foxex: Headwinds

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. US stocks continue their slide from record highs on COVID-19 concerns

2. 30-year Treasury bond yield falls to all-time low, gold surges to new highs

3. Technical analyst sees 'systematic sell signals'

4. Dropbox pops as others drop

Markets Closed

Dow
28,992.41
−227.57 (-0.78%)

S&P
3,337.75
−35.48 (-1.05%)

Nasdaq
9,576.59
−174.34 (-1.79%)

VIX
17.08
+1.52 (+9.77%)

Bitcoin
9,689.91
+$95.41 (0.86%)

US 10-Yr Yield
1.471
−0.054 (-3.54%)

Year-to-Date

Dow
28,992.41 +2.8%

S&P
3,337.75 +3.6%

Nasdaq
9,576.59 +5.3%

Russell 2000
1,678.61 +0.7%

Crude Oil
$53.46 -11.75%

US 10-Yr Yield
1.471 -21.8%

Markets Today

U.S. stocks dropped sharply on Friday, continuing their fall from yesterday after hitting new all-time highs earlier in the week. The S&P 500 fell slightly more than 1%, while the Nasdaq Composite dropped a full 1.79%. The Dow Jones Industrial Average declined by 0.78%. Friday's choppy price action resulted in all of the major U.S. indexes booking a relatively uncommon losing week. The bears were out in force on Friday as fears intensified that a global economic slowdown, and even a recession, could result from the human and economic toll of the coronavirus, or COVID-19, outbreak.

Clearly, signs of fear in the markets increased markedly on Friday. This includes a flight to "safe" assets, a new all-time low for long-term Treasury bond yields, and a large spike in the VIX "fear index".

Headlines:

Wells Fargo (WFC) reached a $3 billion settlement with the U.S. Justice Department and the Securities and Exchange Commission (SEC) over the scandal in which it "unlawfully misused customers' sensitive personal information" to fraudulently open accounts on which it charged fees. The type of settlement reached, called a deferred prosecution agreement, is one in which the SEC files charges against the company, but doesn't further pursue them. The charges will be dropped if the bank continues cooperating with investigators over the next three years. The settlement only resolves issues with the firm itself, not individuals charged in the scandal.
The SEC is investigating whether cigarette-maker Altria Group (MO) adequately disclosed the risk involved in its 2018 purchase of a 35% stake in vape-maker Juul. Altria has had to write down its investment by over $8 billion.
E-commerce site eBay (EBAY) is looking to sell its classified ads business. Possible buyers include the private equity firm, Blackstone Group (BX), and German publishing company, Axel Springer, which owns Rolling Stone magazine and is backed by private equity firm KKR (KKR).
The SEC rejected a proposal from Cboe Global Markets (CBOE) to introduce a four-millisecond delay, known as a "speed bump" on one of its exchanges. The SEC said that the proposal was "discriminatory" and that Cboe didn't offer enough evidence it would improve markets. Supporters of "speed bumps" argue that it prevents high-speed trading firms from having an unfair advantage in markets. Critics of the proposal say it unfairly advantages market makers who would be able to change prices without a delay.
Saudi Arabia, Kuwait, and the United Arab Emirates are meeting this week to talk about cutting oil output by up to 300,000 barrels a day, despite Russia's objections to the need for further cuts. Saudi Arabia has worked with Russia to influence oil prices since 2016, and this could signal that the alliance is weakening.

30-Year Treasury Bond Yield Falls to All-Time Low, Gold Surges to New Highs

As equities tumbled on Friday, investors continued to rush towards the perceived safety of bonds and gold. The run-up in bond prices pushed bond yields lower (bond prices and yields move in opposite directions). The most prominent red flag occurred in the long-term 30-year Treasury yield. This key bond yield dropped to an all-time low of 1.88% before bouncing back modestly by the end of the day. In doing so, the 30-year dropped below the last record low established in August of last year. For its part, the benchmark 10-year Treasury yield dropped to approach long-term lows not seen since September of last year. Bond yields fell as fears increased that the coronavirus would have a significant impact on global economic growth. According to a BofA Global Research report issued on Friday, "recession probabilities have increased above a critical 30% level according to the Fed framework."

Here's a chart of the 30-year Treasury yield and its drop down to new record lows:

As stocks and yields fell sharply on Friday, gold predictably soared to new highs not seen since early 2013. Gold prices, along with other "safe-haven" assets, have been bid up sharply of late as global economic risks have intensified due to the outbreak and rapid spread of the COVID-19 virus.

Here's a chart of gold futures highlighting the recent sharp rise:

Technical Analyst Sees 'Systematic Sell Signals'

On Friday morning, JPMorgan technical analyst Jason Hunter issued a note to clients warning that the S&P 500's recent all-time highs were hit with "much less momentum and weaker internals" than at other times when new records were reached. Hunter also noted that market leadership has been "narrow," which means that there hasn't been widespread participation in the rally. Rather, only a relatively limited group of individual stocks were boosting the S&P 500 to new heights.

JPMorgan further warned that "systematic sell signals," or automated technical triggers, are likely to result in a market pullback in the short term. At several points during both Thursday's and Friday's sessions, rapid declines hinted at such systematic selling.

Dropbox Soars

One unusually bright spot for equities in an otherwise bearish environment on Friday could be seen in the massive jump in Dropbox's (DBX) share price. At its high point on Friday, the stock was up nearly 27% before pulling back to end the day up nearly 20%. Key to the frenzied buying in such a down market was the cloud company's earnings release on Thursday. Dropbox handily beat expectations on both the top and bottom lines, and also issued guidance that was generally at or above expectations. Importantly, Dropbox's CEO Drew Houston said that he expects the company to be profitable by the end of the year.

Here's a one-year chart of DBX stock that highlights Friday's massive jump after earnings:

What to Expect from the Week Ahead

To start off, here's how different asset classes have performed so far this year:

Here are some of the key economic events on the calendar for the week ahead:

Saturday February 22:

Warren Buffett's Annual Letter to Investors

Monday February 24

Market Holiday in Japan for the Emperor's Birthday
Market Holiday in Brazil for Carnival
German Ifo Business Climate Index (Feb.)

Tuesday February 25

Market Holiday in Brazil for Carnival
German Gross Domestic Product (GDP) (Q4)
U.S. Conference Board Consumer Confidence (Feb.)
S&P/Case-Shiller House Price Index (Dec.)

Wednesday February 26

Market Holiday in Brazil for Ash Wednesday
U.S. New Home Sales (Jan.)

Thursday February 27

U.S. Durable Goods Orders (Jan.)
U.S. Preliminary GDP (Q4)
U.S. Pending Home Sales (Jan.)
Tokyo Consumer Price Index (CPI) (Feb.)
Japanese Preliminary Industrial Production (Jan.)

Friday February 28

U.K. Nationwide Housing Price Index (Feb.)
French GDP (Q4)
German Unemployment Change (Feb.)
Indian GDP (Q3)
U.S. Personal Consumption Expenditures (PCE) Price Index (Jan.)
U.S. Preliminary Trade Balance (Jan.)
U.S. Retail Inventories
Canadian GDP (Q4)
Michigan Consumer Sentiment (Feb.)
Chinese Manufacturing Purchasing Managers' Index (PMI) (Feb.)

Warren Buffett's Letter
Warren Buffett releases his annual letter to Berkshire Hathaway (BRK.B) shareholders on Saturday, February 22. Last year, among other things, Buffett talked about how the quality of a business can't be the only consideration when purchasing it, price has to be considered as well. This was clearly in reference to his purchase of a large stake in Kraft Heinz (KHC), which, while a solid business, was purchased at far too high a premium to make it pay off as an investment. He said last year that he has been unable to find an "elephant," the nickname for a very large acquisition, indicating he may not be acquiring another large company soon. Berkshire has under-performed the S&P 500 over the past year and we may get reflections on why that's been the case.

China's Purchasing Managers' Index
China is a behemoth of global manufacturing, and due to the complexity of global supply chains, its industrial production reaches even farther than one would expect. Even products made mostly in the U.S. often use components from China. Because of the widespread quarantines and shutdowns due to the coronavirus, China's Purchasing Managers' Index (PMI), will be important to watch. The PMI measures survey responses from business managers about questions such as levels of new orders and inventory levels. The widespread disruption of the Chinese economy caused by the coronavirus is evident, but the PMI may be able to give a more specific view of the degree.

More News:

Dow Theory Could Signal Broad-Based Decline

Morgan Stanley's E*TRADE Deal Could Signal Long-Term Top

3 Leveraged ETFs to Trade a Stock Market Correction

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(chart courtesy YCHARTS)

Cloud service provider Dropbox rose after posting substantially better-than-expected earnings. It rose above its IPO price for the first time since September. Shares of tractor manufacturer, Deere, also gained today after a positive earnings report.

First Solar fell after releasing significantly lower-than-expected earnings. Toymaker Hasbro dropped after it said that the coronavirus would continue to interrupt its production in China, where the majority of its products are made.

Word of the Day

Treasury Yield

Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations. Looked at another way, the Treasury yield is the effective interest rate that the U.S. government pays to borrow money for different lengths of time.

Today in History

February 21, 1972

Today in 1972 U.S. President Richard Nixon visited the Peoples' Republic of China (PRC), making him the first U.S. president to visit mainland China since the founding of the PRC. President Nixon negotiated with the government of the PRC with the goal of reaching a rapprochement and moving towards normalizing relations between the two countries. Nixon's move was surprising, because he'd always taken a hard line against Communism. However, his strong anti-communist credentials were what helped him to make diplomatic overtures towards China, as he would not have to worry about domestic critics accusing him of being "soft on Communism." At the end of the visit, the two nations released a document called "The Shanghai Communique" in which the U.S. first acknowledged China's "One China" policy. While the U.S. didn't fully normalize relations with China until 1979, this move helped set the stage for the vital diplomatic and economic relationship between the U.S. and China today.

Sources:

https://www.wilsoncenter.org/blog-post/nixon-goes-to-china

https://www.cfr.org/timeline/us-relations-china