Category: Countries & Regions

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Netflix heralds end of COVID boom for tech stocks

A sharp fall in new Netflix subscribers may signal the end of the boom for many tech companies that enjoyed stellar gains since the start of the pandemic. Economies are starting to re-open as vaccination levels rise, warning of tepid growth ahead for companies that thrived during the COVID-19 lockdown.

Zoe Samios at The Age writes:

In the first three months of 2020, Netflix acquired 15.77 million paid subscribers, sending its already elevated shares into the stratosphere. In the corresponding period this year, Netflix added just 3.98 million subscribers, its results on Wednesday morning (AEST) showed.

Netflix (NFLX) momentum has slowed since July last year. Breach of support at 500 would warn of a correction, while breach of support at 460 would signal a primary down-trend.

Netflix (NFLX)

The big five technology stocks all enjoyed a huge surge, up to September 2 last year, gaining between 28% (GOOGL) and 91% (AMZN) since early January. Since then, only Alphabet (GOOGL) and Microsoft (MSFT) have recorded further gains.

AAPL,AMZN,GOOGL,FB,MSFT

The broad S&P 500 index has gained 16.5% since September 2, 2020.

Conclusion

Growth in large technology stocks is slowing as the economy re-opens.

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This time is different

The chart below compares the Wilshire 5000 broad market index (light blue) to the money supply (MZM or “at call” money). The previous two recessions show a surge in the money supply (green circles) as the Fed injects liquidity into financial markets to forestall a deflationary spiral. In both cases, stocks took more than two years to react, with the low-point reached 8 quarters after the Fed started to inject liquidity in Q1 2001 and 9 quarters after liquidity injections commenced in Q3 of 2007.

MZM Money Supply and Wilshire 5000

It took almost 13 years for the index to make a new high after its Q1 2001 Dotcom peak and 5.5 years after its Q3 2007 peak (values are plotted relative to GDP).

The recovery in 2020 was quite different. The index formed a low two quarters after the Fed started to inject liquidity and had recovered to a new high in the next quarter.

While the recovery from the Dotcom crash took an unusually long time — because of the extreme valuations — we can still conclude that the latest recovery was exceptional. Record government stimulus caused a surge in disposable incomes, rather than the fall seen in previous recessions.

Disposable Personal Income

The surge in disposable income combined with a sharp fall in consumption caused a massive spike in personal saving, much of which flowed into the stock market.

Personal Saving

Huge inflows caused a surge in stock prices, which in turn led to similar exuberance to the Dotcom bubble of 1999-2000.

“This is the only time in my 88 years when I saw technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It was insane, and I took advantage of the temporary insanity.” ~ Sir John Templeton, in 2001.

Conclusion

While the government attempt to prevent a fall in personal disposable income during the pandemic is laudable, their overreaction caused a massive spike in personal saving — spreading the contagion to the stock market. Stocks are now trading at precarious levels relative to earnings, with no easy way for authorities to engineer a soft landing.

We are not sure how long the Fed can prop up the stock market but are certain that it will end badly for investors who ignore the risks.

Notes

Sir John Templeton (1912-2008) was an American-born contrarian and value investor, banker, fund manager, and philanthropist. He founded the Templeton Growth Fund in 1954, which averaged more than 15% p.a. over 38 years. In 1999, Money magazine rated him as “arguably the best stock picker of the century.”

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Westpac: US Dollar capped by dovish Fed (video)

Elliot Clarke - Video

Good short video from Elliot Clarke & Richard Franulovich at Westpac IQ about Aussie/US Dollar prospects and the outlook for the US economy.

Rising yields are lifting the Dollar but the Fed’s dovish stance is expected to cap the Dollar going forward, with the Aussie likely to strengthen above 80 US cents.

The Biden stimulus is likely to help the US economic recovery this year but will wear off by year-end. There are many obstacles to passing a major infrastructure bill but that would be the best way to lift growth prospects over 2022/3 and beyond and help the US keep pace with growth in Asia, where there are more development opportunities.

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Tech heavyweights pause for breath

Good progress has been made combating the pandemic but daily COVID cases seem to be struggling to break through a floor between 50 and 60 thousand. The vaccine roll-out is ahead of schedule but people need to stop listening to idiots like Rand Paul — who went to the Senate gym while infected — and listen to the Chief Medical Adviser whose advice is to wear a mask.

Daily US COVID Cases

Stocks have paused after the recent run up in Treasury yields. When both stocks and bonds are being sold, there is nowhere to hide.

The Nasdaq 100 is testing support at 12000. At this stage the correction looks mild, with declining Trend Index remaining above zero, but breach of 12000 would signal a test of the Sep 2020 low.

Nasdaq 100

The S&P 500 is performing better but Volatility troughs above 1.0% still warn of elevated risk.

S&P 500 & Twiggs Volatility 21-Day

The big five tech stocks are a mixed bag. Alphabet (GOOGL) and Facebook (FB) show strength. Microsft (MSFT) looks stable, while Mazon (AMZN) and Apple (AAPL) are trending lower.

AAPL, AMZN, GOOGL, FB, MSFT

When leaders no longer lead normally signals the final stage of a bull market. The chart below shows the Russell 2000 small caps ETF (IWM) clearly outperforming the large cap Nasdaq (QQQ) and S&P 500 (IVV) indices with all the tech heavyweights.

IVV, IWM, QQQ

@Schuldensuehner

The steeper yield curve benefits banks, who profit from the wider net interest margin. Major banks have climbed 60% to 80% over the past six months, with Goldman Sachs (GS) leading and Bank of America (BAC) the laggard.

Major Banks

Consumer durables sectors are, again, a mixed bag. Household Goods (HG) is flat, Apparel Retail (RA) is climbing steadily, while Automobiles (AU) is down sharply — mainly because of Tesla (TSLA).

Consumer Durables

Though light vehicle sales were down a million units in February.

Light Vehicle Sales

And heavy truck sales were down 4,000 units compared to January.

Heavy Truck Sales

Prospects for the tire industry are improving. Goodyear (GT) retraced to test its new support level after breaking out above its high from late 2019. Respect would confirm another advance.

Goodyear Tyre Co. (GT)

Conclusion

The recovery is going to be a long hard slog with frequent setbacks. Banks are doing nicely but stocks generally are over-priced and ripe for a major adjustment. There are signs that this is the final stage of the bull market and market risk is elevated.

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The bond market revolt

The rise in Treasury yields accelerated over the past week, with 10-year Treasuries closing at 1.54% on Thursday and 10-year TIPS at -0.60.

10-Year TIPS & Treasury Yields

A sharp fall in daily new COVID-19 cases has fueled optimism about a rapid re-opening of the US economy.

USA: Daily New COVID-19 Cases

As well as fears of higher inflation.

10-Year Breakeven Inflation Rate

What the sell-off means

Investors are selling Treasuries at a faster rate than the Fed (and banks) are buying, out of fear of accelerating capital losses. Fixed coupons have been badly affected, with iShares 20Year+ Treasury Bond ETF (TLT) showing a loss of 13% over the past 6 months. But even inflation-protected bonds have lost value in anticipation of higher real interest rates, with PIMCO’s 15 Year+ TIPS Bond ETF (LTPZ) falling more than 6%.

20 Year+ Treasury Bond ETF (TLT) & 15 Year+ TIPS Bond ETF

The Fed response

The Fed is likely to respond by weighting purchases towards longer maturities. The 10-year Treasury yield has already started to anticipate this, falling to 1.39% by Friday’s close.

10-Year Treasury Yields

Source: CNBC

The result is a 16 bps fall in the real 10-year yield, to -0.76% on Friday (1.39-2.15).

Conclusion

Fed purchases are expected to suppress long-term Treasury yields over the next few months, with inflation breakeven rates continuing their upward trend, while real yields remain negative.

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S&P 500 fueled by the Fed

The S&P 500 continues, unwavering, in a strong up-trend.

S&P 500

But compare the growth in the S&P 500 index relative to growth in the money supply (M2). In relative terms, the S&P 500 appreciated only 29%, or 2.6% p.a., over the past decade. Most of the stellar performance over the past 10 years can be attributed to the Fed’s expansionary monetary policy.

S&P 500/M2 Money Supply

Dollar Index

The Dollar Index continues to test support at 90. A Trend Index peak below zero warns of strong selling pressure. Breach of support is likely and would signal another primary decline.

Dollar Index

The Chinese Yuan, however, has halted in its appreciation against the Dollar. Trend Index peak below the 7-week MA warns of secondary selling pressure. Breach of support at 15.4 US cents would warn of a correction.

CNYUSD

Conclusion

The S&P 500 is likely to continue rising for as long as the Fed expands the money supply. The Dollar, however, is expected to weaken for the same reason.

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USA: Sales up, daily COVID-19 cases down but jobs still scarce

Daily new COVID-19 cases in the US are clearly falling as the vaccine roll-out takes effect.

USA: COVID-19 Daily Cases

But daily deaths are still rising and may take another few weeks to level off.

USA: COVID-19 Daily Deaths

January payroll figures show the economic recovery has stalled, with total jobs contracting by 6.08% compared to January 2020.

Payroll Growth

Hours worked are down 4.4% compared to last year.

Real GDP & Hours Worked

Average hourly earnings jumped 5.44% for production and non-supervisory workers but these are distorted by strong job losses in the lowest pay grades.

Hourly Wage Rates

Retail sales (excluding food) have also been artificially boosted by government stimulus which added roughly 20% to disposable income.

Retail Sales Excluding Food

Light vehicle sales are similarly boosted.

Light Vehicles

While housing starts are climbing in response to record low mortgage rates.

Housing Permits & Starts

Total unemployment claims (state and federal) declined to a still high 17.8 million for the week ended January 16th.

DOL: State & Federal Unemployment Claims

The proposed Biden stimulus will support households and businesses but employment is likely to remain weak until the COVID-19 outbreak is clearly under control.

Conclusion

Economic activity is expected to remain weak in the first half of 2021. A key determinant will be the length of time it takes to bring the COVID-19 outbreak under control. Subsequent recovery is likely to need strong fiscal support, with federal debt expected to grow faster than GDP in 2021. This will require continued Treasury purchases by the Fed and commercial banks, with interest rates remaining low throughout 2021.

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Global stock market correction

Strong red candles across major market indices warn of a global correction.

Breach of 3650 on the S&P 500 would warn of a test of the strong band of support between 3250 and 3400. Bearish divergence on Twiggs Money Flow continues to warn of long-term selling pressure.

S&P 500

The European Stoxx 600 threatens a similar secondary correction with a test of support at 375.

DJ Euro Stoxx 600

The Footsie is testing support between 6300 and 6500, while Money Flow reversal below zero warns of strong selling pressure. Breach of 6300 is likely and would indicate a strong correction, with primary support at 5500.

FTSE 100

The reaction on China’s Shanghai Composite is of similar weight to the S&P and STOXX. Breach of medium-term support at 3400 would warn of a test of primary support at 3200.

Shanghai Composite

The reaction on Japan’s Nikkei 225 appears secondary and likely to test the rising trendline at 26000.

Nikkei 225

The Seoul Composite is similar, with a rising trendline at 2700.

Seoul Composite

Selling on India’s Nifty 50 is heavier, flagged by a sharp fall in Money Flow over the past three weeks. Support at the rising trendline is unlikely to hold — which would mean a test of support at 12500.

Nifty 50

Conclusion

The correction across global stock markets appears secondary at this stage and likely to test medium-term support levels. Selling is heaviest on the FTSE 100 and India’s Nifty 50. These are the canary in the coal mine and should be monitored for unusual activity. Further falls on strong volume would indicate that sellers are overwhelming support.

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