Closing Stock Market SummaryThe S&P 500 (-0.2%), Nasdaq Composite (-0.4%), and Dow Jones Industrial Average (-0.2%) opened Tuesday's session at fresh record highs in a momentum trade, but they ended the session with slight losses amid a general sense of buyer exhaustion. The Russell 2000 (-1.9%) succumbed to increased profit-taking interest with a 2% decline.
Interestingly, declining issues outpaced advancing issues by a 2:1 margin at the NYSE and a 5:2 margin at the Nasdaq, but relative strength in some of the mega-caps like Amazon (AMZN 3322.00, +28.04, +1.2%) limited the large-cap index declines. Sector losses weren't that big, either, with no S&P 500 sector closing lower by more than 0.7%.
The information technology sector (-0.5%) was an influential laggard amid a reversal in shares of Apple (AAPL 134.87, -1.82, -1.3%), which set an all-time high for the first time since Sept. 2 at the open. Intel (INTC 49.39, +2.32, +4.9%) was one of the few gainers in the sector after activist hedge fund Third Point urged the company to explore strategic alternatives.
The health care (+0.4%) and consumer discretionary (+0.2%) sectors finished in the green.
In the latest stimulus news, the House officially passed a bill to increase stimulus checks to $2000, but Senate Majority Leader McConnell said the Senate will begin the process to address the stimulus checks later this week. Mr. McConnell also said the Senate will address section 230 social media liability reform and election fraud.
Separately, Boeing's (BA 216.25, +0.16, +0.1%) 737 MAX was flown commercially for the first time since March 2019 via American Airlines (AAL 15.86, -0.20, -1.3%).
U.S. Treasuries finished little changed in a quiet trading session. The 2-yr yield increased one basis point to 0.13%, and the 10-yr yield was flat at 0.93%. The U.S. Dollar Index declined 0.4% to 90.00. WTI crude futures increased 0.7%, or $0.33, to $47.97/bbl.
Tuesday's economic data was limited to the S&P Case-Shiller Home Price Index, which increased 7.9% in October (consensus 6.9%) following a 6.6% increase in September.
Looking ahead, investors will receive the Chicago PMI for December, Pending Home Sales for November, and the Advance International Trade in Goods, Retail Inventories, and Wholesale Inventories reports for November on Wednesday.
- Nasdaq Composite +43.2% YTD
- Russell 2000 +17.4% YTD
- S&P 500 +15.4% YTD
- Dow Jones Industrial Average +6.3% YTD
After Hours Summary: Pretty quiet after hours; OSMT -27.6% falls on FDA letter; IMMP +8.5% rises as it receives US patentAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: None
Companies trading higher in after hours in reaction to news: IMMP +8.5% (receives US patent), DMTK +6.4% (receives positive medical benefit policy from Geisinger Health System), DMYT +3.1% (closes combination with Rush Street; to begin trading under symbol RSI on Dec 30), ODT +3% (Tang Capital Mgmt discloses 41.6% in amended 13D filing), RMG +2.2% (closes combination with Romeo Power; to begin trading under symbol RMO on Dec 30), GAN +1.7% (Dan Niles includes in his list of top picks for 2021 on CNBC), LOAK +1.2% (closes combination with Danimer Scientific; to begin trading under symbol DNMR on Dec 30), MGA +1.1% (Dan Niles includes in his list of top picks for 2021 on CNBC), EBS +0.9% (announces initiation of clinical program to evaluate COVID-HIG for prophylaxis), FCAU +0.9% (FCA Italy extends sponsorship with Juventus Football Club thru June 2024), MRNA +0.5% (confirms discussions to supply 40 mln doses of COVID-19 vaccine to South Korea), XLE +0.4% (Dan Niles includes in his list of top picks for 2021 on CNBC), MESA +0.2% (amends its Capacity Purchase Agreement with AAL), VEC +0.2% (awarded $880 mln Army contract), JPM +0.1% (Dan Niles includes in his list of top picks for 2021 on CNBC), ORCL +0.1% (Dan Niles includes in his list of top picks for 2021 on CNBC)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: None
Companies trading lower in after hours in reaction to news: OSMT -27.6% (receives letter from FDA for NDA for arbaclofen; FDA recommends co conduct a new study to show efficacy of arbaclofen), MVIS -4.7% (enters into $13 mln At-the-Market equity offering agreement with Craig-Hallum Capital), SGEN -2.3% (stock offering), TK -1.4% (stock offering), GOGO -0.2% (names new Chairman), TSLA -0.1% (offers 3 months of free Full Self-Driving in unprecedented incentive, according to Electrek)
Early premarket gappers
- Gapping up:
- AMPH +12.5%, QTRX +5.9%, NVRO +4.4%, MNOV +4%, MRUS +3.9%, ABCL +3.5%, FUBO +3.4%, PS +2.8%, NVO +1.8%, TAL +1.4%, IVR +1.3%, GORO +1.3%, YSG +1.2%, IMAX +0.7%
- Gapping down:
- ARCT -27.3%, LYG -3.9%, VXX -1.2%, BCS -1.2%, DB -0.9%
Corporate America experiences ‘K-shaped’ recovery
Many of the largest businesses got larger in 2020 as smaller rivals plunged into crisis
“These are times when the strong can get stronger,” Nike chief executive John Donahoe said in September, as he celebrated the digital investments and robust brand that helped the sportswear group to increase its earnings even as Covid-19 closed its stores.
Nike was far from the only household name boasting of resilient profits and a growing share of a market it already leads. From Amazon to Starbucks, McDonald’s to Mondelez, many of America’s biggest businesses got bigger this year, even as the turmoils of Covid-19 plunged smaller rivals into crisis.
Just as Blackstone had been “a huge winner coming out of the global financial crisis”, chief executive Steve Schwarzman told analysts who follow the private equity group recently, “I think it’s going to turn out to be another one of those acceleration moments.”
The unequal, “K-shaped” recovery that economists fear is dividing the wider US economy is also playing out across corporate America, as the pandemic deepens the gulf between the largest, best-financed companies and those lacking scale, leading brands or robust balance sheets.
Bank and central bank policies coupled with shifts in consumer behaviour have accentuated trends that were already putting more wealth and growth in the hands of a few large companies, according to academics, consultants and corporate advisers.
That, some of them warn, threatens to reduce competition, stifle innovation and hold back smaller businesses that are supposed to be sources of job creation and economic dynamism.
“The last year’s clearly been K-shaped,” said James Manyika, chairman of the McKinsey Global Institute, noting that an MGI analysis found almost all of the “superstar” companies at the top of its rankings had become stronger in 2020.
That partly reflected the fact that the group featured many technology and pharmaceutical companies, and that most of its members had the global reach to ride out local Covid-19 waves.
But the year’s winners had also typically invested more in the digital tools which became critical as employees and customers scattered.
Even within sectors, “the variations between the most and least digitised companies were huge”, Mr Manyika said. From retailers forced to step up their ecommerce offerings to banks needing to move more transactions online, “the digitally enabled ones were ready for this moment”.
‘It reminds them of their childhood’
The trend towards corporate concentration began long before the pandemic, with large US public companies seizing a growing share of economic activity since the mid-1990s, Dartmouth professor Vijay Govindarajan and colleagues found in a study last year.
Small companies have found it increasingly hard to “escape their class”, they wrote, while the biggest businesses have had the resources to invest in assets including their brands.
The companies that went into the pandemic with the strongest brands mostly extended their lead, as customers retreated to familiar suppliers.
“Consumers are really looking during this time for brands they trust,” Michele Buck, Hershey chief executive, said on the chocolate maker’s last earnings call. Dirk Van de Put, chief executive of Mondelez, which owns Cadbury, attributed its market share gains to the same phenomenon: “Consumers . . . went to brands that they felt comfortable with. It reminds them of their childhood,” he told analysts.
Safety-conscious consumers also frequented fewer stores, favouring companies that could supply a wide array of goods. Walmart and Target both cited such “trip consolidation” as playing to their advantage.
Bureau of Labor Statistics data show the human impact of a divergence that happened partly along sectoral lines.
Courier and warehousing companies fuelling the ecommerce boom, tech groups, and big banks and insurers were among the few to add jobs in 2020. In the more fragmented arts and entertainment world, and at hotel and airline companies which were singularly stricken by the pandemic, the lay-offs fell heavily.
The same data set also reveals the divide between winners and losers within certain sectors. The only retailers beyond those selling food and alcohol to have created jobs in the year to November were big box retailers such as Walmart and Costco, and those selling building materials and garden supplies, such as Home Depot.
In their latest earnings statements, Walmart, Costco and Home Depot reported year-on-year sales increases of 5.3 per cent, 16.9 per cent and 23 per cent respectively.
Each has seen its shares rise more than 20 per cent this year, even as Amazon’s growing ecommerce dominance lifted its stock more than two-thirds.
Much of the divergence stems from bigger companies’ easier access to capital, according to Olivier Darmouni, a Columbia Business School economics professor.
Large public companies with investment-grade credit ratings led a record $2.5tn of corporate borrowing this year. That positioned existing industry leaders such as Ford and General Motors to be ready when demand for their products began to recover.
By contrast, a study led by Mr Darmouni showed that the more costly bank loans on which smaller companies are more dependent became much harder to access this year as banks tightened their lending standards. The increase in bank credit in the first half of 2020 “came almost entirely from drawdowns by large firms on pre-committed lines of credit”, his research concluded.
“There’s a very clear premium from being large,” he said. “The contracts that were signed in good times are . . . only reliable if you’re a big firm.”
‘It doesn’t trickle down’
The past year has shown not only how unequally credit flowed, but also how policy responses to the crisis risked amplifying the trend, Mr Darmouni said.
“The Fed and the Treasury are used to helping big companies like big automakers and big banks. They’re not used to dealing with smaller companies. The big lesson there is it doesn’t trickle down,” he said.
The biggest corporate casualties of 2020 were those which went into the pandemic with fragile balance sheets, such as Hertz, the car rental company, and out-of-favour operators in markets such as retail, restaurants and property which suffer from overcapacity.
“The pandemic has exacerbated the strength of the good and similarly highlighted the weaknesses of the worst companies,” said Mohsin Meghji, chief executive of the restructuring advisory group M-III Partners.
Poorly capitalised companies outside their industry’s top two or three competitors could “muddle along” in a strong economy, he said, but now “people will direct their capital to the survivors and remove it from the ones that shouldn’t survive”.
Mr Meghji now expected “significant rationalisation” in those overcrowded sectors, with some weak companies selling to their industries’ winners and others collapsing altogether.
If that happened, he argued, “Covid could end up being a significant catalyst for making the American economy a lot more clear and competitive because it’s forced what should have taken place over five, seven or 10 years to happen much faster.”
According to MGI’s Mr Manyika, roughly half of the winners of one business cycle fall out of the “superstar” ranks in the next cycle. That, he said, raised questions about how long the K-shaped dynamic would last.
Those companies that benefited from stimulus-boosted consumer spending this year could suffer if policy interventions fall short in 2021, while those that depended on a forgiving debt market “can only rely on [their] balance sheet for so long before shareholders say ‘we can’t keep supporting this’”, Mr Manyika observed.
“Eventually, demand has to show back up.”
Toshiba holds emergency board meeting as activist pressure mounts
Japanese group looks to Goldman Sachs for help after second investor demands EGM
Toshiba has held an emergency board meeting and called on Goldman Sachs for help as the Japanese technology conglomerate battles with an unprecedented shareholder revolt on two fronts.
The company, which has tried several strategies to revive its business, faces two demands for extraordinary general shareholder meetings. Toshiba was accused by investors of deploying “dark arts” to survive a knife-edge shareholder vote in July.
Demand for EGMs, viewed by investors as a last resort, remain extremely rare in Japan despite increasing shareholder activism that has helped boost the Tokyo stock market. The appeals take Toshiba into uncharted territory and put exceptional pressure on Nobuaki Kurumatani, chief executive.
Toshiba has said it is studying both EGM requests and people close to the company believe that it is looking for ways to combine both demands into a single meeting.
At the hastily-convened conference on Monday ahead of the new year, Toshiba’s board agreed to grant Mr Kurumatani and other senior executives powers to set the official “date of record”. That determines which shareholders are eligible to vote based on when they bought stakes and marks the first step in the process of holding an EGM.
Shares in Toshiba rose as much as 2.1 per cent on Tuesday. That coincided with the Nikkei 225 index, of which Toshiba is not a constituent, rising 2.8 per cent to break through the 27,500-point threshold and hit its highest level since April 1990.
The first EGM demand came on December 17 from the secretive Singapore-based fund Effissimo, which is Toshiba’s largest shareholder, with a 9.9 per cent stake.
The fund has called on the company to appoint an independent committee to investigate whether the July AGM was conducted fairly. That request followed a report by the Financial Times that certain investors felt pressured into withholding their votes as Toshiba and its advisers mounted an aggressive campaign to keep Mr Kurumatani’s shareholder approval rating over 50 per cent. Sumitomo Mitsui Trust, Japan’s largest shareholder services company, subsequently admitted that a large slab of votes had gone uncounted.
The Effissimo EGM request caused panic within Toshiba, according to people close to the company, and prompted management to ask Goldman Sachs to reprise its role as adviser on defence against shareholder activism. Goldman has not decided whether to formally take on the role, the people said. The bank declined to comment publicly on the matter.
Farallon Capital, another top Toshiba shareholder and one of the world’s largest hedge funds, added to the Japanese company’s woes with its own demand for an EGM on December 25.
Farallon has called on Toshiba management to explain what it believes is a sudden and poorly-justified change in its investment strategy. Toshiba announced in November that it planned to use its capital for “proactive investments on resources”, but Farallon said this policy was at odds with its previous plan of organic expansion and “programmatic M&A”, which it interpreted as smaller, bolt-on acquisitions.
Farallon also questioned Toshiba’s record of big transactions, noting that it had recorded about ¥1.8tn ($17bn) in impairment losses over the last two decades “resulting from heedless growth investments through large-scale M&A, which have led to a reduction of shareholder capital and a crisis of solvency”.
Another investor in Toshiba shared Farallon’s concern about the group’s reported ¥1tn investment plan for renewable energy, saying the company risked repeating its past failures in M&A. Toshiba has said that it has yet to decide on a concrete investment plan at the ¥1tn level.
Hut Group buys trio including Dermstore.com for $430m
Online beauty and health retailer continues expansion following September IPO
The Hut Group has agreed to buy a trio of companies for about $430m as the UK online beauty and health retailer continues to expand since listing in London in September.
The Manchester-based group said on Tuesday it had agreed to acquire skincare retailer Dermstore.com from US retailer Target for $350m. The all-cash deal will add roughly $180m to The Hut Group’s sales next year and requires approval from US antitrust authorities, which the company expects to receive late next month.
The Hut Group also said it was buying Claremont Ingredients and David Berryman for £59.5m. The two UK-based companies, which supply the group with nutrition products, will bring sales of about £15m in 2021 the group said.
“Accessing capital through a London listing has enabled us to accelerate our growth plans and build out a global leadership position within the exciting beauty industry,” said Matthew Moulding, the founder and chief executive of Hut Group.
Earlier in December, the group increased its full-year revenue forecast, the second time it had done so since listing in September, to a £1.57bn-£1.60bn range compared with £1.48bn-£1.52bn previously.
The company raised £920m for itself in its initial public offering, and an additional £961m for its shareholders.
Only One Number Mattered To Global Markets In 2020
When it came to financial markets in 2020, the most frequently asked question was why. Why, in the midst of a global pandemic that has killed some 1.7 million people worldwide and plunged the economy into the worst crisis since the Great Depression, did equity markets stage a historic rebound to reach new highs and become completely disconnected from reality? And it wasn’t just stocks, as anything smacking of carrying any semblance of risk, from junk bonds to Bitcoin, had epic rallies.
Everyone has an explanation for how markets performed. They range from the cerebral (markets are “forward-looking” and investors are anticipating a roaring economy once Covid-19 has been eradicated) to the cynical (just buy the dip). True, the market is always about what will happen rather than what has happened, and it’s been highly profitable in recent years to buy whenever the market pulls back. Still, neither adequately explains the jaw-dropping 66% surge in the MSCI All-Country World Index of stocks from its low in late March, the record-low yields in junk bonds, the more than five-fold increase in the price of Bitcoin or any of the other seemingly inexplicable market moves.
The answer is much simpler and comes down to one number: $14 trillion. That’s the amount by which the aggregate money supply has increased this year in the U.S., China, euro zone, Japan and eight other developed economies.
To put the surge in perspective, the jump to $94.8 trillion exceeds all other years in data going back to 2003 and blows away the previous record increase of $8.38 trillion in 2017, according to data compiled by Bloomberg (how did equities do back then? The MSCI All-Country World Index soared 21.6%, the result of a steady climb all year. Although the MSCI is up a smaller 12.4% this year, it has surged 65% from its low in late March).
Knowing what was behind the performance of markets is only part of the story; it’s also important to understand the mechanics. The place to start is with the central banks, which were instrumental in printing the money they needed to inject directly into the financial markets by purchasing bonds and other assets on a scale never seen before. As of Nov. 30, the collective balance sheet assets of the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England stood at 54.3% of their countries’ total gross domestic product, up from about 36% at the end of 2019 and about 10% in 2008, data compiled by Bloomberg show. The Fed alone is pumping at least $120 billion a month into the financial markets through its purchases of fixed-income assets.
The purchases by central banks helped to suppress bonds yields globally, with the average tumbling to below 1% this year, as measured by the Bloomberg Barclays Global Aggregate Index. Not only that, but the amount of bonds with yields below zero surged above $18 trillion, adding to the financial repression suffered by savers since the financial crisis.
Of course, nobody wants to own bonds that pay next to nothing, or even negative rates, unless they have to for regulatory or other reasons. The result has been a scramble for yield, primarily for the debt obligations of companies and others with below-investment-grade credit ratings. Rising demand pushed yields on bonds issued by these companies to a record low 4.59% worldwide on average. Even so-called frontier nations such as Ghana, Senegal and Belarus are benefiting.
Many realize that these low yields don’t offer a lot of compensation in return for lending money to borrowers at higher risk of default. After all, they’re not called “junk bonds” for nothing. Which is why much of the money that landed in the laps of investors this year found its way into the stock market, pushing the global value of stocks to more than $100 trillion for the first time and the average stock price for a member of the MSCI All-Country World Index to a stratospheric 31 times earnings.
All the money created by governments and central banks also raised some hard questions about the true value of currencies. There’s no small number of people who believe foreign-exchange regimes are on the verge of collapsing because of all of the money-printing — not just this year, but since the financial crisis more than a decade ago. This explains much of the stunning rally in Bitcoin and other cryptocurrencies, as well as gold.
While many governments deserve criticism for their response to the pandemic from a social-welfare context, the swift action they took - in conjunction with their central banks - to support their economies warrants praise despite the worries about permanent “moral hazard,” never-ending central bank support of financial markets and the wealth inequality it exacerbated. It will be years, perhaps a generation, before we know whether too much (or perhaps too little?) money was created to support the economy through the pandemic, nurturing the biggest bubble of all time and uncontrollable inflation.
But imagine the alternative if nothing was done.