Finance

Chinese equity markets have been on a wild ride this year, going from what many considered “un-investable” at the beginning of the year to recent commentary from famed hedge fund manager David Tepper, who stated he is “buying everything” in China. While money managers often like to talk their book, sentiment in China has clearly improved on the back of recent monetary and fiscal stimulus announcements.  

The People’s Bank of China (PBOC) cut reserve requirement ratios (RRR) by 0.5% and their main policy rates by 0.2%, while noting another RRR reduction could be on the table by year-end. These moves support increased loan demand and help banks free up funds for lending. Policymakers also cut mortgage rates for existing homes by around 0.5% and reduced the minimum down payment requirements for first-time and secondary home buyers. Furthermore, the PBOC increased the share of principal it would cover on local government loans used to purchase unsold properties to 100% from 60%.  Finally, they created a new funding facility to boost buyback activity in equity markets.  

On the fiscal side, the Politburo — China’s highest political body of the Communist Party — pledged it would unleash the “necessary spending” to meet this year’s economic growth target of 5%. In addition to rolling out plans to increase consumer spending and renew consumer confidence, they specifically called out their commitment to “halting the declines” in the housing market.  

The message was well received as investors had been patiently waiting for a firmer policy response from Beijing. While there is still debate over whether these measures will be sufficient to revive their beleaguered economy, policymakers’ “do whatever it takes” tone was enough to bring buyers back into the market.  

As highlighted below, the has rallied over 30% in the last two weeks, giving credence to the adage that markets stop panicking when policymakers do. The rally was broad-based and supported by above-average volume. Over 75% of index constituents are trading back above their 200-day moving average (DMA), while 87% also registered new four-week highs. Regarding upside, the next resistance hurdles for the index to clear set up near 70 (2018/2019/2020 lows) and 77 (June 2022 highs). On a shorter-term basis, price action is extremely overbought, and a pullback would not be surprising, but it’s important to remember overbought does not always mean a rally is over, especially when there is the potential for significant short covering. According to the latest Bank of America Fund Manager Survey, short China was the second most crowded trade last month, coming in behind long positioning in the Magnificent Seven stocks.  

Broad-Based Buying Pressure Supports Breakout in China

Source: LPL Research, Bloomberg 10/03/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.  

Stocks in China are not the only thing bouncing higher. The array of monetary policy support from the PBOC and the Politburo’s pledge for fiscal support also sparked a rally higher in Chinese yields. Benchmark 10-year yields are up nearly 0.15% over the last week as traders priced in an improving growth outlook.  

Technically, yields climbed above resistance off the August lows (2.12%) but have stopped short of reversing a downtrend (a close above 2.24% would suggest a new uptrend is developing). Momentum indicators are also improving. As featured in the bottom panel in the chart below, the positive directional movement indicator (+DMI) recently crossed above the negative directional movement indicator (-DMI), a bullish signal for trend direction, especially when the black Average Directional Index (ADX) is above 25, a bullish sign for trend strength. 

Yields are Responding 

Source: LPL Research, Bloomberg 10/03/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.  

Summary

Significant stimulus measures in China have helped restore much-needed investor confidence in China. While the economy will need to respond accordingly, investors have responded by bidding stocks out of a bear market. The bounce higher in Chinese 10-year sovereign yields suggests the fixed-income market is also repricing an improving growth outlook. On a relative basis, China has made progress when compared to U.S. equity markets, but there is insufficient technical evidence suggesting a trend change toward sustainable China leadership is imminent.  

LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains a regional preference for U.S. markets over developed international and emerging markets (EM) due largely to superior earnings and economic growth in the U.S. and significant volatility in the Japanese yen. STAAC maintains a neutral stance on equities, though, with a slightly negative bias in the very short term based on the approaching overbought levels with deviating market breadth, historical seasonal weakness in October during election years, and political and geopolitical uncertainty. The STAAC expects volatility to remain elevated in the coming months as the market waits for more clarity on the economy, elections, and a better seasonal setup. For fixed income, the STAAC recommends a modest overweight, funded from cash, with an up-in-quality approach and benchmark-level interest rate sensitivity. 

Stocks finished little changed yesterday. The trading range was quite wide, but for now, the remains near the zero gamma level for the most part. Today’s is expected to break the stalemate, regardless of the outcome.

What to Expect From Today’s Jobs Report?

Between April 2022 and March 2024, the BLS missed analysts’ estimates only three times. However, since April, the BLS has fallen short of estimates three times. This suggests that something may have changed.

For September, analysts expect 150,000 jobs to be reported. Will it come up short or surprise to the upside? Who knows? It could be a random number pulled out of thin air. What probably matters more at this point are the August numbers and any revisions because the actual non-farm payroll numbers will likely see a significant revision as usual.

The more significant issue might be the 2-month net revisions, expected to show a decline of 86,000 jobs. Given how frequently it has been revised, that figure may carry more weight now than the headline non-farm payroll number. Additionally, there’s a good chance the unemployment rate will rise above the expected 4.2% today.

One reason for this is the ratio of entrants into the labor force compared to the number of open jobs has fallen significantly. At one point, there were nearly five jobs for every new entrant; yesterday, it’s down to 2.8.

This could contribute to a rising , as the labor market may no longer be able to absorb population growth as quickly as it has in the past. Additionally, the market has been relatively complacent, focusing primarily on job losses as seen in data.

S&P 500: What to Keep an Eye on While Trading

Yesterday, we saw a last-minute rally into the close, and it’s not unusual for those gains to be returned the next day. This suggests the S&P 500 could gap lower at the open today, and if it breaks below the 5,675 level, we might have our first real chance of the index filling the gap at 5,620, which has been open since the Fed meeting.

The rising wedge in the S&P 500 is also signaling that the next significant move could be lower. However, there’s no confirmation until it breaks below the support at 5,625. I still believe we’ll fill that gap at 5,620.

It’s worth noting that Nvidia (NASDAQ:) accounted for 115% of the gains in the Bloomberg 500 yesterday. In other words, if Nvidia had been flat, the index would have performed more like the , which was down about 50 basis points.​

I have to say, it’s hard for me to imagine the S&P 500 going higher with Amazon’s (NASDAQ:) stock looking the way it does. My one concern is that it’s not a diamond pattern forming on the chart because that wouldn’t be good news, especially since I’ve owned the stock for so long.

Microsoft (NASDAQ:) isn’t looking great either at the moment. It’s easy to argue that a bear pennant has formed in the stock, but the more critical level is around $380. That’s the neckline of a potential head-and-shoulders pattern, which could be a concerning sign for the stock’s future direction.​

Right now, Adobe (NASDAQ:) is sitting on support at $500. A break of this support could lead to a gap fill at $475. While there’s also a gap to fill at $565, that currently seems like a more challenging move compared to the drop to $475, given the stock’s current position and momentum.​

Anyway, have a good one.

Original Post

Rising geopolitical risks and the upcoming US presidential election are pushing investors towards traditional safe-haven assets like , while faces selling pressure amid Middle East conflicts, in particular with the recent tensions between Israel and Iran.

J.P. Morgan analysts suggest increasing global tensions and November’s US election are reinforcing what some call the “debasement trade,” favoring both gold and bitcoin as hedges against currency devaluation. However, recent market movements show diverging paths for the two assets.

“Rising geopolitical tensions and the coming US election are likely to reinforce what some investors call the ‘debasement trade’ thus favoring both gold and bitcoin,” J.P. Morgan Global Markets Strategy analysts stated in a note on Thursday.

Gold prices have surged in recent weeks, approaching $2,700 per ounce on September 26. The analysts attribute this rise to a 4-5% decline in the dollar and a significant drop in real US Treasury yields. However, gold’s appreciation has exceeded what these factors alone would suggest, indicating renewed interest in the metal as a safe haven.

CryptoQuant highlighted historical trends where lower US Treasury yields correlated with rising gold prices. “In 2008, as the 13-week Treasury Bill yields decreased, gold prices soared from $590 to a peak of $1,900 per ounce by 2011,” the firm noted. “A similar trend is emerging now, with gold climbing from $2,000 to nearly $2,700.”

While gold benefits from the current macroeconomic environment, Bitcoin has faced selling pressure amid escalating Middle East tensions. US spot Bitcoin ETFs reversed an eight-day inflow streak with significant outflows as Bitcoin retreated below $62,000 following Iran’s missile attacks on Israel.

Data from Farside Investors shows that BlackRock’s iShares Bitcoin Trust (NASDAQ:) was the only fund to see net inflows on Tuesday, taking in over $40 million. However, this was insufficient to offset outflows from other funds, resulting in over $242 million in net outflows across US spot Bitcoin ETFs.

The contrasting movements of Bitcoin and gold have reignited debate about Bitcoin’s role as a safe-haven asset. As news of Iran’s missile strikes broke, Bitcoin’s value declined by over 3% in 24 hours, dropping nearly $4,000 to around $60,300. Meanwhile, gold prices increased by 1.4% to $2,665 per ounce, nearing a record high.

The Crypto Fear and Greed Index dropped from a neutral 50 points to 42 points, indicating increased caution among crypto investors as geopolitical risks intensify. Israeli Prime Minister Benjamin Netanyahu’s vow to retaliate against Iran has further heightened tensions, potentially leading to additional market volatility.

While J.P. Morgan analysts see potential for both gold and Bitcoin in the “debasement trade,” current market dynamics demonstrate gold’s stronger appeal as a safe haven during times of geopolitical uncertainty. Bitcoin’s recent price action and ETF outflows suggest that the cryptocurrency may still be viewed as a risk asset by many investors, despite its long-term potential as a hedge against currency devaluation.

As global tensions persist and the US presidential election approaches, investors will likely continue to closely monitor the performance of both gold and Bitcoin as potential safe-haven assets in an increasingly uncertain geopolitical landscape.

Original Post

Most of the important news in the financial markets goes over investors’ heads, only to wake up to new market price action and realize they should have not only paid attention but also acted upon the news that was released in the recent past. Today’s most important news—and implications—can be taken from the recent port strikes that started this week.

When the dominoes are laid out, investors may arrive at a few pain points of inflection. They all end up with worse inflation and a significant hit to the United States GDP, which affects the stock market. But, not all stocks in the are equal; while most in the consumer discretionary and consumer staples sectors stand to be negatively impacted by strikes, those in the transportation sector could now see added demand.

Major importers like Walmart (NYSE:) and Target Corporation (NYSE:) are now facing a potential threat of supply chain disruptions, with no signs of demand slowing down. This mix could create a major issue in terms of pricing and item availability but, conversely, make air freight a more attractive alternative, which is where FedEx (NYSE:) comes into play.

Walmart’s Value Proposition at Risk: What Investors Need to Know

There has to be a reason why Walmart’s CEO recently sold some of the company’s stock, up to $2.3 million. The timing of the transaction seems to answer it all. It was September 26th, just days before the port strikes were announced to begin.

Insiders are getting ahead because this could severely impact Walmart’s ability to offer low-priced items to its consumer base. At the same time, bears are coming in to raid the stock. Walmart’s short interest rose by as much as 3.8% over the past month, showing signs of trouble ahead.

If supply chains are disrupted, then Walmart’s $3 billion worth of imports could see higher shipping and sourcing costs, leaving the consumer to pay for the passed-on expenses down the line. The warning signs didn’t stop at company management and bearish traders; however, some institutional players had the same view in mind.

Anchor Investment Management also decided to trim its Walmart holdings by 6.5% as of September. This decision may have been made after considering Walmart stock’s risk-to-reward profile, as it now trades at a high price-to-earnings (P/E) ratio of 42.3x, above the rest of the peer group.

The downside is now seemingly larger than the upside, and these new port strikes might be the catalyst for the rest of the market to see that as well.

Target’s Smaller Scale Puts It at Risk

While Walmart has enough international reach to cushion some of the potential impacts, Target does not. Because of these increased risks to a brand already affected by inflationary pressures, some insiders also decided to trim some of their Target stock before the actual impact of these strikes is known.

Richard H. Gomez, a Target insider, sold as many as 6,348 shares as of September 27th. Getting rid of roughly $1 million worth of stock just days before the strikes began amplifies the concern that this event poses on the industry. Still, the bearish evidence didn’t stop there.

Over the past quarter, Target stock’s short interest has risen from roughly $1 billion to $2.2 billion today, which could corner some of the bulls who may attempt to get out during the potential volatility these strikes could create. As Walmart experienced, Target is also reporting some institutional names selling some of their holdings in the company.

First Financial Bank Trust decided to trim its holdings in Target stock by 3.3% during the past quarter, but it wasn’t alone in this decision. Park National (NYSE:) also reduced its investments in Target stock by 7.5% as of October 2024.

FedEx Stock Could Rebound as Port Strikes Threaten Supply Chains

Now that regular freight schedules and supply chains are becoming disrupted through strikes, air transportation could become the next best alternative. With this potential tailwind behind it, FedEx stock may stand to close down the gap left behind after its recent earnings selloff.

Now that the stock trades at 85% of its 52-week high, the company has a double-digit opportunity to make a comeback. This is why analysts at J.P. Morgan Chase see a potential for FedEx stock to head higher toward their price target of $350, which calls for a net upside of 29.8% from where the stock trades today.

Knowing this could be the case, bearish traders decided to step off the gas when it came to selling short. FedEx stock’s short interest declined by over 8.5% in the past month, showing investors signs of this bearish capitulation. Replacing some of the beaten bears were a few institutional buyers as well.

Leading the most recent buys, Jacobs & Co. increased their holdings by 0.4% as of October 2024. This may not seem like much of a boost on a percentage basis. Still, it did bring the group’s net investment to $12.6 million today as a sign of institutional confidence for FedEx’s future.

This is, of course, a small drop compared to the $8.3 billion in institutional capital that has entered FedEx stock over the past 12 months.

Original Post

Nike (NYSE:) reported after the closing bell on Tuesday, and despite the big EPS beat and better gross margins, the stock fell 10% as investors realized that the turnaround is in it’s infancy and there’s a lot of work to be done.

Here’s the bad news:

1.) EPS and revenue estimates were cut sharply after Nike withdrew guidance for fiscal ’25 (ends May ’25);

2.) 8 quarters ago, the sell-side was expecting Nike to grow 21% in fiscal ’25, but after Tuesday night’s call, consensus EPS estimates are looking for a decline of 28% in EPS this fiscal ‘year ’25;

3.) Revenue estimate revision now expect a full-year 7% decline in Nike revenue for May ’25;

4.) The 120 bp y-o-y increase in Nike’s gross margin isn’t expected to continue per the Jefferies analyst;

5.) On the conference call, management noted worse-than-expected declines in Nike Direct and Nike Digital;

What’s the good news?

1.) Despite the seeming lack of visibility Nike is still innovating and saw growth in “multiple sports dimensions” i.e. men’s fitness, men’s global football, and men’s and women’s running footwear. Men’s and women’s running footwear delivered positive growth, a “meaningful improvement” versus the fiscal Q4 ’24 (May ’24) quarter.

2.) A note out Of Jeffries said that Nike has witnessed a positive reception on it’s Spring running, (from whole sale partners), although that growth has offset other weakness since the Spring ’25 order book “came in roughly flat” (per the Jefferies analyst).

3) SG&A expenses have declined 7% and 9% y-o-y in the last two quarters although as a percentage of revenue at 24%’ish SG&A looks to be a little high relative to its 21% – 22% range during normal periods.

With the $8 drop in Nike shares, Nike is trading back under 2x revenue, which is much cheaper than where the shares were trading in late ’21 when the stock was trading up at $175 – $180.

Summary / conclusion:

As readers and investors would probably expect, John Donahoe wasn’t on the conference call Tuesday night, and Matt Friend, the CFO lead the call for the Nike management team. This blog’s Nike earnings preview captured all the salient points. With the China rally last week, that could eventually be a positive for Nike in terms of Chinese consumer spending.

I hate to bore readers and pound the analyst drum, but I hope Matt Friend, Nike CFO, can find his way to release a statement of cash-flow with quarter earnings. Most major companies today are reporting their statement of cash-flow with the quarterly earnings release, rather than having to wait for the 10-Q to come out.

The pulling of the ’25 revenue and EPS guidance by Matt Friend was probably a nod to Elliott Hill, the new CEO and returning Nike employee, as it gives Elliott a clean slate to set his own guidance and keep expectations reasonable.

1.) Investors would like to see EPS and revenue revisions stop falling or stabilize and then start to climb again;

2.) Personally, i think we’ll need at least another 6 months to see if Nike can generate some excitement (and revenue growth) around Spring ’25;

Turnarounds are tough. Many do not succeed, but I think Nike has the right guy for the job. This blog has been following Nike since the mid-1990’s and the “brown shoe craze” that torpedoed Nike’s stock in 1997, resulted in the stock not seeing an all-time high until 2002, 2003. Now 2001 and 2002 were tough markets for growth stocks so the stock treaded water until the SP 500 saw a strong rally in 2003 (started with the launch of the 2nd Gulf War in March ’03), but once Nike broke out it kept going.

Technically, a trade below $70, which would be below the recent July – August ’24 lows would not be a positive.

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None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can and does involve the loss of principal even for short periods of time.