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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday, August 07, 2020 Headlines

1. US markets split as tech stocks drag down the Nasdaq

2. US employers added 1.76 million jobs as unemployment rate falls

3. Trump bans TikTok and WeChat in the US

4. Berkshire Hathaway reports earnings tomorrow

5. What to expect next week

Markets Closed

Dow
27,433.48
+46.50 (+0.17%)

S&P
3,351.28
+2.12 (+0.06%)

Nasdaq
11,010.98
−97.09 (-0.87%)

VIX
22.27
−0.38 (-1.68%)

Bitcoin
$11,565.43
−$211.34 (-1.77%)

US 10-Yr Yield
0.562
+0.026 (+4.85%)

Year-to-Date

Dow
27,433.48 (-3.87%)

S&P
3,351.28 (+3.73%)

Nasdaq
11,010.98 (+22.72%)

Russell 2000
1,569.18 (-5.95%)

Crude Oil
$41.50 (-32.21%)

US 10-Yr Yield
0.562 (-70.71%)

Photo courtesy GettyImages/Mario Tama/Staff

Markets Today

The DJIA and the S&P 500 managed to squeeze out slight gains as tech stocks stalled, but U.S. markets had a strong overall week. Investors climbed more walls of worry and stuck with the stocks that have led the recovery to date. President Trump's banning of TikTok and WeChat, and Canada's levying of tariffs on U.S. goods, did little to interrupt investor enthusiasm.

That said, overall fund flows still show a cautiousness among institutional investors with $22.7 billion going into cash, $17 billion going into bonds, and $2.7 billion going towards gold, of course. $7.4 billion flowed out of stocks, the largest outflow in 11 weeks. But, as we know, if money is flowing into the biggest tech stocks, the overall market trudges higher.

The July jobs report showed an addition of 1.76 million jobs and the unemployment rate ticked lower to 10.2%. Those were both better than expected, but there are still over 30 million Americans collecting unemployment. With the stimulus talks hitting an impasse today on Capitol Hill, the prospects for an extended period of high unemployment are becoming more real every day.

Headlines:

Canada said it will slap retaliatory tariffs on $2.7 billion worth of U.S. goods, the latest development in a new trade feud sparked by President Donald Trump's decision to reimpose aluminum duties on the U.S. ally. Canadian Deputy Prime Minister Chrystia Freeland said at a press conference: "We will impose dollar-for-dollar countermeasures in a balanced and perfectly reciprocal retaliation," she said. "We will not escalate and we will not back down."
President Trump, citing national security concerns, has issued executive orders prohibiting American companies from doing any business with China's Tencent and ByteDance, the parent companies of messaging apps WeChat and TikTok. The orders will go into effect in 45 days, and expect lawsuits challenging them to be announced soon.
China's exports boomed in July, stunning analysts who expected a small decline year-over-year. Exports rose 7.2% from last year with categories besides medical supplies, like electronic parts, handsets, computers, clothing, and automobiles, seeing improvements. Imports fell 1.4%, while analysts expected an increase. The trade surplus was $62.33 billion, the second-highest since Oct. 2015 after May 2020.
Total U.S. household debt decreased by $34 billion (0.2%) in the second quarter to $14.27 trillion, according to a New York Federal Reserve survey. This marks the first decline since the second quarter of 2014 and is the largest decline since the second quarter of 2013. Credit card balances fell by $76 billion, the steepest decline in card balances on record. Mortgage balances rose by $63 billion.
The trend in U.S. job postings on Indeed was 18% lower than in 2019, as of July 31. The website noted that job postings are rebounding much more slowly in metros where more of the jobs can be done from home. In work-from-home metros, postings in retail, restaurant, and personal-services jobs have suffered. Job postings in the largest metros are still 28% below last year's trend, versus just 8% for the smallest markets.
Short sellers betting against U.S. equities and ADRs are down $27.2 billion in mark-to-market losses this year as of the end of July, according to S3 Partners. The shorts with the highest profits in July were Caesar's Entertainment, Intel, Carnival, American Airlines, Boeing, and Nikola. The biggest losers are below:

Inside the June Jobs Report

U.S. employers added 1.76 million jobs in July as the unemployment rate ticked down to 10.2%, according to the Labor Department. Today's report brings the total number of jobs added in the last three months to 9.279 million, after losing 22.16 million jobs in March and April. The headline numbers are better than expected, but under the surface, the unemployment crisis in the U.S. is more severe than it appears.

Details included in the Labor Dept.'s release show a stubbornly high number of workers who have been unemployed for several weeks or more:

Those who were jobless less than five weeks increased by 364,000 in July to 3.2 million
Those who were jobless 15–26 weeks rose by 4.6 million to 6.5 million
Those who were jobless five–14 weeks fell by 6.3 million to 5.2 million

This indicates that many people who were temporarily laid off in the past three months were rehired or obtained new jobs. Those who have been out of work the longest remained jobless, and the number of those jobless people increased dramatically.

Racial Divides in Unemployment Report
The slight recovery in hiring in July continued to show a mixed picture for American workers by race, according to the Department of Labor. While the unemployment rates declined for white workers, Asian workers, and Hispanic workers, the rate for Black workers saw little change. Here's the breakdown:

Adult men (all): 9.4%
Adult women (all): 10.5%
White workers: 9.2%
Asian workers: 12.0%
Hispanic workers: 12.9%
Black workers: 14.6%

Berkshire Hathaway Reports Earnings Tomorrow

Make no mistake about it, long time Berkshire Hathaway holders have done very well sticking with Warren Buffett, but 2020 has been no market for old conglomerates. Berkshire is heavily invested in the energy sector, which has been leveled in 2020. But the holding company is sitting on $127 billion in cash, and Buffett and his partner Charlie Munger have been looking for years for an "elephant-sized target," as Buffett likes to say. Will they surprise us with one tomorrow?

In terms of its equity holdings, which are a substantial part of Berkshire Hathaway's earnings, we know Buffett and his team bought more shares of Bank of America in the past month, and that they have dumped most of their airline stocks. Apple (AAPL) has become one of its biggest holdings, which has served Berkshire's bottom line well.

What to Expect Next Week

The first week of August was a positive one for equity markets with stocks like Apple, Facebook, and Amazon driving the gains, lifting all indexes higher. Gold made new record highs as did the Nasdaq, crossing 11,000 for the first time.

Here is how major asset classes have performed so far this year:

Events This Week
Saturday, Aug. 8:

Berkshire Hathaway Reports Earnings

Monday, Aug. 10:

Market Holiday in Japan for Mountain Day
U.S. Job Openings and Labor Turnover Survey (JOLTS) (June)

Tuesday, Aug. 11:

U.K. Unemployment Claimant Count and Unemployment Rate (June)
German ZEW Economic Sentiment (August)
U.S. Energy Information Agency Short-Term Energy Outlook

Wednesday, Aug. 12:

U.K. Manufacturing Production (June)
U.K. Monthly Gross Domestic Product (GDP) Estimate (June)
U.S. Consumer Price Index (CPI) (July)

Thursday, Aug. 13:

China Industrial Production (July)
China Unemployment Rate

Friday, Aug. 14:

Eurozone Trade Balance (June)
U.S. Retail Sales (July)
U.S. Industrial Production (July)
Preliminary U.S. Michigan Consumer Expectations (August)

Industrial Production: A Tale of Two Recoveries
Both China and the U.S. report July industrial production figures this week. China started growing again in June, rising 4.8% year-over-year (YOY), and U.S. industrial production went positive in May, rising 5.4% YOY. A big factor in how these trends continue is likely to be the continued spread of COVID-19 in both countries.

According to The New York Times coronavirus map, the average daily number of new cases in China over the past two weeks was 61, whereas in the U.S., it was 56,979. Because the number of new cases rose substantially during July, exaggerating the difference between the countries, last month's results will shed light on how much the pandemic affected industrial production.

Retail Sales Lockdown: The Sequel
U.S. retail sales recovered somewhat in May as quarantines were relaxed, but growth was muted in June as new cases flared up that same month. As the rate of new cases continued to accelerate throughout much of July, quarantines were reinstated or extended. That impacted brick-and-mortar retailers more than those who are more e-commerce based, but spending on discretionary goods will still remain low.

AB 5: Uber's Judicial Sword of Damocles
Uber and Lyft have been in a major legal battle since California Assembly Bill 5 (AB5) went into effect at the beginning of this year. This bill would force Uber and Lyft to classify their drivers as employees, not contractors. Because they are contractors, Uber and Lyft drivers don't need to be paid a minimum wage, granted sick leave, workers compensation insurance, unemployment insurance, or other benefits employees are entitled to. The state of California filed a preliminary injunction to stop Uber and Lyft from classifying their workers as contractors until the larger case, in which Uber and Lyft are accused of gaining an unfair and illegal advantage over their competition by misclassifying its workers, is settled. The judge said that he will likely make a ruling within a matter of days, so keep an eye out for that, as it could significantly change the way the gig economy works in the U.S.

More News:

Curve Flattening Lifts Transportation Stocks

1.76 Million Jobs Added in July as Unemployment Rate Falls to 10.2%

Uber (UBER) Sells Off After Greater-Than-Expected Q2 Loss

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(chart courtesy YCHARTS)

Biogen's share price rose by 10% after the biotechnology company's new Alzheimer's drug, aducanumab, was granted priority review status by the U.S. Food and Drug Administration (FDA). Shares of UPS and FedEx both climbed higher today following the announcements that each will start charging additional fees due to the recent surge in deliveries.

Shares of Illumina are down by nearly 11% after the biotechnology company reported Q2 revenue results that showed a 25% year-over-year decrease. Similarly, FleetCor Technologies' stock price fell by over 8.5% amid the fuel card provider posting Q2 revenue results that missed analyst expectations.

Word of the Day

Short Selling

Short selling is an investment or trading strategy that speculates on the decline in a stock or other securities price. It is an advanced strategy that should only be undertaken by experienced traders and investors. Traders may use short selling as speculation, and investors or portfolio managers may use it as a hedge against the downside risk of a long position in the same security or a related one. Speculation carries the possibility of substantial risk and is an advanced trading method.

Image courtesy NYT.com

Today in History

Aug. 7, 1990:

The Wall Street Journal published market guru Joe Granville's forecast that the stock market would "crash within a few days." Granville called for the Dow Jones Industrial Average to fall below 2,200 by the end of August and to drop below 1,750 by the spring of 1992. Unfortunately for him, and fortunately for everyone who ignored him, the Dow barely budged, finishing the month at 2,614 and soaring past 3,200 by the spring of 1992.

The Wall Street Journal, Aug. 7, 1990, p. C2; https://www.dowjones.com/