HI Market View Commentary 01-21-2020
|WEEK OF JAN. 13 THROUGH JAN. 17, 2020|
|The Standard & Poor’s 500 index rose 2.0% this week to a fresh closing high as the Q4 earnings season got off to a strong start while the signing of the US-China trade deal also brought some relief.
The market benchmark ended the week at 3,329.62, up from last week’s closing level of 3,265.35. Friday’s close marked the S&P 500’s highest closing level ever while the index also reached a fresh intraday record in Friday’s session slightly above that, at 3,329.88.
The weekly advance was broad, with all but one sector — energy — in the black. The utilities sector had the largest percentage increase of the week, up 3.7%, followed by technology, up 2.9%. Energy, meanwhile, slipped 1.1%.
The upbeat activity came as many of the Q4 earnings results that were released this week, mainly by big banks, came in above analysts’ estimates. Companies that posted better-than-expected Q4 earnings this week included Bank of America (BAC), JPMorgan Chase (JPM), Morgan Stanley (MS) and CSX (CSX). Investors took the results as a strong sign for the economy and other earnings reports to come this reporting season.
Investors were also relieved to see US President Donald Trump sign the US-China trade deal after worries about the trade dispute between the two countries had weighed on sentiment for months. The deal calls for China to buy more products from the US, while the US agreed to reduce some existing tariffs. However, many tariffs remain and negotiations are to continue on remaining issues.
The utilities sector’s gainers included Southern Co. (SO), whose shares rose 5.7% amid an investment rating upgrade to overweight from sector weight from KeyBanc. In making the upgrade, the firm described Southern Co. as “a premium utility operating in business-friendly jurisdictions,” noting the company “has one of the most constructive regulatory frameworks in our coverage.”
The technology sector was also boosted by bullish analyst actions and outlooks. Gainers included Cisco (CSCO) and Apple (AAPL), which were both named preferred stocks by RBC Capital. Cisco’s shares rose 4.0% on the week while Apple shares climbed 2.7%.
On the downside, the energy sector’s slide came as oil futures fell on the week amid a bearish 2020 outlook from the International Energy Agency. Shares of Exxon Mobil (XOM) slipped 0.8% while Chevron (CVX) fell 0.7%.
Provided by MT Newswires.
What I want to talk about today?
Where will our markets end this week?
DJIA – Bullish
SPX – Bullish
COMP – Bullish
Where Will the SPX end January 2020?
Tues: HAL, UTX, COF, IBM, NFLX, ZION
Wed: ABT, BKR, JNJ, EBAY, LVS, TXN
Thur: AAL, CMCSA, JBLU, KEY, KMB, PG, LUV, UNP, ALK, DFS, INTC, ISRG, FCX
Fri: AXP, VFC
Wed: MBA, FHFA Housing Price Index, Existing Home Sales,
Thur: Initial, Continuing, Leading Indicators
Tues – World Economic Forum – Davos
Wed – World Economic Forum – Davos
Thursday – ECB Rate Decision
How am I looking to trade?
Earnings are coming up and protecting through earnings with protective puts and NO short Calls
AAPL – 1/28 AMC
AOBC – 3/05 est
BA – 1/29 BMO
BIDU – 2/20 est
CVS – 2/12 BMO
DIS – 2/04 AMC
F – 1/23 AMC
FB – 1/29 AMC
FCX – 1/23 BMO
KEY – 1/23 BMO
LLY 1/30 BMO
MRO – 2/12 AMC
MU – 3/19 est
NEM – 2/20 BMO
SLB 1/17 BMO
TGT – 3/03 est
UAA – 2/13 est
V – 1/29 est
ZION – 1/21 AMC
www.myhurleyinvestment.com = Blogsite
Visualizing the Biggest Risks to the Global Economy in 2020
4 days ago
January 17, 2020
Top Risks in 2020: Dominated by Environmental Factors
Environmental concerns are a frequent talking point drawn upon by politicians and scientists alike, and for good reason. Irrespective of economic or social status, climate change has the potential to affect us all.
While public urgency surrounding climate action has been growing, it can be difficult to comprehend the potential extent of economic disruption that environmental risks pose.
Front and Center
Today’s chart uses data from the World Economic Forum’s annual Global Risks Report, which surveyed 800 leaders from business, government, and non-profits to showcase the most prominent economic risks the world faces.
According to the data in the report, here are the top five risks to the global economy, in terms of their likelihood and potential impact:
|Top Global Risks (by “Likelihood”)||Top Global Risks (by “Impact”)|
|#1||Extreme weather||#1||Climate action failure|
|#2||Climate action failure||#2||Weapons of mass destruction|
|#3||Natural disasters||#3||Biodiversity loss|
|#4||Biodiversity loss||#4||Extreme weather|
|#5||Humanmade environmental disasters||#5||Water crises|
With more emphasis being placed on environmental risks, how much do we need to worry?
According to the World Economic Forum, more than we can imagine. The report asserts that, among many other things, natural disasters are becoming more intense and more frequent.
While it can be difficult to extrapolate precisely how environmental risks could cascade into trouble for the global economy and financial system, here are some interesting examples of how they are already affecting institutional investors and the insurance industry.
The Stranded Assets Dilemma
If the world is to stick to its 2°C global warming threshold, as outlined in the Paris Agreement, a significant amount of oil, gas, and coal reserves would need to be left untouched. These assets would become “stranded”, forfeiting roughly $1-4 trillion from the world economy.
Growing awareness of this risk has led to a change in sentiment. Many institutional investors have become wary of their portfolio exposures, and in some cases, have begun divesting from the sector entirely.
The financial case for fossil fuel divestment is strong. Fossil fuel companies once led the economy and world stock markets. They now lag.
– Institute for Energy Economics and Financial Analysis
The last couple of years have been a game-changer for the industry’s future prospects. For example, 2018 was a milestone year in fossil fuel divestment:
- Nearly 1,000 institutional investors representing $6.24 trillion in assets have pledged to divest from fossil fuels, up from just $52 billion four years ago;
- Ireland became the first country to commit to fossil fuel divestment. At the time of announcement, its sovereign development fund had $10.4 billion in assets;
- New York City became the largest (but not the first) city to commit to fossil fuel divestment. Its pension funds, totaling $189 billion at the time of announcement, aim to divest over a 5-year period.
A Tough Road Ahead
In a recent survey, actuaries ranked climate change as their top risk for 2019, ahead of damages from cyberattacks, financial instability, and terrorism—drawing strong parallels with the results of this year’s Global Risk Report.
These growing concerns are well-founded. 2017 was the costliest year on record for natural disasters, with $344 billion in global economic losses. This daunting figure translated to a record year for insured losses, totalling $140 billion.
Although insured losses over 2019 have fallen back in line with the average over the past 10 years, Munich RE believes that long-term environmental effects are already being felt:
- Recent studies have shown that over the long term, the environmental conditions for bushfires in Australia have become more favorable;
- Despite a decrease in U.S. wildfire losses compared to previous years, there is a rising long-term trend for forest area burned in the U.S.;
- An increase in hailstorms, as a result of climate change, has been shown to contribute to growing losses across the globe.
The Ball Is In Our Court
It’s clear that the environmental issues we face are beginning to have a larger real impact. Despite growing awareness and preliminary actions such as fossil fuel divestment, the Global Risk Report stresses that there is much more work to be done to mitigate risks.
How companies and governments choose to respond over the next decade will be a focal point of many discussions to come.
Disney Stock Looks Attractive for the Next 10 Years, Bill Priest Says
Jan. 17, 2020 5:15 pm ET
Photograph by Jeff Brown
It’s time for the rubber to meet the road. In the latest installment of Barron’s annual investment Roundtable, five of our panelists give—and defend—their views on specific stocks and other investments.
The Roundtable members spend half of their daylong meeting each January proposing stocks, bonds, and funds that they believe will race ahead or fall on their faces, and this year was no different. There was a clutch of compelling picks, some persuasive pans, and even what one of our newest panelists views as a couple of likely 10-baggers. See the other picks here, and check in next week for the picks and pans of our other five panelists.
Weighing in below is William Priest of Epoch Investment Partners.
Barron’s: Bill, tell us what you like.
William Priest’s Picks
|Company / Ticker||Price 1/3/20|
|Bausch Health / BHC||$29.42|
|Takeda Phamaceutical / TAK||19.80|
|Walt Disney / DIS||146.50|
|Centene / CNC||61.16|
|Woodward / WWD||119.61|
What else do you like, Bill?
Priest: Walt Disney (DIS) was a good stock last year. The earnings numbers aren’t exactly small, the multiples are high. But Disney is becoming what is know as a PaaS: platform-as-a-service company. It’s a reinvention of a very successful business model. Ultimately, all of Disney—the theme parks, the merchandise—will be bundled. It’s going to enable Disney to reduce reliance on third parties, creating value by bringing all content in-house, versus licensing independent content categories. And it should improve capital allocation.
There’s an execution risk here, but it should work. By focusing on creative talent, shared managerial, promotional, financial, and technology infrastructure, Disney will transition from being a company about products, titles, and characters to one that sells stories year-round through different mediums and formats. And it should result in an incremental growth rate to their free-cash-flow generation. If they can do this, the valuation should continue to be extraordinary.
What numbers do you see?
Priest: Earnings this year should exceed $6. A $200 stock price is not unrealistic if they successfully transition to a model with better margins and higher capital returns. If you want to put the stock away for 10 years, it should be outstanding.
Senate passes new North American trade deal, sending it to Trump
PUBLISHED THU, JAN 16 202011:47 AM ESTUPDATED THU, JAN 16 20203:46 PM EST
- The Senate passes a new North American trade deal, sending it to President Donald Trump’s desk.
- The chamber overwhelmingly voted to pass the United States-Mexico-Canada Agreement after most Democrats got on board.
- Bernie Sanders and Chuck Schumer were among the senators who voted against the successor to NAFTA.
The Senate passed a new North American trade deal Thursday, sending one of President Donald Trump’s top priorities to his desk for ratification.
The GOP-held chamber approved the United States-Mexico-Canada Agreement in an overwhelming 89-10 vote. After Trump signs the three-nation pact, it needs only Canada’s approval to take effect.
The Senate rushed to pass the agreement before the expected start of the president’s impeachment trial next week. The House delivered articles of impeachment to the upper chamber on Wednesday, and the Senate could take weeks to decide whether to convict Trump and remove him from office.
USMCA will head to the president more than 14 months after the North American nations agreed to the deal. The Trump administration worked with Democrats to resolve concerns about enforcement of labor and environmental standards — changes that led most but not all of the party’s lawmakers to support the agreement.
The Senate’s passage of USMCA came a day after Trump signed a partial trade deal with China. The agreement with Beijing does not require congressional approval.
USMCA makes several tweaks to the North American Free Trade Agreement, which took effect in 1994. Trump and Democrats alike argued that the earlier deal, which opened more free trade across the three countries, damaged American workers by encouraging companies to move jobs out of the U.S.
USMCA gives American producers better access to Canadian dairy markets. It creates stricter rules for auto part rules of origin, and requires at least 40% of the parts for a car to be produced in plants where workers make at least $16 an hour.
Other changes include updating digital trade and copyright rules.
The tweaks to labor enforcement mechanisms got House Speaker Nancy Pelosi and the massive union federation AFL-CIO on board. Trade skeptics in the Senate such as Sherrod Brown, D-Ohio, backed USMCA. Brown voted against NAFTA as a House member.
However, several major unions and environmental groups still oppose the agreement. Sen. Bernie Sanders, a Vermont independent and one of the leading 2020 Democratic presidential candidates, voted against the agreement because he said it did not do enough to address climate change and protect jobs.
“In my view, we need to re-write this trade agreement to stop the outsourcing of American jobs, to combat climate change, to protect the environment, and stop the destructive race to the bottom,” he said in a statement Wednesday.
Senate Minority Leader Chuck Schumer, D-N.Y., also opposed USMCA on climate grounds. In a statement Thursday, he said that “on the greatest issue facing our planet, addressing the climate crisis, the USMCA falls far too short.”
Sanders’ stance separates him from the rest of the senators running for the Democratic presidential nomination. Sens. Elizabeth Warren, D-Mass., Amy Klobuchar, D-Minn., and Michael Bennet, D-Colo., all voted to pass USMCA on Thursday.
In Tuesday’s Democratic presidential debate, Warren said the deal will “give some relief” to farmers in Iowa and around the country hurt by Trump’s trade war with China.
Sen. Pat Toomey, R-Pa., was the only GOP senator to vote against the agreement. He previously said the changes made to appease Democrats could stifle free trade.
USMCA is expected to boost economic growth and job creation, though only modestly. The U.S. International Trade Commission estimates it will increase GDP by 0.35% and create 176,000 jobs.
Visa And Plaid: A Marriage Made In Heaven
Jan. 16, 2020 6:34 PM ET
I have been a Visa and Mastercard investor for years.
Visa announced its decision to acquire Plaid.
Plaid is a company used by more than 200 million people. Most have never heard about it.
I have been long Visa (V) since I started investing. In this report, I will explain why I am more excited about the company’s recent acquisition of Plaid. Plaid will help Visa be more involved in the backend of the biggest fintech companies in the world. I will also explain the big market potential that Visa is betting on with this acquisition.
Visa has been one of my core investments since I started investing. I have also owned Mastercard (MA) for several years. In fact, as I wrote in this Visa vs. Mastercard comparison, I have long preferred Mastercard over Visa because I believe the company is more innovative. I also believe that Mastercard has a longer runway for growth than Visa.
There are several reasons why I own the two companies. First, the two companies operate an asset-light and high margin business. This is because they simply provide a technology that empower people to transact. They don’t provide capital to individuals who use their credit cards. As such, the two companies have a gross margin of more than 90% and an EBITDA margin of more than 55%.
Second, it is difficult for these companies to be disrupted. Indeed, their closest competitors have a negligible market share around the world. It is rare to see such companies today.
Third, I believe that the companies have a greater room to grow in the developed and emerging market countries as more people start cashless transactions. As a person who lives in a developing country and travels a lot in the emerging markets, I have experienced first-hand the number of people who are shopping using their cards. I have spoken to many cashiers who told me of the increasing number of people using these cards.
Visa Acquires Plaid
On January 13, it was reported that Visa was paying more than $5.3 billion to acquire Plaid. This is the biggest acquisition Visa has made after it paid more than €13 billion ($14 billion) for Visa Europe in 2015. In 2019, the company made several acquisitions. In August, it acquired Earthport, a cross-border payment company.
I was surprised when I heard that announcement. This is because Plaid is one of the few fintech companies that I have followed for several years. I have followed the story of how Zach Perret co-founded the company to solve a problem he went through when starting another company. You can watch this CNBC video where he talks about how he started the company.
Plaid is a unique company. It is a company that most Americans have never heard about. Yet, Plaid is a company that millions of Americans use every day.
To starters, Plaid is a company that creates technology that connects most banks in the United States. For example, if you want to create a transactional fintech company, it is very difficult to talk to banks to use their data. This is the problem that Plaid helps solve. It has negotiated with most banks and credit unions and created a technology that it sells to many fintech companies. Today, the company is used to power most of all fintech companies you have heard about. If you use Venmo (PYPL), Betterment, Wealthfront, Acorns, Trim, and Lending Club (LC), you have indirectly used a service powered by Plaid. The screenshot below, from Visa, shows the reasons why Fintech companies chose Plaid.
As someone who follows fintech companies closely, I have long believed that it is, without a doubt, the most important fintech company that most people have never heard about. The solution it provides enables developers in the United States and Canada to start their companies without making a lot of investments. This is evidenced by its pricing, which is shown below.
Venture capitalists saw the opportunity in the company. The company, which was started in 2012 had raised more than $309.3 million from private investors. This valued it at more than $2.5 billion. The latest round was in December 2018. While the $5.3 billion valuation may seem pricey, I believe that it will be worth it in the long term.
Implication for Visa
Regular readers know that I am always skeptical about large acquisitions. Just last month, I criticized PayPal’s acquisition of Honey. I still believe that the acquisition made little sense for PayPal. At the same time, I have cheered acquisitions that help companies accelerate their growth. The current Plaid acquisition is one of them.
To a large extent, Visa and Plaid are similar companies. They are all asset-light entities that people use every day. They also have a large total addressable market and high margin. Think about this. Once a fintech company becomes a client, Plaid will continue to make money in perpetuity. It does not need to do any marketing because it does not need to be known.
Like Visa, Plaid is also a company with a large moat. I don’t think we will see many companies come up with the products it is offering. Also, it will be difficult for the company to lose clients. Companies like Lending Club and Betterment don’t have any incentive to build their own platforms or move to other competing companies.
Visa and Mastercard are already beneficiaries of the ongoing transition from cash. They have also been beneficiaries of the current fintech products. For example, fintech companies like Acorns help people save and invest money after they transact while Venmo helps people send money. Visa and Mastercard take a small commission in the backend of these transactions. Owning Plaid will help Visa take a bigger role in the fintech world.
At the same time, Visa will use its global networks of banks and companies to introduce Plaid to the international market. This is because Plaid is only available in the United States, Europe, and Canada. As a result, I expect Plaid to have a significant role for Visa in the emerging markets, which is its fastest-growing market today.
Most importantly, the market potential for fintech companies is enormous. Indeed, big players have realized this. A good example of this is Goldman Sachs (GS), which is building a fintech company to reach more customers. The company has partnered with Apple (NASDAQ:AAPL) to launch Apple Card and the company is accelerating its Marcus project. GS was one of the original investors in Plaid. The same trend is happening in Europe, where companies like Revolut and N26 are changing how people bank. The same can be said about the emerging markets.
As shown above, Plaid is used by more than 200 million people. This is a significant growth from the 10 million people who used it in 2015. The runway for growth continues to be significantly long considering the world has more than 7 billion people. According to EY;
With such growing adoption comes growing influence – maturing fintech challengers are now not only winning business of their own, but actively driving legacy and non-financial organizations to develop their own fintech products and services. Although some challenges have yet to be overcome, it seems that growth in the fintech space steadily continues.
According to Visa;
Connectivity between financial institutions and developers has become increasingly important to facilitate consumers’ ability to use fintech applications. 75 percent of the world’s internet-enabled consumers used a fintech application to initiate money movement in 2019 versus 18 percent in 2015. Plaid has been a leader in enabling this connectivity at scale. Today, one in four people with a U.S. bank account have used Plaid to connect to more than 2,600 fintech developers across more than 11,000 financial institutions.
There are two risks in this transaction. First, there is an integration risk. As it has been noted by researchers, many acquisitions fail to generate the projected returns. This could happen for this acquisition. The second risk is that a good number of Plaid’s customers are relatively young companies. Young companies tend to fail faster than big and stable companies.
I have been a critic of large acquisitions for many years. I remember wondering what General Electric (GE) was thinking when they acquired Baker Hughes. I have also criticized IBM’s (IBM) acquisition of Red Hat. However, I also believe that companies can grow well through acquisitions. I strongly believe that Visa did the right thing to buy Plaid, which is its most important acquisition since it bought Visa Europe.
Disclosure: I am/we are long V, MA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Here’s what China agreed to buy from the US in the phase one trade deal
PUBLISHED WED, JAN 15 20201:26 PM ESTUPDATED THU, JAN 16 202011:01 AM EST
China agreed to purchase an additional $200 billion in U.S. goods over the next two years as part of the “phase one” trade deal.
The additional purchases will come on top of the 2017 U.S. export numbers.
The deal stipulates that Beijing will buy $77 billion in additional goods and services in 2020 and $123 billion in 2021 to meet the total $200 billion. China bought $186 billion of U.S. goods and services in 2017.
Combined with the new incremental agreement, U.S. exports to China should in theory climb to $263 billion in 2020 and $309 billion in 2021. Either amount would mark a record-breaking acceleration for U.S. exports to China.
The two nations signed the first-phase trade agreement Wednesday afternoon at the White House. The globe’s two largest economies have for the better part of two years slapped tariffs of billions of dollars’ worth of each other’s goods in one of the most protracted trade battles in modern American history.
The phase one deal is seen as a sort of truce and includes concessions by the Chinese to crack down on intellectual property theft and the forced transfer of American technologies. But it also includes import targets for Beijing, which has promised to buy a host of American products as the two sides work toward a permanent bilateral agreement.
The composition of that additional $200 billion is as follows:
- Manufactured goods: $32.9 billion in 2020, $44.8 billion in 2021
- Agricultural goods: $12.5 billion in 2020, $19.5 billion in 2021
- Energy goods: $18.5 billion in 2020, $33.9 billion in 2021
- Services: $12.8 billion in 2020, $25.1 billion in 2021
Manufactured goods include industrial equipment, electric equipment, pharmaceutical products, vehicles and optical instruments. Agricultural products include oilseeds, meats, cereals, cotton and seafood.
Digging deeper, China agreed to purchase a variety of goods from each major industry, including but not limited to the following:
Finer detail, such as the exact value of specific farm purchases (such as soybeans or pork) promised by China over the next two years, could not be ascertained.