foxex: Clarification

The Market Sum | Insight after the bell

By James Early

Monday's Headlines

1. U.S. Treasury May Not Limit Investment into Chinese Companies After All, Maybe

2. White House Considers Investment Limits on China

3. Oil Prices Down for the Quarter, Despite Drone Strike

4. Metropolitan Museum of Art's Latest Addition: Junk Bonds

Markets Closed

Dow
26,916.83 +0.36%

S&P
2,976.74 +0.50%

Nasdaq
7,999.34 +0.75%

VIX
16.24 -5.69%

Bitcoin
$8,244.60 +2.40%

US 10-Yr Yield
1.675 0.00%

Markets Today

U.S. markets like that the Treasury won't restrict investment into China (yet)
S&P 500: UP 0.5%
Nasdaq: UP 0.75%
Last trading day of the third quarter
S&P 500 virtually flat for the quarter
Chicago PMI down to 47, indicating contraction

It wasn't the best of days, but it wasn't the worst either. (Same, incidentally, goes for 2019's third quarter, which ended today.) On Monday, stocks reversed their momentum from last Friday, when Bloomberg broke a story that the White House was aiming to restrict Americans' ability to invest in Chinese companies in the name of protecting American investors. Clarification from the Treasury department over the weekend and the White House today that such plans were, in fact, not imminent brought calm, but worth noting is that those clarifying didn't clarify completely, perhaps leaving a little negotiating leverage on the table.

From Friday, the market was more worried about this being a further escalation of the trade war than simply a targeted blow to Chinese companies trading in the U.S.—though it would have indeed been a serious blow to them. Some of the bigger names bounced back slightly more than the overall market:

Tencent (ADR): UP 1.81%

Baidu: UP 1.53%

Alibaba: UP 0.75%

NetEase: UP 2.11%

In drier-but-still-important economic news, Chicago PMI was down to 47 (a number below 50 indicates a contraction) and came in below expectations. Purchasing managers' indices are leading economic indicators, meaning at least those in the Chicago economic ecosystem might be in for a little softening. But the frustrating thing about economics? Nobody knows exactly when.

Treasury Says it Won't Restrict Chinese Listings

Don't like the news about China? Wait five minutes. Or maybe a weekend, but same idea. Markets were "all shook up" in a twitching, bad-Elvis sort of way on Friday after Bloomberg reported that the White House was brewing on ways to restrict U.S. investment into Chinese firms, including forced delistings from U.S. exchanges.

White House advisor—and big-time China hawk—Peter Navarro told CNBC on Monday that the Bloomberg story was "inaccurate" but declined to say in what way.

This partially echoes a Saturday clarification from Treasury spokeswoman Monica Crowley—again to Bloomberg—that the Treasury had no plans to stop Chinese firms from listing in the U.S. "at this time." No mention about other restrictions, or by what authority (executive order, perhaps?) this would be imposed. Sometimes the proviso says as much as the message, and this may be one of those times. The threat may have started as a bargaining chip that met with a stronger-than-expected reception stateside, and was thus walked back a bit. The Chinese side, generally quick to lash out at any perceived slight, went for the high-ground approach, calmly saying that they'll continue opening their markets. In fairness, however, China isn't in much of a position to criticize anyone else's market restrictions.

WeWork Postpones IPO

No IPO is better than a wee one.

So thinks WeWork parent We Company, or at least its owners and the investment bankers they hired. If you've taken first grade math, you can figure out why: Back in January, Japanese mega-investment firm SoftBank added $100 million to its WeWork position at a private market valuation of $47 billion. No doubt SoftBank, which called WeWork "the next Alibaba," hoped for a near-term IPO at a meaningfully higher price. But nine months and a lot of bad publicity about WeWork founder Adam Neumann later, WeWork was reported to be looking at an IPO valuation of just $10 billion.

Ouch.

Strangely enough, my Wall Street friends are unanimously heartened by this whole WeWork train wreck. Not heartened that a bad thing happened, but that investors were actually awake and responsive to it. First, there's that pesky question: WeWork is a cool idea, but can it work as a business? So far, the numbers aren't answering that question positively, and prior shared-office-type companies like Regus didn't end well.

Second, although WeWork isn't even a public company, the investment community seems refreshingly appalled by founder and until-six-days-ago-CEO Adam Neumann, the 6'5" 40-year-old known for (allegedly, for some, and among other things) renting buildings he partly owned to WeWork, using $32 million from WeWork to invest in a snack food business started by his surfer friend Laird Hamilton, taking a $362 million loan from WeWork, raging at employees, swilling $140-per-bottle tequila, and walking barefoot "everywhere," according to employees—on New York sidewalks, in his offices, and even in gas station bathrooms. Okay, I made the last one up, but you get the idea here.

WeWork lost nearly $2 billion last year (see below), which is just shy of Neumann's net worth.

Oil Prices Down for the Quarter, Despite Drone Strike

Just two weeks ago, the story about oil was how high prices had become in the wake of the drone attack on two Saudi Arabian oil plants, which reportedly shut down 5% of global oil supply. Oil peaked at $72 then (Brent oil pricing; relative to West Texas Intermediate, Brent pricing sees more international use). Now, the story is about how cheap oil has become ($61 now) despite the attacks. The minor cause is that the plants recovered quickly, but the larger one is simply that global demand is sluggish. That means something, even for people who don't care about oil (Tesla drivers, I'm talking to you).

Brent oil is down more than 8% for the quarter, largely on concerns the trade war with China is slowing the Middle Kingdom's growth. That's a fair concern, considering that China is the world's largest oil importer. While Saudi Crown Prince Mohammed bin Salman warned that oil could spike to "unimaginably high levels" (that, by virtue of making such a statement, he seems to have imagined) if the world doesn't keep Iran in check, the general narrative is that supply shocks notwithstanding, oil will return to its recent day job as a barometer of the global economic mood.

(credits: Macrotrends.net)

Metropolitan Museum of Art Buys Junk Bonds

Like junk bonds? You've got company in high society. As reported in Barrons, The New York Metropolitan Museum of Art plunked $10 million into New Mountain Guardian III, a junk bond fund, buying 10.3% of it. Before you start wondering if some art history majors know more about the yield curve than you do, know that junk bonds tend to be larger bets on the creditworthiness of the issuer than interest rates themselves. And despite the insulting name, junk bonds aren't always as insidious as they sound: Nearly all bonds issued by small U.S. companies are junk bonds, by definition, because they're too small to be rated, and JPMorgan, IBM, and even the U.S. itself (albeit in the 1700s) have issued shaky debt. Despite assets of nearly $3.5 billion, the Met had an operating deficit of $8.3 million last year which, it hopes, is nothing a little junk won't fix.

(credits: REUTERS/Lucas Jackson)

More News:

Investors flee Biotech ETFs as they Lag Bull Market

4 Under the Radar Stocks That Can Outperform in New Market Rebound

Drastic Decline in S&P 500 Breadth a Warning Sign to Bull Market

chart courtesy www.koyfin.com

Shares of Marriott rose by nearly 3% after the company announced it will be adding Beyond Meat to its Courtyard restaurant menu. Newell Rubbermaid's stock price also increased by almost 3% today, following the company finally reducing its debt to manageable levels by selling assets as part of a turnaround plan, which began in 2018.

National-Oilwell was one of several oil companies that fell today, its shares suffering the largest drop of almost 4%; alongside it were Baker Hughes (over 3%) and Marathon Petroleum (nearly 3%). Macerich's stock price fell by more than 2% amid Forever 21 filing for bankruptcy.

Word of the Day

Junk Bond
Junk bonds are bonds that carry a higher risk of default than most bonds issued by corporations and governments. A bond is a debt or promise to pay investors interest payments and the return of invested principal in exchange for buying the bond. Junk bonds represent bonds issued by companies that are struggling financially and have a high risk of defaulting or not paying their interest payments or repaying the principal to investors.

Programming note: Today's Market Sum is guest written by James Early.

(image courtesy: Koyfin.com)

Today in Market History

Sept. 30, 1981:

Ten-year U.S. Treasury yields reach 15.84%. The Koyfin rates graph, as cited by Ritholtz Wealth Management, nearly says it all: Rates are close to one-tenth of what they were the year the Space Shuttle first launched. Good as it sounds to lend to Uncle Sam at 15%, remember that mortgage rates averaged 17% and unemployment was nearing 9%.