting read. We read it for you and summarized the key points therein:

5 Takeaways From Jeff Bezos:

"Third party sellers are kicking our first party butt. Badly."
"We knew we wanted to create a culture of builders" and employees with "customer obsession."
"Amazon today remains a small player in global retail."
"As a company grows, everything needs to scale, including the size of your failed experiments."
"Today I challenge our top retail competitors (you know who you are!) to match our employee benefits and our $15 minimum wage...It's a kind of competition that will benefit everyone."

In essence, Bezos is challenging his troops to think bigger, take bigger swings and extend Amazon's dominance across the globe. We should not be surprised by his ambition as it has served to make him the wealthiest person on the planet. The stock is up 6-fold in the past 5 years and passed the $1 trillion market cap mark last year before falling below it. But, given the size of the company, it is weighed down by the law of large numbers. It needs massive wins to move the needle, and Bezos was clear that he would accept big losses as the price of failure for pursuing those wins.

"If the size of your failures isn't growing, you're not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures."

- Jeff Bezos

Bezos last point, a direct challenge to Amazon's competitors to match the $15 minimum wage, did not go unnoticed by Walmart, its biggest competitor. Dan Bartlett, the head of Communications for Walmart issued this tweet in response to Bezos' challenge:

Context

While Walmart raised its minimum wage to $11 per hour in January of 2018, but the company claims that the all-in pay for workers earning that wage is $17.55 which includes benefits. As for taxes, Walmart has a point. Amazon paid no federal taxes in 2018 on a profit of $11.2 billion. Walmart, on the other hand, paid $3.2 billion in federal taxes on a profit of $28.3 billion. Amazon has been able to exploit loopholes in the federal tax system to avoid paying those taxes, but politicians, including President Trump and 2020 Democratic presidential candidate Elizabeth Warren, are promising to change that.

You can't argue that Amazon hasn't benefitted from its advantage, and investors have rewarded the company handsomely. Its share price has outperformed Walmart's by 10x over the past 5 years.

Today in Financial History

On April 11, 1968, U.S. President Lyndon Johnson signed the 1968 Civil Rights Act, which is also known as Fair Housing Act. The 1968 Civil Rights Act was a follow up to the 1964 Civil Rights Act, and it made it a federal crime to discriminate against people seeking housing or financing for housing due to "...reason of their race, color, religion, or national origin, handicap or familial status." President Johnson signed the Act in the midst of the race riots taking place across the country in the wake of the assassination of Dr. Martin Luther King.

While not necessarily a financial piece of legislation, the 1968 Civil Rights Act was a necessary and long overdue law that attempted to deliver on the promise of freedom and opportunity for all people, regardless of their race, creed or color. Unfortunately, lending discrimination still exists today, and it is not solely a U.S. based problem.

More News:

Tax Deductions That Went Away This Year

5 Things We Learned From The Jeff Bezos Annual Letter

Fed Boosts the Outlook for Stocks and Junk Bonds

Chart of the Day: Pound Remains Supported as EU Extends Brexit Deadline

The British pound dropped on Thursday, but remained supported after the European Union granted the UK a substantial extension of the Brexit deadline to October 31, 2019. This extension also has a provision whereby the UK would be able to leave the EU earlier if the British Parliament is able to pass a Brexit plan. Prime Minister Theresa May has already tried and failed three times to get her deal passed.

At this point in the drawn-out and chaotic Brexit process, the worst case scenario for both the British pound and equity markets alike would be a no-deal Brexit. Thursday's extension by the EU helped decrease the likelihood of this happening, as it affords a significant length of time for the British government to come to a consensus on a Brexit deal. While the pressure on UK markets is far from lifted, at least there's more breathing room for the time being.

The chart above shows the British pound vs the US dollar (GBP/USD). Since the 1.2500-area lows of December and early January, the currency pair has been entrenched in a general recovery. Most recently, GBP/USD has been well-supported by its key 200-day moving average. It has also been trading in a rough uptrend channel for around the past five months. New Brexit developments in the run-up to the extended October deadline could easily result in a breakdown of the pound. But if the currency pair is able to hold the strong support offered by both the rising trend channel and the 200-day moving average, the key 1.3300 level serves as the next major upside target. And any sustained rise above 1.3300 would likely confirm an extension of the GBP/USD's recent recovery.