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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. Rally Fizzles
2. Longest Economic Expansion... but how Strong?
3. Beyond Meat gets Seared, but Chewy is Coming
4. A Tale of Two Metals: Gold and Copper

Markets Closed

Dow
26,048.51 -0.05%

S&P
2,885.72 -0.03%

Nasdaq
7,822.57 -0.01%

VIX
16.07 +1.00%

Bitcoin
$7,922.70 -0.52%

US 10-Yr Yield
2.14 -0.14%

U.S. Stock Rally Fizzles

With no real catalysts to swing stocks in one direction or another, they took the path of least resistance today - lower. The losses were slight, and after rising for the past six sessions, U.S. markets are approaching all-time highs, again. If it doesn't feel that way, it's likely because of all the potential obstacles facing the markets. If you are a regular reader, you already know what they are.

But just in case...

U.S. government policy and the trade war with China
Slowing corporate profits
Slowing global economies, notably China, Germany and the U.S.
Uncertainty about the U.S. Federal Reserve's next move. Traders are betting on a rate cut, potentially 50 basis points (0.50%), but the Fed marches to its own beat and may disappoint those cajoling it into being more dovish.
Yield curve inversion. It's happened a couple of times this Spring, but markets have been resilient. How long can that last?

Make no mistake, U.S., European, Asian and Australian markets have all been buoyed by accommodative central banks that have kept interest rates very low for an extended period of time. Low interest rates make stocks more attractive since they make it easier for companies to borrow cheaply and hoard cash, which many use to buy back shares.

Sure enough, stock buybacks are up 18% in 2019, after breaking records in 2018. We often use the term T.I.N.A., in times like these. "There is no alternative". Investors can't get yields out of treasury bonds, currencies are erratic due to trade tensions, and commodities like oil and copper are on the decline due to global growth. There is no alternative to stocks for many investors, and there are very few alternative uses of cash for companies that are as rewarding.

Economic Expansion Nears a Record...but it's Limping

Next month, the U.S. economy will break a record for the longest economic expansion in modern history. With the help of a very accommodative Federal Reserve that has both kept interest rates low and been a net buyer of U.S. treasuries through quantitative easing, the U.S. is closing in on 40 quarters of growth. But, as Liz Ann Sonders, Chief Investment Strategist for Schwab, points out, this expansion is the weakest in the modern era.

The black dotted line represents the current economic expansion, and as we can see, it has not produced strong GDP growth. It hasn't been terribly weak, it's just not pound your chest growth. That's because it's been abetted by friendly monetary policy and not what investors like to call, 'multiple expansion'. Multiple expansion is when companies are organically growing their sales and profits through good, old-fashioned business practices and not financial chicanery. To be sure, many companies are growing organically and playing the game right, but there are many more that have relied on cost-cutting, stock buybacks and financial wizardry to inflate their earnings.

Thank the Consumer...

The U.S., the E.U., and Japan are three of the four largest economies in the world. Their economies are largely driven by consumer spending. In the U.S., consumer spending is 70% of GDP. By and large, the consumers in these regions have held up very well throughout the post-financial crisis economic expansion. But that confidence is starting to fade a bit, and it's reminiscent of the tail end of past economic cycles that were followed by recessions. Schwab's investment research team warns that one of the unheralded, but important aspects of the trade war with China is its impact on consumer psyche. The notion that prices will go up due to tariffs has a psychological impact on consumers, who might just hold onto their money now in case of a downturn. Weakened consumer confidence, on top of slowing economic growth that is manifesting itself in weaker manufacturing and production, are the ingredients for a painful economic slowdown, and potentially a recession. We are not saying it will happen...but this is how it might.

IPO Check Up

Yesterday we talked about Beyond Meat's unbelievable 580% surge since it went public several weeks ago. We may have jinxed the stock, because it fell 25% today after an analyst at JPMorgan downgraded the stock. The rationale was that it was over-valued at more than $9 billion in market cap. You think? The kicker is that JPMorgan was Beyond Meat's lead underwriter for its IPO. The 25% selloff puts Beyond's market value at just over $7 billion, today.

Here Comes Chewy!

The biggest online pet store in the world is planning to go public this week. Chewy.com, which is owned by retailer PetSmart, is planning a public offering this week in an attempt to raise at least $700 million. PetSmart needs that money to settle with its bondholders since its retail business is suffering. Selling pet food and supplies online is a much better business, bringing Chewy.com $3.5 billion in revenue last year. It even outsells Amazon.com in its category. Woof!

photo courtesy chewy.com

Radiohead Strikes Back

This is one of the best stories I've read in awhile. Hackers allegedly stole a minidisk of unreleased songs from the legendary English rock group, Radiohead. (I'm a big fan.) According to the band, those hackers tried to extort the band for $150,000, threatening to release archived music that Radiohead never intended to be published. Instead of paying the ransom, the band made the 18 hours of music available for download on music platform Bandcamp for £18 — around $23 — but only for the next 18 days. Proceeds will go to Extinction Rebellion, a climate-change organization.

Everything in its right place... Well played, Radiohead.

Here's the company's post from its website:

More News:

Why Video Game Stocks May Thrive Amid Market Turmoil

Why Tech Stocks Rising at Fastest Pace in 7 Years May Flame Out

Broadcom Stock at Resistance Ahead of Earnings

chart courtesy www.koyfin.com

H&R Block rose nearly 3% today, as the company's fourth quarter fiscal report saw profit and revenue both beat expectations. The company also boosted its dividend and announced its acquisition of Wave Financial Inc. a platform offering financial services and online software to small businesses.

Both Raytheon and United Technologies fell today, days after they announced their merging to form an aerospace giant.

Word of the Day

Currency Devaluation

Yesterday, Trump said that the United States needed a "fair playing field" against China. He was expressing frustration at the Chinese devaluing their currency, in effect nullifying the impact of tariffs. If you want to learn more about how a government can devalue their currency, or how that would nullify the impact of tariffs, Investopedia is a good place to start:

"Devaluation is the deliberate downward adjustment of the value of a country's money relative to another currency, group of currencies, or currency standard. Countries that have a fixed exchange rate or semi-fixed exchange rate use this monetary policy tool. It is often confused with depreciation and is the opposite of revaluation, which refers to the readjustment of a currency's exchange rate."

Today in History

June 11th - As far as we can tell, nothing important happened in financial history today. For real. Go out there and make your own!

Chart of the Day: A Tale of Two Metals

Gold and copper are two of the world's most important metals, but they have vastly different uses and purposes. In short, gold is a key precious metal that is considered a "safe-haven" asset, which worried investors tend to flock to when economic and geo-political uncertainties intensify. Copper, in contrast, is the world's third most utilized metal for industrial purposes (following iron and aluminum) due to its versatility and conductivity. Because of this widespread usage, copper demand has long been considered one of the most effective barometers of economic health and growth, both in specific countries/regions as well as on a global basis.

Given these differing characteristics, gold and copper prices often diverge in direction, which has been the case multiple times in the past several months. For example, in May, markets became more deeply concerned about slowing global economic growth along with the ongoing U.S.-China trade conflict. In reaction, copper futures extended their slide from mid-April while gold futures rallied significantly starting in late May. From a longer-term perspective, going back around a full year from Tuesday, copper prices are down around 18%, while gold futures are just above water for the year, around +2%. This contrasting price action reinforces the prevailing market theme that investors are fearing a global economic slowdown.

For both gold and copper, prices are near major technical support/resistance areas that could help guide the metals in the near future. Gold futures have just retreated from a major double-top, while copper futures are not far above a major triple bottom. This suggests that we could be seeing some potentially major moves for these metals on the horizon.