foxex: Downgraded

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Global Markets Fall on Growth Worries

2. Negative Yields are Everywhere

3. Apple Gets a Downgrade

4. Deutsche Bank Restructures

5. WeWork Issues More Debt Ahead of IPO

6. Happy Birthday, Wall Street Journal

Markets Closed

Dow
26,806.14 -0.43%

S&P
2,975.95 -0.48%

Nasdaq
8,098.38 -0.78%

VIX
13.85 +4.74%

Bitcoin
$12,201.43 +6.32%

US 10-Yr Yield
2.034 -0.68%

Stocks Sink on Strong Jobs Report

U.S. Markets Fall on Growth Concerns and Apple Downgrade
The S&P500 Beats the World
Fed Watching

U.S. Markets Under Pressure

U.S. markets faced a broad selloff Monday as many investors returned from an extended holiday weekend. The selling started overseas as Asian and Australian markets all fell more than one percent, then moved West through European markets, which also closed lower for the day.

Morgan Stanley's investment research team effectively downgraded all U.S. equity markets in a research report this morning, saying, among other things:

"Irreconcilable differences across markets can't persist indefinitely. With fundamentals deteriorating rapidly and trade dynamics biting, we doubt earnings can remain resilient and profit misses will highlight the excessive dependence on buybacks."

and...

"We believe that risk-based markets will need to at least consider that the Fed can't cure all."

but...

"Global central banks' radical easing policies have created a burst of liquidity that could carry both stock and bond prices a bit higher in the short term."

Translation: Corporate fundamentals are weak and getting weaker. A rate cut by the Federal Reserve cannot fix this problem, although it might delay its arrival. Morgan Stanley is recommending that investors hide out in commodities until this storm passes. You can make up your own mind if that strategy is right for you.

You can't argue with the fact that the U.S. has been the place to earn returns over the past decade. Ultra low interest rates and a relatively healthy economy have made it so. This chart from JPMorgan's research team on the performance difference between the S&P 500 and the MSCI All-World (ex-U.S.) Index over the past 22 years is startling. Right around 2012, the S&P 500 and the MSCI diverged, and the returns speak for themselves.

What Now?

If you believe Morgan Stanley, this outperformance may not last. If the Fed cuts rates as many expect it will do when it meets July 31st, it may provide a short term boost to stocks, but they are already pretty high, and highly valued. There are 48 other countries in the developed world with lower interest rates than the U.S., but many of them have much weaker economies and systemic issues.

Analyst Says "Sell Apple"

Rare "sell" rating for iPhone maker
Doubts about iPhone sales in Asia and Services

Apple received a rare sell rating by an equity analyst today, which may have contributed to a 2% selloff for the stock. Rosenblatt Securities downgraded the iPhone maker's shares to "sell" from "neutral," and said it expected the company to face "fundamental deterioration" in the next six to 12 months. Rosenblatt cited weakness in iPhone sales and in Apple's services businesses, which include the App Store and iCloud, among others. Services brought in $11.4 billion of Apple's $46.5 billion in revenue in the first quarter of 2019, and is one of the fastest growing segments at the company.

As we know, Apple is one of the most widely held and heavily weighted stocks in the S&P 500, trailing only Microsoft. At 3.4% of the Index's weighting, a drop in Apple can bring down the entire market.

Read more: Apple's Impact on the S&P 500

How Apple's weighting in the S&P 500 has changed, courtesy Siblis Research

Deutsche Bank Restructures

Bank to cut 18,000 jobs over two years
Exiting the equities business
Shares fall despite the cuts

The 150 year-old German bank has finally thrown in the towel on what was one of its strongest businesses a decade ago, and is pursuing a streamlined strategy to take it back to its roots as a merchant bank.

Late Sunday, the Bank revealed a series of measures it will take, including downsizing its investment bank, to cut adjusted costs by approximately 6 billion euros to 17 billion euros by 2022 and achieve a post-tax return on tangible equity of 8% that same year. It aims to free up 5 billion euros to return to shareholders through share buybacks and dividends starting in 2022 and will not pay dividends in the 2019 or 2020 financial years.

Read More: Behind Deutsche Bank's Massive Overhaul

Here are some of the biggest actions the bank will be taking:

Creating a new Corporate Bank division—the central focus of the firm—to handle global transaction banking and the German commercial banking business
Shutting down the equity sales and trading business and transferring clients to BNP Paribas, cutting capital used in the fixed-income operations
Transferring 288 billion euros, or about 20% of the bank's leverage exposure, and 74 billion euros of risk weighted assets (RWA) to a new Capital Release Unit (CRU) or "bad bank" for wind-down
Laying off approximately 18,000 full-time employees by 2022
Investing 17 billion euros in improving technology and controls
Changing management structure

It's been a long and painful ride down for the Bank and its shareholders over the past decade, to be sure. But usually, news of a restructuring of this magnitude is met with investor enthusiasm. Not today, and not for this Bank.

Here's the last 10 years, courtesy www.koyfin.com

WeWork to Hit Debt Market Ahead of IPO

WSJ: Seeks to raise $3 billion to $4 billion through debt offering before IPO
WeWork may still use an IPO to raise billions

Nice scoop here from my pal Maureen Farrell at the WSJ.

She reports that WeWork is planning to issue a massive debt offering ahead of its IPO to raise up to $4 billion. It could even prolong the debt offering to raise as much as $10 billion, per the WSJ. By issuing debt, the company would be less reliant on the success and proceeds of its IPO when WeWork finally goes public. Perhaps WeWork has seen the rejection money losing companies like Uber and Lyft have faced in the public markets and realized that debt may be a safer and more reliable way to raise the capital it needs to grow its business, and maybe one day earn a profit.

WeWork lost $1.9 billion last year, according to filings and has not outlined an easy path to profitability. Issuing debt, and using its valuable leases on prime real estate around the world as collateral, might just be the hack the company needs to raise a lot of cash before it goes public. But just a word of caution to potential investors... companies saddled with heavy debt have a hard time showing investors that they can be strong growth companies when they become public. Uber is exhibit A.

Read More: How WeWork Makes Money

Read More: Why Do Companies Issue Debt?

More News:

WeWork Raising Billions In Debt To Bolster IPO In Extraordinary Step

Why Second Quarter Earnings Aren't As Dismal As They Look

What is Rivian?

chart courtesy www.koyfin.com

Edison International witnessed its stock increase by over 3% amid a collective rise for utility holding companies. Western Digital's stock rose by almost 3% not long after Cowen analysts reported the memory chip maker has potential for a strong second-half growth, following a pattern established by Micron back in June (which itself is up by over 2% today).

The manufacturer of fiber lasers—IPG Photonics—watched its stock plummet by over 5% after releasing its earnings update, which predicted a heavy profit drop by next year. Davita Healthcare Partners' stock fell by over 4% amid a collective decrease in the healthcare sector.

Word of the Day

Downgrade

With Morgan Stanley's research report downgrading all U.S. stocks, including those of the tech giant Apple, it seemed like an obvious choice what our word for the day should be. Here's a little more context:

"A downgrade is a negative change in the rating of a security. This situation occurs when analysts feel that the future prospects for the security have weakened from the original recommendation, usually due to a material and fundamental change in the company's operations, future outlook or industry. There are multiple organizations that provide sell side research and rate securities with a buy, hold or sell rating. A downgrade of a stock would be moving the rating from a buy to a hold, or a hold to a sell. Debt has its own rating system as well. The ratings agencies assign letter grades to debt similar to letter grades earned in school. When a bond is downgraded it might move from an "A" rating to a "BBB" rating."

first edition of the Wall Street Journal. July 8, 1889

courtesy Dow Jones

Today in History

July 8th, 1889:

Vol. I, No. 1, the first issue of The Wall Street Journal, is published by Charles Henry Dow, Edward Davis Jones and Charles M. Bergstresser. 130 years later, the Journal is still the standard in business reporting and produces excellent work. Here's to another 130 years!

Museum of American Financial History (www.financialhistory.org).

Chart of the Day: The Final 30 Minutes

Bloomberg News ran an insightful story today about how most money is made in the stock market in the final 30 minutes of the trading day. Bloomberg reports that the stock market has a very narrow trading range up until about 3:30pm. At that time trading algorithms and high-frequency traders jump in and whip the market into a mini-tornado, producing volatility and price swings that can earn a nimble trader quite a bit of money. We are not recommending that strategy, here... we just find it interesting.