foxex: Inverted

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. U.S. Markets Sell Off on Yield Curve Concerns

2. Dow Posts Worst Day of 2019, Falling 800 Points

2. Bond Market Fears Take Front Seat

3. WeWork files for IPO Amid Massive Losses

Markets Closed

Dow
25,479.42 -3.05%

S&P
2,840.60 -2.93%

Nasdaq
7,773.94 -3.02%

VIX
22.1 +26.14%

Bitcoin
$10,224.56 -6.32%

US 10-Yr Yield
1.581 -5.89%

Markets Today

Markets slide hard on bond yield concerns
10-year and 2-year U.S. Treasuries invert
Pressure on Fed for more rate cuts

The euphoria over yesterday's trade news didn't last long as investors ditched stocks in a hurry as fears of the inverted yield curve took hold. Today, yields on the 10-year U.S. Treasury bond and the 2-year U.S. bond finally inverted after threatening to do so for several months.

The simple way to think about this is that the investor rush into the safety of the long-term 10-year Treasury, often considered to be one of the safest investments in the world, brought down yields below those of the 2-year U.S. Treasury. That's a sign that confidence in the near term—the next two years—is very low. When this inverted yield curve happens, recessions often follow, but not always.

This is what it looked like today:

This last happened in 2006 right before the Financial Crisis. It has threatened to do so many times in the past year, but it has not gotten the attention it normally gets due to the trade war with China. There are many economists who think that the trade war may have exacerbated the circumstances leading to this, and they wouldn't be wrong. But with the stock market continuing to make new highs since the beginning of the year, the bond market has taken a back seat while equities have had the wheel. But we should never forget—the bond market is a leading indicator, and now it is driving the bus.

Here's the last 40 years of yield curve inversions. The shaded areas in gray indicate periods of recessions.

What Now for Stocks?

As we mentioned earlier in the week, 80% of stocks in the S&P 500 were already down 10% or more in what we call a correction. Leadership was thin, with big, heavily weighted stocks like Microsoft, Apple, AMD, and McDonalds leading the charge. That's never a healthy sign. We want to see a variety of stocks across multiple sectors making new highs, which is a sign of a growing economy with healthy appetites from consumers and businesses.

Companies with exposure to China were getting whipsawed by headlines about the trade deal—both positive and negative. Uncertainty has been the name of the game, and that game doesn't usually end well.

While the S&P 500 is still up 14% for 2019, it is flat from a year ago. Stocks have made a lot of noise, and several of them are at or near all-time highs, but the market itself is right back where it started from.

Fed to the Rescue?

Interest rate cuts are a panacea for stocks in normal circumstances. They bring down borrowing costs and encourage spending. But rate cuts are also a sign of economic weakness, and that is pervasive in the U.S. and around the world. China reported very weak consumer spending and manufacturing numbers this week. Germany also reported dire manufacturing results this morning. Central banks around the world are taking an axe to their own interest rates, driving yields in once formidable economies like Germany, Japan, and Switzerland into negative territory. There is nothing healthy or normal about that.

But the U.S. Fed is not concerned with the stock market. Its two objectives are low unemployment and keeping inflation at or around 2%. It has achieved the former and is getting closer to the latter. The Fed does start to care about the stock market if sentiment gets really sour and companies start laying off workers, cutting back on spending, and running for cover. That happens during extended bear markets. We had a baby bear market at the end of 2018 as the Fed raised interest rates and the trade war was heating up, but it didn't last long enough for companies to retrench.

Fed Chair Powell has promised to be accommodative and do what it takes to keep the economic expansion alive. That implies more rate cuts, and options traders are counting on it, according to the CME's Fed Watch tool. The Fed next meets in 34 days, and traders are betting on a cut of at least another 0.25%.

Pressure from the White House

President Trump has been a vocal critic of the Fed chair since he appointed Powell to the post in February of 2018. He lambasted Powell for raising interest rates in 2018, and has continued to do so even though Powell and the Fed have changed their tune and indicated they would be more dovish.

According to Trump, they are not moving fast enough. To him, the trade war is not the issue, even though a majority of companies cited the uncertainty it has caused in their earnings reports over the past few weeks.

WeWork files to go public

We've been waiting for this S-1 filing for a long time. Ever since WeWork, which now wants to be called the "We Company," confidentially filed paperwork with the SEC to go public back in May, everyone has been wondering just how steep the company's losses are, and what its plans are for growth.

We learned both today, when the We Company dropped this 200 page plus whopper on us early this morning. We read these things so you don't have to, but if you want to learn how a 21st century company in the gig economy can raise billions of dollars in cash, burn through it like a bonfire, and go back to the debt market for billions more, have at it.

Here are some of the key details:

Revenue for the first six months of 2019: $1.54 billion
Net income losses for the first six months of 2019: $900 million
Long-term lease obligations: $17.9 billion
Long-term lease obligations non-discounted: $47.2 billion
Most recent valuation: $47 billion
528 locations around the world
More than 50% of its members are outside the U.S.
Biggest shareholder: WE Holdings (Controlled by CEO Adam Neumann), JPMorgan Chase, Benchmark Capital, and SoftBank

Many other companies have gone public with bigger losses on their books. Uber went public with a $5 billion loss. Not for nothing, Uber's stock hit an all-time low today. That doesn't mean WeWork will suffer the same fate, but investors will be taking a very big bet on an unproven business model when the company goes public in September as it plans to do.

Here's the We Company's P&L from past two years. Zoom in to see some really big numbers.

More News:

How Tesla has Become Most Profitable Short Bet at $2.75 Billion

Mixed Messages Heading Into NVIDIA Earnings

Volatility Across Asset Classes Raises Giant Red Flag

chart courtesy www.koyfin.com

Newmont Mining recovered somewhat from yesterday, its stock price having risen by almost 1%, after it was announced that Northern Star Resources was one of the frontrunners to bid for the joint Newmont/Barrick Gold venture's stake in the Super Pit gold mine. The remaining companies in the S&P 500 suffered significant losses today, with Ventas and Evergy the only other shares to actually increase; the latter just barely remaining above water at only 0.03%.

Shares of Macy's plummeted by over 13% today, after the company lowered its full-year earnings outlook upon failing to hit its profit expectations last quarter. Another department store, Kohl's, received similar results, falling by almost 11% amid the Zacks Consensus Estimate of its Q2 earnings going down.

Egypt was the sole exception of today's dismal performance; even though it only rose by 0.7%, it was still clearly the lucky one. The rest of the world suffered heavy losses, with Brazil, South Africa, and Israel getting hit the hardest.

Word of the Day:

Correction

In the world of investments, a correction is generally defined as a decline of 10% or greater in the price of a security from its most recent peak. Corrections can happen anywhere, including individual stocks, the indexes that follow stocks or sectors, the commodities and currency markets, or any asset that trades on an exchange.

An asset, index, or market may fall into a correction either briefly or for sustained periods—days, weeks, months, or even longer. However, the average market correction is short-lived and lasts anywhere between three and four months.

photo courtesy ssa.gov

Today in Financial History

Aug. 14, 1935: The Social Security Act is signed into law, assuring some retirement income for all working Americans. Payroll taxes are set at 1%, for both workers and employers, on the first $3,000 of earnings.