Stocks Dive Sharply
Stocks Dive - Investors were correct to be bearish on stocks in the near term. But we were wrong to say the trade news wouldn’t affect stocks. Trade worries caused a big decline on Tuesday after the market mostly recovered from its trade related selloff on Monday. This time the losses remained as S&P 500 fell 1.65%, Nasdaq decreased 1.96%, and Russell 2000 fell 2.02%.
Stocks Dive - As you can see from the chart below, 89% of NYSE stocks fell which was slightly more than the percentage of stocks that fell when the market was down 2.7% on Christmas Eve. That was the day the market bottomed. This just shows poor breadth. Don’t expect another massive rally to follow this decline.
VIX rose 25.13% which pushed the CNN fear and greed index down 15 points to 40 which signals fear. I wouldn’t say many bulls are worried just yet. This hasn’t even been a garden variety 5% to 7% pullback. Every sector declined. The worst 3 sectors were technology, industrials, and healthcare which fell 2.12%, 2.04%, and 1.95%.
Semiconductors index was very volatile as these firms rely on China. The SOXX ETF fell 2.46%. Its decline was worse early in the afternoon, but it rallied over 1% off the low on the day.
Lyft Earnings
Stocks Dive - The sub heading of this section should really be called “Lyft losses” as the company came nowhere near profitability. I think it’s important to follow this company as it signals how much slack Wall Street is willing to give new growth firms. It also tells us how successful Uber’s IPO might be later this week. Lyft lost an astounding $9.02 per share in adjusted earnings.
Results weren’t comparable to estimates of $1.81 per share in losses. 9 analysts’ estimates ranged from losses of 63 cents to losses of $4.73 per share. The non-comparable report wasn’t close to them.
Revenues of $776 million beat estimates for $739.4 million. Usually, this type of early stage growth company is judged based on revenue growth, but I can’t ignore the massive losses. The market couldn’t ignore the losses either as the stock fell 2.85% after hours. That’s after the stock had fallen over 20% since its first closing day.
As you can see from the chart below, Lyft’s active rider growth slowed from 47.6% to 46.4% as it now has 21 million active rides.
Its revenue per active rider was $37.9 which increased 33.9% yearly. That’s above last quarter’s growth of 31.8%. The business is growing as the industry is basically a duopoly with Uber. The problem is this is a terrible business with less than zero profits. Losses this quarter were better than last year which had a non-GAAP loss of $11.40 per share. The firm expects losses to peak in 2019. I don’t need to see profits to invest in such a company, but these losses are far too much. I wouldn’t consider buying this stock.
Stocks Dive - Trade Tensions Become A Bigger Issue
Trade worries haven't affected stocks much. There definitely could be some traders selling because of the bad economic reports last week. But you can tell by which stocks fell, that this was all about trade.
Stocks Dive - Big negative news that hurt stocks Tuesday was that U.S. trade representative, Robert Lighthizer, stated the tariff increase from 10% to 25% on $200 billion worth of Chinese goods will go into effect at 12:01 AM on Friday. That doesn’t leave much time to get the negotiations back on track to avoid this increase. Lighthizer mentioned an “erosion of commitments” by the Chinese.
While America is meeting with Chinese representatives this week, raising tariffs and saying trust has been lost, doesn’t make it seem like negotiations are about to go well. Specifically, China’s Vice Premier, Liu He, will join a delegation on May 9th and May 10th.
That means there will be trade headlines throughout the week swinging markets back and forth. If the market’s decline gets too severe, I’m guessing American officials will start to get more positive on a possible trade deal. Even if the facts haven’t changed.
More trade tensions will push soybean prices lower, hurting American farmers. As you can see from the chart above, their prices have already plummeted in the past few months. This gives us a great signal as to how the negotiations are going. Hint: they aren’t going well lately. I don’t expect a trade deal to be made in the next few weeks.
Officials will likely say the meetings this week went well. The truth will be seen on Friday morning when we are told if tariffs were raised.
Trade War’s Effect On China
Global trade has fallen 2 straight quarters for the first time since the financial crisis. Added tariffs certainly aren’t a step in the right direction. I don’t think tariffs are the principal cause of the global slowdown; I think it’s cyclical. However, this negative catalyst certainly won’t help.
China’s April manufacturing PMI fell from 50.8 to 50.2 and its services PMI increased from 54.4 to 54.5. Its composite index was only down 0.2 from its 9 month high. Chinese economy has been helped by its fiscal stimulus. According to Citigroup’s head economist, the tariffs increasing 10% to 25% would hurt Chinese growth by 0.5% and global growth by 0.2%. Global economy is already near a recession, so that won’t help.
In China’s latest trade report from April, its trade surplus was way below estimates. That’s the exact opposite of March’s report. Specifically, its trade surplus fell from $32.65 billion to $13.84 billion which was below estimates for $35 billion. Dollar denominated exports fell 2.7% from last year which missed estimates for a 2.3% increase. Imports rose 4% which destroyed estimates for a 3.6% decline.
Even though China’s surplus fell by more than half, its surplus with America increased from $20.5 billion to $21.01 billion which means China had a deficit with the rest of the world. The increased tariff rate will likely slow exports to America. There won’t be a boost due to pre-buying because it was an unexpected move.
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