Closing Stock Market SummaryThe S&P 500 fell 1.5% on Thursday, as another spike in the 10-yr yield (1.73%) continued to undercut the heavily-weighted growth stocks, whose losses took a toll on risk sentiment. The Nasdaq Composite (-3.0%) and Russell 2000 (-2.9%) dropped around 3.0%. The Dow Jones Industrial Average decreased just 0.5% after setting an all-time high during the day.
Briefly, the 10-yr yield rose past yesterday's pre-FOMC high and flirted with 1.76% today on continued growth/inflation expectations and a report out of the Nikkei that the Bank of Japan is likely to widen its trading band around 0.00% for the 10-yr JGB to 50 basis points from 40 basis points. The 10-yr settled nine basis points above yesterday's settlement at 1.73%.
The mega-cap/growth/technology stocks succumbed to renewed selling interest amid underlying concerns that these widely-owned names might not perform as well as they did in 2020 in a higher interest-rate environment. The lack of a buy-the-dip mentality in these stocks despite long-term rates easing from session highs likely exacerbated selling interest.
Ten of the 11 S&P 500 sectors closed in negative territory, with the information technology (-2.9%), consumer discretionary (-2.6%), and communication services (-2.0%) sectors as influential laggards. The energy sector (-4.7%) declined the most, though, as oil prices ($60.00/bbl, -$4.61, -7.1%) pulled back 7% alongside other risk assets.
Note, crude futures slid into the pit close after France's Prime Minister Castex announced a new monthlong lockdown in 16 regions, including Paris, stirring some concerns about the recovery in global oil demand. A stronger U.S. dollar (91.85, +0.40, +0.4%) was another negative factor for oil prices. Prior to today, crude futures were up 34% this year.
Some investors rotated money into the financials sector (+0.6%), especially early in the day, as the 2s10s rate spread continued to widen, but this trade lost steam as the broader market weakened in the afternoon and into the close. The financials sector was up as much as 2.5% intraday. The 2-yr yield increased three basis points to 0.16%.
Positive news that were lost in the shuffle of today's weakness included the Philadelphia Fed Index soaring to 51.8 in March (consensus 23.5) from 23.1 in February and the EMA confirming that AstraZeneca's (AZN 49.33, -0.74, -1.5%) COVID-19 vaccine is safe and effective. The EMA saw no association with an increase in overall risk of blood clots.
Reviewing Thursday's economic data:
- Initial jobless claims for the week ending March 13 increased by 45,000 to 770,000 (consensus 710,000) while continuing claims for the week ending March 6 decreased by 18,000 to 4.124 million.
- The key takeaway from the report is the high level (still) of initial jobless claims, yet the perceived takeaway is likely to be that coming weeks should produce more encouraging numbers as reopening activity increases hiring, and reduces layoff, activity.
- The Conference Board's Leading Economic Index (LEI) increased 0.2% m/m in February (consensus 0.3%) following an unrevised 0.5% increase in January. February marked the tenth consecutive monthly increase.
- The key takeaway from the report is that it has not yet fully captured the momentum of the vaccination program and the passage of the $1.9 trillion stimulus package, which leads one to think it should show a higher reading next month, especially as business activity rebounds from the transitory impact of severely adverse winter weather seen in the South and Midwest in mid-February.
- The Philadelphia Fed Index soared to 51.8 in March (Briefing.com consensus 23.5) from 23.1 in February.
There is no economic data of note scheduled for Friday.
- Russell 2000 +14.8% YTD
- Dow Jones Industrial Average +7.4% YTD
- S&P 500 +4.2% YTD
- Nasdaq Composite +1.8% YTD
Volkswagen: valuation moves into overtaking lane
Shares have been ramped up by enthusiastic retail punters, as well an institutions
Volkswagen is once again Germany’s most valuable public company. Shares in the carmaker this week climbed by almost a fifth, nearly regaining the pre-diesel scandal heights of 2015. Excitement was fuelled by more detail about its electric-car ambitions, including heavy investment in battery factories. It aims to be the global market leader by 2025 at the latest.
It will probably overtake Tesla, the current market leader, well before that. But car sales are not the full story. The US company’s enterprise value is nearly twice that of VW. The premium stems from software. That is expected to account for almost half Tesla’s post-2025 operating profits, according to UBS. Analysts see an analogy with Apple’s ecosystem of products, services and software. VW takes the role of Samsung, a hardware producer.
VW does not accept it is an also-ran on automotive software. It believes Europe still has a rare chance to play a leading role. In any case, some of the value ascribed to software, notably relating to self-driving technology, is overhyped. Cars are more than just smartphones on wheels. Repair and service networks, where Tesla lags behind VW in Europe, are critically important.
Charging time also matters greatly. VW — which like Tesla has ambitions to halve battery costs — has placed a bet on next-generation lithium-ion batteries. Drastic cuts in the time needed to charge the battery are promised by the Silicon Valley start-up QuantumScape, in which VW holds a stake. But there is still a lot to do to industrialise the technology.
VW shares, fewer than a tenth of which are free floating, according to Barclays, have been ramped up by enthusiastic retail punters, as well an institutional investors. Even so they do not look expensive, priced at just under 10 times forward earnings. That is cheaper than those of GM, another traditional carmaker pushing hard into electric vehicles.
VW has reason to cheer the rise in its share price. The higher value could make it easier to fund its electric vehicle ambitions. In its rivalry with US tech companies, VW understands that lofty valuations can bestow a competitive edge.
VW/Porsche: discount delusion
More thoughts on Mr Market’s sudden affection for the German automaker
VW, the German car manufacturer attempting to refashion itself as the market leader in electric vehicles, is on quite a run. Since Friday’s close, the company’s ordinary shares have ramped up as high as 36 per cent as investors have cottoned on to the fact the Wolfsburg-based business will grow electric vehicle deliveries faster than Tesla in 2021.
Yet, for some reason, VW’s preference shares have lagged behind. Market observers, such as Mirabaud’s Neil Campling, have pointed out the price action is reminiscent of the epic VW short squeeze of 2008, when a similar gap opened up between the two securities.
Here’s the performance gap from 2008:
So what’s going on?
Well one suggestion, from Reuters, is that VW’s ordinary shares, which are traded in the US via an over-the-counter American depositary receipt, or ADR, have caught the attention of retail bros. The preference shares, meanwhile, can only be accessed by those on the German exchanges, so they have less pull with the stimmy crowd.
But that’s not the only way to buy VW shares.
Porsche SE is the listed German holding company of the Porsche-Piëch family. It owns 31.4 per cent of VW (53.3 per cent of the ordinary shares), with further investments in data analytics, lidar and software companies, such as self-driving car business Aurora.
Remove the value of those smaller investments, however, and you’re left with VW ordinary shares worth some €42bn at pixel time. Yet the holding company trades at a market capitalisation of €26bn, according to S&P Global data. That’s a discount of 39 per cent. So in theory, you can buy Porsche SE, and wait for the discount to close to make money, regardless of whether the market comes around to VW’s shares as a way to play the electric car gold rush.
Good idea then? Well, no. The problem is, unlike the target of delivering 1m electric vehicles in 2021, a discount to net asset value is not an easy story to tell to the market. And, in this sort of market environment, stories matter. To that point, over the past five trading days Porsche SE’s preference shares have returned 13.3 per cent. VW’s preference shares? 17.5 per cent.
It’s a funny one. You can imagine an analyst bounding up to his portfolio manager with the pitch that “not only is the market underpricing VW’s electric vehicle plans but we can buy these shares at a discount via Porsche SE, and also get the optionality of these other assets for free.” “Great idea. Let’s put it on,” the portfolio manager might say. After all, it’s a clever pitch, the sort that fund managers like to chat about as a sign of their sophistication when trying to raise capital.
But sometimes, you can be too cute for your own good. In the case of VW, this just might be one of those times.
Gibraltar and Isle of Man deny plans to house asylum seekers for UK
British territories named in reports about government proposals for new ‘firm but fair’ system
Gibraltar and the Isle of Man have ruled out acting as processing sites to hold people seeking asylum in the UK after they were named in reports on ministers’ latest efforts to discourage clandestine migrants.
The British territories were cited in the Daily Mail and The Times on plans expected to be published next week to produce a “firm but fair” asylum system inspired partly by Australia, which has sent asylum seekers to await processing on Pacific islands including Nauru and Manus, and in Papua New Guinea.
The proposals represent ministers’ latest effort to deter crossings of the English Channel in small boats by people seeking asylum in the UK.
A record 8,420 people made the crossing in small boats last year, according to unofficial figures collated by charities, while more than 800 people have crossed so far this year.
Last year they considered sending arriving asylum seekers to offshore sites including St Helena and Ascension Island in the south Atlantic. They have also housed people arriving in small boats in rundown former military barracks, including Napier Barracks, near Folkestone, where hundreds of residents in January and February contracted Covid-19.
Government inspectors said last week the people were living in conditions that made an outbreak “virtually inevitable”.
Any efforts to remove asylum seekers forcibly to a third country would probably encounter multiple legal challenges because of the government’s obligation under the 1951 UN refugee convention to consider asylum claims from people arriving on its territory.
The Isle of Man’s government said in response to reports people seeking asylum could be housed on its territory that there was “no foundation” to the stories.
“There are no talks,” it said.
Colin Yeo, an immigration barrister, pointed out that the Isle of Man was part of the Common Travel Area with the UK, the Irish Republic and the Channel Islands, meaning that anyone sent there would be free to return to the mainland UK.
Meanwhile, Fabian Picardo, Gibraltar’s chief minister, ruled out housing asylum seekers there because of the effect such a step would have on the rock’s deal to participate in the EU’s Schengen free-movement area.
Picardo described the reports as “groundless speculation”.
“Gibraltar is always ready to help the United Kingdom as part of the British family of nations,” he said. “Our geography makes some things difficult, however, and the processing of asylum seekers to the UK in Gibraltar would be one of them.”
Ministers have been consistently frustrated at their inability to prevent small boat arrivals from France, where they insist migrants should seek protection, instead of coming to the UK. Britain has lost the ability to return asylum seekers to France and other European countries since December 31, when the end of the post-Brexit transition period removed the UK from the EU’s Dublin conventions on the return of asylum seekers.
Zoe Gardner, policy adviser on asylum at the Joint Council for the Welfare of Immigrants, said that, because the proposals would deny meaningful access to asylum in the UK to most refugees, they were “potentially incompatible” with Britain’s obligations under the refugee convention.
Nick Thomas-Symonds, the shadow home secretary, said the government was lurching “from one inhumane, ridiculous proposal to another” with its asylum plans.
“These absurd ideas show the government has lost control and all sense of compassion,” he said.
The Home Office did not immediately respond to a request for comment.
Gapping down
In reaction to earnings/guidance:
- ZTO -6.2%, GEVO -5.8%, PD -5.1%, RIDE -4.6% (also says timeline to start production remains on track for Sept 2021), DG -4.5%, MLHR -3.3%, TITN -1.6%, UTZ -1.4%
Other news:
- TBIO -26.5% (reports clinical trial results for MRT5005)
- PHAS -13.9% (prices offering of 16 mln shares of common stock at $3.50 per share)
- CFRX -12.2% (prices offering of 10 mln shares of common stock at $5.00 per share)
- SLDB -4.7% (stock offering)
- AHT -3.9% (stock offering)
- MAXR -3.7% (prices $400 mln common stock offering)
- NOK -3.3% (Capital Markets update)
- PAYA -3% (prices offering of 20 mln shares of common stock at $12.25 per share)
- IIVI -2.6% (Coherent confirms receipt of revised proposal from IIVI)
- U -2.5% (new CFO)
- SHC -2.3% (prices 25 mln shares of common stock at $27.00 per share)
- PENN -1.2% (to launch Barstool Sportsbook app in VA in coming months)
- PANW -1.1% (new CFO)
Analyst comments:
- ADNT -2.6% (downgraded to Underweight from Equal-Weight at Morgan Stanley)
- PDD -2.3% (downgraded to Hold from Buy at Truist)
- FTI -1.8% (downgraded to Neutral from Buy at Citigroup)
- KRP -1.4% (downgraded to Equal Weight from Overweight at Wells Fargo)
- CLX -1.1% (downgraded to Neutral from Buy at DA Davidson)
Gapping up
In reaction to earnings/guidance:
- UPST +42.3% (also to acquire Prodigy Software), WSM +11.1% (also increases dividend, approves new $1 bln share repurchase auth), AOUT +10%, SIG +7.8%, CSIQ +6.3%, FIVE +5.2%, WOOF +4.4%, ACN +3.4%, WB +3.3%, LEGN +2.8%, ADCT +2.4%, HHR +1.9%, CMC +1.6%, ONTF +1.5%, SMTC +1.3%
Other news:
- VCEL +10.3% (to be added to the S&P SmallCap 600)
- WPRT +6.4% (joint venture modifies terms for supply of HPDI systems)
- URGN +4.6% (has entered into a strategic funding agreement with RTW Investments)
- AMC +4.3% (to have 98% of its US locations open by March 19)
- COHR +3.2% (Coherent confirms receipt of revised proposal from IIVI)
- APLS +2.3% (Phase 3 PEGASUS study results comparing pegcetacoplan to eculizumab for PNH published in NEJM) PPL +2.1% (divests its U.K. utility business) SGMO +2% (EMA releases details in support of Orphan Designation of BIVV003)
- QTRX +1.9% (Simoa Tech accelerates critical plasma biomarker research)
- RC +1.7% (ANH receives stockholder approval for merger with RC)
- ORGS +1.7% (entered a collaboration with MIDA Biotech B.V. (MIDA) to establish point-of-care centers at hospitals and other medical institutions across western Europe)
Analyst comments:
- NPTN +2.8% (upgraded to Buy from Neutral at Rosenblatt)
- RVLV +2.4% (upgraded to Buy from Neutral at BofA Securities)
- A +1.3% (upgraded to Buy from Neutral at Citigroup)
- CCL +1.3% (upgraded to Buy from Neutral at UBS)