Four Negative Catalysts
The stock market dealt with 4 negative catalysts on Tuesday. It's actually surprising that it didn’t fall more. Even with small cap value stocks underperforming, they did well considering the news. Johnson & Johnson’s vaccine testing and Eli Lilly’s therapeutics testing were both paused. Those are normal events, but the stock market is very sensitive to everything.
Furthermore, COVID-19 hospitalizations increased again as Wisconsin is experiencing a major outbreak. Finally, Pelosi explained why a deal won’t get done on CNN. That interview went so badly she might change her mind. However, to the market, this sticks a nail in the coffin of getting a deal done within the next few weeks.
Apple & Small Cap Value Fall
We had no stimulus, worse COVID-19 data, bad news on therapeutics, and bad news on a vaccine, yet the S&P 500 only fell 63 basis points. The market was led by big tech excluding Apple as the Nasdaq fell 10 basis points and the Nasdaq 100 was flat. Apple underperformed on the announcement of its new iPhones and HomePod mini. Apple stock fell 2.7%.
That decline doesn’t mean the launches will be bad. However, many don’t see why 5G is going to sell phones considering that most people don’t have 5G. It was a smart move for Apple to add the tech because without it the devices would be behind. However, most people won’t have 5G service for a couple years.
It's not surprising Apple didn’t release a folding phone. We're all curious if Apple doesn’t release one next year if that hurts its market share in 2022. Right now, they are niche devices. However, if Apple were to release a $1,500 folding device, it would sell like hotcakes.
If we had to guess, most don’t think Apple will. A variable here is whether Samsung’s devices get good enough and cheap enough to compete for significant market share. It was mildly disappointing Apple didn’t release a phone with a high refresh rate screen.
It’s no surprise cloud stocks beat small cap value on Tuesday with the negative COVID-19 news. Most would have thought they would have beaten small cap value by more. Cloud stocks were up 1.5% as Zoom was up 5.5% to a new record high. Small cap value fell 1.5% as Cinemark fell 7.7%. Movie theaters are the hardest hit by the virus because of New York’s tough rules preventing the release of major blockbusters.
Fund Manager Positioning In October
Fund managers are positioned in an extreme manner mainly because of COVID-19. As you can see from the chart below, the positioning of healthcare has a z score of about 1.8. Investors are also overweight America and discretionary stocks. Surprisingly, they are hardly overweight tech. On the other hand, the z score of energy is almost -2.2 as energy is on its worst run ever. UK, REITs, and banks are also not loved.
It's likely that foreclosures won’t be as big of an issue as people think. Compared to last month, the position of healthcare, staples, and equities increased the most. Positioning of energy, REITs, bonds, and banks decreased the most. People can’t believe there was anyone left to sell energy.
That brings us to the chart below which shows there is one part of energy that actually is doing well. Clean energy is in a bubble, while dirty energy like oil is in a bear market for the ages. Examples of explosive clean energy stocks are NextEra Energy and Tesla which are up 26.3% and 419% year to date.
COVID-19 Hospitalizations Increase Again
Verdict is clear. Wisconsin’s outbreak seems to be out of control. Cases in the Midwest are causing the national hospitalization total to increase steadily. As you can see from the chart below, there are now 36,034 people in the hospital.
Keep in mind, the chart is flawed. First spike would be higher if it included all the states. Not every state was reporting hospitalizations in March and April. Good news is the 7 day average of new tests per day got above 1 million for the first time ever. It will likely get to 1.5 million by the end of the month. It’s about 500,000 below my original target for mid-October. 7 day average of deaths is only 697 which isn’t terrible.
Wisconsin is in bad shape as there were 3,279 new cases on Tuesday which put the 7 day average at 2,728 which is a new record high. It was wrong to say it peaked in early October. If cases in this state peak soon, hospitalizations will peak, but we don’t know when that will happen.
JP Morgan Beats Estimates
JP Morgan beat EPS estimates even though it had a sharp decline in net interest margins seen in the chart below. The bank had $9.44 billion in profit and $2.92 in EPS which beat estimates for $2.23. It had $29.94 billion in sales which beat estimates by $1.5 billion.
JP Morgan reduced provisions for loan losses by $569 million due to a runoff in the mortgage portfolio. It added over $15 billion in loan loss provisions in the first 2 quarters. Outlook for banks is good because of the improved economy. A problem for JP Morgan is it can’t buyback shares until next year because of regulations. JP Morgan stock fell 1.6% on the news of this good report.
Citigroup Also Beats Estimates
Citi reported earnings per share of $1.4 which destroyed estimates for 93 cents. Sales were $17.3 billion which beat estimates by $100 million. Excluding a $400 million civil penalty, the firm had $1.55 in EPS. Its net credit losses fell from $2.2 billion to $1.9 billion because the economy improved.
Despite these good results, the stock fell 4.8%. Citi stock is down 17.1% in the past 5 years. It has been a bad run for the bank. On Tuesday the regional bank index was down a massive 3.1%. That’s not a surprise because the industry was getting overheated. Plus, the 10 year yield is only at 73.2 basis points. High this month was 79.5 basis points.
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