foxex: Charging Ahead

The Market Sum | Insight after the bell

By James Early, Editor in Chief

Monday's Headlines

1. U.S. Markets Charge Ahead

2. U.S. and China Talking Again

3. According to 181 Top CEOs, Profit is No Longer First

4. This Week in Central Banking

Markets Closed

Dow
26,135.79 +0.96%

S&P
2,923.65 1.21%

Nasdaq
8,002.81 +1.35%

VIX
16.88 -8.61%

Bitcoin
$10,703.85 +2.96%

US 10-Yr Yield
1.598 +3.83%

Markets Today

Dow shot up 1% and NASDAQ 1.35% as stocks charged back from selloff
Treasury yields also rose, easing fears of recession
China and the U.S. are talking after all

After a brutal selloff last week in which inverted yield curve fears pummeled the Dow Jones Industrial Average down 800 points, or 3.1%, in a single Wednesday. Stocks have been climbing back, less on specific economic news and more on a combination of apparent belief that last week's selling was just a bit overdone (the yield curve has since un-inverted) and upbeat news about the trade war. Hey, we'll take it.

Treasury yields also rose. Recall that because bond prices and yields move inversely, rising U.S. Treasury bond yields mean investors are selling Treasuries (which investors buy more of in times of fear) and presumably buying riskier assets like stocks with that money. This is seen as an optimistic indicator for markets, and as the Morgan Stanley chart below shows, recent market gains have been driven more by optimism—investors paying more for the same earnings (technically called "multiple expansion")—than by actual gains in earnings. Today's news is good news, but remember, it's only a day.

Can We Just Talk?

Apparently, we can. President Trump recently tweeted: "We are doing very well with China, and talking!" While Trump is seemingly still not ready to make a deal, White House Economic Advisor Larry Kudlow also chimed in to echo that trade negotiations had produced "positive news." One recent example: The U.S. granted Chinese telecom company Huawei a 90-day reprieve before the full ban on U.S. suppliers kicks in.

This helped tech stocks today. Oil futures, which have become something of a trade war sentiment barometer, also signaled optimism, rising 2.4%.

"I don't see a recession at all," Kudlow also remarked. Of course, Kudlow realizes that markets are sensitive to rhetoric, and like any economic advisor he arguably has an incentive to underscore the positive. But as far as the trade war is concerned, we now know that Chinese diplomat Yang Jiechi met with U.S. Secretary of State Mike Pompeo in New York last Tuesday, which was the same day Trump agreed to delay 10% tariffs on $130 billion of Chinese imports. So it's looking like the talks are actually leading to action—in addition to a lot of frequent flyer miles for the negotiators.

Profit Doesn't Come First Anymore

At least apparently not for the 181 CEOs who singed the Business Roundtable's recent Statement on the Purpose of a Corporation. Signatories included Jamie Dimon, CEO of J.P. Morgan; Tim Cook of Apple; Jeff Bezos of Amazon; and Alex Gorsky of Johnson & Johnson, who basically declared that a business' purpose should be broader, and address the well-being of a more comprehensive range of stakeholders besides owners.

As anyone who took at least one college-level business class remembers, the purpose of a company has long been to maximize shareholder value.

While it may be tempting to wonder if this feel-good declaration is a response to Friday's Market Sum mention that since 1978, compensation rose 1,007.5% for CEOs, compared with 11.9% for average workers, this announcement likely reflects the growing consensus that companies operate in corporate "ecosystems" that include suppliers, customers, employees, local communities, and so forth, and at a minimum, what's good for the ecosystem is often good for the company. But at least on paper, this announcement seems to suggest feelings that go even deeper than "because it benefits my company in the end." Black Rock CEO Larry Fink mentioned an "inextricable link" between purpose and profit. And Jamie Dimon said, "The American dream is alive, but fraying."

This Week in Central Banking

With things being quiet on the corporate earnings front this week, central bankers get a bit more spotlight.

China: The People's Bank of China effectively telegraphed an indirect rate cut by announcing a new interest rate policy: Instead of the PBOC's usual fixed benchmark lending rate (currently 4.35%, and which has not changed since 2015), new loans will be pegged to a reformatted version of China's Loan Prime Rate, or LPR, which will be set monthly. Noticeably, the PBOC didn't adjust its fixed benchmark rate; some analysts speculate that doing so would signal more desperation to stimulate the economy than China wants to show now. But investors still rejoiced at a step toward a more progressive interest rate policy: This news drove the Shanghai Index up 2.1% and the desperate-for-good news Hang Seng Index of Hong Kong up 2.2%.

If you're wondering, a prime rate is an interest rate that banks charge their best customers. In short, the LPR will be based on the bids that 18 major banks, including two foreign banks, make to participate in the PBOC's market lending facility. Setting this, instead of an absolute number, as the benchmark for China's loans is a step toward a more market-based economy. However, analysts so far seem to expect the actual rate reduction to be fairly modest, at 10-15 basis points.

Germany: Whereas Kudlow and Trump like to sound positive, talk is more matter-of-fact in Germany, at least from its central bank, which announced the economy appears to be entering a recession. Then again, the handwriting is almost on the wall; Germany's economy shrank 0.1% last quarter and seems ready to repeat. One definition of a recession is two quarters of economic shrinkage. Europe has been slow for a while and has Brexit to contend with (the U.K.'s economy is also shrinking, incidentally), and Germany exports hefty amounts to the U.S. and China, both of which may suffer trade-war softness.

Chart credit: CNN

U.S.: When you're under stress, there are worse places to be than Jackson Hole, Wyoming. The Fed, no doubt under stress these days, will have its annual Jackson Hole conference later this week, and the question seems to be whether Fed Chair Jerome Powell will announce a rate cut or not. When the Fed cut rates 25 basis points on July 31, investors, and especially President Trump, felt Powell's accompanying commentary made July's rate cut seem too one-time-y, in contrast to the more systematically dovish forecast the market hoped for. Yet since then, the yield curve has both inverted and un-inverted; retail sales have been decent, as have jobs. We don't know what will come of Powell's Friday morning speech, but it's safe to say he'll have a rapt audience.

More News:

Tilray Shares Flag Red With Big Trading Activity

Homebuilders Could Enter Bull Markets

Arrowhead Pharma Shares Quietly See Big Buy Demand

chart courtesy www.koyfin.com

Shares of Estee rose by almost 13% today after its reported Q4 earnings beat market estimates, largely driven by strong sales in China and other emerging markets. Nvidia's stock price increased by just over 7%, following an announcement that its GeForce Now service will soon be available on Android phones.

Despite making a significant recovery last Friday, shares of GE dropped again today amid the ongoing fraud claims scandal. They didn't fall too far though, not even reaching 1.5%.

Today was a great day for Europe; every country's ETFs in this category received a boost, with Greece being the biggest winner. Conversely, while there weren't as many who lost today, Argentina suffered far more compared to its fellows.

Word of the Day:

Basis Points

Basis points, otherwise known as bps or "bips," are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. Likewise, a fractional basis point such as 1.5 basis points is equivalent to 0.015% or 0.00015 in decimal form.

In most cases, basis points refer to changes in interest rates and bond yields.

Today in Financial History

Aug. 19, 2004:

Google goes public using a Dutch Auction, an uncommon IPO process that considers all bids and then prices an offering at the highest price at which the full offering can be sold. Google's plan was to democratize the IPO process and avoid the traditional IPO "pop" that tends to benefit the investment banks instead of ordinary investors. The IPO worked as planned, but the trend never caught on.