foxex: Knock Out

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Worst Day of the Year for Markets

2. Sentiment was Improving

3. Apple Loses Supreme Court Ruling

Markets Closed

Dow
25,324.99 -2.38%

S&P
2,811.87 -2.41%

Nasdaq
7,647.02 -3.41%

VIX
20.55 +28.12%

INV Anxiety Index
97.11 Low

US 10-Yr Yield
2.405 -2.04%

Markets Shredded on Trade War Escalation

U.S. markets had their worst day of 2019 as investors hit the 'Sell' button, and never took their fingers off of it. China retaliated to the new tariffs the U.S. imposed last Friday by announcing tariffs on $60 billion worth of U.S. goods beginning on June 1st. It is targeting the U.S. agricultural and manufacturing sector by adding tariffs to grains, including wheat, corn and soybeans, meat products, including pork and poultry, and mechanical parts and instruments.

For its part, the U.S. raised tariffs from 10 to 25% last week on Chinese products including electronics parts, aluminum auto parts, fashion accessories and seafood.

The selling today hit stocks all over the market including retailers like The Gap, Nike, and L Brands. Industrial stocks like Caterpillar, John Deere and Ingersoll-Rand were targeted, while technology stocks like Apple, Intel and Nvidia were absolutely blistered. Bitcoin, on the other hand, has been surging of late. James has more on that below.

This scatter plot chart from Koyfin Charts shows all the stocks in the S&P 500. As you can see, very few of them closed in positive territory today.

Sentiment was Getting Positive...

The abrupt change in the tenor of the trade talks has taken a lot of investors by surprise. Even though retail investors have been selling stocks throughout the first five months of 2019 despite the fact that U.S. markets were off to their best start since 1987, recent earnings reports and hopes of a trade deal with China were improving investor sentiment. The survey of Individual Investors taken on May 9th showed a healthy optimism among retail investors as U.S. markets danced around record highs.

Even U.S. companies were sounding more optimistic than they did at the beginning of the year. At the start of 2019, concerns about China and an escalating trade war dominated their earnings reports and forecasts for the year. As of this earnings season, those concerns had turned to green shoots of optimism. According to an analysis by Bank of America Merrill Lynch, more companies across more sectors cited positive factors in terms of their business relationships with China.

chart courtesy Bank of America

Apple Loses a Legal Battle

Apple took it from all sides today. The iPhone maker is super-sensitive to rising tariffs because it both sources components from China, and manufactures on the mainland. It also hopes to sell its Macs, iPads and iPhones to China's growing consumer class. AAPL shares were deep in the trade sell-off today, but the company also lost a Supreme Court ruling today which could open it up to an antitrust suit from users who claim the company engaged in monopolistic behavior with its App Store.

If the iPhone users prevail in the anti-trust suit, Apple could be forced to pay hundreds of millions of dollars in penalties. It may also have to change the way it sells apps on its platform. The suit may take a year or more to finally get heard in court, and even if Apple loses, it has more than enough money to appeal. Still, it is another albatross hanging on the company's neck.

The Supreme Court's opinion, Apple Inc. v. Pepper, is fascinating to read if you like to read court documents. Here's the essence of the antitrust suit, per the Court:

"...The plaintiffs' allegations boil down to one straightforward claim: that Apple exercises monopoly power in the retail market for the sale of apps and has unlawfully used its monopoly power to force iPhone owners to pay Apple higher-than-competitive prices for apps. According to the plaintiffs, when iPhone owners want to purchase an app, they have only two options: (1) buy the app from Apple's App Store at a higher-than-competitive price or (2) do not buy the app at all. Any iPhone owners who are dissatisfied with the selection of apps available in the App Store or with the price of the apps available in the App Store are out of luck, or so the plaintiffs allege."

Like I said, this may take a while to play out in court, but if Apple loses, it will impact the way the App Store currently works and it may force competitors like Amazon and Google to change their App experiences.

For Apple shareholders, they are right back where they started six months ago.

More News:

How a Trade War Could Push U.S. into a Recession and Bear Market

10 Blue Chip Stocks With Biggest Exposure To China Tariffs

Cryptocurrencies on the Comeback Trail

Charts courtesy of www.koyfin.com

When investors run for cover, they usually like to hide out in U.S. utility stocks that have no exposure to China or anywhere else. That's why American Water Works and American Electric Power fared so well today.

Generic drug-maker Mylan is having global problems with sales and FDA approvals of its medicines. This was a rare stock not impacted by the trade war, today. Skyworks and Seagate both make semiconductor equipment, and found themselves in between the U.S. and China, today.

Trade wars aren't good for any country's stock markets.

Word of the Day

Volatility

After disappearing for the first five moths of the year, stock market volatility is back. Blame the trade war or investor skittishness around stocks near record levels, but volatility, as measured by the volume of options trades betting the market will be much higher or much lower a week to a year out, is at its highest levels since January 4th.

Here' s our definition:

Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.

Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index.

In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a "volatile" market.

photo courtesy Mrily Miglin/YouTube

Today in History

May 13, 1986 Home Shopping Network goes public, selling 2 million shares at an initial offering price of $18. The stock closes at $47.75, up 165.3%, probably the highest first-day return yet on record. (A decade later, the Internet will change all that.) By accident, home shopping gets its start on a Clearwater, Florida AM radio station when an advertiser cannot pay his bill. The station owner accepts 112 electric can openers in lieu of cash, which he decides to auction over the air. A complete sellout gives birth to "Suncoast Bargaineers," a regularly scheduled radio show. In 1995, Barry Diller, Chairman and CEO of Paramount Pictures and Fox Inc., purchases the Home Shopping Network and becomes its Chairman. (Full disclosure - Barry Diller is also the Chairman of IAC, the parent company of Investopedia). In 2017, HSN was acquired by rival QVC.

Jay R. Ritter, professor of finance, University of Florida, Big IPO Runups of 1975-2000, at http://bear.cba.ufl.edu/ritter/ritterbi.htm

Chart of the Day: Bitcoin Extends Resurgence Amid Market Slide

As global stock markets continued to slide amid an escalating U.S.-China trade war, Bitcoin and its cryptocurrency brethren were doing just fine. In fact, they were doing more than fine. Bitcoin, the pioneer and leader among cryptocurrencies, shot up more than 15% on Monday to trade above the $8000 level, sharply extending its bullish run from the $3100-area lows of mid-December. During the course of this run, Bitcoin has risen by more than 150%, and has also recently formed a "golden cross" technical pattern (a pattern considered highly bullish, consisting of the 50-day moving average crossing above the 200-day moving average). As of Monday, the cryptocurrency hit a nine-month high, a level not seen since late July of last year.

The most recent rise in Bitcoin has coincided with a few different major factors that may have contributed to the sharp surge. Foremost of these factors has been a plunge in global equity markets in reaction to the intensifying U.S.-China trade war. While Bitcoin has yet to become established as a safe-haven asset (like gold), investors may be starting to see it that way. This may already be the case at least for Chinese investors. Coinciding with the global equity slide has been a drop in the value of the Chinese yuan currency. As the yuan loses value, it's conceivable that Chinese investors have been diversifying into Bitcoin and other cryptocurrencies.

Besides its plausible use as a safe-haven hedge and diversifying asset, Bitcoin has reportedly begun to be accepted (unofficially, in some cases) as payment by prominent retail giants. These include Whole Foods Market, Nordstrom, Lowe's, Bed Bath & Beyond, Barnes & Noble and even Starbucks. Why would this matter for the price of Bitcoin? One of the original purposes of Bitcoin was to be used as a universal, decentralized currency that could be used for everyday payments. Clearly, that never really caught on ... until now (maybe). Any future broad-based acceptance of Bitcoin by major retailers would further legitimize the currency and potentially raise its value even more.

Is this to say that Bitcoin could soon reach back up to its $20,000-area highs of late 2017? Probably not in the near future. But if the top cryptocurrency indeed gains further acceptance as both a safe-haven asset and a mode of payment for goods and services, the price of Bitcoin could see substantially more upside.