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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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What Matters This Week (and A Few Things from Last Week)

Updated: Jul 19, 2020

The Market Last Week: Up until Friday, the global equity markets rallied strongly for four consecutive days, enabling investors to claw back the significant losses from the week before. Here’s how the major markets did last week, compared to the week before and over the prior two week period.

As you can see in the table, the S&P 500 has been the best performer over the past two weeks and the FTSE 100 has been the worst. Perhaps concerns over the Coronavirus (discussed further below), which had weighed heavily on the overall market the last week in January, became more quantifiable. Rather than “throw out the baby with the bathwater”, investors started to show greater discretion in trying to determine which companies were likely to be affected by this virus and which ones were less likely. Overall, I thought that earnings were decent last week, with the negative surprises mainly coming from the U.S. automotive sector. After four strong days to start the week, good U.S. nonfarm payroll data on Friday (see below) could not stop investors from taking a breather, as most markets closed the day lower, nevertheless capping a strong week across the board.

U.S. Nonfarm Payrolls (last Friday): The U.S. economy added 225,000 nonfarm payroll jobs in January, well above expectations of 158,000-164,000 jobs. Wage growth in January year-over-year was 3.1%, and unemployment increased modestly to 3.6% (mainly because the labour force participation rate increased, a positive). This link will take you to the full report from the U.S. Bureau of Labor Statistics.

Data This Week (Week of Feb 10th): This week Fed Chairman Powell testifies before Congress on Tuesday and Wednesday mornings (bi-annual), and U.S. inflation and retail sales figures (amongst other data) for January will be released during the week.

Tesla (again) and Casper (IPO): Tesla’s one-way march upwards was halted on Wednesday, after the shares hit an intraday high the day before of $968.99/share. Wow! Tesla gave some of the gains back though, closing the week at $748.07/ share. In case you’re keeping track, that’s still a very nice gain from Tesla’s closing price the week before, which was $650.57/share (Jan 31), and from the closing price last year (Dec 31st 2019) of $418.33/share. As the company’s share price has skyrocketed, so have the number of news articles trying to explain the reasons why. As you might expect, both the bulls and the bears have very different views. If you are interested in one of the reasons mentioned most often – short covering – then you should know that according to Shortsqueeze, short interests were 18.6% of the company’s outstanding shares (circa 25m shares) as of the end of the week. (Note that Elon Musk holds around 20% of the company’s shares, which he certainly would not lend to shorts, which means the short interest is understated even at these insane levels.) It is true that shorts as a percentage of outstanding shares has come down a bit, but not that significantly. What I don’t understand is how this situation ever gets corrected, at least in an orderly way. As the shares go higher and higher, more and more investors see the disconnect with fundamental value and decide to short the stock. At the same time, investors that are short Tesla are forced to contain their losses by covering their shorts. It feels like a hamster wheel, never stopping – one set of shorts is replaced by another set of different shorts, and on and on. Playing the short side or buying puts on Tesla is very appetising, but as I have said all along, it’s a fool’s game because this stock has a life of its own. Technicals are driving it, and it’s simply impossible to tell where the shares might be priced day to day. My view long term though is that the shares are over-valued and will eventually be brought (down) to a level that better reflects fundamental value.

The heavily-anticipated IPO of (mainly) mail order mattress-in-a-box company Casper (NYSE: CSPR) came at the lower end of revised expectations on Thursday at $12/share, well below early hopes of $17-$19/share. According to MarketWatch, the money-losing company raised $101m, selling 8.4m shares, which valued the company at $468m. Joining a growing club of disappointing IPO’s, the last private raise for Casper in March 2019 valued the company at a whopping $1.1 bln, qualifying it - at least back then – for unicorn status. The stock performed well on its first day, closing above its IPO price at $13.50/share (+12.5 %), a nice pop in my opinion. I heard CNBC interviewing the CEO on Thursday morning after the stock started trading, and they asked him if the IPO price had been too low at $12/share. He defended the level. And he also looked pretty smart one day later as the shares flopped, closing the week at $11.05/share (below the IPO price).

Earnings Last Week, and What’s Ahead: Here is a summary of earnings from last week for a few higher-profile issuers:

The actual vs (analysts) consensus is probably the most relevant column, with companies that serve up negative earnings surprises likely to underperform after earnings release. But this single gauge is far from always being the sole driver. It’s not just about earnings, but also about other metrics like revenue growth, customer/subscriber growth, trends in unit sales, direction of costs, etc. Of the red figures in the actual vs consensus column, Ford, GM, and Yum! Brands all saw their stock prices fall after missing EPS consensus. However, Twitter bucked the negative performance versus consensus by delivering very strong user growth, which investors liked more than they disliked the disappointment in earnings.

Some of the companies releasing earnings this week include Loews, Goodyear, Hasbro, LYFT, CVS, AIG, Alibaba, NVIDIA, KraftHeinz, Fidelity and Pepsi. In total, 68 S&P 500 companies will release earnings this week.

U.S. Politics: President Trump gave his State of the Union address on Tuesday evening, which you can watch here on YouTube (warning: it’s 1 hour, 25 minutes, from Global News). It was largely self-congratulatory focused mainly on economic tailwinds, as one would expect from the president as his re-election campaign gains steam. President Trump stuck to his script, and the speech overall was generally positive, similar in my opinion – at least from an economics perspective – to his speech in Davos a couple of weeks before (see link here for my assessment). What happened just before and just after the speech was also interesting. President Trump did not shake Speaker of the House Nancy Pelosi’s hand after delivering a hard copy of the speech to her just before he spoke, the House Speaker then dispensed with some of the usual more formal language in her introduction of President Trump, and then Ms. Pelosi ripped up the hard copy of the speech standing just behind President Trump after he had finished presenting his State of the Union. It seems that U.S. politics is a lot like reality TV these days! After being acquitted as expected in the impeachment “trial” by the Senate the following day, President Trump spoke at the 68th annual National Prayer breakfast on Thursday, using this normally non-partisan forum to ramp up his tirade against the Democrats and the impeachment process. If you want to read this directly from the horse’s mouth (meaning the White House itself), then here’s the link for the transcript. After an eventful and very successful week, President Trump ended the week with his best approval ratings (49%) ever, according to a recent Gallup Poll. Meanwhile, on the opposite side, the Democrats made a mess out of their opening caucus in Iowa, although Pete Buttigieg was finally announced as the winner on Friday by the narrowest of margins. The Dems held yet another debate on Friday evening in New Hampshire, the next state up for grabs (this Tuesday). According to the press, the main take-away from that debate was apparently the candidates ganging up on and trying to crush the momentum of the newly-minted winner of Iowa. The next few months are going to be interesting for sure!

(As the Democratic race heats up, it reminded me - do you know the difference between a caucus and a primary? Some states do one, some the other, and some a mix. I thought this article from was decent in explaining the difference between the two, if you are interested.)

U.K. Budget:  One thing that caught my eye in the U.K. press at the end of last week (FT) was a discussion of the various tax reforms currently under consideration by Chancellor of the Exchequer Sajid Javid to “level up” the economy.  Apparently pension reform is one item under consideration, and specifically, he is looking at capping tax relief on pension contributions at 20%, rather than the top marginal rate (45% in the U.K.).  What I found interesting about this is that the Conservative government would entertain what is effectively a tax increase on higher income earners - its traditional support base - although this might be necessary so that the government can deliver on the financial pledges in its manifesto.  The FT presents it as effectively a wealth transfer from the richer south of the country to the poorer North, since it is the latter that offered up much stronger-than-expected support for the Conservative party in the recent election.  This article was also a reminder that the budget is due on March 11th, not far off.  It will be interesting to watch how this evolves, and you should expect more “Chinese whispers” as Mr Javid floats ideas. 

Coronavirus: As of 8h GMT this morning according to Bloomberg, there have now been 40,614 cases of Coronavirus reported and 910 deaths. All of the deaths but two (one Hong Kong and one The Philippines) have been in mainland China. It is too early to say that the virus has been stopped, but hopefully it is in the process of being contained. The diagram below is from World Health Organization.

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