What a day!
It was a wild day on Wall Street with stocks opening higher, nose-diving in the morning, and then spiking higher as the Dow gained triple-digits. The tech-heavy Nasdaq closed in the red.
Crude oil spiked after having lost about 10% in the first two days of the week.
US long-term Treasury yields, meanwhile, continue to rally.
First, the scoreboard:
- Dow: 16,336, +183, (+1.1%)
- S&P 500: 1,912, +9, (+0.5%)
- Nasdaq: 4,504, -12, (-0.3%)
- WTI crude oil: $32.30, +8%
The US economy
The big economic news on Wednesday was weak data out of the services sector, which accounts for the vast majority of US GDP growth.
Readings from both Markit Economics and the Institute for Supply Management indicated a slowing pace of expansion in the services sector in January as ISM’s measure fell to the lowest level since March 2014 and Markit’s services PMI hit a 27-month low. The services sector, we’d remind readers, accounts for about tw0-thirds of GDP.
Now, the catch is that these sectors are still expanding just a slower pace than in recent months. The manufacturing sector, in contrast, is in outright contraction.
But so the biggest economic trend during the last six months of 2015 — and one that was expected to continue moving into this year — is the relative strength in services driving continued growth in the US economy amid calls for recession. (Again, manufacturing is in outright recession but this only accounts for about 12% of GDP.)
And so the concern, simply put, is that this trend is over.
Or as TD Securities’ Gennadiy Goldberg wrote in a note to clients Wednesday:
The ISM non-manufacturing sector report’s outperformance of its manufacturing counterpart has recently been a key sign suggesting that US economic growth momentum has been weathering both domestic and global headwinds. Nevertheless, the ISM services sector gauge trimming its recent outperformance may go a long way in fanning fears of a more pronounced slowdown to US growth momentum heading into 2016.
Elsewhere in economic data, the latest private payroll reading from ADP showed that 205,000 jobs were added in the private sector in January.
Crude oil prices spiked on Wednesday.
An interesting note from RBC Capital Markets crossed our desk on Wednesday with data indicating that production form the Gulf of Mexico is really what’s behind the relentless build in inventories that continues to put pressure on global prices.
Rich Barry down at the New York Stock Exchange noted that prices rallied today while inventories — which are at historic highs and usually get blamed for why prices simply won’t go down (supply won’t clear, and so on) — which brings to mind an old market adage: “When crude rallies on news of huge inventory levels, it means that we have seen the bottom in the commodity.”
Armin Rosen, meanwhile, has the lowdown on the increasingly stressed financial system in Saudi Arabia. The big problem? More money out, less money in.
Amazon is apparently planning to open “300 to 400” bookstores around the country.
(We got here from a Wall Street Journal report citing comments from General Growth Properties’ CEO Sandeep Mathrani on the company’s recent earnings call. You can read the transcript here.)
The interesting take here, of course, is that an Amazon gets more mature it starts to look like a “regular” company that does things like own trucks, investing in infrastructure, and deal with the attendant problems that have plagued retailers since the advent of online shopping, all in the name of lower prices and higher efficiency.
And so while it’s unclear if Amazon wants to put these bookstores in malls — which are distressed real estate properties right now, by and large — or not, Amazon is basically playing out the bull thesis NYU professor Scott Galloway outlined for Macy’s about a year ago. Namely that Macy’s already had the “flexible warehouses” that would be so beneficial for a company (read: Amazon) that wants to control what retailers call the “final mile.”
Miriam Gottfried at The Wall Street Journal argued that all retailers should be worried by reports Amazon is even further encroaching on their turf, and we’d tend to agree. The Financial Times published the (sort of) hilarious chart of Amazon’s profit against revenue over the last two decades: profit goes nowhere, revenue skyrockets. And so not only should retailers be concerned because Amazon is willing to take less profit in exchange for more market share but because their shareholders seem to believe in this strategy because they are actually good at it.
Almost no matter what Amazon really plans to do with respect to increasing its physical footprint, it’s probably bad news for retailers.
Michael Kors shares rallied 24% on Tuesday after earnings beat expectations.
This is good.
What is bad is basically everything we outlined in the above section about Amazon. Or as Michael Kors CEO John Idol said:
“Unfortunately today, e-commerce generates a lower operating profit for us than four-wall brick-and-mortar. We think over time that will reverse itself, but, as you know, when the consumer requires free delivery, free return, wonderful packaging, plus there’s a new trend that people are buying multiple sizes of things to try them out at home and then return them, that all is a negative headwind for us.”
So the takeaway is that online retail has created very profit-unfriendly habits among customers. Going to a store and trying on clothes is a (sort of) a fun activity but now you can basically just do that from the comfort of your home. And at the cost of profit margins for retailers.
This seems problematic. In the long run.
Wall Street is betting big against China, specifically that China’s government will be forced to significantly devalue the yuan.
In an interview on CNBC on Wednesday, Kyle Bass outlined why he put his trade (also sort of letting slip that he’s got about $1 billion in this one) on and why he has absolutely no worries that it’s getting too crowded.
As Bass lays out, China’s banking system is up to about $34 trillion, toughly 10 times the size of its GDP. And so as stresses run through the banking system the government and the People’s Bank of China will be forced to buy just a massive amount of assets and lend huge amounts of money in order to stabilise the system. And as a result, the government will need to weaken its currency, particularly as cash in the system leaves and China’s dollar reserves continue to be depleted.
You should watch the Bass interview: here’s much more clear on the issue.
BlackRock’s Rick Rieder reminds us just how bad 2015 was: “No year since 1990 has seen more asset classes finish in negative territory than 2015, even if losses were more extreme in 2008, according to a BlackRock analysis.”
Martin Shkreli lost about $40 million in his E-Trade account, according to the US government.
Chipotle? Not healthy anymore. Shares lost 3% on Wednesday.
Orange Capital closed.
Kathleen Elkins took the “Elon Musk Challenge.” Next stop, obviously, is space.
Elon Musk told a blogger he couldn’t have a car because wrote a “rude” post.
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