Connect with us

The Higher The Number Of Covid Cases, And The More Layoffs, The More Bullish It Is For Stocks

The Higher The Number Of Covid Cases, And The More Layoffs, The More Bullish It Is For Stocks

Published

on

The Higher The Number Of Covid Cases, And The More Layoffs, The More Bullish It Is For Stocks Tyler Durden Mon, 07/13/2020 - 14:05

Earlier today, Rabobank's Micheal Every laid out a big-picture case for why "we live in a pretty crazy world right now." It's safe to say that the market is not too far behind for two reasons: the higher the number of coronavirus cases, and the higher the unemployment the more bullish it is for stocks, and as even mainstream media such as Reuters now admits, we have the Fed to thank for this massive stock bubble.

As the main pillar of its report, Reuters quotes Andrew Brenner, head of international fixed income at NatAlliance who said that "COVID-19 is now inversely related to the markets. The worse that COVID-19 gets, the better the markets do because the Fed will bring in stimulus. That is what has been driving markets."

This is precisely what we have been saying for the past month when looking at the Fed's shrinking balance sheet, to wit:

... for the stock market to move substantially from this point on - since the market is now fully disconnected from fundamentals and is simply a derivative of endogenous liquidity and fund flow - Powell will need to find another justification to expand the Fed's QE aggressively, as discussed in "JPMorgan Spots A Big Problem For Stocks." Something like - for example - a second wave of the coronavirus pandemic.

And just like that both a virus cure and the virus itself are now bullish.

But wait there's more, because picking up on what Morgan Stanley said last week, when chief equity strategist Michael Wilson said that record layoffs are bullish because they mean even higher corporate profits (discussed extensively here) or as the bank puts it, massive layoffs mean "explosive operating leverage"...

... today Bloomberg echoes Wilson's argument and in "There’s a Bull Case on Stocks Tied to Rising Ranks of Unemployed" it writes that "job cuts are setting the stage for a swift rebound in profits. Conceivably, a leaner cost structure will allow companies to pocket more earnings from sales once the economy recovers, so the thinking goes."

While the theory can sound deaf to the suffering of millions of jobless Americans, there’s precedent, including the last recession, which came before an 11-year bull market. Dehumanization is already an inescapable narrative of the current rally, one dominated by asset-light, algorithmically optimized megacompanies that are soaring even as the virus lays low the economy.

In addition to referring to Wilson, Bloomberg also quotes its own Intelligence strategist Gina Martin Adams, who said that while job cuts mean lower consumer spending, they also help facilitate a swift profit recovery.

“It does sound a little callous, but it always sounds that way in recession, and it is reality -- companies do cut costs to dig out of earnings recessions,” Adams said. “The reduction in expenses contributes to margin expansion for companies, which should allow for a stabilizing earnings outlook.”

Of course, mass layoffs coupled with even higher stock prices just make the gaping would across US society - record wealth inequality sparked by the Fed - even bigger as the middle class losses millions of jobs while the top 1% gets richer with every passing day.

While stock strategists are only doing their jobs pointing such things out, the scenario they’re describing accords with certain suspicions about the Wall Street value system -- that the rich get richer on the back of the poor, and companies prioritize shareholder value over employee well-being. Those issues have existed for decades and have been getting a fuller airing amid the Covid-19 pandemic and George Floyd protests.

To be sure, most of the companies engaging in mass layoffs have also suspended temporarily their buybacks and dividends, but we expect that once the S&P returns to all time highs, companies will be quick to transform all those billions they raised in the bond market into dry powder to return to shareholders in the form of dividends and buybacks, leading to an even greater inequality, and even more populist anger, protests and riots. And since it is now far too late for the Fed to change direction, the only realistic outcome is social unrest and a populist uprising, which sends stocks crashing and forcing a long overdue reset on a society that has been broken ever since the Fed took over capital markets in 2009.

To Michael Shaoul, chief executive officer at Marketfield Asset Management LLC., while the pandemic has called for social responsibility, mixing that with market or economic analysis can be tricky.

“You do have to disassociate what you think about the world as a human being and what you think the economic implications and market implications are,” he said. “If you want to conflate the two, you probably aren’t going to do a great job on Wall Street, because our job is to understand what the market is doing.”

Michael is right, of course, however now that central banks basically have full control over capital markets, his job "to understand what the market is doing" basically boils down to just one thing - as Goldman explained, all investors care about first thing in the morning is whether to fight or follow the Fed. The rest no longer matters.

And as long as the Fed is injecting billions and trillions into the economy as it is doing right now, stocks will keep rising resulting in even greater inequality, until one day the tipping point will finally arrive - for either populist anger or inflation - and it all comes crashing down. 

Read More

Continue Reading

Uncategorized

Does the Alphabet share price make it a no-brainer investment?

The Alphabet share price is down 32.09% so far this year knocking around $618 billion off the Google-owner’s market capitalisation. The drop…
The post…

Published

on

The Alphabet share price is down 32.09% so far this year knocking around $618 billion off the Google-owner’s market capitalisation. The drop in Alphabet’s valuation can be seen as the result of two main factors. The first is that this year’s decline is at least partly a natural correction after Big Tech valuations went into melt-up during the pandemic.

The second influence has been a slowdown in revenue growth to its slowest rate since 2013 (6%), excepting a brief period during the pandemic, and concerns over the financial impact of a global recession on digital advertising revenues.

However, at the current share price of $98.46, there is a strong feeling Alphabet has been heavily oversold despite recent gains. That also appears to be a growing feeling among fund managers, who have catalysed the recent rally by buying up swathes of Alphabet stock in recent weeks.

An article by the financial markets and funds data company Morningstar this week ranked Alphabet at the top of a table of “high conviction purchases” by tracked investment managers. Managers 17 funds tracked by Morningstar have made what the data company defines as purchases of Alphabet stock that represents a meaningful addition to their portfolios, judged by the size of the purchase in relation to the portfolio’s size.

The second most popular stock in the table for high conviction purposes was the U.S. bank and financial services company Wells Fargo, with 5 fund managers taking on significant exposure to the company. Alphabet is also currently given a rare 5-star rating by Morningstar’s inhouse analysts, indicating they see it as having limited downside and significant upside at its current valuation.

chart

Source: Morningstar

Why is Alphabet seen by many professional stock pickers and analysts as undervalued?

Even if Alphabet is attracting investor attention at its current knock-down valuation, markets are still sceptical overall. If they weren’t, the company’s valuation would be higher. So while some fund managers have been making major recent investments in Alphabet, reflected by an 18% gain in the share price since November 3, the mainstream is yet to be fully convinced.

Is that simply because investors buying the stock now are cleverer than the wider market which is proving slow to appreciate it has oversold Alphabet? Or are those investors taking a significant risk with their glass half-full view of the company’s prospects over the near to mid-term?

Morningstar points out its analyst Ali Mogharabi estimates fair value for Alphabet shares at $160. That’s 62.5% higher than the current share price of $98, suggesting significant potential upside.

Mogharbi’s fair value estimate of an Alphabet share price of $160 is based on the strong revenue growth and cash flow generated by the company’s 80% share of the global search engine market held by Google. 85% of Alphabet’s revenue is still generated by digital advertising on Google, its associated ad platforms and YouTube.

The remaining 15% comes from a combination of sale of income generated by apps and content on Google Play, its quickly growing cloud service, licensing fees (especially for the Android mobile operating system), and hardware sales. Alphabet also has a loss-making “other bets” division that invests in future technologies and includes companies like the self-driving cars software company Waymo and life sciences company Verily.

Mogharbi expects Google’s dominant position in the search engine market to mean it will continue to see revenue and cash flow growth in future years with no obvious competition in sight. He believes future bets investments are reasonable as long as they are not to the extent they significantly compromise group-wide operating margins and profitability. Especially as there is a reasonable chance some might eventually contribute significantly to future revenues.

Waymo, which is developing an operating system for self-driving cars it hopes will mimic the success of Android for mobile devices, is expected to be a major player in a market worth tens of billions within the next ten to fifteen years.

But future bets aside, Mogharbi expects revenue growth from digital ad sales to maintain average annual double-digit growth for the next five years as mobile usage increases, even taking into consideration the potential for a slowdown next year as recession hurts global economies. He also sees video-content platform YouTube as contributing more to the top and bottom lines over the next few years despite the recent deceleration of its revenue growth.

And the Google Cloud Platform (GCP) is put forward as a strong business that will become increasingly important as it continues to grow. Revenue was up 38% year-on-year to $6.9 billion in Q3 and unlike its two larger competitors, Amazon Web Services and Microsoft’s Azure, Google Cloud is still losing money.

GCP should move into profitability in the medium term, the operating margin has recently shrunk from -14% to -10%, which would boost the group’s value. It is unlikely to ever be as big as AWS or Azure but could still be a major contributor to the bottom line within the next 5-10 years.

Alphabet is also responding to calls from activist investors to tighten its belt by reducing spend on future bets as well as staff numbers and remuneration levels. That should improve margins again and see the company emerge leaner from the current economic slowdown.

The company is also still a cash machine, which is facilitating a strong share buyback policy. Over the last year, the company has repurchased 433 million shares, spending $43.9 billion over the last nine months. Those repurchases reduced its share count by 3.2%, and with the stock price down and $116 billion in cash and equivalents on the balance sheet, the company could get more aggressive with the repurchases, which will help increase earnings per share.

That would be expected to put Alphabet in a very strong position to see its valuation rebound quickly when the cyclical market for online ads turns positive again.

The Alphabet share price also simply looks incredibly good value at its current level. On a trailing basis, it is trading at a price-to-earnings ratio of just 19.5. That’s even lower than the average 20.5 across the broad S&P 500 index which, based on Alphabet’s continued profitability, remaining growth potential, market dominance and balance sheet, just seems strange.

Risks to Alphabet share price upside

The main short term risk to the Alphabet share price is the potential depth of the global recession most economists agreed we have already entered. If the economic slowdown around the world proves more severe than expected and digital ad spend drops more as a result, markets could foreseeably punish Alphabet again and drag its value down.

Longer term, the company is still heavily reliant on digital advertising revenues and it will be a long time before that might realistically change. While some of the company’s future bets, especially Waymo, look very promising, there is still growth potential in the online marketing sector and existing businesses like Google Cloud Platform should make a much bigger contribution over future years, it is hard to deny Alphabet has a lot of its eggs in one basket. That does have to be seen as a risk.

However, overall, while the year ahead poses some downside risks, it does seem hard to imagine the Alphabet share price not rising significantly from current levels over the years ahead. At under $100, the Alphabet share price has a lot going for it.

The post Does the Alphabet share price make it a no-brainer investment? first appeared on Trading and Investment News.

Read More

Continue Reading

Spread & Containment

License Plates Could Be Printed On McDonald’s Bags To Stop Littering

License Plates Could Be Printed On McDonald’s Bags To Stop Littering

There’s been talk about McDonald’s in southwest Great Britain could print…

Published

on

License Plates Could Be Printed On McDonald's Bags To Stop Littering

There's been talk about McDonald's in southwest Great Britain could print car license plates on drive-thru bags to prevent customers from littering. 

"It's not clear exactly how the number plate would be printed on packaging, but it could be scanned onto the brown bags that contain the food," Daily Mail noted. 

Chris Howell, Swansea Council's head of waste, parks and cleansing, told a climate change corporate delivery committee meeting: 

"The Welsh Government has explored with McDonald's, or their franchises, whether or not they could print number plates of cars collecting takeaways from their drive-throughs with a view that that would discourage people from discarding their materials (litter)."

Howell said one of the biggest hurdles with fast-food companies is that if one chain adopts the climate initiative, customers will go to competitors that don't print license plates on bags. 

"If McDonald's do it, then people will just go to Burger King instead of McDonald's, because nobody wants to have their private details printed on that packaging." He added: "I think it's a really good idea but at the minute it's fraught with some difficulties." 

The nationalist political party in Wales, Plaid Cymru, first proposed the idea more than two years ago during the pandemic lockdown when party leaders noticed a spike in fast-food trash along city streets and highways. 

Welsh Government spokesperson told MailOnline:

"There are no current plans to introduce a requirement for drive-through restaurants to add vehicle registration details to fast food drive-through packaging.

"We are continuing to support Keep Wales Tidy with other initiatives to tackle roadside litter including their No Regrets campaign and their Adopt a Highway initiative."

Now 'the cat is out of the bag'. It's only a matter of time before governments start forcing fast-food companies to print license plate numbers on drive-thru bags. The dangers of this could be more surveillance, and who knows what corporations would do with license plate data if such a system were implemented. 

Tyler Durden Sat, 11/26/2022 - 18:00

Read More

Continue Reading

Uncategorized

Energy is the master resource but it could be Bitcoin that reigns supreme

Nothing shines a light on the importance of energy as much as a fast-approaching winter.
The post Energy is the master resource but it could be Bitcoin…

Published

on

Nothing shines a light on the importance of energy as much as a fast-approaching winter. When the temperature drops, the scarcity of energy becomes obvious and global efforts to preserve it begin.

This year, the fight for energy is more aggressive than it’s ever been.

The fiscal and monetary policies set in place during the COVID-19 pandemic caused dangerous inflation in almost every country in the world. The quantitative easing that set out to curb the consequences of the pandemic resulted in a historically unprecedented increase in the M2 money supply. This decision diluted the purchasing power and led to an increase in energy prices, sparking a crisis that is set to culminate this winter.

CryptoSlate analysis showed that the E.U. will most likely be the one hit the hardest by the energy crisis.

The European Central Bank (ECB) has been struggling to keep core inflation down this year. The Core Consumer Price Index (CPI) began to increase substantially in 2021 due to the pandemic both in the U.S. and the E.U.

The U.S. has seen its Core CPI decrease sharply since its culmination in February and posted better-than-expected results last month. However, Core CPI in the Eurozone has continued to increase throughout the year and currently shows no sign of stopping.

Graph showing the Core CPI in the U.S. and the Eurozone from 2017 to 2022 (Source: The Daily Shot)

A similar increase in Core CPI can also be seen in Japan and the U.K. One of the factors that may have contributed to their monetary instability is a lack of investment and support for commodities like oil and gas. Widespread efforts to switch to renewable sources of energy led to a decrease in oil and gas purchases in the E.U. and the U.K.

In contrast, the U.S. and Russia have been investing heavily in oil and gas and promoting innovation in the field.

Looking at the value of fiat currencies against the U.S. dollar further confirms this impact.

The Russian Ruble and the DXY have both increased in value in the past two years, while the euro, British Pound, and Japanese Yen have all seen their Dollar value decrease.

global fiat currencies
Graph showing DXY, GBP, EUR, JPY, and RUB and their value against the U.S. dollar (Source: TradingView)

With rising inflation and a seriously weakened currency, the E.U. will have a hard time competing for oil and gas on the global market. Natural gas producers warned that almost all long-term contracts for natural gas coming out of the U.S. have been sold out until 2026. Until then, when a new wave of natural gas supply is expected to come, the E.U. will have to compete with Asia for the limited supply and swallow the high gas price.

All of this uncertainty could have a positive effect on Bitcoin. While the broader crypto market struggles to remain afloat after the FTX fallout, Bitcoin has positioned itself as a pillar of stability in a market plagued with bad actors. Devalued fiat currencies could push retail investors away from safe-haven assets like gold and commodities and towards an asset like Bitcoin.

The post Energy is the master resource but it could be Bitcoin that reigns supreme appeared first on CryptoSlate.

Read More

Continue Reading

Trending