foxex: Deal, or No Deal?

The Market Sum | Insight after the bell

By James Early

Friday's Headlines

1. Market Loses Faith in U.S.-China Deal

2. Uber Loses $5.2 Billion for the Quarter

3. Huawei Loses Chance to do Business with US Government

4. The Week Ahead

Markets Closed

Dow
26,287.44 -0.34%

S&P
2,918.65 -0.66%

Nasdaq
7,959.14 -1.00%

VIX
17.97 +6.27%

Bitcoin
$11,864.33 +1.66%

US 10-Yr Yield
1.734 +1.05%

Year-to-Date

Dow
26,287.44 +13.98%

S&P
2,918.65 +17.42%

Nasdaq
7,959.14 +20.88%

Russell 2000
1,513.04 +12.20%

Crude Oil
54.27 +12.34%

US 10-Yr Yield
1.734 -36.62%

** Note to Market Sum readers: James Early, a friend of the site and great newsletter writer, has the wheel today. He'll be guest writing from time to time. Enjoy! Caleb **

Markets Today

Trade war fears beat Dow down 91 points
S&P 500 down 0.66%
Uber proves it still has a lot to prove

Let's Make a Deal… or Not

"We're not ready to make a deal."

For the market, Trump's words giveth, and Trump's words taketh away. Today, they tooketh away, undoing a chunk of Thursday's rebound that came as investors gained confidence that China wouldn't let the RMB slip further. Trump also hammered the "currency manipulator" nail in his brief media comment.

In simpler terms, Trump is saying the trade war is still on. And trade wars aren't good for markets. Investors sold off today, not on any specific economic news, but rather on fears that an ongoing or worsening trade war would affect trade, corporate profits, and thus stock prices in the months and possibly years ahead.

What a Week!

Monday began with a body slam when the People's Bank of China, in response to Trump's threat to increase tariffs on Sep. 1, allowed the RMB to weaken just past the economically-unimportant-but-psychologically-very-important 7:1 ratio vs. the US dollar. Currency devaluation has long been China's nuclear weapon—feared but never used—and while the PBOC didn't really deploy it in any major way, it at least opened its coat to show markets that it was packing heat.

Markets got jittery, egged on by the U.S. Treasury—labeling China a currency manipulator (incorrectly). By Thursday, all seemed forgiven as the S&P posted its biggest gain in two months. Forgiven, that is, until Friday, when Trump decided not to ease up on U.S. companies supplying China's Huawei after all. Trump said the U.S. won't do business with the company—at least until there is a trade deal.

Despite all this, stocks ended up slightly ahead for the week.

The Year so Far

The upside? It's actually been a great year. The S&P is up nearly 17%, well ahead of its 9.8% average annual return over the past 90 years. Yes, that's a bit worse than last week. But it's only August.

The Big Risk That Nobody's Talking About

Well, not nobody. But not many people. We know that an inverted yield curve tends to be a predictor of recession. For example, the U.S. curve inverted in Feb. 2007, and by Dec. 2007, we were in a recession. You may know that the Treasury yield curve—which, among several ways, can be proxied by subtracting one-year Treasury Bill rates from 10-year Treasury Bond rates—has dipped a toe into negative territory. It is traditional Wall Street wisdom that the bond market is smarter than the stock market, so one school of thought is that this bearish bond market signal should have more credibility than the currently ebullient stock market.

Chart from GuruFocus.com

And this time is different, relative to 2007, at least in one regard: Global interest rates are a lot lower—a record $15 trillion of debt worldwide trades at negative yields, meaning investors are getting paid to borrow money, and central banks have limited dry powder to fight economic malaise. Although you may gripe about your lowball money market yields, the U.S., thanks to its strong economy, actually has some of the highest rates among major economies. But U.S. rates are going back down. If—heaven forbid—U.S. rates were to ever go negative too, the world could step into an epic, and impossible to model, economic storm.

Image courtesy of FXStreet.com

Uber Needs a Lift

Remember the last time you lost $5.2 billion in three months? Me, neither.

But Uber did it—losing $5.2 billion from $3.2 billion in revenue—while simultaneously underperforming Wall Street analyst expectations on both the top line (aka "revenue," bringing in $3.17 billion vs. $3.36 billion expected) and bottom line (aka "earnings," where Uber lost $4.17 per share vs. an analyst-expected $3.12 per-share loss). To be fair, Uber had two major one-time expenses this quarter: a $3.9 billion charge related to expensing of restricted stock units, or RSUs, now that these things can be priced following the IPO, and a $298 million in driver appreciation payments also related to the IPO. Uber shares were down 6.8% today.

Here's the rub: Everyone except taxi drivers and the occasional regulator agrees that Uber (and Lyft) are on to a cool idea. But will it work? Revenue growth has been great, but if cost growth keeps increasing: Uber isn't even profitable on the gross margin line, thanks to huge R&D expenses (driverless cars + its own IT platform), and huge marketing costs. This quarter's one-offs notwithstanding, Uber has been trying to cut some fat, but it's got a long way to go. Ride-sharing works great for consumers, but is it a viable business?

What to Watch for Next Week

The obvious thing to watch for next week will be the Chinese response to Trump's latest rhetoric indicating that he's unsatisfied with their RMB devaluation—and "solution" of at least not letting it slide more. The Chinese and American sides have been fairly tit-for-tat in the trade war, so a Chinese response of some sort seems likely.

The RMB move this week is a microcosm of how China seems to be handling things: One on level, it wants to send a message to the U.S. that it's ready to fight—even to turn a trade war into a currency war. On another level, China knows that much of the world lives in fear of a major RMB devaluation (Monday's was not major). A devaluation suddenly makes Chinese exports cheaper, potentially offsetting the effects of tariffs, but also taking market share away from other exporters who've based their economies around the current pricing. But China also has capital flight to contend with: A cheaper RMB makes China's citizens who can get their money out want to get their money out—who wants to hold a currency that's worth less and less? China sees capital flight as a major destabilizer and seeks to avoid it.

This is a long way of saying that as the direct trade-related options get exhausted, the countries will have to reach for broader economic weapons to battle each other, and those weapons tend to have farther-reaching economic effects, so responses at this point must be chosen carefully.

In more standard economic reports due out next week, here's what we are watching:

Tuesday: CPI (inflation)—It has been stubbornly low.

Thursday: Weekly jobless claims, retail sales, and industrial production

Friday: Housing starts —Low interest rates have driven mortgage rates down with them, but we need to see that translate to home buying and construction.

More News:

Caterpillar Stock Has Become Cheap and Offers a Solid Dividend

How Mega $1 Billion Trades Are Transforming The ETF Market

How a Lehman-Like Tail Risk Could Sink the Markets

chart courtesy www.koyfin.com

Amgen's stock price increased by almost 6% today amid an announcement that the U.S. District Court of New Jersey has ruled in the biopharmaceutical company's favor on the validity of its two Enbrel® (etanercept) patents. Both shares of News Corp rose by over 5% after it reported a very successful fourth quarter and high full-year results for fiscal 2019.

Shares of DXC Technology suffered a heavy loss of over 30% after releasing its less-than-stellar fiscal 2020 Q1 earnings report. Nectar Therapeutics plummeted by more than 29% today upon revealing manufacturing problem in two batches of experimental cancer drugs.

Argentina won big today, even compared to the other countries that it shared the winner's circle with. Meanwhile, South Africa faired the worst amongst a crowded pool of underachievers.

Word of the Day

Forced Technology Transfer

Forced technology transfer (FTT) is a practice in which a domestic government forces foreign businesses to share their tech in exchange for market access. The practice is common in China. When a company wants to enter the Chinese market, the Chinese government can compel the firm to share its technology with Chinese companies.

Illustration courtesy The 1995 Blog (Netscape founder Marc Andreessen with backers Jim Clark and James Barksdale)

Today in Financial History

Aug. 9th, 1995

The Internet stock sector is born with a bang as 16-month-old Netscape Communications Corp. goes public, issuing its IPO on the NASDAQ at an initial price of $28 per share. Because none of the initial buyers are willing to sell, lead underwriter Morgan Stanley has to raise the opening price all the way to $71 before public trading can begin. "I don't know how to put a value on it," says leading tech analyst Lise Buyer of T. Rowe Price. "You pick a price you're willing to pay and you find a way to rationalize it." The shares close the day at $58.25.