Play ball. Stocks rose yesterday on continued optimism, led by the bubbly tech sector, which vaulted the Nasdaq to another new high. Manufacturing is experiencing a comeback but with a smaller labor force.
N O T E W O R T H Y
Highly SPAC-ulative. US investors are getting quite frisky. I am referring, of course, to risk. I am not writing about how the stock market has rallied since its early pandemic lows… despite the fact that we are still in the midst of said pandemic. No, I am not talking about the fact that investors are buying but rather, to what it is that they are buying. Let’s get the buying out of the way first and briefly, because it is old news. Investors are buying stocks because they believe that the virus-caused economic downturn will be short (another 12 months or so) and that the economy will rapidly boom once a vaccine becomes widely available (6-12 months). Ignoring all of the details… like when laid-off employees will return to work, or even more importantly, if they will even return to the same jobs they once had, as we witnessed in the aftermath of the financial crisis which saw a massive shift in employment that took some 6 years to recover. Ignoring those details, the high-level thesis of "buy now" is not unreasonable if one can tolerate volatility. Now back to the whats that investors have been interested in. A few weeks ago I wrote about SPACs, Special Purpose Acquisition Companies, when Bill Ackman launched his $2 billion blank check company in an IPO (https://siebert.com/blog/index.php/2020/07/23/immune/) . I urged appropriate caution as SPACs, after all, are really blank check companies. Now, I would never imply that they would not be successful, because some actually are successful. Most recently and noteworthy are Nikola (NKLA), Draft Kings (DKING), and Virgin Galactic (SPCE). Yeah, there were some ups and downs, but the faithful prevailed in the end. Maybe it was the recent success of those companies that has been driving investor demand or perhaps, possibly the fact that investors believe that the usual-suspect growth stocks are overdone and they are hoping to find the next Apple, Google, Amazon…. The fact is that demand is up and Wall Streeters are always sure to provide the supply. No fewer than 50 SPACs have been formed in 2020 so far… highly speculative vehicles… in the midst of a global pandemic… with the economy contracting… and unemployment spiking. The latest SPAC news came yesterday when DiamondPeak Holdings (DPHC) announced that it was merging with Lordstown Motors, an electric truck company. Why not, EV vehicles are the wave of the future, and the valuations on those companies, whether profitable or even in production yet, are amazing. I won’t show you the chart, but I will tell you that the stock closed up by +21% yesterday. Looking at its competition, investors can expect some volatility in the days ahead.
It’s not just investor appetite for SPACs that evidence risk appetite, but also junk bonds. If you take a quick look at chart 17 (“Fixed Income Cheat Sheet”) in my attached daily chartbook and refer to the bottom panel, you will see that spread of high yield bonds have been tightening. The pink line is the high yield bond index (Ba and below) and the blue line represents CCC and below. The downward trending lines show that the yield premium over risk-free treasuries paid by investors is shrinking. In other words, investors are willing to get compensated less for taking risk… in the midst of a global pandemic… with the economy contracting… and you know the rest. One other thing to note here is that there were 54 corporate defaults in the second quarter, according to Moody’s. That is the highest quarterly number since 2009. Further, Moody’s expects that defaults will continue to rise and possibly peak sometime next year. Now, it is important to note that not all bonds are the same and clearly lower rated bonds are higher risk, but all bonds that trade below Ba1 (Moody’s) or BB+ (S&P) are considered speculative, or non-investment grade. A bond with a CCC rating is consider “Vulnerable” and dependent on favorable economic conditions. Like all investments, no matter the quality, bonds too need to be carefully researched before participating. Greater return means greater risks ... and investors seem to be in the market for that greater return.
THE MARKETS
Stocks traded up in yesterday’s session led by continued bullishness in the tech sector.
The S&P500 rose by +0.72%, the Dow Jones Industrial Average climbed by +0.89%, the Russell 2000 Index advanced by +1.78%, and the Nasdaq Composite Index launched by +1.47% to a new all-time high. Bonds slipped and 10-year treasury yields climbed by +3 basis points to 0.55%.
NXT UP
- Factory Orders (June) may have risen by +5.0%, down from May’s +8.0% rise.
- Durable Goods Orders (June) are expected to have risen by +7.3% in line with earlier estimates.
- This morning Leidos, Ares, Simmer Biomet, Cinemark, Us Foods, Exelon, KKR, and Vulcan Materials beat estimates while AdaptHealth, Aramark, Lending Tree, and Spirit Air disappointed. Notable releases after the bell include Disney, Allstate, Activision Blizzard, Nikola Corp, Enphase, Paycom, Match Group, Twilio, BioMarin, Fox Corp, Beyond Meat, Devon Energy, Wynn Resorts, and Monster Beverage.