Markets Continue to Linger

Markets continue to linger; accommodative central banks keep investors champing at the bit. Apple becomes the first US company to warn of a hit to demand this quarter (and WHY should that really surprise anyone?), taking all of the suppliers with it. There is still no slowing the coronavirus. Total confirmed infections now top 72k while more than 60 mil Chinese people remain quarantined. China is still not allowing the US to help, as they continue to push back. Talk of the P4 lab in Wuhan (where this all began) starting to take on new meaning…

[A P4 lab is a lab that is specifically used for diagnostic work and research on easily transmitted pathogens which can cause fatal diseases, i.e. Ebola virus, SARS, etc.]

Stocks on Friday continued to rise, no matter that the number of COVID19 infections continued to rise as well. Many are continuing to question whether the reporting is even honest, as so much of the data that comes out of China is suspect at best. None of that appears to be an issue as low global interest rates continue to force money into risk assets. Besides stocks, that includes US treasuries, which only yield in the neighborhood of 1.6%, but are still better than the negative rates seen in Europe. $23 billion went into treasuries last week. Gold surged $35 and Utilities stocks enjoyed the company of buyers as the XLU rallied nearly 3% itself on top of the 6% bringing its total year to date performance to better than 9%. That makes sense as those assets represent the “safety trade,” while the broader market (S&P) also closed at a new high, leaving many industry professionals stumped. As far as we can tell, this whole virus “thing” is not over and nor does it appear that it is even slowing so the fallout is not fully known yet, so why the markets are making new highs is confusing.

Now while the early sense back in January was one of uncertainty, taking the market down almost 4%, investors/traders and algos have managed to take it back up. clawing back all of those losses. They even allowed the Dow, S&P and Nasdaq to make new highs. Individual industry groups that had taken it on the chin, like Gaming/Casino, Airlines, Tech, and Energy, have all rallied back.

BJK, the Van Eck Gaming ETF, which fell 9.5% in late January on virus concerns has rallied back by 7.5%, which is a bit odd because so many of the gaming centers across Asia remain shut. But this speaks directly to the complacency about this virus that seems to be permeating the psyche. The Airline Index, XAL lost 5% and has since regained it all. Technology (XLK)has not only regained all of the losses suffered in January, but has surged to new highs in the last two weeks. Energy, XLE, which has been under pressure for more than one year now and was down an additional 12% since January is beginning to lift its head as many investors are finding “value” in the space (think yields that range from 4.5% – 7.5%), allowing that group to rally 5% off the lows seen three weeks ago. Cruise line stocks like (RCL: Royal Caribbean, CCL: Carnival Cruises) have yet to rebound. That does make sense since we have all seen how four or five ships carrying passengers have been sent to sea, holding passengers hostage in their cabins as the virus spins out of control, causing so many travelers to reconsider the whole “cruise ship” industry.

Now there has been a lot of talk of whether this is an epidemic or a pandemic. By all accounts it is now a “pandemic.” A pandemic is defined as an epidemic that spreads throughout the world, and while the WHO (World Health Org) has yet to define it that way, it is clear to the rest of us that with cases across Asia, Europe, the US, that this is a pandemic. With that, there is still more news to hit the airwaves, because this ain’t over yet. The social and financial impact is also not over.

Enter stage right: Apple computer. Overnight, Apple raises the flag and announces that with Asia essentially at a standstill, revenues for the current quarter are now under attack. Recall that in January, when they announced their earnings, CEO Timmy Cook was very measured in his guidance, leaving it wide open, suggesting that it could be anywhere between $63 billion -$67 billion in the coming quarter ending in March. But this morning, we find out that even that wide guidance figure is no longer in the ball park. This will hit Apple hard this morning as all of the Apple suppliers across the globe got hammered overnight. Note that in this same announcement he made sure to tell us that while production IS coming back on line (slowly) it will take time to ramp up. Look, do not forget, Apple essentially makes all of their products in China (they define it as “most of their products”). As the virus takes hold it has brought China to her knees, halting production and closing stores. We knew that this could happen and this should not be a surprise. As I said earlier, the complacency in the market is astounding. Apple which had fallen 7.2% in January has rallied back 7.9% in the past two weeks, attempting to make a new high. All this while the virus continued to spread, causing quarantine of people, closing of factories and closing of stores. Yet, the algos took the stock higher. Watch what happens today, when the algos get ahold of this latest headline. Are we taking bets? (HINT: In Frankfurt, Germany, Apple was trading down 5% or $16 at 4 am and by 5 am had rallied back just a bit leaving it down 4%)

Suppliers like Japan’s Alps Alpine fell by 2.9%, Murata Manf, lower by 3.4%, Taiyo Yuden falling 5.6%. In Hong Kong – Sunny Optical diving by 4.8%, Aac Tech losing 4%. In South Korea, SK Hynix lost 2.8% and Samsung is lower by 2.7% and in Taiwan. Hon Hai fell 1% before ending the day down 0.6%. Talk of whether or not this is going to affect “2020 holiday sales” of Apple products is already being bandied about. (Holiday sales defined as Christmas 2020! It’s ridiculous really!)

Overnight, Asian markets all tumbled after the Apple announcement, as all of the suppliers got smashed, with no change to the COVID19 outlook. This latest news continues to roil the markets. In addition, Moody’s reports that they expect economic growth to slow across APAC (Asia/Pacific) and they lowered their annual GDP forecast for China from 5.8% to 5.2%.

Japan lost 1.40%, Hong Kong -1.54%, China -0.49% , while the ASX -0.16%.

As the sun rises over Europe, markets there are under pressure, taking in the Apple and Moody’s announcements. HSBC announces 2019 results and misses badly. In the same report they announced a massive restructuring eliminating 35k jobs mostly in the UK and the US saying that “management will be surgical and ruthless in targeting parts of the business where returns weren’t acceptable.” As the day dawns and European markets begin trading, we see all market centers under pressure as Apple, Moody’s and HSBC announcements take their place in history. Eurozone finance ministers working hard to figure out any fiscal policy options available to them to help boost their continued “sluggish” economy and with fears of more sluggishness as the virus spreads. Their conversations are becoming more relevant. Macro data today includes UK employment and productivity figures as well as Germany’s ZEW economic index.

In early trade we see the FTSE -.35%, CAC 40 -0.55%, DAX -0.71%, EUROSTOXX -0.53%, SPAIN -0.15% and ITALY +0.14%.

US futures are pointing lower at 5 am. Dow -160 pts, the S&P lower by 16 pts, the Nasdaq giving up 85 pts and the Russell off by 7 pts. Much of the negative tone today is due to Apple’s forecast along with the other negative headlines that hit the tape overnight. With US markets closed yesterday, Investors/traders and algos will have the first shot this week to react to all of this news. And while Apple has indicated that it will not meet the January guidance figures of between $63 billion – $67 billion, they also did NOT provide any indication of what they think they will do. This is what is causing more of the angst, only because analysts/strategists and traders can’t define the parameters? Are they suggesting $62 billion or $55 billion? Clearly there is a difference, so let’s see what the market thinks.

Economic data today includes: The Empire Manufacturing index- exp of +5 – this speaks directly to the manufacturing activity in the NY/Northeast region. Later in the week we will get Housing Starts – exp of minus 11% month/month while Building Permits are expected to rise by 2.1%. PPI and FOMC mins on Wednesday.

This week also brings us more political debate. CNN is featuring their “Town Hall” meetings tonight and Thursday evening while the DNC will be featuring a live Democratic debate on Wednesday in Las Vegas. So far it is Biden, Buttigieg, Klobuchar, Warren and Sanders. Mikey Bloomberg has yet to qualify but is on the cusp, so stay tuned. This would be Mikey’s first debate allowing him to publicly challenge the others. This is sure to be one to watch.

The S&P closed at 3380 another new closing high, (go figure). It still feels like it wants to challenge 3390, although that is NOT happening today. On the downside it feels like 3365/3370 today. If it gets really ugly, we could slice right through that and test 3300 fairly quickly. But I don’t think that is today.

Oil, which rallied nicely last week, is under a bit of pressure with all of the negative headlines, trading down 80 cents/barrel at $51.21. It seems to have found support at the $50 level that we discussed and I would not be surprised to see it test there again in the next couple of days, depending on the news. I still think it is looking to move towards the mid-50s but will also react to the angst created by the ongoing virus.

Gold? As expected, with a nervous market, investors are once again flocking to gold (and treasuries and Utilities). Gold is up $5 this morning at $1591 as it looks to challenge $1600, where I think it should find resistance unless of course the virus talk continues to worsen, which would mean investors will go all in pushing gold up and thru its most recent high of $1620. But that is NOT today.

Take good care.


potato soup

Potato Leek Soup

Leeks are a great vegetable to cook with and add a new dimension of taste to many dishes – so today – try the soup – easy to make and good for the soul. and on this bitter cold, snowy day here in the northeast – it makes perfect sense.

For this you will need: 1/2 stick of butter, garlic clove, 1 stalk of celery diced, 6 leeks, white parts only, cleaned and sliced crosswise, 4 large potatoes, peeled and diced, s&p (white pepper is preferable), chicken broth (you can use veggie broth), 2 cups half-and-half, 1 cup heavy cream, chopped fresh chives to garnish when serving.

To start – Melt butter in a large saucepan over medium heat. Add leeks and cook until soft about 10 minutes. Now add potatoes, s&p, and the broth. Turn heat to simmer and cook until potatoes are tender, about 30 minutes.

Next pour into the food processor and blend until smooth. Do not leave chunky. Add half-and-half, heavy cream, season with pepper.

Return to stove and gently heat over medium heat until warmed through. Serve immediately in warmed bowls – making sure to garnish with the chopped chives.

Buon Appetito.

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Kenny Polcari

Kenny is the editor of Morning Thoughts and has been with Seven Figure Publishing since 2019.

Kenny is a CNBC exclusive contributor appearing on shows like The Halftime Report, Power Lunch, and Closing Bell. His market commentary has reached audiences across the nation on media outlets such as Bloomberg, Fox, ABC, and more.


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