Hey Everyone, now we are getting Q4 Earnings underway and moving into a key week of high profile corporate earnings, key Economic Data and a Fed Policy meeting. So this week will be interesting and either serve as supporting a bullish case for more upside or moving into a more consolidation risk off posture…in addition we have the possibility of a world health scare on the Corona Virus emanating from China…so we have a lot on our plate as we move into the coming week.
• The market action this week ended on a down note mostly from the potential contagion of the Corona Virus from China with over 1,000 confirmed cases and 41 deaths in China with 2 confirmed cases here in the US…immediate reaction was in comparison terms to the SARs outbreak which had causes a market drop over 10%…so clearly this has moved current price action to a “risk off” environment; especially since this virus outbreak comes at the worst possible time; the Chinese Lunar New Year where travel is one of the biggest ways of celebration…the reaction in this specific outbreak was immediate which China rapidly locking down cities with populations over 36 million from travel….from a market price perspective, markets were looking for a reason to take some profits off the table and wait until further economic and Q4 Earnings are forthcoming so the Corona Virus thus far has served as a catalyst….after all, we’ve seen the S&P has gone 71 days without a 1% move in either direction, which is the longest streak since Oct 9th 2018…
• In this risk off market week we have seen something I find very interesting; -10 Year Treasury interest rates hit a closing weekly low of 1.681% and the FEDs adding more liquidity to the markets via Repo Options has increased or expanded the US Balance sheet by over $300 Billion by buying short term T-Bills…but what’s most intriguing, you would think with this additional $300 Billion in balance sheet expansion since last Sept, it has actually contracted by over $25B since early January…how did this happen? Simply by letting its holdings of mortgage back securities mature without being replaced…I am sure we will get more information on this one this coming Wednesday during Fed Chair Powell’s press conference…
• OK, now that the Phase 1 China Trade Deal has been signed you may be thinking the Trade Issues are now on the back table as we run through 2020 but you would be wrong…At Davos (the gathering of elites and Billionaires) we see that France and the US agreed to stand down (for the moment) on tariff hikes due to France’s desire to impose a digital tax on key US internet providers and Trump fired a salvo at the E.U and the U.K. on possible new tariffs if deal cannot be worked out on car imports..
• As I have indicated to our members, this past year we saw 2019 PE Multiples all expand, not due to earnings growth, but thru interest rate reductions….earnings were very poor showing mostly negative year over year growth…in fact, nearly 40% of the listed companies reported losing money over the last 12 months which is the highest percentage in the last 1990’s…and of the largest 100 companies that reported losses over 75% saw their share prices move higher…and of all the money losing companies over 41% saw their share prices move higher…so we now have a much larger valuation premium laid at the foot of most listed companies here in the US…the risk to US markets as we move into Earnings for 2020 we will not see any more PE Multiple expansion without earnings growth…..
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