JPMorgan Acquires One Of U.K’s Top Robo Advisors Nutmeg

JPMorgan is expanding its overseas retail banking and has acquired one of the U.K’s leading robo advisors Nutmeg. The acquisition deal has been finalized for an undisclosed fee, and it will complement the lunch of its standalone digital bank brand in the United Kingdom.

JPMorgan is expanding its overseas banking business

The biggest bank in the US by assets under management JPMorgan Chase is expanding its overseas retail banking business. The bank has decided to acquire Nutmeg, one of the U.K.’s largest robo-advisors, for an undisclosed fee.

Nutmeg is one of the largest robo advisory firms in the U.K, with over £3.5 billion ($4.9 billion) in assets under management. The firm offers numerous investment accounts, including general investments, pensions and ISAs.

The acquisition is expected to complement JPMorgan’s standalone digital bank, which is expected to launch in the U.K before the end of the year.

JPMorgan strengthening its position in the market

The bank made the move to acquire Nutmeg after JPMorgan CEO Jamie Dimon noted that they would be more aggressive in searching for acquisitions that would help them add capabilities. JPMorgan Chase hasn’t been as active as its competitors, such as Morgan Stanley, in this area over the past few years.

Morgan Stanley acquired E-Trade and Eaton Vance for $20 billion last year, allowing it to challenge other top investment banks in the United States. Sanoke Viswanathan, CEO of international consumer at JPMorgan, said, “We are building Chase in the U.K. from scratch using the very latest technology and putting the customer’s experience at the heart of our offering, principles that Nutmeg shares with us.”

JPM stock chart. Source: FXEMPIRE

JPMorgan’s stock has performed excellently so far this year. JPM began trading at $124 at the start of the year, but it is up by over 20% to currently trade above $150. However, JPM’s price is down by 1.4% so far today despite the Nutmeg acquisition news.

JPMorgan Chase Could Sell Off to 140

Dow component JPMorgan Chase and Co. (JPM) could trade lower in coming weeks after CEO Jamie Dimon warned the banking giant will book about $6 billion in second quarter trading revenue, down 38% over the same period in 2020. Citigroup Inc. (C) CFO Mark Mason reiterated this bearish theme, warning about a 30% decline. Windfall revenue in these divisions bolstered profits during the pandemic, keeping a floor under the banking industry’s equity prices.

Mixed Catalysts Heading Into Third Quarter

Federal Reserve Chairman Jerome Powell eased investor anxiety on Wednesday, declaring the U.S. economy had recovered faster than expected, setting the stage for interest rate hikes that have been off-the-table during the pandemic.  Higher rates steepen the spread between the prices that banks pay for capital and the prices paid by corporations seeking loans, improving profits. However, higher rates can also curtail lending volumes, especially after two or three hikes.

Dimon ended his comments on an upbeat note, reminding listeners that “The quarter last year was exceptional. The last quarter is exceptional. This quarter is what I call more normal…which is still pretty good.” Meanwhile, Mason examined reasons for the surge, noting “If you think back to the second quarter of 2020, at least for Citi, we were looking at Markets revenues back then that were up 50%. We had seen record levels of debt issuances from our clients.”

Wall Street and Technical Outlook

Wall Street consensus on JPMorgan remains bullish despite mixed catalysts, with an ‘Overweight’ rating based upon 15 ‘Buy’, 2 ‘Overweight’, 6 ‘Hold’, and 1 ‘Underweight’ recommendation. In addition, 3 of 27 analysts recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $110 to a Street-high $200 while the stock is set to open Thursday’s session more than $15 below the median $171 target.

A JPMorgan uptrend topped out at 141 in January 2020, ahead of a steep pandemic decline. The subsequent uptick reached the prior high in January 2021, yielding a February breakout that added 26 points into early June’s all-time high at 167.44. The pullback since that time has sliced through the 50-day moving average while accumulation has dropped to a 4-month low. This price action raises odds for downside that could offer a buying opportunity in the low 140s.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

How Will EU Ban on 10 Banks From Bond Sales Impact Markets and Banks?

Here’s what the move means for EU debt sales, bond markets and the affected banks:

WHICH BANKS ARE AFFECTED?

Banks from all corners of the world are affected: U.S. lenders JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. as well as British peers Barclays Plc and NatWest Group Plc are on the list.

In continental Europe, Deutsche Bank AG, Natixis SA and Credit Agricole SA and UniCredit SpA are affected. Plus Japan’s Nomura Holdings Inc.. All banks declined to comment.

All on the list of 39 primary dealers responsible for managing debt sales — syndicated and auctioned — for the bloc and managing its debt trading in the secondary market.

Many are Europe’s go-to banks in the public sector bond market; seven are among the top 10 fee earners from syndicated debt sales in this market since 2020, according to Dealogic.

WHAT DID THEY DO?

The ban relates to lenders found being part of three cartels in the past three years. One saw a number of banks fined over tinkering in FX spot markets between 2007-2013. Another one found a number of banks colluded on trading strategies and pricing between 2010-2015 on public sector bonds – debt issued by government-linked institutions. A third one related to a cartel of traders at various banks in the primary and secondary market for European government bonds.

HOW BIG WILL FEE LOSSES BE?

Sitting out from syndications, where investment banks are hired by an issuer to sell debt directly on to end investors, means losing out on lucrative fees. Banks netted 20 million euros – 0.1% of the 20 billion euros – in fees from Tuesday’s debut bond, according to Reuters calculations.

Fees vary with debt maturities; the longer the bond, the higher the fees.

An average of its fees across all maturities for the remaining 60 billion euros of this year’s long-term debt issuance would translate into a pool of another 66 million euros if all that debt were to be syndicated, Reuters calculations showed. Considering it will be divided among all banks participating, that’s a relatively small amount compared to the $224 million top earner JPMorgan alone reaped from syndicated European public sector debt sales since the start of 2020, according to Dealogic.

The EU also pays smaller fees for its recovery fund debt than European sovereigns. However, it currently issues all its debt through syndications and will rely on them much more heavily than sovereigns even after auctions start in September, meaning it is a fee source banks won’t want to miss out on.

Exclusion also means smaller lenders could see their fee share increase. Graphic: EU syndication fees: https://fingfx.thomsonreuters.com/gfx/mkt/azgvooddjvd/4Xyrm-eu-syndication-fees-for-recovery-fund-bonds.png

HOW LONG WILL THE BAN LAST?

No timeline has been given. EU Budget Commissioner Johannes Hahn said the commission would work through information provided by banks on how they addressed the issues “as fast as possible”.

Sources told Reuters some banks already submitted information, with the remaining ones expected to follow soon. This could mean some of the banned banks could get the green light to rejoin bond sales, the sources said.

A senior debt banker at a primary dealer not banned said he expects at least a few of the banks to be re-admitted by September, when EU auctions begin.

WILL IT HIT LIQUIDITY?

ECB bond buying has zapped some liquidity in the bloc’s fixed income markets. Liquidity matters to investors, making it easier and cheaper to transact.

Syndication fees are a key factor that motivate banks to participate in auctions that are much less lucrative but crucial to maintain liquidity.

European governments have lost primary dealers in recent years as banks have judged the business to be less profitable.

And having less major banks left to underwrite its syndications could also pose risks for the EU.

(Reporting by Yoruk Bahceli, Abhinav Ramnarayan, Dhara Ranasinghe and Iain Withers in London, John O’Donnell in Frankfurt and Foo Yun Chee in Brussels; writing by Karin Strohecker; Editing by Chizu Nomiyama)

 

Why Citigroup Stock Is Down By 4% Today

Citigroup Stock Declines As Company Warns That Trading Revenue Would Fall By 30%

Shares of Citigroup gained additional downside momentum and continued their pullback after the company warned investors that its trading revenue would likely decline by about 30% compared to previous year’s levels.

Currently, analysts expect that Citigroup will report earnings of $9.06 per share in 2021. The company’s earnings are projected to decline to $8.25 per share in 2022, so the stock is trading at less than 9 forward P/E which is cheaper compared to peers like Bank of America or JP Morgan.

Citigroup’s shares are up by about 15% this year despite the recent pullback as traders bet that higher interest rates would provide support to financial companies.

The stock suffered a sell-off in June as Treasury yields moved lower, but the situation may change quickly after today’s Fed Interest Rate Decision.

What’s Next For Citigroup Stock?

The near term dynamics of Citigroup stock and shares of other financial companies will depend on Fed’s comments today. If Fed reiterates its dovish message, Treasury yields may move lower, which will be bearish for financial stocks.

In case Fed hints that it is worried about inflation, markets will start to price in the risks of higher interest rates, which will provide support to financial stocks.

It should be noted that Citigroup remains attractively valued compared to many stocks in the current market environment. However, analyst estimates call for lower earnings in 2022, which may serve as an obstacle on the stock’s way up unless there are other positive catalysts.

In this light, the results of today’s Fed’s meeting will likely serve as the main catalyst for the stock until the company provides its second-quarter results on July 14. In fact, dynamics of Treasury yields and Fed’s view of future interest rates will be more important for Citigroup stock compared to the company’s own financial results.

For a look at all of today’s economic events, check out our economic calendar.

Will Amazon Surpass Walmart As The Largest Retailer? JPMorgan Thinks So

Amazon has experienced amazing growth over the past year, and JPMorgan Chase now believes it will surpass Walmart as the largest retailer in the United States.

Amazon’s 2020 growth makes it a Buy

One of the companies to experience huge growth during the pandemic is Amazon. The retail giant dominated the market thanks to its numerous delivery power. As such, JPMorgan now estimates that it would surpass Walmart to become the leading retailer in the United States by next year.

In its analysis of Amazon, JPMorgan analyst Doug Anmuth reiterated that Amazon is one of the leading picks. He told clients Amazon could cross a major milestone next year and surpass Walmart to become the top retailer in the United States. As such, he rated Amazon as a Buy, with the stock currently trading at $3,376 per share.

AMZN chart. Source: FXEMPIRE

JPMorgan said, “The dramatic growth of e-commerce over the past 18 months has accelerated Amazon’s rise to dominance, and even the largest traditional retailer may soon fall behind.”

The prediction came after a stellar 2020 for Amazon, where its e-commerce business helped it catch up to Walmart in the US retail game. In 2019, Amazon had a 6.8% share of US retail sales while Walmart had an 8.9%. However, Amazon’s share jumped to 9.2% last year while Walmart went ahead to 9.3%.

Amazon’s rally came due to the pandemic, causing huge demand for e-commerce services. As of 2020, Amazon had a 51.2% share of e-commerce sales in the United States, while Walmart only had 5.6%.

AMZN dips despite positive analysis

Amazon’s stock (AMZN) is performing poorly at Tuesday’s pre-market trading session despite the Buy recommendation from JPMorgan. At the time of this report, AMZN is trading at $3,369.43, down by 0.43% in the pre-market trading session.

WMT chart. Source: FXEMPIRE

Walmart’s stock (WMT) isn’t fairing any better in the market. WMT is down by 0.50% over the past few hours, and it is currently trading at $139.86 per share.

Year-to-date, Amazon is the better performer. AMZN began the year trading at $3,340 and has added roughly $30 since then. Meanwhile, WMT’s price has declined year-to-date, from $144 to $139.

Financials Look Ripe For A Reversal

The financials and banking stocks have been some of the best performing of the reflation trade since the second half of 2020. Banks in particular have benefitted handsomely from the rise in yields and steepening of the yield curve. Since last October, the KBE banks ETF is up roughly 100%, rewarding investors who saw fit to take advantage of the immense value on offer at the time. However, there are a number of signs suggesting now may be a prudent opportunity for investors to begin to take profits and redeploy capital elsewhere.

Firstly, from a valuation perspective, the group can no longer be considered cheap on a relative or absolute basis. Of the “big four” banks, JP Morgan Chase and Bank of America are trading at their highest valuations in a decade, as measured by price to book value.

On the whole, we know banks like to make their profits by lending long-term and borrowing short-term. With long-term yields looking to have stalled for the time being, or perhaps even rolling over, the yield curve did not confirm the recent highs in the sector. It looks as though banks may have some catching up to do on the downside.

As banks and financials have largely proven to be a de-facto short-bonds trade of late, the bond market is sending a similar message as the yield-curve.

For the banking sector to continue its outperformance, it needs the tailwind that rising yields provide. With the US 30-year yield recently breaking its uptrend to the downside, it is looking as though this tailwind may be turning into a headwind for the time being. A move down to the 200-day moving average would put the 30-year yield at around 1.9%.

Additionally, there is strong overhead resistance for yields around their current levels. This breakdown coincides with the 30-years recent rejection of said resistance.

Couple this with the fact that small speculators (i.e. the “dumb money”) in the 30-year treasury futures market remain nearly as short as they have ever been, all the while commercial hedgers (i.e. the “smart money”) remain heavily net-long. Such positioning in the past has usually preceded favourable performance for bonds, and thus seen yields fall.

What’s more, we are now entering a seasonally favourable period for bonds and conversely an unfavorable period for yields. This adds to the bearish headwinds for financials.

Turning to the technicals of the financials sector itself, a number of indicators are signaling exhaustion. We are seeing DeMark setup and countdown 9 and 13’s trigger on the daily, weekly and monthly charts. When such exhaustion signals begin to appear on multiple timeframes simultaneously, it is generally a fairly reliable indication a pullback, or at the very least a period of consolidation, is imminent. The 9-13-9 is considered one of the most reliable of the DeMark sequential indicators.

Focusing on the daily chart of the financials sector ETF, we have just seen a breakdown of its ascending wedge pattern. This coincides with bearish divergences in momentum (RSI) and money flow, in conjunction with the aforementioned daily DeMark 9-13-19 sequential sell signals.

A rally to test the underside of the broken trendline could be an attractive point for those looking to take profits, or for those who are so inclined to trade from the short-side. Additionally, seasonality of the financials sector is also signaling that it may be time to take a bearish, or less bullish, stance towards financial stocks.

In summary, the risk-reward setup for banks and financials in the short-term does not appear to be overly favourable, nor do these companies offer the kind value they provided last year. Depending on your intermediate to long-term outlook for the direction of interest rates and whether your are in the inflationary or deflationary camps, a potential pullback may provide an attractive buying opportunity for the inflationist. For the deflationists or for those who believe rates may be peaking, this may be a good time to take profits and redeploy capital in alternative opportunities set to benefit from falling rates.

For a look at all of today’s economic events, check out our economic calendar.

Is The Bitcoin Bear Market Here? JPMorgan Analysts Seem To Think So

The prices of most cryptocurrencies have dropped by nearly 50% in recent weeks, sparking fears that the bull cycle is over and we are at the beginning of a bear market. Analysts at JPMorgan already think the bear market is close.

The Bear Market is Here

JPMorgan strategists have revealed that they think the Bitcoin bear market is getting closer. The leading cryptocurrency’s price has been stuck below the $40k region for the past few weeks and has struggled despite some positive news in the market.

JPMorgan strategists led by Nikolaos Panigirtzoglou said, “We believe that the return to backwardation in recent weeks has been a negative signal pointing to a bear market.” The analysts added that Bitcoin’s relatively depressed share of the total cryptocurrency market cap is another trend that indicates that a bear market might be close.

The strategists based their analysis on the 21-day rolling average of the 2nd Bitcoin futures spread over spot prices. They stated that the backwardation displayed is an unusual development, and it reflects how week Bitcoin demand is from institutional investors at the moment. The analysts pointed out that in 2018 when Bitcoin’s price plunged by 74%, the Bitcoin futures curve was also in backwardation.

Bitcoin has lost a chunk of its market share to altcoins. The leading cryptocurrency currently accounts for roughly 40% of the total crypto market cap, down from 70% at the start of the year. According to some analysts, retail investors shifting to altcoins is another sign that the Bitcoin bear market is close.

BTC/USD pair
BTC/USD chart. source: FXEMPIRE

Bitcoin’s Price Still Trading Below $40k

Bitcoin’s price has been struggling for the past few weeks. The leading cryptocurrency’s price is trading below $40k despite the wave of positive news in the market recently. El Salvador became the first country to officially adopt Bitcoin as a legal tender ad more Latin American countries are looking to make similar moves. The crypto space is also gaining fast adoption, with numerous institutional entities like Interactive Brokers and Victory Capital coming into the market. With the prices still down, it would be interesting to see how the market performs in the coming days and weeks.

Jpmorgan Appoints Goldman, Wells Fargo Execs to Lead Growth Equity Arm

The group, called J.P. Morgan Private Capital, recruited Christopher Dawe from Goldman Sachs Group Inc to lead its technology and consumer growth equity business, and Osei Van Horne from Wells Fargo & Co to lead its investments across industries, particularly those with an ESG focus.

The group’s head is Brian Carlin, who used to be the head of J.P. Morgan’s wealth management solutions. Rick Smith, who previously headed private investments at JPMorgan Chase, a separate division of the bank, will serve as chairman of the group. Meg McClellan will lead private debt.

The group will report to Anton Pil, the global head of alternatives.

(Reporting by Sohini Podder in Bengaluru, additional reporting by Elizabeth Dilts Marshall in New York; Editing by Amy Caren Daniel)

JPMorgan Seeks Regulatory Approval for Full Ownership of Chinese Joint Venture

The Wall Street bank currently owns 71% of the joint venture after buying out one of its business partners in October last year..It now hopes to move to 100% ownership, following Goldman Sachs Group which also is shifting to take full control of it mainland Chinese business.

The news was first reported by Bloomberg News and later confirmed by a spokesman to Reuters.

Securities joint ventures in China typically house investment banking, equities sales, research and fixed income divisions and most of the foreign banks are keen to increase their stakes in the business.

Beijing scrapped foreign ownership limits in the securities and mutual fund industry on April 1 last year.

Outright ownership could allow foreign banks to expand their operations in the multitrillion-dollar Chinese financial sector, and better integrate them with their global businesses.

(Reporting by Scott Murdoch in Hong Kong and Samuel Shen in Shanghai; Editing by Ana Nicolaci da Costa)

JPMorgan Chase Could Hit New Highs After Earnings

Dow component JPMorgan Chase and Co. (JPM) kicks off first quarter earnings season for the banking sector on Wednesday, followed by Citigroup Inc. (C) and Bank of America Corp. (BAC) on Thursday. The western hemisphere’s largest bank is expected to post a profit of $2.94 per-share on $29.96 billion in Q1 2021 revenue. If met, earnings-per-share (EPS) will mark a dramatic 377% profit increase compared to the same quarter in 2020.

Banks Lift into Market Leadership

Many U.S. banks have broken out above 2018 resistance in reaction to rising interest rates that should bolster industry profits for several years at a minimum. Historically speaking, rising rates are bullish for banks in the early phases of an economic boom but that tailwind dissipates as soon as rates get too high to support growth. That could happen before the next presidential election, given the current rate trajectory and trillions of printed dollars being handed out to U.S. citizens.

CEO Jamie Dimon sounded the alarm in a shareholder letter last week, warning “In an inflationary case, fiscal and monetary policy may very well be at odds. Also in this case, the cost of interest on U.S. debt could go up fairly dramatically making things a little worse. Rapidly raising rates to offset an overheating economy is a typical cause of a recession. One other negative: In this case, we would be going into a recession with an already very high U.S. deficit.”

Wall Street and Technical Outlook

Wall Street consensus has dropped to an ‘Overweight’ rating in response to Morgan’s 23% year-to-date return, based upon 16 ‘Buy’, 2 ‘Overweight’, 6 ‘Hold’, 1 ‘Underweight’, and 2 ‘Sell’ recommendations. Price targets currently range from a low of $95 to a Street-high $187 while the stock ended Friday’s session about $9 below the median $165 target. There’s plenty of room for upside in this configuration, especially if Q1 earnings results exceed expectations.

The stock broke out above the 2000 high in the mid-60s in 2016 and entered a powerful uptrend that stalled above 140 at the end of 2019. It plummeted to a three-year low during the pandemic decline and turned higher in a two-legged recovery that finally reached the prior high in January 2021. Morgan then carved the handle in a cup and handle breakout pattern and took off in a rally that could easily top 200 by the fourth quarter.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Earnings to Watch Next Week: JPMorgan, Goldman, PepsiCo, BofA, Citigroup and Delta Airlines in Focus

Earnings Calendar For The Week Of April 12

Monday (April 12)

Ticker Company EPS Forecast
HDS HD Supply Holdings $0.39

Tuesday (April 13)

Ticker Company EPS Forecast
FAST Fastenal $0.37
HCSG Healthcare Services $0.28

Wednesday (April 14)

IN THE SPOTLIGHT: JPMORGAN CHASE, GOLDMAN SACHS

JPMORGAN CHASE: The leading global financial services firm with assets over $2 trillion is expected to report its first-quarter earnings of $2.06 per share, which represents year-over-year growth of over 290% from $0.78 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of over 6%.

The New York City-based investment bank would post revenue growth of about 6% to around $29.8 billion.

“We expect JPMorgan to likely beat the consensus estimates for revenues and earnings. The bank has outperformed the consensus estimates in each of the last three quarters, primarily driven by a jump in the Corporate & Investment Banking segment led by higher sales & trading and investment banking revenues. However, the above growth was partially offset by some weakness in the Consumer & Community Banking segment due to the lower interest rates environment. We expect the sales & trading and investment banking revenues to drive the first-quarter FY2021 results as well,” noted analysts at TREFIS.

“Further, recovery in bond yields over the recent months is likely to benefit core-banking revenues. Additionally, JPM released $2.9 billion from its loan-loss-reserve in the fourth quarter, suggesting some improvement in the perceived loan default risk. We expect the same momentum to continue in the first quarter. Our forecast indicates that JPMorgan’s valuation is around $143 per share, which is 7% lower than the current market price of around $154.”

GOLDMAN SACHS: The leading global investment bank is expected to report its first-quarter earnings of $10.10 per share, which represents year-over-year growth of about 225% from $3.11 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of nearly 50%.

The New York City-based bank would post revenue growth of over 31% to around $11.5 billion.

“We expect Goldman Sachs to outperform the consensus estimates for revenues and earnings. The bank has reported better than expected results in each of the last three quarters, mainly due to its strength in sales & trading and the investment banking space,” noted equity analysts at TREFIS.

“Despite the economic slowdown and the COVID-19 crisis, the company reported strong revenue growth in 2020 driven by a 43% y-o-y jump in global markets division (sales & trading) and a 24% rise in the investment banking unit. We expect the same trend to drive the first-quarter FY2021 results as well. Our forecast indicates that Goldman Sachs’ valuation is around $366 per share, which is 12% more than the current market price of around $327.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE APRIL 14

Ticker Company EPS Forecast
TSCO Tesco £8.15
INFY Infosys $0.16
JPM JPMorgan Chase $3.06
GS Goldman Sachs $10.12
BBBY Bed Bath & Beyond Inc. $0.31
FRC First Republic Bank $1.54
SJR Shaw Communications USA $0.26
WFC Wells Fargo $0.69
ACI AltaGas Canada $0.51

 Thursday (April 15)

IN THE SPOTLIGHT: PEPSICO, BANK OF AMERICA, CITIGROUP, BLACKROCK, DELTA AIR LINES

PEPSICO: The company which holds approximately a 32% share of the U.S. soft drink industry is expected to report its first-quarter earnings of $1.12 per share, which represents year-over-year growth of about 4% from $1.07 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of nearly 6%.

The U.S. multinational food, snack, and beverage corporation would post revenue growth of over 5% to about $14.6 billion.

“Based on the 2020 performance and evolving business conditions, the company provided guidance for 2021. It expects organic revenue growth in the mid-single digits, with core constant currency EPS growth in high-single digits. It expects a core effective tax rate of 21%. Additionally, the company expects currency tailwinds to aid its revenues and core EPS by 1 percentage point in 2021, based on the current rates,” noted analysts at ZACKS Research.

“Further, it remains committed to rewarding its shareholders through dividends and share buybacks. It anticipates total cash returns to shareholders of $5.9 million, including $5.8 million of cash dividends and $100 million of share repurchases. The company recently completed its share-repurchase authorization and expects no more share repurchases through the rest of 2021.”

BANK OF AMERICA: The Charlotte, North Carolina-based investment bank is expected to report its first-quarter earnings of $0.66 per share, which represents year-over-year growth of over 60% from $0.40 per share seen in the same quarter a year ago. In the last four consecutive quarters, on average, the company has delivered an earnings surprise of over 9%.

However, the United States’ second-largest bank would see a revenue decline of more than 4% to around $21.7 billion.

CITIGROUP: The New York City-based investment bank is expected to report its first-quarter earnings of $2.52 per share, which represents year-over-year growth of 140% from $1.05 per share seen in the same quarter a year ago. But Citigroup’s revenue would decline about 12% to around $18.3 billion.

BLACKROCK: The world’s largest asset manager with $8.67 trillion in assets under management is expected to report its first-quarter earnings of $7.87 per share, which represents year-over-year growth of over 19% from $6.60 per share seen in the same quarter a year ago. The New York City-based bank would post revenue growth of about 16% to around $4.3 billion.

DELTA AIR LINES: The Airline company which provides scheduled air transportation for passengers and cargo throughout the United States and across the world is expected to report a loss for the fifth consecutive time of $2.84 in the first quarter of 2021 as the airlines continue to be negatively impacted by the ongoing COVID-19 pandemic and travel restrictions. That would represent a year-over-year decline of over 450% from -$0.51 per share seen in the same quarter a year ago.

The Atlanta-based airline’s revenue would decline more than 50% to around $3.9 billion.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE APRIL 15

Ticker Company EPS Forecast
CBSH Commerce Bancshares $0.94
PEP PepsiCo $1.12
WIT Wipro $0.07
BAC Bank Of America $0.66
C Citigroup $2.52
UNH UnitedHealth $4.38
HOMB Home Bancshares $0.43
USB US Bancorp $0.95
SCHW Charles Schwab $0.79
TFC Truist Financial Corp $0.93
BLK BlackRock $7.87
JBHT J B Hunt Transport Services $1.22
AA Alcoa $0.41
PPG PPG Industries $1.57
WAL Western Alliance Bancorporation $1.47
TSM Taiwan Semiconductor Mfg $0.93
DAL Delta Air Lines -$2.84
WAFD Washington Federal $0.48

Friday (April 16)

Ticker Company EPS Forecast
CFG Citizens Financial $0.96
BK Bank Of New York Mellon $0.87
PNC PNC $2.70
ALLY Ally Financial $1.13
STT State Street $1.35
MS Morgan Stanley $1.72
KSU Kansas City Southern $1.97

 

Credit Suisse Shaken by Aftershocks of Greensill Insolvency

By Brenna Hughes Neghaiwi and Makiko Yamazaki

The Swiss bank has hired external firms to help with their inquiries in the wake of Greensill Capital’s insolvency, a source familiar with the matter said on Wednesday.

The head of Credit Suisse’s European asset management arm, which sold the Greensill-linked funds to investors, along with two colleagues have temporarily stood aside, the bank said in a memo. Credit Suisse is also taking steps to recover a $140 million loan made to a Greensill company in Australia

Credit Suisse was a key source of funding for the speciality finance firm, selling securities created by Greensill to investors via its asset management arm.

The supply chain financier began to unravel last week after losing insurance coverage for its debt repackaging business, prompting Credit Suisse to freeze funds linked to it.

Switzerland’s second largest bank has hired the external firms in order to expedite the process of returning liquidation proceeds from the funds to investors, the source told Reuters.

Credit Suisse has so far made $3.05 billion worth of payments to investors. It has said further liquidation proceeds will be paid out “as soon as practicable”.

There are questions over the insurance contracts that underpinned Greensill’s securities, which were meant to protect investors in the event of a default.

Japanese insurer Tokio Marine, which provided $4.6 billion of coverage to Greensill credit notes, said that it was investigating the validity of those policies which it inherited when it bought Insurance Australia Group in 2019.

A source familiar with the situation said the policies were directly linked to the $10 billion in funds frozen by Credit Suisse.

In a note to investors on Tuesday, Credit Suisse said it had not been informed of any insurance cancellation “until very recently,” and that existing policies from Insurance Australia had remained unchanged.

Credit Suisse declined comment on the Tokio Marine probe.

If Greensill’s lending practices did not meet standards laid out in the insurance contract or were inconsistent with normal accounting rules, then an insurer would have grounds to challenge whether coverage applied, supply chain experts have said.

Greensill declined to comment.

“We have concerns about the validity of all Greensill policies and are conducting an investigation,” Tokio Marine spokesman Tetsuya Hirano said.

Hirano said that the $4.6 billion worth of coverage attributed to Tokio Marine Holdings in court filings did not reflect the likely loss. He declined to comment further.

In Germany, where Greensill runs a bank, financial regulator BaFin has filed a criminal complaint with prosecutors in Bremen, where the lender is based. The precise details of the complaint are not known.

BLOW FOR CEO

The funds’ troubles are a blow for Credit Suisse boss Thomas Gottstein, who became chief executive in the aftermath of a spy scandal and just as the coronavirus crisis struck.

The asset management unit behind the Greensill strategy was hit by a large impairment charge on a hedge fund investment in the fourth quarter.

Credit Suisse said in a memo sent to employees on Wednesday that Michel Degen, head of asset management in Switzerland and the EMEA region, was temporarily stepping aside along with managers Luc Mathys and Lukas Haas.

Reuters could not immediately reach Degen, Mathys or Haas for comment. According to their LinkedIn profiles, Mathys ran fixed income at the division and Haas worked in credit risk management. Haas was listed as the fund manager for some of the Greensill funds according to various fund websites.

Meanwhile in Australia, two people familiar with the matter said that Credit Suisse had appointed receivers to recover a bridging loan of about $140 million made to a Greensill company.

Credit Suisse was advising Greensill on a potential IPO last year and had lent it the $140 million on expectations the loan be repaid when it listed, one of the people said. Credit Suisse declined to comment and Greensill did not respond to requests for comment.

APOLLO TALKS DERAILED

Greensill was in talks to sell a chunk of its operating business to Athene Holding – an annuity seller which recently merged with Apollo Global Management – but those talks have been derailed after one of the firm’s key technology partners secured a $6 billion credit facility from a pool of banks led by JPMorgan, one source familiar with the matter told Reuters. Taulia, a San Francisco-based financial technology company that had worked closely with Greensill, expressed concern that the Apollo deal would have affected its own business model, which is based on using multiple banks for financing, two separate sources said, speaking on condition of anonymity. In a statement, Taulia confirmed it had held conversations with Apollo over their plans to purchase parts of Greensill, adding Taulia wanted to continue giving clients “flexibility in the source of funding for early payments.”

JPMorgan, an investor in and strategic partner of Taulia, came to its rescue providing $3.8 billion of an overall $6 billion credit lifeline and reducing the need for an emergency deal with Apollo, the first source said. Other banks including UniCredit, which has a commercial partnership with Taulia, are expected to commit capital and top up the U.S. firm’s credit facility, this source said. UniCredit declined to comment.

(Reporting by Brenna Hughes Neghaiwi in Zurich and Iain Withers in London; Additional reporting by Paulina Duran in Sydney, Makiko Yamazaki in Tokyo and Pamela Barbaglia in London; Writing by Alexander Smith; Editing by Carmel Crimmins)

U.S. Market Wrap and Forecast for Wednesday

U.S. equity markets opened higher on the first day of options expiration week and promptly sold off, dropping SP-500 index back into a rising channel in place since November. Bonds lost ground as well, lifting the 30-year yield to the highest high since March 2020. The 10-year Treasury note pushed against 1.3% at the same time, signaling greater conviction about rising inflation as the stimulus bill works its way through Congress.

Banks Lift into Leadership

Credit card delinquencies held firm at elevated levels in January, reflecting continued stress as a result of high unemployment. However, the United States is rapidly turning the corner on the pandemic, with crashing positives set to translate into reopened restaurants and rehired workers. Dow component JP Morgan Chase and Co (JPM) posted an all-time high, lifting above 2018 resistance. Bank sector funds look solid as a rock at 2½ year highs and could easily break out in coming weeks, benefiting from a perfect storm of financial tailwinds.

The SP-500 index is closing in on the 4,000 level, just 16 months after trading above 3,000 for the first time. It took five years to go from 2,000 to 3,000 and 17 years to make the jump from 1,000 to 2,000. Market players who love two-sided price action have been left behind by this relentless uptrend, which will end as soon as the last bear capitulates. However, it’s anyone’s guess when that will happen.

Looking Ahead to Mid-Week

Walmart Inc. (WMT) and hotel chains lead a light reporting calendar during this holiday-shortened week. Marriott International Inc. (MAR) revenue fell 57% in the quarter ending in September and the run-up into year’s end could look even worse, given international lockdowns and quarantines.  MAR and rivals are trading close to 52-week highs despite obvious headwinds but bullishness may be misplaced, given pressure on business travel in the next few years.

Wednesday retail sales are expected to show a minor uptick after better-than-expected holiday sales. Market players will also examine the Fed Minutes for clues about interest rates but Chairman Powell has done a good job telegraphing the central bank’s intention to keep rates low. Taken together with dovish comments by Treasury Secretary Janet Yellen, there’s little reason to suspect that anyone in government will be tapping on the brakes in 2021.

For a look at all of this week’s economic events, check out our economic calendar.

U.S. Market Wrap and Forecast for Friday

Major index benchmarks added to weekly gains ahead of the January Non-Farm Payrolls report. The Russell-2000 small cap index outperformed blue chips, lifting more than 2% to an all-time high. Chip stocks added a few points after Wednesday’s reversal while the 30-year Treasury bond stuck its nose above 2.00% for the first time since March 2020. Fintech issues shined after another strong quarter from market leader PayPal Holdings Inc. (PYPL).

Banks Get Bought

Speculative favorite DraftKings Inc. (DKNG) spiked into October resistance, completing the last leg of a 60-point round trip. High short interest small caps continued to deflate, signaling the demise of last week’s biggest story, which doesn’t seem too important in retrospect. Gamestop Inc. (GME) fell another 42% into the low 50s, marking the lowest low since Jan. 22. More importantly, the stock has dropped 89% off the Jan. 28 peak, trapping many Kool-Aid drinkers.

Dow component JPMorgan Chase and Co Inc. (JPM) surged into a test of January’s all-time high but the stock hasn’t broken out yet because it’s still dealing with tough resistance at the 2020 high above 140. This should be a great year for commercial banks worldwide, with the early stages of an inflationary environment widening the yield curve while generating the strongest tailwinds for the financial sector in more than a decade.

Heading Into the Weekend

Wall Street is looking for Friday’s report to add about 50,000 new jobs, much lower than the 174,000 jobs reported in Wednesday’s ADP release. The divergence between expectations and reality is more important than actual metrics at this juncture because everyone knows that millions are still out of work, waiting for restaurants, fitness centers, and travel destinations to rebuild their businesses after the pandemic runs its course.

Major benchmarks hovered around bull market highs at Thursday’s close, raising the potential for breakouts in coming sessions. The Biden administration may need to pull a few legislative tricks to pass the gigantic stimulus bill but the odds are good and Democrats don’t want to make the same mistake they made at the start of the Obama administration. Specifically, the last president made it clear there’s no advantage in seeking ‘unity’ with the other side of the aisle.

For a look at all of today’s economic events, check out our economic calendar.

Bank Earnings Off to a Rough Start

Even so, the group has booked major gains since November when positive vaccine data from Pfizer Inc. (PFE) triggered a sustained rotation out of COVID-19 beneficiaries and into 2021 recovery plays. As a result, current selling pressure appears technical in nature, driven by overbought readings.

Bond yields are rising while the yield curve steepens, signaling a more favorable banking environment that should generate higher profit margins. Revenue remains a major obstacle, with most quarterly reports so far posting substantial year-over-year revenue declines as a result of the pandemic. Dow component JPMorgan Chase and Co. (JPM) is the only bank of the big three to grow revenue in the quarter, in line with its longstanding market leadership.

JPMorgan Chase

JPMorgan Chase lifted to an all-time high ahead of last week’s strong earnings report and pulled back in a notable sell-the-news reaction. Two days of profit-taking could mark the start of an intermediate correction that targets unfilled gaps at 120 and 126. The Nov. 9 breakout gap between 105 and 110 remains unfilled as well, but that might not come into play until later in the year. When it does, it should mark a low-risk buying opportunity.

Bank of America

Bank of America Corp. (BAC) lost nearly 1% on Tuesday after beating Q4 2020 profit estimates and falling short on revenue, with a 9.9% year-over-year decline. Credit loss provisions dropped sharply during the quarter, indicating less stress on customer budgets as the world adjusts to the COVID-19 pandemic. The company announced it would buy back up to $2.9 billion in common stock in the first quarter, after getting Federal Reserve approval.

Citigroup

Citigroup Inc. (C) has booked the greatest downside of the three banks after beating Q4 2020 earnings by a wide margin on Friday. However, revenue fell 10.2% year-over-year, triggering a shareholder exodus that’s now relinquished nearly 8%. Unlike Bank of America, Citi credit losses went in the wrong direction during the quarter, rising to 3.73% of total loans, compared to just 1.84% in the same quarter last year.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.

US Stock Indices Daily Recap (14th Jan) – Decline, Don’t get Caught

This market reminds me of the days leading up to Christmas Eve 2018. For those who don’t remember, it was a pretty dark day for those trading in financial markets.

I was in the office, alone, and felt particularly responsible for my clients that day. You see, since October of that year, markets had been in a tailspin lower.

“Fundamentals look good, add some exposure to equities here” I found myself saying, more than once. And just when I thought I would get a break, have a half day in the markets, and take a couple days off – boom. Markets fell 2 to 3 percent on the day .

I still remember the feeling, it was like a gut punch. We were unprepared and had added more equity exposure for most of our clients in the prior few weeks. My boss was furious, as I was responsible for allocating hundreds of millions of dollars and we were having our worst quarter ever. I vowed to never be caught unprepared and foolhardy about markets ever again after that quarter.

It was a great lesson, and one that allowed me to flourish in 2020. While I did not foresee a global pandemic, back in January of 2020, things were looking eerily similar to 2018. Markets were frothy, and it appeared that no downside was possible. And I cut exposure for my family assets significantly.

That allowed me to avoid the worst of the pullback, and in March, with an eye on the long run, I took my family assets and picked up several companies at mouth watering valuations, some we hadn’t seen in years.

So far, so good. My old boss would have been pleased – not that it matters…

And now? Well. We’re falling into the same song and dance lately, aren’t we. I have some tips below for those interested, and if you want to know how my personal portfolios have performed, slip into my DMs.

My goal for these updates is to educate you, give you ideas, and help you manage money like I did when I was pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one where I could help people who needed help, instead of the ultra high net worth. Hopefully, you’ll find the below enlightening from my perspective, and I welcome your thoughts and questions.

Although stocks closed mildly lower on Thursday (Jan. 14), stocks have overall had a strong start to 2021.

Be that as it may, I am still concerned about overheated valuations for stocks and the return of inflation. The S&P 500 is trading at its highest forward P/E ratio since 2000, and the 10-year treasury is at its highest level since March. The Russell 2000 is also up over 37% from its 200-day moving average for the first time in its history.

Overvalued stocks combined with inflation returning by mid-year is quite concerning for me. I feel that a correction between now and the end of Q1 2020 is likely.

I like how economist Mohammed El-Erian described the market as a “ rational bubble .” But he did caution against four major risks that could cause a downturn.

The first two risks, and the least likely are the Fed pulling back on monetary stimulus and the potential for corporate bankruptcies. As Fed Chair Jay Powell said himself Thursday though, (Jan. 14) “be careful not to exit too early,”

The last two risks could be riskier.

The first is “some sort of market accident” akin to the dot-com bubble popping in 1999. THIS is what concerns me most right now. The IPO market is simply absurd right now. The DoorDash (DASH) and AirBnB (ABNB) IPOs were ridiculous, and other IPOs are looking more and more like a circus. Lender Affirm went public on Wednesday (Jan. 13) and nearly doubled. Shares of Poshmark also surged more than 130% in its debut Thursday (Jan. 14).

The other risk is the bond market and its effect on inflation. According to El-Erian, “If we were to see another 20 basis point move in yields, that would be bad news.”

Despite my concerns, it is clear to me that investors are loving the potential for a $1.9 trillion stimulus package under President-elect Biden.

Although a short-term tug of war between good news and bad news could continue, it seems to me that investors (for now) would just prefer to ride this out for what could be a strong second half of the year. According to CNBC’s Jim Cramer , there appears to be a lack of “people willing to sell”.

Be that as it may, jobless claims surged to their highest levels since August, and the pandemic is still out of control. According to Goldman Sachs’ Chief Economist Jan Hatzius, U.S. stocks and bond markets could possibly “ take more of a breather ” in the near term.

Generally, corrections are healthy, good for markets, and more common than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). Because we haven’t seen a correction since March 2020, we could be well overdue.

This is healthy market behavior and could be a very good buying opportunity for what should be a great second half of the year.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. I don’t think that a correction above ~20% leading to a bear market will happen.

Hope everyone has a great day. Best of luck, and happy trading!

S&P 500’s Valuation is its Highest in Years

Figure 1- S&P 500 Large Cap Index $SPX

Conventional wisdom would tell you that the S&P had overheated and valuations are crazy. The index’s forward P/E ratio is the highest it’s been in two decades.

But did you just see JP Morgan ’s (JPM) earnings report?

Wow.

The big bank crushed both top and bottom line estimates, and saw a net income growth of 42% from a year ago.

But look deeper into the earnings call, and there are some things to worry about. JP Morgan reported a net benefit of $1.89 billion in credit reserves and is maintaining a reserve topping $30 billion.

Why is this worrying? According to CEO Jamie Dimon, this is because of “significant near term uncertainty” due to the pandemic.

Dimon further added that despite vaccine and stimulus-related optimism, JP Morgan is holding onto these reserves in order to “withstand an economic environment far worse than the current base forecast by most economists.”

That’s a bit troubling.

The S&P 500 has been trading in a streaky matter as of late and reflects the broader tug-of-war between good news and bad. The index seemingly goes on multiple day winning streaks and losing streaks on a weekly basis. After seeing its worst sell-off since October last Monday (Jan. 4), for example, it went on a four-day win streak and broke past 3800.

We are now back below 3800. Although I always cheer stocks going up and hitting records, I want buying opportunities. I would like to see a drop to around 3600 or below before making a BUY call for the long-term.

For now, my near-term outlook is murky. A short-term correction could inevitably occur by the end of Q1 2021, but for now, I am calling the S&P a HOLD. I would like to see a sharp correction before initiating S&P exposure at a discount. There is clear upside for the second half of 2021, but I would just prefer to maximize the upside from a lower level.

For an ETF that attempts to directly correlate with the performance of the S&P, the SPDR S&P ETF (SPY) is a good option.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Biden’s Stimulus Plan Fails To Push Stocks Higher

Traders Take Some Profits Off The Table At The Start Of The Earnings Season

S&P 500 futures are moving lower in premarket trading as traders take some profits off the table after Biden’s stimulus plan announcement.

Yesterday, U.S. President-elect Joe Biden unveiled a new stimulus plan worth $1.9 trillion which included $1,400 stimulus checks. Early reports suggested that the plan would be worth $1.5 trillion – $2 trillion so Biden’s proposal was in line with traders’ expectations.

Meanwhile, Fed Chair Jerome Powell stated that it was not the time to talk about changing the pace of monthly bond purchasing, refuting rumors about potential cuts to the current asset purchase program.

While the additional stimulus package and the continued bond purchases should be supportive for stocks in the longer run, traders have decided to take some chips off the table at the beginning of the earnings season.

Big Banks Report Earnings

Citigroup, JPMorgan Chase and Wells Fargo have provided their quarterly reports today ahead of the market open, marking the beginning of the earnings season.

All three banks easily beat analyst estimates on earnings as they released some of the reserves they built to deal with the consequences of the coronavirus pandemic. Stimulus programs provided support to banks’ customers which allowed banks to enjoy stronger results.

Interestingly, the market is not satisfied with the reports, and banks’ stocks are losing ground in premarket trading. Financials enjoyed a very strong rally in recent months so traders may be using better-than-expected reports as an opportunity to take profits.

Retail Sales Declined By 0.7% In December

The U.S. has just reported that Retail Sales decreased by 0.7% month-over-month in December while analysts believed that they would remain unchanged compared to November levels. On a year-over-year basis, Retail Sales increased by 2.9%.

The slowdown in Retail Sales is due to the negative impact of the second wave of the virus. However, Retail Sales may soon get a boost when additional stimulus checks are delivered.

Later today, the U.S. will provide Industrial Production and Manufacturing Production reports for December. Industrial Production is expected to grow by 0.5% month-over-month while Manufacturing Production is also projected to increase by 0.5%.

For a look at all of today’s economic events, check out our economic calendar.

US Stock Futures Edge Lower as Biden Unveils Stimulus Plan; Major Banks Set to Kickoff Earnings Season

The major U.S. stock index futures are edging lower in the pre-market session on Friday as investors digested the details of President-elect Joe Biden’s $1.9 trillion stimulus plan revealed Thursday evening local time.

In the early trade, futures tied to the benchmark S&P 500 Index were down 21.75 points. Futures associated with the blue chip Dow Jones Industrial Average were off by nearly 200 points and futures connected with the tech-driven NASDAQ Composite Index traded lower by about 45 points.

Biden’s American Rescue Plan

A quick recap of President-elect Joe Biden’s American Rescue Plan, includes increasing the additional federal unemployment payments to $400 per week and extending them through September, direct payments to many Americans of $1,400, and extending federal moratoriums on evictions and foreclosures through September.

The plan also calls for $350 billion in aid to state and local governments, $70 billion for COVID testing and vaccination programs and raising the federal minimum wage to $15 per hour.

Earnings Season Begins

On Friday, investors will get fresh looks at major banks as Wells Fargo, Citigroup and JPMorgan Chase report their fourth quarter earnings.

JPMorgan kicks off fourth-quarter earnings season for big banks on Friday at about 12:00 GMT, followed by releases from Wells Fargo and Citigroup.

Earnings expectations for the fourth quarter have been on the rise, thanks to climbing interest rates and expectations for solid trading and investment banking results.

The biggest U.S. banks (with the exception of Wells Fargo) all saw per-share earnings estimates jump by at least 8% in the past month, according to Barclays analysts Jason Goldberg.

Thursday US Stock Market Recap

Wall Street closed lower on Thursday after turning down late in the session as reports emerged about U.S. President-elect Joe Biden’s pandemic aid proposal following earlier data that showed a weakening labor market.

Of the 11 major S&P sectors, only four closed higher with economically-sensitive energy, up 3%, showing the biggest percentage gains as oil prices rose. The biggest percentage decliner on the day was the information technology sector.

The domestically-focused small-cap Russell 2000 Index closed up 2%, while the Dow Jones Transports Index ended up 1% after both sectors, which are seen as big beneficiaries of stimulus, scaled all-time highs during the day.

Helping the transport index was a 2.5% rise in shares of Delta Air Lines after Chief Executive Ed Bastian forecast 2021 to be “the year of recovery” after the coronavirus pandemic prompted its first annual loss in 11 years.

The S&P 1500 Airlines Index closed up 3.4%.

The Philadelphia Semiconductor Index also hit a record high with a big boost from Taiwan Semiconductor Manufacturing Co Ltd. The chip manufacturer’s U.S. shares closed up 5% after it announced its best-even quarterly profit and raised revenue and capital spending estimates.

For a look at all of today’s economic events, check out our economic calendar.

Markets Surge Despite Unprecedented Violence at U.S. Capitol

In a news-filled day, the Dow Jones hit an all-time high on Wednesday (Jan. 6), despite unprecedented unrest taking place in Washington D.C.

News Recap

  • The Dow climbed 438 points or 1.4% and briefly rose more than 600 points earlier in the day. The S&P 500 also gained 0.6% and hit an intraday record, while the Nasdaq fell 0.6%. The small-cap Russell 2000 surged by nearly 4%.
  • The day began with investors focused on the Georgia U.S. Senate special election runoff . Democrat Raphael Warnock defeated incumbent Republican Kelly Loeffler, with other Democrat Jon Ossoff announced as the winner over incumbent Republican Sen. David Perdue later in the day.
  • With a Democrat sweep in Georgia, the party now has control of the Senate. Although it is a 50-50 split (with two independents) in the Senate, both Democrats win, they have full control because Vice President-elect Kamala Harris will serve as the tiebreaker vote.
  • Many believe that because President-elect Biden, a Democrat, has a House and Senate under Democrat control, he could more easily pass higher taxes and progressive policies that may hurt the market. On the other hand, others believe that this Democrat sweep could bring into effect a larger and quicker stimulus relief bill.
  • The real news of the day was what happened at the U.S. Capitol building. After President Trump (and his family) led a “Stop the Steal” rally in Washington, D.C. to protest Congress’ certification of Joe Biden as the next president, angry MAGA supporters did the unthinkable and stormed the Capitol.
  • Wednesday (Jan. 6) was the first time since 1814 that the Capitol building was physically breached by hostile actors.
  • The invasion of the Capitol occurred after Vice President Mike Pence rejected President Trump’s calls to block Joe Biden’s election confirmation. Shortly after, the Capitol went into full lockdown.
  • Later that night, the Capitol was secured and Congress reconvened to officially certify Biden as the president. The CBOE Volatility Index (VIX) moved higher due to the unrest at the Capitol.
  • Caterpillar (CAT) surged 5.5%, while big banks such as JPMorgan Chase (JPM) and Bank of America (BAC) gained 4.7% and 6.3%, respectively. Other names and sectors that could be aided by Biden’s agenda rose as well such as the Invesco Solar ETF (TAN) which boomed 8.4%.
  • Tech lagged on the day due to fears of higher taxes and higher stimulus potential. Facebook (FB) and Amazon (AMZN) each fell more than 2%, while Netflix (NFLX) dipped 3.9%.
  • The 10-year Treasury note yield topped 1% for the first time since March.

What a newsworthy day Wednesday (Jan. 6) was. What started as a day focused on Senate runoff elections with the balance of Senate power at stake, ended with President-elect Biden being officially confirmed as the next president. But in between? A mob took over the capitol building! Did you ever think you would read that sentence in your lifetime?

Love him or hate him, President Trump is an eccentric character to put it lightly. Scorned, and still convinced that he won the election, Trump and his bruised ego whipped his supporters into a frenzy during a “Stop the Steal” rally and encouraged them to march towards the Capitol and make their voices heard. Somehow the protest turned into a storming of the Capitol after Vice President Mike Pence refused to overturn the election. Pence was later ushered out of the Senate and the Capitol went into lockdown.

What’s truly shocking here is that the markets still went up! In fact, the Dow hit yet ANOTHER all-time high! Whether you like it or not, this has to give you some sort of faith in the resiliency of capitalism,

The results of the Georgia election can be credited for the market surge.

Although some sectors plummeted due to fears of higher taxes and stricter regulations, with full Democrat control of the Presidency, Senate, and House, there is clarity for one, and expectations of further spending and government stimulus.

Goldman Sachs expects another big stimulus package of around $600 billion . While this could be bad for the national debt and have long-term consequences, in the short-term, it could send the economy heating. Small-cap stocks surged as a result.

I still believe that there will be a short-term tug of war between good news and bad news. Many of these moves upwards or downwards are based on emotion and sentiment, and I believe there could be some serious volatility in the near-term. Although markets on Wednesday (Jan. 6) may have been overly excited from the “Blue Wave” thanks to Georgia, consider this: the Capitol was invaded and the pandemic is still wreaking havoc! Even though the markets gained and the 10-year treasury ticked above 1% for the first time since March, the VIX still rose which means that fear is on the rise.

There was no pullback to end 2020 as I anticipated, but I still believe that markets have overheated in the short-term, and that between now and the end of Q1 2020 a correction could happen.

Carl Icahn seemingly agrees with me, and told CNBC on Monday (Jan. 4) that “in my day I’ve seen a lot of wild rallies with a lot of mispriced stocks, but there is one thing they all have in common. Eventually they hit a wall and go into a major painful correction.”

National Securities’ chief market strategist Art Hogan also believes that we could see a 5%-8% pullback as early as this month.

I believe though that corrections are healthy and could be a good thing. Corrections happen way more often than people realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017). I believe we are overdue for one since there has not been one since the lows of March 2020. This is healthy market behavior and could be a very good buying opportunity for what I believe will be a great second half of the year.

While there will certainly be short-term bumps in the road, I love the outlook in the mid-term and long-term once vaccines become more widely available. The pandemic is awful right now, and these new infectious strains out of the U.K. and South Africa are quite concerning. But despite this, I believe the positive manufacturing data released on Tuesday (Jan. 5) is a step in the right direction, especially considering all the restrictions that most countries are living through.

The consensus is that 2021 could be a strong year for stocks. According to a CNBC survey which polled more than 100 chief investment officers and portfolio managers, two-thirds of respondents said the Dow Jones will most likely finish 2021 at 35,000, while five percent also said that the index could climb to 40,000.

Therefore, to sum it up:

While there is long-term optimism, there are short-term concerns. A short-term correction between now and Q1 2021 is very possible. But I do not believe, with conviction, that a correction above ~20% leading to a bear market will happen.

Can Small-caps Own 2021?

Small-caps are the comeback darlings of the week. Although I believed that the Russell 2000’s record-setting run since the start of November was coming to an end, it has rallied over 5% in the last two trading days. Thanks to a Democrat sweep in Georgia and hopes of further economic stimulus, small-cap stocks have climbed back towards record highs.

I love small-cap stocks in the long-term, especially as the world reopens. A Democrat-dominated Congress could help these stocks too. But I believe that in the short-term, the index, by any measurement, has simply overheated. Before Jan. 4, the RSI for the I WM Russell 2000 ETF was at an astronomical 74.54. I called a pullback happening in the short-term due to this RSI, and it happened. Well now the RSI is back above 72, and I believe that a bigger correction in the near-term could be imminent.

Stocks simply just don’t always go up in a straight line, and that’s what the Russell 2000 has essentially been between November and December.

What this also comes down to is that small-caps are more sensitive to the news – good or bad. I believe that vaccine gains have possibly been baked in by now. There could be another near-term pop due to hopes of further stimulus, but I believe that it’s likely possible that small-caps in the near-term could trade sideways before an eventual larger pullback.

I truthfully hope small-caps decline a minimum of 10% before jumping back in for long-term buying opportunities.

SELL and take Wednesday’s (Jan. 6) profits if you can- but do not fully exit positions .

If there is a pullback, this is a STRONG BUY for the long-term recovery.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Dow, S&P Dip Again on Lockdown Fears

Stocks closed largely down on Monday (Dec. 14) as fears of stricter lockdowns outweighed vaccine optimism.

News Recap

  • The Dow Jones closed lower by 185 points, or 0.5% after earlier rising by as much as 200 points and hitting a record intraday high. The S&P 500 also declined by 0.4%, while the Nasdaq outperformed and gained 0.5%. The small-cap Russell 2000 once again rose, gaining 0.26%.
  • Although the day started with optimism as Pfizer began the rollout of its vaccine, comments from New York City Mayor Bill De Blasio put pressure on the Dow and S&P, and spooked investors about further lockdowns. De Blasio warned earlier in the day that New York could experience a “full shutdown” soon, due to infection levels not seen since May.
  • There is some cautious optimism that some sort of stimulus could be passed before the end of the year, however, congress remains deeply divided on several fronts. Namely, these partisan divides stem from liability protections for businesses, the scope of state and local aid, and weekly unemployment benefits.
  • We have reached the deadliest weeks of the COVID-19 pandemic. More than 300,000 total COVID-related deaths have now been confirmed in the U.S., with over 16 million confirmed cases.
  • After the U.S. FDA. officially cleared Pfizer (PFE) and BioNTech’s (BNTX) vaccine last Friday (Dec. 11), the roll-out officially began on Monday (Dec. 14). The first doses were administered to healthcare workers and nursing home staffers. Approximately 2.9 million doses were shipped to 636 sites across the country. Pfizer also said it would roll out a second batch of 2.9 million doses shortly after this initial batch. The FDA is also slated to publish its assessment on Moderna’s vaccine this week, before mass deployment.
  • Despite the start of the vaccine roll-out, shares of Pfizer and BioNTech both sharply fell 4.65 and 14.95%, respectively.
  • Companies dependent on an economic reopening lagged the “stay-at-home” and tech winners from early on in the pandemic. United Airlines (UAL) dropped 3.4% and Chevron (CVX) fell 3.26% compared to Netflix (NFLX) which gained over 3.8%, and Amazon (AMZN) which popped more than 1%.
  • Tesla (TSLA) also surged 4.90% as investors anticipate its inclusion into the S&P 500 after this week.

While the short-term may see some pain and/or mixed sentiment, the mid-term and long-term optimism is certainly very real. Overall, the general consensus between market strategists is to look past short-term painful realities and focus more on the longer-term – a world where COVID-19 is expected to be a thing of the past and we are back to normal.

According to Robert Dye, Comerica Bank Chief Economist : “I am pretty bullish on the second half of next year, but the trouble is we have to get there…As we all know, we’re facing a lot of near-term risks. But I think when we get into the second half of next year, we get the vaccine behind us, we’ve got a lot of consumer optimism, business optimism coming up and a huge amount of pent-up demand to spend out with very low interest rates.”

Other Wall Street strategists are bullish about 2021 as well. According to a JPMorgan note to clients released on Wednesday (Dec. 9), a widely available vaccine will lift stocks to new highs in 2021:

“Equities are facing one of the best backdrops for sustained gains next year,” JPMorgan said. “We expect markets to be driven by recovery from the COVID-19 crisis at the back of highly effective vaccines and continued extraordinary monetary and fiscal support.”

JPMorgan’s S&P 500 target for 2021 is 4,400. This implies a nearly 20% gain.

On the other hand, for the rest of 2020, and maybe early on into 2021, markets will wrestle with the negative reality on the ground and optimism for an economic rebound.

Additionally, the rally since election week invokes concerns of overheating with bad fundamentals. Commerce Street Capital CEO Dory Wiley advised caution in this overheated market. He pointed to 90% of stocks on the NYSE trading above their 200-day moving average as an indication that valuations might be stretched:

“Timing the market is not always well-advised and paring back can miss out on some gains the next two months, but after such good returns in clearly a terrible fundamentals year, I think taking some profits and moving to cash, not bonds, makes some sense here,” he said.

In the short-term, there will be some optimistic and pessimistic days. Some days, like Monday (Dec. 14), will reflect what the broader “pandemic” trend has been – cyclical and recovery stocks lagging, and tech and “stay-at-home” stocks leading. On other days (and in my opinion this will be most trading days), markets will trade largely mixed, sideways, and reflect the uncertainty. However, if a stimulus deal passes before the end of the year, it could mean very good things for short-term market gains. It is possible that there could be a minor compromise reached before the end of the year, however, a more large-scale comprehensive package may not be agreed to until 2021.

In the mid-term and long-term, there is certainly a light at the end of the tunnel. Once this pandemic is finally brought under control and vaccines are mass deployed, volatility will stabilize, and optimism and relief will permeate the markets. Stocks especially dependent on a rapid recovery and reopening, such as small-caps, should thrive.

Due to this tug of war between sentiments, it is truly hard to say with conviction whether another crash or bear market will come.

Therefore, to sum it up:

While there is long-term optimism, there is short-term pessimism. A short-term correction is very possible. But it is hard to say with conviction that a big correction will happen.

On Pessimistic Days, Tech is Crucial…But There are Concerns

Tech shares led the markets on Monday (Dec. 14) and reflected a return of the “stay-at-home” trade – possibly due to Mayor De Blasio’s “shut down” comments about New York City. However, I believe these are short-term moves rather than a return of long-term trends. I do not believe there is “market nostalgia” for the way the indices traded largely from April through the end of October.

Although I believe tech exposure is important during pessimistic trading days, I have many concerns about tech valuations and their astoundingly inflated levels. Last week’s IPOs of DoorDash (DASH) and AirBnB (ABNB) reflect this and invoke traumatic memories of the dotcom bubble era. I believe that more pullbacks along the lines of last Wednesday (Dec. 9) are inevitably coming in the short-term and would make me feel far more confident about initiating tech positions at lower valuations for the long-term.

After exceeding an overbought RSI level of 70, the pullback last Wednesday (Dec. 9th) brought it back down to a healthier level. While its current RSI of 63.30 is still pretty high, it is not quite overbought and still a hold. But monitor this . If the index goes on another bull-run and exceeds 70, then you may want to consider selling some. While an overbought RSI does not automatically mean a trend reversal, it does not help the overvaluation of the market and possible correction. The NASDAQ’s pullback last Wednesday (Dec. 9), after it exceeded a 70 RSI, reflects that.

The decline in volume since the start of the month is also quite concerning for volatility purposes. Low volume, especially a declining trend, means that there are fewer shares trading. Lower volume also means less liquidity across the index, and an increase in stock price volatility.

On pessimistic days, like Monday (Dec. 14), having NASDAQ exposure is crucial because of all the “stay-at-home” stocks that trade on the index. However, positive vaccine news always induces the risk of downward pressure on tech names – both on and off the NASDAQ. But what concerns me most are sharp sell-offs due to overheating and mania. Don’t ever let anyone tell you “this time is different” if fears of the dot-com bubble are discussed. History repeats itself – especially in markets.

It is very hard to say with conviction to sell your tech shares though. A further correction would not shock me in the least. But again, there is so much unpredictability right now, and truly anything could happen. The one thing I can confidently say though, is that if the RSI exceeds 70 again, then you should consider selling. For now, however, the NASDAQ stays a HOLD .

For an ETF that attempts to directly correlate with the performance of the NASDAQ, the Invesco QQQ ETF (QQQ) is an excellent option.

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For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

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All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.