China & Copper Crater While Tesla Soars (Again)

Big News Day For Markets

Monday was definitely the most interesting day of the year for markets. Tesla stock exploded higher. ISM manufacturing PMI beat estimates substantially. Alphabet reported earnings. Chinese stock market re-opened following its holiday close. Iowa Democratic caucus occurred. U.S. stock market reversed course after selling off on Friday. And commodities fell sharply again. Results of the Iowa caucus were delayed because the new app the Democratic party used didn’t work.

Commodities Crash

Commodities didn’t drive inflation in 2019 and certainly won’t in early 2020. Commodities prices have been crashing because Chinese demand is waning due to the coronavirus. Q1 Chinese GDP report isn't worrisome because by the time that comes out, this situation will likely be priced in. Chinese equities should be reversing by then. However, that’s not to say the coronavirus won’t still impact markets in the meantime.

Unfortunately, the coronavirus’ death toll has reached 425 and there have been 20,438 cases in China. 16 cities are on lockdown and 45 million people have been affected. U.S. global airlines have stopped falling as the JETS ETF was up 0.7% on Monday. 

However, the Bloomberg CRB commodities total return index fell 1.31% on Monday and is now down 9.42% year to date. As you can see from the chart below, copper futures have fallen 13 days in a row. WTI oil has fallen to $50.46 which is down from $63.27 on January 6^th.

Tesla Stock Explodes Higher

A decline in oil actually makes electric cars less viable versus gas cars, which is bad for Tesla. On the other hand, Bernie’s rise in the polls could help electric cars because he might give more tax incentives to EV buyers. It’s also possible the Tesla rally is a complete bubble with no rationale to support it. Tesla stock rose 19.6% on Monday. That was its biggest 1 day rise since May 2013. It’s up 85% year to date. 

TSLA stock was helped on Monday by Argus Research’s price target increase from $556 to $808. It has risen so much recently, that’s only $38 above its current price. The firm raised its 2020 EPS expectation from $5.96 to $8.01 and thinks that will double in 2021.

China Re-opens

It’s no surprise the Shanghai Composite index cratered because it needed to make up for lost ground while it was closed because of the new year holiday. The index fell 7.72%. As you can see from the chart below, that was the 6^th largest decline since 2000. 

Good news is the Chinese market stopped falling on Tuesday which means the worst could be over. It seems like the rate of growth of the coronavirus has slowed. It’s just a matter when cities re-open. GDP growth should rebound after the dip in Q1.

U.S. Market Recovers

After Friday’s selloff, the U.S. market recovered as the S&P 500 rose 0.73% on Monday. Nasdaq was up 1.34% and the Russell 2000 was up 1.12%. VIX fell 0.87 to 17.97. While it’s reasonable to suggest the decline related to the coronavirus is over, the decline caused by Sanders’ surge in the polls could be just getting started. 

Once earnings season finishes up, all eyes will be on the Democratic primary. So far, 227 S&P 500 firms have reported results. It has been a good earnings season as Q1 estimates have been cut by 1.52% which is below last quarter which had estimates cut by 2.42% (53% cut instead of 61%).

Next pivotal Democratic debate will be on February 19^th. It will be the most important debate of the primary because Michael Bloomberg might qualify since the Democratic Party eliminated the need to have a certain number of donations to make it. 

Even with Bernie’s recent surge in the polls, the IHF healthcare ETF was up 0.23%. Best 2 sectors on Monday were materials and tech which rose 2.13% and 1.32%. Energy was down 1.34% as oil prices have been hurt by China’s weakening demand.

Alphabet Falls Despite Earnings Beat

Alphabet reported $15.35 in EPS which beat estimates for $12.53. Even with that beat, its stock fell 4.17% after hours. Now all the big tech firms have reported results. Alphabet had revenues of $46.08 billion which missed estimates by $860 million. Traffic acquisition costs came in as expected as they were $8.5 billion.

A big story out of this report is the firm reported YouTube and cloud revenues for the first time ever. YouTube ads garnered $15.15 billion in 2019 and $4.72 billion in Q4. It had 35.8% growth in 2019 and 30.7% yearly growth in Q4. The firm has 2 million YouTube TV paid subscribers and ended the year at a $3 billion run rate. 

Its cloud business’s $8.92 billion of revenue in 2019 is still relatively small. But it’s growing quickly as its $10 billion annual run rate was up 53% from last year.

In Q4 alone, ad revenue was $37.93 billion which was up 16.1% from last year. “Other Revenue” fell as it was $5.26 billion; it had revenue of $6.48 billion in Q4 2018. This category includes its Pixel phone, Nest devices, and cloud. Since cloud revenue was up from $1.71 billion to $2.61 billion, the hardware in this category really took a hit. 

Finally, “Other Bets” had revenue of $172 million which was up from $154 million. This includes Alphabet’s self-driving company Waymo and life sciences firm Verily. The CEO of Alphabet stated, “Many of our bets are now getting to the stage where it now makes sense for them to partner closely with other players and investors in the industry,”

Iowa Disaster

The delay of the Iowa results makes them less important. This probably makes the New Hampshire primary more important. That’s good for Sanders because he has a big lead in New Hampshire. 

Uncertainty about the results is good for President Trump's re-election campaign because it makes the Democratic party look disorganized.