foxex: The Low Down

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Markets Fall as Fed Backs Off

2. Tesla Returns to the Debt Market

3. Oil Slides to a One Month Low

Markets Closed

Dow
26,307.79 -0.46%

S&P
2,917.52 -0.21%

Nasdaq
8,036.77 -0.16%

VIX
14.42 -2.57%

INV Anxiety Index
95.27 Low

US 10-Yr Yield
2.552 +1.63%

Second Day of Market Declines Following Fed Announcement

The day after the Federal Reserve announced it would be holding rates in their current range for the foreseeable future, U.S. markets sold off again as investors come to terms with the fact that there likely won't be an interest rate cut this year.

The Fed cited low inflation and low unemployment as the reasons for holding rates where they are. Cutting interest rates is counter to its mission, which, by its scorecard, is working out just fine.

For perspective, inflation below 2% in the U.S. is very low given historical standards. The Fed made mention that it may reconsider its 2% target rate for inflation and potentially raise it. Investors didn't like that one bit. But ask anyone who was trying to raise a family in the U.S. in the 1970s and 80s about inflation and you'll realize just how low it is right now. Except for food and health care - two things we really need - inflation has been tame for the past decade. Here's the Federal Reserve's chart of consumer prices going back to to 1960 for perspective.

Perspective

Omar Aguilar, the Chief Investment Officer for Schwab, stopped by our offices today for a chat. He gave us 5 reasons inflation is so much lower today than it was even a decade ago.

Oil prices are much lower than they were (inflation adjusted) than they were from 1970-2015.
Demographic changes: A significant amount of the working population is not retiring and therefore not making room for younger workers to move into their higher paying roles.
Technology has created price compression. Think about what the internet has done to retail, entertainment and the travel industry.
Companies are reluctant to pass on higher labor costs to consumers. While wage growth is starting to creep higher, companies are scared to make us pay more for their products given cutthroat competition online.
The global economy is slowing. This means that the U.S. has been exporting inflation in the form of the stronger dollar and higher priced goods, rather than importing it from countries like Japan and China.

All of this means that inflation, one of the key factors in setting monetary policy, is low and may stay that way. Why cut rates when prices are already relatively cheap?

Tesla Taps the Debt Market, Again

Tesla shares got a boost today after the company announced its intentions to raise money through both a debt and equity offering. In a regulatory filing, Tesla said it plans to raise up to $2 billion, with $1.35 billion coming from convertible notes and $650 million from new equity, including a big purchase from CEO Elon Musk. Musk intends to buy $10 million of the new stock offering, according to an SEC filing, which would increase his ownership stake in the company beyond the 20% he already owns.

Tesla has been burning through cash at an alarming rate, spending $2 billion in the first quarter alone. It had to pay $900 million to service a prior debt offering and it has been spending aggressively to ramp up production to hit sales targets.

Shares of the company are down 22% over the past three months as the company has missed production, sales and earnings targets.

A Meat-less IPO Gets Devoured

Beyond Meat, a plant-based food company, went public on the Nasdaq today, and shares sprouted up 163% on its debut, giving the 10-year old company a market value of $3.77 billion. The company lost $30 million in 2018 on sales of about $88 million, but it did manage grow those sales 170% from 2017. It is now selling its famous 'Beyond Burger' in Hamburger chains like Carl's Jr in the U.S.

Side note: I tried a Beyond Burger the other night, and it wasn't too bad.

Still, the company, which has only been public for one day, is trading at 44 times its sales, which is outrageous for a food company.

CNBC put together this comparison of Beyond Meat's sales multiples against other food industry giants. This won't last, but it is fascinating.

The company is attacking an underserved part of the market, which you have to admire if you love business. They have been able to create a real brand with a real following, and real backers. Twitter co-founded Ev WIlliams is on the board along with other industry heavyweights. It's worth reading their prospectus, at least the letter from founder Ethan Brown. He's clearly passionate, talented and well aware of the challenges his company faces. Those may be a little easier now that he has billions of dollars in market value to attack the meat industry.

More News:

Pfizer Stock Rebounds Under Cloud of Negative Charts

Natural Gas ETFs Break Out From Falling Wedge

Merck Stock Bounces Back Thanks to a 'Golden Cross'

Charts courtesy of www.koyfin.com

Under Armour posted a bit of a comeback today on a strong earnings report. It helps that Steph Curry, its top athletic spokesperson, is crushing it in the NBA playoffs.

More trouble in the oil patch today as lower prices hurt companies like Marathon and Apache, which both reported less than stellar earnings.

Word of the Day:

Price to Sales Ratio

Given Beyond Meat's exorbitant valuation following its successful IPO, price to sales ratio seems appropriate, today.

The price-to-sales (P/S) ratio is a valuation ratio that compares a company's stock price to its revenues. It is an indicator of the value placed on each dollar of a company's sales or revenues.

The P/S ratio can be calculated either by dividing the company's market capitalization by its total sales over a designated period – usually twelve months, or on a per-share basis by dividing the stock price by sales per share. The P/S ratio is also known as a "sales multiple" or "revenue multiple."

Peter Lynch photo- Source: marketwatch.com

Today in History

On May 2, 1963, Edward C. Johnson II, the head of Fidelity Investments, starts a small mutual fund and gives it to his son, Ned, to run. He called it the Magellan Fund. The Fidelity Magellan Fund was one of the most famous and successful mutual funds in history, topping $100 billion in assets in 2000. The legendary Peter Lynch ran the fund from 1977-1990, posting annualized returns of 29%. Fidelity closed the fund to new investors in 1997 as it was getting to be too big to generate those outsized returns. It reopened to new investors in 2008. Today, it is much smaller than in its heyday, with assets under management of around $17 billion.

Source: Fidelity.com

Chart of the Day: Falling Crude Prices Threaten Oil Recovery

U.S. crude oil futures fell sharply again on Thursday as it became apparent that supplies may not be tightening as much as previously feared. Wednesday's report from the Energy Information Administration revealed that U.S. crude oil inventories increased by a whopping 9.9M barrels last week, a level not seen since November, against previous consensus forecast of only 1.3M barrels. In fact, crude stock increases in five of the past six weeks have far exceeded expectations, pointing to abundant supply and pressuring prices.

In contrast, developments in recent months and weeks have served to boost the price of crude oil, primarily by pressuring supply. The main factor has revolved around OPEC countries and their allies voluntarily limiting output for the past several months in efforts to stabilize oil prices.

Also, the U.S. government has recently renewed economic sanctions on major oil producer, Iran, which has further weighed on global oil supply. On Thursday, the U.S. ceased providing waivers to certain high-demand countries like India and China, which previously allowed them to buy oil from Iran despite the sanctions. President Trump has said that other producers, most notably Saudi Arabia, will likely fill the Iranian oil gap. And refineries in Asia have reportedly begun asking the Saudis to increase production accordingly.

Another major oil producer, Venezuela, is currently embroiled in an ongoing political crisis revolving around its socialist leader, Nicolas Maduro. The U.S. has recently begun to institute sanctions on Venezuela, which has severely choked off its oil export revenue and further diminished global supply sources.

Despite all of these potentially price-boosting conditions, however, sharply rising crude stockpiles are telling a different story. These rising inventories have begun to weigh heavily on the bullish recovery trend for crude oil that has been in place since late December. On Thursday, the price of U.S. crude oil dropped down to touch the close convergence of the 200-day and 50-day moving averages. This constitutes a key support level for the current uptrend. Any major breakdown below this support could mark a potential downside reversal towards the next major support level around $55.00.