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Msg  65400 of 65659  at  7/18/2019 9:33:09 AM  by

carswell


The Launch Pad


Daily market commentary
The Launch Pad
July 18, 2019
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Today

The world’s markets are mostly following the USA’s lead lower from yesterday, though this morning’s action is looking mixed across the asset classes. Even crypto is little changed in the grand scheme of things.

We would note that gold surged yesterday and hit a new cycle high again before pulling back somewhat this morning. Gold has been rising despite a flat US dollar, which we would usually expect to decline amidst a commodities rally. This tells us to look elsewhere for the reason for the rally.

Michael Batnick seeks to debunk some of the conventional wisdom in finance. We think this is a pretty simplistic view of the rules of thumb, but reminds us to always question them. The one we agree with most in this list is that your house is an investment. While land/homes tend to be an appreciating asset, while you live there, they are a negative cash-flowing necessity. Comparing un-levered real estate investments to un-levered equity or fixed income investments also provides a starkly different view… we are all used to using serious leverage on real estate.

With close to $13 trillion in negative yielding debt floating around the globe, it may be only a matter of time before the negative yield quicksand risks trapping even the U.S. bond market. This, according to JPM’s Jan Loeys. It wouldn’t happen overnight but will likely be triggered by the next recession. The Fed has only so many arrows in its quiver, and under any pronounced economic downturn will be at the zero bound before we know it. Here’s the Bloomberg link on the looming sand trap.

Trump has been talking about wanting a weaker US dollar, and it seems the IMF agrees with him. According to the International Monetary Fund yesterday, the USD is at least 6% stronger than warranted by economic fundamentals. Citi economists said “conditions seem increasingly favorable for the US administration to intervene against perceived overvaluation.” Rate cuts will naturally weaken the currency, but a currency intervention could jeopardize the dollar’s status as the world’s reserve currency. One option to weaken the dollar could include the US Treasury selling the greenback to buy foreign currency, but they only have $126 billion in reserves (drop in the pan for the $5 trillion in currency traded every day). If the US were to raise the debt ceiling (again), they could easily borrow to purchase foreign currencies and have a meaningful impact. Most other currency devaluation strategies would require cooperation from the fed, who act independently from the government, and have promised not to interfere in foreign exchange markets. Many analysts see the USD weakening even without intervention, assuming the dovish monetary policy continues.

Maybe you missed it (we doubt it), but Amazon is saying that their Prime Day (2 days really) was the largest shopping event in its history. Sales surpassed last year’s Black Friday and Cyber Monday combined. Prime members globally bought 175 million items. Can you guess the top selling items? Instant Pots and DNA kits. Funny, people are up in arms against Facebook on Privacy concerns, but they are more than willing to hand over their DNA to private companies. DNA companies have acknowledged that DNA data is sometimes shared with third parties. It’s probably only a matter of time before we hear about DNA leaks and unauthorized clones. Talk about identity theft.

This is pretty meta – Activist investor Bill Ackman runs the London listed closed-end hedge fund Pershing Square Holdings, which now has an activist investor of its own after losses mount up and the fund continuously trading at a significant discount to its net asset value.

Uber is making a comeback after their disappointing IPO, taking their service to the next level in 10 lucky U.S. cities, catering to Millennials’ on-the-go habits and dire need for convenience. Cargo struck a deal to become the ride-sharing service’s exclusive, in-car commerce provider globally. Initially, this service was initiated with selling snacks in the cars, however, with technology on their side they are now rolling out a Cargo app with the goal of becoming an on-the-go convenience store to sell items like the Amazon Echo, Apple Airpods, Away Luggage. Looks like this fancy new tactic is proving to be valuable as Uber’s shares are up by 4.9%.

Diversion: It’s happening faster than you think. More classic-body, electric guts car conversions. This time with 1970’s model Porsches. Yummy.

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Company news

Honeywell International posted impressive sales growth amid softening global growth. The company posted their 8th straight quarter of better than 5% sales growth. They benefited from solid demand for jets, defense and warehouse automation. Philip Morrisrallied 2.2% shortly after posting an earning beat this morning. The company also raised their guidance for the rest of the year. Netflixshares fell around 11% after a disappointing earnings print. An increase in domestic pricing is being blamed for loss of 130,000 U.S. customers last quarter. Blackstone Group gathered $45bb in the second quarter, topping their internal goal. Earnings rose to $709mm topping street estimates.

Commodities

Oil prices advanced amid continued tensions and military action in the Middle East; at the time of writing, WTI Crude is up +60 bps to US$57.12. Pricing support came from the supply side last night when Iranian state TV reported that Tehran had seized a foreign tanker smuggling fuel in the Lark Island of the Persian Gulf, claiming the foreign vessel was smuggling one million liters of fuel in the region. The news came as music to traders’ ears after oil sold off aggressively yesterday when gasoline stockpiles surged. Oil came under pressure when the U.S. Energy Information Administration reported a gasoline inventory buildup of 3.6mm barrels; investors had been expecting a decline of 925k barrels.

Gold prices pulled back slightly on profit taking activity; at the time of writing, Spot Gold is trading -4 bps at US$1,422.70. As our trader would say, gold has been “range bound” recently, but holds above the US$1,382 mark, suggesting that a wider bullish trend is likely to remain intact. In other commodities news, Germany’s hard coal imports fell for a fourth year in a row this year by around -10% y/y due to competition from renewable energy and a slack in demand from steelmakers. Coal-based power generation also declined y/y -22.9%. As Europe’s largest coal importer, the implications of this new trend are wide; the country has an influence on global coal trade flows and pricing at landing ports. It’s not the end for coal yet, though. Coal-to-power plants still offer more secure round-the-clock electricity and can act as back ups for volatile renewables.


Fixed income and economics

Treasury yields are rising this morning with no apparent reason other than a technical bounce from overbought levels. Despite a reflationary narrative at the beginning of this week, we’ve seen 10-year yields drift back toward the new “it level” of 2.0% which continues to have a fundamental pull ahead of Powell’s looming first cut. The market’s limited response to several bond bullish developments overnight speaks to the relevance of this level as the near-term equilibrium and serves as a reminder that round numbers have a particular draw in the rates market. Adventures in behavioral finance would suggest the 2.0% to 3.0% 10-year yield range seen throughout the last several years has a degree of magnetism which is difficult to fade in the current global growth environment. This isn’t to suggest a late summer attempt at 1.75% 10-year yields isn’t still the path of least resistance, but don’t be surprised to see a move toward 1.50% as the long term bond bull continues. Weekly jobless claims this morning were in line and there is no other data to influence the pattern for the balance of the session.

Chart of the day


Markets

Quote of the day

You can’t keep blaming yourself. Just blame yourself once and move on.

– Homer Simpson



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