Vulgar Display of Power

 

As you might have guessed from the title, I’m going to touch on China a bit here. This is a complex situation, but not all that surprising considering the tensions over the previous few years. The Chinese Communist Party seems to want to make sure that Chinese companies and their leaders know who’s in charge. That said the government has started to pull their punches a little. They have noted that they will consider the market impact before introducing new policies in the future.

Below we’re looking at the top 30 holders of MSCI China stocks on the left and the same for the battered KWEB names on the right.

In non-China news last week, volume for equities was pretty light. Chairman Powell put the market at ease on Wednesday when he noted that while the US economy has come a long way, it still has a ways to go and the Fed is in no rush to change its dovish policy. That said we’re not fully clear of the land mines Washington is putting out there. Next up is finding a way through the debt ceiling debates. The GOP will probably try to flex its muscle. Remember spending and debt are only a problem when your party is not in control. This is a huge game of chicken.

Earnings Watch

Last week

The mega cap tech names really didn’t disappoint when it came to the earnings, but they didn’t really get too much love. Alphabet traded up nicely. Microsoft opened higher, but ended up slightly down by the end of the day. The other big names Apple, Amazon, and Facebook were each off a decent amount. I’ve also highlighted some of the names that moved most. Tilray and Meritage Homes had great numbers, but LendingClub was the star to the upside ending the week up 50% on World Record type numbers. Citrix Systems, Lamb Weston, and Cheesecake Factory all ended their day down more than 13%. Cheesecake ended the week down almost 18%.

This Week

We’ve still got a decent volume of announcements on the calendar this week in the Americas. It’s less than the huge numbers that reported last week but here is the summary of the major indices:

• SPX = 178 names / 14% of Market Cap
• Russell 1000 = 350 names / 16% of Market Cap
• Russell 2000 = 779 names / 43% of Market Cap
• S&P / TSX = 79 names / 205 of Market Cap

We’ve got some big individual names reporting. We’ll hear from Berkshire, Moderna, GM, among a bunch of others. One name whose data grabbed my attention was Square. They have 2.8% Predicted Surprise from Starmine and also have seen the estimates jump quite a bit recently. There is one bold estimate to the downside that has me double thinking trading this to the upside.

Equity Capital Markets (via Refinitiv’s IFR)

I didn’t get too much time to pay attention to this last week, so I’m going to share the highlights from IFR’s ECM Briefing note. July priced 48 IPOs of $50M or more for a total of %15.8B in proceeds. The average return from this week’s pricings was 11.8%. Led by Icosavax, which ended up 65.7% The big disappointment was Dole’s down 9.4% day. The biggest name was obviously Robinhood. It was off more than 8% on it’s opening day, but came back from off more than 12%. Word that Cathie Wood was buying probably helped a bit. One other event to be aware of is the Baker Hughes announced $2B buyback authorization. That’s about 9% of shares outstanding.

This week we’ve got nine names on the IPO schedule with a few of decent size. Grill maker Weber is looking to raise about $800M, WCG Clinical is estimated to raise $750M, and Healthcare Royalty is also about $800M.

Best of the Week

Everybody is looking to data science to help make them better. This first link is a short article that notes a few highlights from the NT survey. I went to NT to get the report and the article focuses on the top points, but there’s a treasure trove of data in it. Below are a few of the charts that I found useful. I highly recommend going to the survey page and downloading it. There’s a ton of commentary from their team on these charts as well. It’s a really well done report. I just want to highlight a few numbers from the charts below.

• Only 51% have a methodology to rank/score ideas to help prioritize research
• Only 12% said they used a research management platform that was not on a spreadsheet
• 52% want to make their best ideas repeatable
• Only 34% use company financial data vs 59% using ESG data
• 41% are pursuing because of client pressure, but only 31% view as a new business factor
• Less than half (44%) use a Research Mgmt System for notes

As the conclusion notes, adding data science is both a challenge and opportunity.

Almost all buy-side firms use data science to optimize performance, Northern Trust finds

THE ART OF ALPHA: IT’S ALL ABOUT INVESTMENT DATA SCIENCE

Best of the Rest

This Zack’s podcast has a value theme and it is geared toward the retail investor, but some of the questions and themes they discussed have really been driving equity markets of late.

Should You Sell Your Chinese Stocks? - Listening time: 36 minutes

This article from the South China Morning Post is mostly behind a paywall, but I wanted to share because we get enough of the theme from just the open and first few paragraphs. The State-run media ran articles assuring Chinese stocks. After the recent crackdown of the Chinese Communist Party and Chinese market selloff, it appears there’s an attempt to quell the panic that’s setting in for local Chinese investors.

China’s state media moves to reassure rattled investors after rout wiped US$574 billion off stock market

This is something I’m surprised took this long. Too many companies circumvent the US security laws here. Carson Block thinks the Chinese government is telling its companies to find a way to exit the US public markets before you get forced out. He doesn’t think they will let their companies comply with the US regulators. There’s already a rumor that recently listed Didi is considering going private. While I think this is probably a lock to happen, I am wondering what happens with something like the Chinese weights in MSCI World index, we saw above some of the huge dollar amounts US investors have in Chinese equities.

Is the End Near for U.S.- Listed Chinese Companies? Probably, Says Carson Block

This chart from Goldman Sachs via The Market Ear caught my eye. It shows how the current sell off compares to other Asian crisis events. The post also showed the FXI volatility index and the one month implied vol for the CNH.

The China crisis in two pics

This report is from last month, but I figured I’d share it anyway as I just found it and the article above has me wondering about this sort of info. Blackrock has this Geopolitical Risk Indicator (BGRI) and it looks at the market’s attention to the geopolitical risks. The piece notes and you can see in the chart below the indicator has been trending lower since the change in the US administration. What this notes though is that any shocks would likely catch investors by surprise because they’re not in as much focus. After the chart, there’s an excellent table that reviews the top 10 risks.

Blackrock - Geopolitical risk dashboard

Looking at Refinitiv’s client usage is always useful. The general challenge is there’s so much data exhaust you need to know what you want to see. In the article, my colleague Jharonne took a look at the views of some of the reopening industries versus the vaccination rate. Jharonne uses the IBES estimates and Starmine Quant models to show some trends in these three industries related to the virus and reopening. If you prefer a short video, Jharonne joins Roger Hirst on the Data on the Data series. I highly recommend following her work, which you can do here.

Resurgent COVID-19 Pressuring Airline, Hotel, Entertainment Stocks

Will the US Consumer Rebound Continue? - Data on the Data - Refinitiv

This chart grabbed my attention. This chart from BCA Research shows a little bit of depth into the rising wage story. I don’t have access to the report behind it, but I think you can get enough info with the chart alone.

The Daily Shot Brief – July 26th

The subject is a little misleading here. While passive still owns the majority of flows, the author also highlights the recent wave of active ETFs coming to market. Cost will be a huge battle ground. While themes might sell the investment, cost helps drive which fund gets the allocation from advisors. This continues with the story we’ve been seeing that lowering expenses and possibly a merger might help with lower margins.

Passive Still Reigns In ETFs

This paper was a little beyond my level of knowledge around fixed income. I read it a couple of times to try to be able to add some real insight. I still think there's something there beyond the basics of what I understand. The summary of the article is “ten-year yields move virtually one-for-one with changes in long-term inflation and growth expectations.” Many feel the risk for bonds is lower, but the article notes that’s not necessarily the case.

What Drives Bond Yields?

Sort of a new story, but this thesis got me thinking. Does the role of ESG, or more appropriately Sustainable investing, start to expand into human health? The “E” in ESG looks at the health of our planet, the “S” sort of targets the health of the workforce, “G” looks at the health of the organization's management. Is there going to be an initiative to look at how a company and its business affects human health?

Philip Morris CEO Wants to “Unsmoke the World”

A relatively quick summary of some of the new ideas in the revised version of “Nudge.” This book is one of my all-time favorites. I love Richard Thaler’s work and recommend this book to anyone. The book really brought Behavioral Economics to life.

The Behavioral Economics Manifesto Gets Revised

One for the “Road”

This week’s wrap up is a little different. This is where I get to share something I love dearly, swimming. Since the pandemic started, I haven’t been able to regularly swim the way I like to. Pre-pandemic I’d swim 3-4 days a week at my local pool, then hit the open water as soon as the river hit 65F or 18C. Now, I’ve been locked up in my backyard attached to a tether. This article tells you about some of the benefits of swimming. They do a good job here of getting to the point quickly. “Regular swimming has been shown to improve memory, cognitive function, immune response and mood. Swimming may also help repair damage from stress and forge new neural connections in the brain.” It’s the one place I can really get away from EVERYTHING. I highly recommend it.

Swimming gives your brain a boost

Thanks for reading. I will be taking off until September. I hope the rest of your summer goes swimmingly. 

Michael