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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday, September 14, 2020 Headlines

1. Markets race higher powered by heavy dealmaking

2. Multi-billion dollar acquisitions fuel chipmakers and pharma

3. Drawdowns have been nearly unavoidable

4. Value investing's long, slow demise

Markets Closed

Dow
27,993.33
+327.69 (+1.18%)

S&P
3,383.54
+42.57 (+1.27%)

Nasdaq
11,056.65
+203.11 (+1.87%)

VIX
25.58
−1.29 (-4.80%)

Bitcoin
10,706.65
+376.86 (+3.65%)

US 10-Yr Yield
0.671
+0.002 (+0.30%)

Image courtesy GettyImages/Arturo de Frias photography

Markets Today

Stocks charged out of the gate this morning, emboldened by heavy dealmaking across the semiconductor and pharmaceutical industries (see below). With swollen market caps and cheap debt, giants like Nvidia, Verizon, and Gilead Sciences went on a buying spree. More upbeat vaccine news also lifted sentiment, as Pfizer's CEO said its vaccine may be ready by year-end.

Volatility took the day off as tech stocks surged, leading all sectors higher. Gold surged, reversing its recent trend, and other industrial metals rose as well on hopes of improving economic conditions. Conditions are improving on a macroeconomic level across developed countries. That is giving some investors a shot in the arm of confidence, even amid the stock market's recent turmoil.

As for other shots, some Americans are not so eager anymore. According to a recent survey by The Morning Consult, as time goes on, less people are willing to get a COVID-19 vaccine. The share of U.S. adults who say they'll take one has fallen 21 points since early-April peak.

Chart courtesy TheMorningConsult

PODCAST ALERT! The latest episode of The Investopedia Express is LIVE.

On this week's podcast:

Why the markets will remain under pressure
Why American tech giants are cozying up to India's Reliance Industries
A few good minutes with Schwab's Liz Ann Sonders
Why you need to know about Quadruple Witching Day

Sign up below or wherever you get your audio podcasts and please give it a listen. We'd love you to rate and recommend it if you think it is worthy.

Headlines:

ByteDance, the Chinese owner of social video app TikTok, has chosen Oracle to be TikTok's U.S. technology partner, and Oracle will take a significant stake in the business, according to multiple reports. The White House had imposed a Sept. 20 deadline for ByteDance to announce a plan for a sale of TikTok in the U.S. or be banned by Sept. 29, and a deal would have to be done by Nov. 12. The U.S. Justice Dept. says it will review the agreement with Oracle.
Shares of DraftKings (DKNG) rose more than 15% after the sports gaming company announced an agreement with sports entertainment giant ESPN. As part of the agreement, DraftKings will be the exclusive provider of daily fantasy sports and a co-exclusive partner for gambling link-outs from ESPN. DraftKings content will be integrated into ESPN's digital offerings and studio shows, according to the announcement.
Delta Air Lines said that it will borrow $6.5 billion backed by its frequent-flyer program, joining American and United, who have announced similar capital raising strategies. The airline plans to sell senior secured notes and enter into a new term loan, both backed by its SkyMiles program. SkyMiles will lend the net proceeds of the bond offering to Delta, although a portion will go to a reserve account. Delta said last week that it had about $16 billion in cash at the end of June and that it was burning around $27 million a day.
Nvidia has agreed to buy Arm Holdings, a designer of chips for mobile phones, from SoftBank in a deal worth $40 billion, the companies announced Sunday. Arm is the designer of an architecture used in chips in most mobile phones, including the Qualcomm chips used in most Android phones as well as Apple's iPhone.
Verizon has agreed to acquire prepaid wireless reseller TracFone from América Móvil for up to $7 billion in cash and stock, bringing the country's largest reseller of cellphone services under the wing of the country's biggest wireless provider.
Gilead Sciences is acquiring biotech company Immunomedics in a $21 billion deal that will expand Gilead's availability of cancer treatments, the companies announced on Sunday. The deal will provide Gilead access to the drug Trodelvy, an FDA-approved treatment for metastatic triple-negative breast cancer. Gilead will acquire Immunomedics for $88 per share in cash. The offer will be funded through about $15 billion in cash on hand and $6 billion in newly issued debt.
President Trump signed an executive order on Sunday to reduce the cost of prescription drugs for U.S. seniors by more closely aligning prices with what pharmaceutical companies charge in other countries. The order is unlikely to have an immediate effect because it requires federal rule-making that could take months to complete. But if Mr. Trump wins a second term and goes ahead with the rules with wide applications, the move could be significant, since most developed nations have far lower drug prices than the U.S. does.
Big landlords increased the number of eviction cases they filed after the CDC's recent moratorium. Institutional landlords filed more than 900 eviction cases across eight metropolitan areas from Sept. 2 to Sept. 8, according to data compiled by Private Equity Stakeholder Project, an activist group partly funded by organized labor. Landlords filed 165 cases in the same markets during the week of Aug. 3.
PepsiCo is launching a new drink called Driftwell that is meant to help consumers relax and unwind before bed. The enhanced water drink contains 200 grams of L-theanine, an amino acid that's found in green and black teas and some mushrooms. A few studies have suggested that the ingredient can improve sleep quality and can help reduce the physical symptoms of stress. Driftwell will be available nationwide starting in December.

Photo courtesy PepsiCo

Unavoidable Drawdowns

2020 has been a tough year to be a stock-picker, unless you picked Tesla and the FANGMAN stocks, plus a few of the stay-at-home unicorns like Zoom (ZM) and Peloton (PTON). Many of you did, according to our most recent survey, but when you bought those stocks and how long you have held them is what really makes the difference.

Most stocks have underperformed the stock market this year, as you know. But as Michael Batnick of Ritholtz Wealth Management points out, many have also experienced deeper drawdowns than the overall market. According to Batnick and YCharts, 66% of S&P 500 stocks have underperformed over the last year, while 76% had a deeper drawdown. Only 10 stocks avoided bear market territory, while 81 fell 60% or more.

Chart courtesy TheIrrelevantInvestor

Requiem for Value Investing

Value investing, the investment strategy that has made legends out of the likes of Warren Buffett, Charlie Munger, Benjamin Graham, and other icons, is being memorialized by Bank of America's Research team in a note out to clients. Its demise has been a slow and painful one for investors who have clung to the principles of picking stocks that appear to be trading for less than their intrinsic or book value.

BofA points out that the last ten years have been even worse for value investors than the dotcom bubble, with the worst returns in history for U.S. value stocks relative to growth.

What Killed Value?

The pandemic twisted the blade in value stocks, which just returned one of the weakest quarters in history despite some improvements in economic conditions. If you are looking for a culprit, look no further than the lack of inflation and a decade of ultra-low interest rates. The 1970s and 80s were characterized by high interest rates, high inflation, and high oil prices. The biggest companies were much more closely tied to the macro economy than they are today.

Today's growth winners thrive on deflation and low interest rates. Those conditions will be around for quite awhile, as the U.S. Federal Reserve recently reminded us.

While we are not ready to bury value investing, since many of its principles are important in any market condition, it is fair to say that the traditional model needs some rethinking.

More News:

Major Airlines Drop Change Fees Permanently on Many Flights

GameStop (GME) Rebounds After Analyst Upgrades

10 Biggest Solar Companies

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(charts courtesy YCharts)

Shares of Apartment Investment & Management are up by 7% after the real estate investment trust announced its plan to split into two publicly traded companies. Micron's stock price rose by over 6.5% following a Goldman Sachs analyst upgrading the stock from Neutral to Buy.

Shares of Citigroup are down by over 5% amid the investment banking company's CFO warning that revenue will drop in the third quarter. The WSJ also reported that federal regulators are preparing to reprimand Citigroup for failing to improve its risk-management systems. Kroger's stock price fell by 4.5% after a Bank of America analyst downgraded the grocery store chain from Buy to Neutral.

Word of the Day

Book Value

An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation. Book value can also be thought of as the net asset value of a company calculated as total assets minus intangible assets (patents, goodwill) and liabilities. For the initial outlay of an investment, book value may be net or gross of expenses such as trading costs, sales taxes, service charges, and so on.

Photo credit : Eisenhowerlibrary.gov

Today in History

Sept. 14, 1960:

Pres. Dwight D. Eisenhower signed into law the Real Estate Investment Trust Act of 1960, which created REITs, enabling retail investors to buy shares in commercial real estate for the first time.

Source: www.nareit.com