Closing Stock Market SummaryThe stock market had a positive bias for the entirety of today's session but remained in a narrow range until the final 30 minutes of trade, where the major indices pushed to new session highs. Today's buying was fueled by the emerging hope that Fed Chair Powell's comments tomorrow regarding the rate-hike path will align with what market participants want to hear. The 10-yr note yield moving markedly lower was another support factor for today's buying effort.
Mixed earnings results since yesterday's close were met with mixed price action. Salesforce (CRM 173.91, -6.10, -3.4%) was a limiting factor for the Dow today after disappointing guidance while other growth stocks got a boost from the drop in the 10-yr yield and some relatively impressive results from Snowflake (SNOW 196.28, +36.79, +23.1%).
NVIDIA's (NVDA 179.13, +6.91, +4.0%) below-consensus Q3 revenue guidance was met with buying interest as some participants saw the weak guidance as an indication the bottom is near for the semiconductor industry. The PHLX Semiconductor Index closed with a 3.7% gain.
The positive bias today left all 11 S&P 500 sectors in the green with gains ranging from 0.5% (consumer staples) to 2.3% (materials). The risk-on tone had defensive sectors, utilities (+0.6%), consumer staples (+0.5%), and health care (+1.1%), trailing the broader market.
Energy (+0.8%) also fell towards the bottom of the pack amid falling oil prices. WTI crude oil futures fell 1.9% to $93.08/bbl.
The Treasury market was mixed with the 2-yr note yield rising two basis points to 3.39% while the 10-yr note yield fell eight basis points to 3.03%. Notably, several Fed officials commented that the Fed has more work to do in fighting inflation. St. Louis Fed President Bullard (FOMC voter), for one, thinks inflation could be more persistent than many on Wall Street expect and that this risk is underpriced in the markets.
Looking ahead to Friday, market participants will receive the July PCE Price Index (consensus 0.1%; prior 1.0%) and core PCE Price Index ( consensus 0.3%; prior 0.6%) included in the Personal Income ( consensus 0.6%; prior 0.6%) and Spending Report ( consensus 0.4%; prior 1.1%) at 8:30 a.m. ET. July Advanced Intl. Trade in Goods (prior -$98.2B), Advanced Retail Inventories (prior 2.0%), and Advanced Wholesale Inventories (prior 1.9%) are also out at 8:30 a.m. ET. The August University of Michigan Consumer Sentiment final reading ( consensus 55.1; prior 55.1) is out at 10:00 a.m. ET.
The focal point after the PCE Price Index, though, will be Fed Chair Powell's speech at 10:00 a.m. ET at the Jackson Hole Economic Policy Symposium.
Reviewing today's economic data:
- Initial jobless claims for the week ending August 20 decreased by 2,000 to 243,000 ( consensus 253,000) while continuing jobless claims for the week ending August 13 decreased by 19,000 to 1.415 million.
- The key takeaway from this report is the improvement in initial claims. A reading below 250,000 certainly indicates that labor market conditions remain tight, which means the potential for sticky wage-based inflation pressures also remains tight, and that is unlikely to be a comforting indication for Fed officials.
- The revised Q2 GDP report showed real GDP decreased at an annual rate of 0.6% versus the advance estimate of -0.9%, with an upward revision to consumer spending helping. The Q2 GDP Price Deflator, though, was revised up to 8.9% from 8.7%.
- The key takeaway from the report is simply in the understanding that it was not as bad as first reported, but given its dated nature (we're almost two-thirds of the way through Q3), it cannot be considered a market-moving report.
- Weekly EIA Natural Gas Inventories showed a build of 60 bcf after last week's build of 18 bcf.
Dow Jones Industrial Average: -8.4% YTD
S&P 400: -9.3% YTD
S&P 500: -11.9% YTD
Russell 2000: -12.5% YTD
Nasdaq Composite: -19.2% YTD
The quantum computing bubble
The industry has yet to demonstrate any real utility, despite the fanfare, billions of VC dollars and three Spacs
Financial bubbles occur when large groups of investors repeatedly make poor investment decisions, often due to greed, misunderstanding and easy money. A modern-day example of this is quantum computing.
Quantum computing is often portrayed as an up-and-coming technology whose eventual impact will only be rivalled by artificial intelligence. According to the quantum evangelists, it is only a matter of time before a fully-functional quantum computer will appear and do everything from revolutionising drug development to cracking internet encryption schemes.
Billions of dollars have poured into the field in recent years, culminating with the public market debuts of prominent quantum computing companies like IonQ, Rigetti and D-Wave through 2021’s favourite frothy market phenomenon, special purpose acquisition vehicles (Spacs).
These three jointly still have a market capitalisation of $3bn, but combined expected sales of about $32mn this year (and about $150mn of net losses), according to Refinitiv. Here’s what their stocks have done this year.
The reality is that none of these companies — or any other quantum computing firm, for that matter — are actually earning any real money. The little revenue they generate mostly comes from consulting missions aimed at teaching other companies about “how quantum computers will help their business”, as opposed to genuinely harnessing any advantages that quantum computers have over classical computers.
The simple reason for this is that despite years of effort nobody has yet come close to building a quantum machine that is actually capable of solving practical problems. The current devices are so error-prone that any information one tries to process with them will almost instantly degenerate into noise. The problem only grows worse if the computer is scaled up (ie, the number of “qubits” increased).
A convincing strategy for overcoming these errors has not yet been demonstrated, making it unclear as to when — if ever — it will become possible to build a large-scale, fault-tolerant quantum computer. Yet according to the evangelists, we are apparently in the middle of a Quantum Moore’s Law (aka “Rose’s Law”, after D-Wave founder Geordie Rose) analogous to the microchip revolution of the 1970s — 2010s.
Another fundamental issue is that it is unclear what commercially-useful problems can even be solved with quantum computers — if any.
The most prominent application by far is the Shor algorithm for factorising large numbers into their constituent primes, which is exponentially faster than any known corresponding scheme running on a classical computer. Since most cryptography currently used to protect our internet traffic are based on the assumed hardness of the prime factorisation problem, the sudden appearance of an actually functional quantum computer capable of running Shor’s algorithm would indeed pose a major security risk.
Shor’s algorithm has been a godsend to the quantum industry, leading to untold amounts of funding from government security agencies all over the world. However, the commonly forgotten caveat here is that there are many alternative cryptographic schemes that are not vulnerable to quantum computers. It would be far from impossible to simply replace these vulnerable schemes with so-called “quantum-secure” ones.
And the uncertain practical viability of Shor’s algorithm is only the tip of the iceberg. There has been much controversy regarding where and when quantum computing can actually offer any practical advantage. The latest research points out that there is no evidence that even quantum chemistry calculations can be significantly sped up with quantum computers. That is bad news for the much-touted idea of quantum computers being useful for drug design.
In essence, the quantum computing industry has yet to demonstrate any practical utility, despite the fanfare. Why is then so much money flowing in? Well, it is mainly due to the fanfare. The views of scientists are still (mostly) respected in society, and so when physicists get excited about something, people notice.
The excitement truly began in the 90s, which saw a range of pioneering breakthroughs that truly marked the birth of quantum technologies as an academic field. As more progress was made over the years, the excitement grew, eventually going well beyond the community.
By the 2010s capital had become cheap, and investors started taking notice, even if they had no real understand of the technology (beyond the “a qubit can simultaneously be both one and zero” cliché). As more money flowed in, the field grew, and it became progressively more tempting for scientists to oversell their results. With time, salesman-type figures, typically without any understanding of quantum physics, entered the field, taking senior positions in companies and focusing solely on generating fanfare. After a few years of this, a highly exaggerated perspective on the promise of quantum computing reached the mainstream, leading to a greed and misunderstanding taking hold and the formation of a classical bubble.
Some physicists believe, in private, that there is no problem here: why not take advantage of the situation while it lasts, and take the easy money from the not-too-sophisticated investors? Earning a private-sector level salary whilst doing essentially academic research is a pretty good deal, after all.
Well, when exactly the bubble will pop is difficult to say, but at some point the claims will be found out and the funding will dry up. I just hope that when the music stops and the bubble pops, the public will still listen to us physicists.
"It's Not Enough": A Deeper Look Inside China's Latest 1 Trillion Yuan Stimulus
A few days ago we mocked the relentless China newsmill, saying that "Every day there are 5 stories about some new imminent stimulus out of China and every day nothing at all happens."
Well, it appears that someone in Beijing heard us because just days later we got not one but two major "stimmy" developments:
The first one hit early on Monday when we learned that to contain the collapse of China's critical housing sector, which at $62 trillion is the world's largest asset class...
... Beijing would offer 200 billion yuan ($29.3 billion) in "special loans" to ensure stalled housing projects are delivered to buyers. This new lending program "would make it the biggest financial commitment yet from Beijing to contain a property crisis that’s seen home prices slump and real estate sales plummet, at a time when growing housing market instability also means a growing threat to political stability during the sensitive run-up to the Communist Party’s leadership transition later this year.
The second stimulus hit overnight, when China unexpectedly stepped up its economic stimulus with a further 1 trillion yuan ($146 billion) of funding focused on infrastructure spending, support which analysts quickly calculated won’t go nearly far enough to either counter the damage from repeated Covid lockdowns and a property market slump, or to reboot the struggling Chinese economy which has is on the verge of contraction.
On Wedneseday, the State Council - China’s Cabinet - outlined a 19-point policy package on Wednesday, including another 300 billion yuan that state policy banks can invest in infrastructure projects, on top of 300 billion yuan already announced at the end of June. Local governments will be allocated 500 billion yuan of special bonds from previously unused quotas.
At a meeting chaired by Premier Li Keqiang, the State Council vowed to make use of “tools available in the toolbox” to maintain a reasonable policy scale in a timely and decisive manner, and announced a series of growth supportive measures, including an additional 300bn yuan credit support by policy banks and RMB 200bn bond issuance by power generating central SOEs. Li also pledged to accelerate infrastructure investment project approvals, and urged local governments to better utilize the RMB500bn local government bond issuance allowance accumulated from previous years’ unused quota.
The Chinese Premier also urged local governments to distribute RMB10bn subsidies to the agricultural sector, and further urged relevant government institutions to announce detailed implementation plans for these measures; and stated that policymakers would approve a batch of infrastructure investment projects (though he also required policymakers to ensure the quality of these projects).
The 19 measures came on top of several recent stimulus steps: policy banks have been allocated a total of 1.1 trillion yuan of financing for infrastructure projects since June; the central bank delivered a surprise 10 basis-point interest rate cut last week; and in May, Beijing announced about 1.9 trillion yuan of support measures in a 33-point policy package, including targeting small businesses. The State Council on Wednesday also pledged to approve a batch of infrastructure projects. Local authorities are encouraged to use city-specific credit policies to support reasonable housing demand, it said.
However, to counter speculation that Beijing is finally turning the tide on years of fiscal frugality, the State Council also said the economy won’t be flooded with excessive stimulus, and that China won’t “overdraw” on the room it has to take more policy action to protect longer-term growth - reiterating the cautious stance officials have taken toward stimulus in recent years.
The meeting sent a signal: “Don’t expect massive additional stimulus,” according to Bruce Pang, head of research and chief economist for Greater China at Jones Lang LaSalle Inc. He added that the language used in the announcement suggested “the possibility of adopting extraordinary tools such as special sovereign bonds or increasing official budget deficit has decreased.”
Commenting on the stimulus, Goldman said that in its view, the RMB300bn credit support (equivalent to around 0.3% of GDP) is a new supportive measure, while the RMB 500bn potential local government special bond issuance echoes the statement in the July Politburo meeting, but was significantly smaller than the RMB 1.5tn difference between the allowed total LGSB outstanding (RMB 21.8tn) and the actual outstanding (RMB 20.4tn). Whether the RMB200bn bond issuance by power generating central SOEs represents incremental policy support remains to be seen.
The bank also believes that these measures could help offset the sharp contraction in government revenue and support infrastructure investment growth to some degree in coming months. However, with a very weak property sector, and headwinds to activity growth from local Covid outbreaks and related control measures, barring major policy easing measures, we think overall growth would remain sluggish during the rest of this year (Goldman recently downgraded its 2022 full-year GDP growth to 3.0% yoy).
“We’re getting easing, but it’s not quickly enough to keep up with the pace of deterioration in the broader economy,” said Andrew Tilton, chief economist for Asia Pacific at Goldman Sachs, in an interview on Bloomberg TV. “More domestic policy easing and improved growth and domestic demand is going to be key as we get into 2023.”
Others agreed: Bloomberg economists Chang Shu and David Qu wrote that "China’s latest package isn’t enough to turn the economy around. It will create more public demand that will partially fill a growing hole left by a retreating private sector -- giving some support to growth. What it won’t do is deliver a confidence boost that’s needed to prompt households to spend more and companies to invest more."
The 500 billion yuan in additional local government special bonds this year is smaller than what some analysts had expected, given the estimated amount of unused quota could be as high as 1.5 trillion yuan. Local authorities have accelerated their issuance of the bonds -- a major source for infrastructure investment -- this year compared with previous years, and have used up most of the 3.65 trillion yuan in official quota set early this year.
Nomura economists led by Lu Ting said Thursday the measures aren’t “game-changers.” That’s partially because the property sector is still in deep trouble, they wrote in a research note, pointing out that in previous easing cycles, real estate played a major role in pumping up credit demand among households, companies and local governments.
Indeed, Despite the surprise one-two stimulus punch out of China this week, economists were downbeat on the measures, while financial markets were muted. The yield on 10-year government bonds rose 2 basis points to 2.65%. China’s CSI 300 Index of stocks rose as much as 0.6% before paring gains to trade up 0.3%.
Research Calls
- Upgrades:
- Dream Finders Homes (DFH) upgraded to Neutral from Underperform at BofA Securities; tgt raised to $12
- FREYR Battery (FREY) upgraded to Buy from Neutral at Goldman; tgt raised to $19
- Kosmos Energy (KOS) upgraded to Buy from Hold at Berenberg; tgt raised to $8.50
- Stride (LRN) upgraded to Overweight from Equal-Weight at Morgan Stanley; tgt $45
- Verve Therapeutics (VERV) upgraded to Buy from Hold at Stifel; tgt raised to $56
- Downgrades:
- Edgewise Therapeutics (EWTX) downgraded to Sell from Neutral at Goldman; tgt $5
- GDS Holdings (GDS) downgraded to Hold from Buy at Deutsche Bank; tgt $32.80
- KB Home (KBH) downgraded to Neutral from Buy at BofA Securities; tgt $34
- Krystal Biotech (KRYS) downgraded to Neutral from Buy at Goldman; tgt $74
- La-Z-Boy (LZB) downgraded to Mkt Perform from Outperform at Raymond James
- Lennar (LEN) downgraded to Underperform from Neutral at BofA Securities; tgt $82
- Magenta Therapeutics (MGTA) downgraded to Neutral from Buy at Goldman; tgt $2
- Toll Brothers (TOL) downgraded to Neutral from Buy at BofA Securities; tgt $49
- Others:
- Actinum Pharma (ATNM) initiated with a Buy at B. Riley Securities; tgt $16
- Adaptive Biotechnologies (ADPT) initiated with an Underperform at Credit Suisse; tgt $8
- Agilent (A) initiated with an Outperform at Credit Suisse; tgt $165
- Avantor (AVTR) initiated with a Neutral at Credit Suisse; tgt $32
- Avidbank Holdings (AVBH) initiated with an Overweight at Piper Sandler; tgt $24
- Bio-Rad Labs (BIO) initiated with an Outperform at Credit Suisse; tgt $715
- Bio-Techne (TECH) initiated with an Outperform at Credit Suisse; tgt $465
- Certara (CERT) initiated with an Outperform at Credit Suisse; tgt $22
- ChampionX (CHX) initiated with a Buy at The Benchmark Company; tgt $32
- Charles River (CRL) initiated with an Outperform at Credit Suisse; tgt $285
- Concert Pharmaceuticals (CNCE) initiated with a Buy at JonesTrading; tgt $17
- Danaher (DHR) initiated with an Outperform at Credit Suisse; tgt $340
- Enhabit Inc. (EHAB) initiated with a Neutral at Credit Suisse; tgt $19
- Exact Sciences (EXAS) initiated with an Outperform at Credit Suisse; tgt $55
- Fulgent Genetics (FLGT) initiated with an Outperform at Credit Suisse; tgt $65
- Guardant Health (GH) initiated with an Outperform at Credit Suisse; tgt $80
- ICON plc (ICLR) initiated with a Neutral at Credit Suisse; tgt $260
- Illumina (ILMN) initiated with a Neutral at Credit Suisse; tgt $230
- IQVIA (IQV) initiated with an Outperform at Credit Suisse; tgt $300
- Impel Pharmaceuticals (IMPL) initiated with a Buy at JonesTrading; tgt $26
- Invitae (NVTA) initiated with an Underperform at Credit Suisse; tgt $1
- Kimbell Royalty Partners (KRP) initiated with a Buy at Citigroup; tgt $24
- Kinetik (KNTK) initiated with an Equal-Weight at Morgan Stanley; tgt $46
- Lion Electric (LEV) initiated with a Sell at Veritas; tgt $2.50
- Maravai Life Sciences (MRVI) initiated with an Outperform at Credit Suisse; tgt $34
- MoonLake Immunotherapeutics (MLTX) initiated with an Outperform at SVB Leerink; tgt $17
- Natera (NTRA) initiated with an Outperform at Credit Suisse; tgt $70
- NICE (NICE) initiated with a Neutral at Piper Sandler; tgt $236
- NOV Inc. (NOV) initiated with a Hold at The Benchmark Company
- NuScale Power (SMR) initiated with an Equal Weight at Wells Fargo; tgt $17
- PerkinElmer (PKI) initiated with a Neutral at Credit Suisse; tgt $175
- Protagonist Therapeutics (PTGX) initiated with a Mkt Outperform at JMP Securities; tgt $21
- Satsuma Pharmaceuticals (STSA) initiated with a Buy at JonesTrading; tgt $14
- TechnipFMC (FTI) initiated with a Buy at The Benchmark Company; tgt $12
- Thermo Fisher (TMO) initiated with a Neutral at Credit Suisse; tgt $675
- Waters (WAT) initiated with a Neutral at Credit Suisse; tgt $345
Gapping down
In reaction to earnings/guidance:
- PTON -15.9%, ANF -11.4%, SPLK -9.9%, BURL -9%, DLTR -8.1%, CRM -6.9% (also authorizes new $10 bln share repurchase program), VSCO -5.4%, ZUO -5% (also to acquire Zephr), BOX -3.6%, NVDA -3.5%, DG -2.3%
Other news:
- PDSB -1% (files for $150 mln mixed securities shelf offering)
- NVS -0.5% (intends to separate Sandoz business to create a standalone company by way of a 100% spin-off)
Analyst comments:
- EWTX -3.5% (downgraded to Sell from Neutral at Goldman)
Gapping up
In reaction to earnings/guidance:
- SNOW +18.8%, ADSK +9.1%, TITN +8.4%, NTAP +6.8%, SBSW +3.4%, FRO +2.5%, COTY +2.4%, WSM +2.1%, HIBB +2%, MBUU +1.8%, GFI +1.7%, TD +1.7%
Other news:
- HYLN +7.1% (has entered into a definitive agreement to acquire a new hydrogen and fuel agnostic capable generator from GE Additive -- part of GE)
- AMWL +6.5% (AMZN to shut down its telehealth offering according to WaPo)
- TDOC +6% (AMZN to shut down its telehealth offering according to WaPo)
- GDRX +5.2% (AMZN to shut down its telehealth offering according to WaPo)
- TGTX +4.3% (Announces Results from the ULTIMATE I & II Phase 3 Trials of Investigational Ublituximab in RMS Published in The New England Journal of Medicine)
- RIDE +3.8% (files for $500 mln mixed securities shelf offering)
- FLXS +3.1% (confirms receipt of unsolicited proposal from CSC Generation Holdings for $20.80 per share in cash)
- ZTO +2.8% (prices offering of convertible senior notes due 2027)
- ELY +2.1% (to change name to Topgolf Callaway Brands)
- BCRX +2% (U.S. Gov't exercises option to purchase additional 10K doses of RAPIVAB (peramivir injection) for ~$7 mln)
- BMRN +1.5% (first gene therapy for adults with severe hemophilia approved in Europe) ET +1.3% (enters into 20-year LNG Sale and Purchase Agreement with Shell)
- GME +1.1% (boosting compensation for some store employees according to WSJ)
- AMZN +1.1% (to shut down its telehealth offering according to WaPo)
- GSRM +1.1% (Bitcoin Depot to merge with GSRM in SPAC deal with enterprise value of $755 million)
- DOOO +1% (provides update on data leak)
Analyst comments:
- FREY +16.4% (upgraded to Buy from Neutral at Goldman)