“One turns the cheek: the other kisses it. One provides the cash: the other spends it.” — George Bernard Shaw
A shorter-piece this week, sent earlier than usual as Singapore celebrates Hari Raya Haji or the Festival of Sacrifice (known in the majority of the Muslim world as Eid ul-Adha). In light of COVID-19, however, the actual ritual of sacrifice has been suspended this year by the government.
(The festivals and major events for all the well-represented religions in Singapore are national holidays. )
First, a quick run through earnings announcements by the mega-cap tech names.
Starting with Apple, from the Financial Times
“Apple’s revenues rose 11 per cent to a new record for the June quarter, trumping forecasts that its business would decline because of the coronavirus-induced slowdown and the closure of its stores around the world.
The result — which sent Apple’s shares to a record above $400 — was a highlight of a blowout evening of earnings results from the biggest US tech companies.”
Amazon, from the Wall Street Journal:
“Amazon reported record revenue and profit even as it spent $4 billion between April and June to stabilize its supply chain and improve worker safety. The Seattle e-commerce pioneer now employs more than 1 million workers, the second-largest in the U.S. Amazon reported $88.9 billion in sales as a flood of customers grew to rely more than ever on online shopping. Profits doubled to a record $5.2 billion, far exceeding analyst expectations.”
Facebook, from the Wall Street Journal:
“Facebook generated $18.7 billion in revenue, up from $16.9 billion a year earlier and above analysts’ expectations of $17.34 billion, according to data from FactSet. The 11% growth is a deceleration from the average gain of nearly 25% for the preceding four quarters.
Profit for the second quarter nearly doubled to $5.18 billion, or $1.80 a share, exceeding Wall Street estimates. Facebook shares gained more than 6% in after-hours trading.”
Last but by no means least is Google, from the Financial Times:
“Google has suffered its first recorded revenue decline, as the coronavirus crisis wiped 8 per cent from advertising income in the latest quarter and depressed parent company Alphabet’s revenues by 2 per cent from the year before.
Despite the unprecedented fall-off in its core business, however, Google executives said conditions had improved as the quarter progressed, and offered cautious optimism for a return to growth in the current period.
Sundar Pichai, chief executive, said Google had seen “the early signs of stabilisation, as users returned to commercial activity online.”
Ruth Porat, chief financial officer, added that the search advertising business had ended the quarter with revenue roughly flat compared with the previous year, and had also seen “a modest improvement” in July.”
Apple’s revenues increased 11 per cent versus expectations of a 3 per cent decline.
Amazon doubled earnings versus the same quarter last year.
Facebook posted double-digit revenue growth.
Google was a relative disappointment, suffering its first revenue decline — we highlighted it as a name we do not prefer in the tech space in our annual outlook piece issued in January — relative to other sectors, however, the performance was robust.
Given the stellar earnings performance of big tech and their huge weight in the market indices, over and above the conducive liquidity backdrop, calls for an end to the tech-led bull market seem premature.
A couple of weeks ago in Complexity/Market Perspective we wrote:
“For equity markets to continue making new highs, there need to be disturbances that lead to pull backs but are not debilitating, healthy markets keep needing to climb the proverbial wall of worry.
A lack of disturbances, on the other hand, should be a cause for concern that would lead to extreme levels of optimisation last seen at the tail end of the tech bubble — if have cash then buy technology stocks.
If the market makes moves 10-20 per cent higher without a pause, then rallies should be sold. If on the other hand there are pull backs of around 3 to 5 per cent at regular intervals, then dips should be bought.”
The above continues to be the playbook we are following and guides our trading strategy. We are encouraged that each correction in the market is seen as precipitating a sharp, March-like, sell-off — just the type of sentiment that makes a bull market resilient.
The “Pre-Election Spending Spree”
The US Treasury’s burgeoning cash pile held with the Fed has caught the attention of many. The five-year average of cash held with the Fed is a little over US dollar 200 billion and the highest level reached prior to April 2020 is less than US dollars 500 billion. Today, the account holds more than US dollars 1.8 trillion. This is cash that is held outside the financial system and once added to it, can be levered up to increase flow of credit in the economy.
The growing consensus is that Treasury Secretary Mnuchin intends to go on a pre-election spending spree to get the economy really humming and boost the chances of President Trump being re-elected.
For now, this is all conjecture. However, the following statistics may be of value should the cash make its way into the financial system:
Over the last five years, there have been 46 four-week periods, including overlaps, when the cash balance has declined by US dollars 50 billion or more. The average and median increase in the price of gold during these periods has been 1.2 and 1.5 per cent, respectively.
The average and median change in the S&P 500 during these periods has been -0.3 and 0.8 per cent, respectively. If, however, we remove the return during the four-week period ended 18 March 2020, the average increase in the S&P 500 becomes 0.2 per cent.
The average and median change in the trade weighted US dollar index during these periods has been 0.0 and 0.1 per cent, respectively.
Consumer Inflation Charts
Below are two charts related to consumer inflation we are thinking about but are yet to draw meaningful conclusions from.
US consumers have not benefited as much from the recent sharp drops in the price of crude as much as the historical correlations suggests they should have.
With disrupted supply chains, increased consumption of home-cooked meals and generally people eating more during lock downs might explain the sharp increase in food inflation.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.