The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide


The bubble isn’t burst yet.


Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite
COMP,
-1.99%

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle
ORCL,
+0.66%

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
ZM,
-1.32%
.
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
PTON,
-3.75%
,
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
RIO,
-1.67%
,
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures
ES00,
+0.65%

NQ00,
+0.64%

were stronger.

Gold futures
GCZ20,
-0.46%

fell while oil futures
CL.1,
+0.21%

edged higher.

The British pound
GBPUSD,
+0.18%

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla
TSLA,
+1.38%

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple
AAPL,
-3.26%
,
Alphabet
GOOGL,
-1.36%

and Facebook
FB,
-2.05%

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify
SHOP,
-1.59%

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.



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NYC restaurants can reopen indoor dining on Sept. 30, Gov. Cuomo says


Just one day after referring to indoor dining in New York City as a “reckless” proposition, Gov. Andrew Cuomo announced on Wednesday that such service will return to the city at the end of the month.

As of Sept. 30, restaurants will be allowed to serve guests indoors at 25% of their usual capacity, the governor said. The reopening plan includes a series of new safety measures and restrictions. Diners will be required to wear face coverings when not seated; at least one member of each party must provide information for contact tracing; temperature checks will be given at the door; no bar seating will be permitted; and restaurants will close at midnight. Businesses will also be required to operate with enhanced air filtration systems, a requirement similar to one of the stipulations used for gym reopenings.

The positivity rate in New York state — or the percentage of tests coming back positive for the virus — has remained below 1% for 33 days as of Tuesday. In New York City, that rate was 0.7%, down from a peak of more than 60% at the height of the crisis in March and April, when the city was the nation’s viral epicenter. 

Don’t miss: I went to the Met, and here’s what I saw

The governor previously cited concerns about the city’s failure to come up with a plan to enforce safety compliance for indoor dining, suggesting at one point that several thousand police officers be deployed to ensure good behavior in restaurants. It appears a mixture of improving compliance on outdoor dining rules and a promise of additional enforcement from the city cleared the way for Wednesday’s decision. 

“Because compliance is better, we can now take the next step,” Cuomo said.

The city will provide 400 enforcement personnel to monitor indoor dining in addition to compliance officers with the State Liquor Authority, Cuomo said. It wasn’t immediately clear which city agencies would be staffing that beefed-up enforcement. 

The governor also called for New Yorkers themselves to aid in enforcement at the 10,000 restaurants that are expected to require inspection. Restaurants will be required to publicly post capacity limits and phone numbers for patrons to report violations: 833-208-4160, or text ‘VIOLATION’ to 855-904-5036.

“I trust that if they have the right information, they will do the right thing,” he said, warning that if the infection rate in New York City spikes, the state can always close indoor dining again. 

If the infection rate has not increased by Nov. 1, indoor dining may be allowed to expand to 50% capacity, Cuomo said.

Also see: Welcome to New York! Don’t you dare go outside!

Pressure to reopen also came from the restaurant industry itself; in August, a group of more than 300 restaurants filed a class-action lawsuit against the state for the ongoing closure mandates, seeking more than $2 billion in damages.

James Mermigis, the attorney representing the restaurants in the suit, did not immediately respond to request for comment.

“The New York City restaurant industry has been financially devastated by the Covid-19 pandemic, and a safe return to indoor dining is critical to help save these vital small businesses and jobs,” NYC Hospitality Alliance executive director Andrew Rigie said in a statement emailed to MarketWatch. “We’re thankful to Gov. Cuomo for announcing a return to indoor dining with a blueprint for future expansion. Restaurants are essential to New York’s economic and social fabric, and indoor dining is a key component to the industry’s recovery.”

Read next: There are seven coronavirus vaccine candidates being tested in the U.S. — here’s where they stand



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This analysis of Wall Street stock ratings is sounding a warning for Tesla and 62 other stocks


In the financial media, “Wall Street” typically means U.S. brokerage firms and often the analysts who work for them. They are known as “sell-side analysts.” They work independently of the firms’ sales teams, but there’s no question that Wall Street’s job is to sell stocks. So when you see a high level of “sell” ratings on a stock, take heed.

Tesla Inc.
TSLA,
+2.78%

is the poster child for high-flying stocks during this pandemic year. The electric-car company’s shares are up 435% this year and 891% in the past 12 months. And as the shares have shot up, many analysts have continually increased their price targets.

But not all of them have kept doing so. And now, among 37 sell-side analysts polled by FactSet, eight rate the shares the equivalent of a “buy,” while 11 rate them the equivalent of a “sell.” The shares closed at $447.37 on Sept. 2. The consensus price target among those analysts is $284.97, implying 36% downside for the shares.

Tesla is not yet included in the benchmark S&P 500 Index
SPX,
-0.81%
,
although it is expected to be added soon. It is rare for any S&P 500 stock to have majority “sell” ratings, and none do at this time. But a quick look shows 33 stocks with “sell” ratings outweighing “buy” ratings.

Expanding to the Russell 1000 Index
RUI,
-0.85%

of the largest 1,000 publicly traded companies listed in the U.S. by market capitalization (including Tesla and subject to changes when stocks plunge), there are four companies with majority “sell” ratings.

Among the Russell 1000, there are 63 companies with “sell” ratings outweighing “buy” ratings. Here they are, sorted by market capitalization:

Company

Ticker

Share ‘buy’ ratings

Share ‘sell’ ratings

Market cap. ($ millions)

Total return – 2020 through Sept. 2

Tesla Inc.

TSLA,
+2.78%
22%

30%

416,863

435%

Exxon Mobil Corp.

XOM,
-0.07%
12%

20%

165,704

-41%

Illinois Tool Works Inc.

ITW,
-0.37%
13%

22%

63,849

14%

Public Storage

PSA,
-0.37%
13%

27%

37,436

3%

Southern Copper Corp.

SCCO,
+0.81%
15%

54%

37,092

16%

Walgreens Boots Alliance Inc.

WBA,
-0.53%
5%

9%

32,209

-35%

WEC Energy Group Inc.

WEC,
+0.13%
15%

38%

30,726

8%

Paychex Inc.

PAYX,
-0.36%
10%

19%

27,988

-6%

Hormel Foods Corp.

HRL,
+0.17%
8%

23%

27,698

15%

ResMed Inc.

RMD,
-2.41%
22%

33%

26,517

19%

McCormick & Co. Inc.

MKC,
-1.05%
17%

33%

26,001

25%

Brown-Forman Corp. Class B

BF.B,
+0.97%
6%

33%

24,715

19%

Consolidated Edison Inc.

ED,
+0.88%
6%

35%

24,161

-18%

Mettler-Toledo International Inc.

MTD,
-1.42%
0%

25%

24,095

27%

Equity Residential

EQR,
+1.23%
21%

26%

21,473

-27%

Expeditors International of Washington Inc.

EXPD,
-0.84%
7%

36%

15,218

17%

Avangrid Inc.

AGR,
+0.55%
9%

36%

14,968

-3%

Tiffany & Co.

TIF,
-0.31%
0%

7%

14,854

-8%

J.M. Smucker Co.

SJM,
-0.56%
6%

17%

13,786

19%

FactSet Research Systems Inc.

FDS,
-1.97%
0%

44%

13,452

33%

Waters Corp.

WAT,
-1.39%
0%

38%

13,442

-7%

C.H. Robinson Worldwide Inc.

CHRW,
+0.29%
18%

23%

13,438

29%

Jack Henry & Associates Inc.

JKHY,
-1.52%
10%

20%

13,113

18%

Cognex Corp.

CGNX,
-5.22%
22%

28%

12,376

28%

Brown-Forman Corp. Class A

BF.A,
+0.31%
6%

35%

12,170

15%

CenturyLink Inc.

CTL,
-0.09%
13%

44%

11,985

-11%

Ubiquiti Inc.

UI,
+0.13%
25%

75%

11,942

0%

Omnicom Group Inc

OMC,
-0.38%
25%

33%

11,588

-32%

Occidental Petroleum Corp.

OXY,
-2.70%
12%

19%

11,534

-68%

Lennox International Inc.

LII,
-0.42%
12%

29%

11,009

19%

Franklin Resources Inc.

BEN,
-1.02%
0%

43%

10,784

-14%

Carnival Corp.

CCL,
+5.40%
5%

20%

10,037

-67%

Western Union Co.

WU,
-0.86%
10%

29%

9,852

-9%

Allegion PLC

ALLE,
-0.74%
0%

9%

9,666

-15%

CNA Financial Corp.

CNA,
-0.34%
0%

25%

8,766

-22%

Watsco Inc.

WSO,
-0.95%
11%

22%

8,161

42%

Beyond Meat Inc.

BYND,
-3.06%
22%

30%

8,099

72%

Gap Inc.

GPS,
-0.90%
13%

17%

6,870

5%

Vornado Realty Trust

VNO,
+1.46%
15%

23%

6,830

-44%

Credit Acceptance Corp.

CACC,
+0.42%
0%

33%

6,807

-13%

American Airlines Group Inc.

AAL,
+1.87%
20%

45%

6,728

-54%

Grubhub Inc.

GRUB,
-0.77%
0%

4%

6,629

48%

Commerce Bancshares Inc.

CBSH,
+1.86%
0%

40%

6,599

-12%

Continental Resources Inc.

CLR,
-1.81%
10%

16%

5,992

-52%

Comerica Inc.

CMA,
+2.54%
19%

23%

5,587

-42%

Invesco Ltd.

IVZ,
+2.24%
11%

28%

4,881

-38%

Cullen/Frost Bankers Inc.

CFR,
+2.79%
20%

47%

4,403

-26%

Rayonier Inc.

RYN,
-2.17%
14%

29%

4,109

-6%

Xerox Holdings Corp.

XRX,
+1.52%
13%

25%

3,992

-48%

Unum Group

UNM,
+8.21%
9%

18%

3,802

-33%

Hawaiian Electric Industries Inc.

HE,
+0.20%
0%

67%

3,750

-25%

Antero Midstream Corp.

AM,
-1.63%
11%

22%

2,979

-2%

Brighthouse Financial Inc.

BHF,
+6.15%
9%

27%

2,865

-21%

Teradata Corp.

TDC,
-0.70%
14%

21%

2,611

-11%

Mercury General Corp.

MCY,
+0.17%
0%

50%

2,526

-3%

Trinity Industries Inc.

TRN,
+1.79%
17%

33%

2,469

-3%

Nordstrom Inc.

JWN,
+2.77%
14%

18%

2,448

-61%

Taubman Centers Inc.

TCO,
+1.24%
0%

11%

2,357

25%

Park Hotels & Resorts Inc.

PK,
+6.64%
7%

36%

2,300

-60%

Sabre Corp.

SABR,
+2.98%
22%

33%

2,253

-67%

First Hawaiian Inc.

FHB,
+1.12%
25%

50%

2,133

-41%

Associated Banc-Corp

ASB,
+2.79%
0%

10%

2,096

-36%

Chesapeake Energy Corp.

CHKAQ,
+2.36%
0%

100%

46

-97%

Source: FactSet



Original source link

European stocks rise, diverging from U.S. tech fears


A worker assembles VW ID.3 electric cars at the Volkswagen factory on July 31, 2020 in Zwickau, Germany.


Jens Schlueter/Getty Images

European stocks advanced Monday, diverging from the U.S. after a rough week in markets.

Down 1.9% last week, the Stoxx Europe 600
SXXP,
+1.10%

rose 0.8%, with automakers including Renault
RNO,
+2.80%

and Volkswagen
VOW3,
+3.14%

advancing.

The German DAX
DAX,
+1.29%
,
French CAC 40
PX1,
+1.17%

and U.K. FTSE 100
UKX,
+1.36%

also advanced.

U.S. stock futures, which will still trade despite U.S. markets being shut for the Labor Day holiday, were lower, particularly for the tech-oriented Nasdaq 100
NQ00,
-0.94%
.

Last week the tech-dominated Nasdaq Composite
COMP,
-1.26%

lost 3.2%, its worst decline since the period ending March 20, and first drop after five consecutive gains.

SoftBank Group
9984,
-7.15%

shares dropped over 7% in Tokyo on Monday after The Wall Street Journal reported the Japanese investment group bought $4 billion worth of options tied to around $50 billion worth of individual tech stocks.

“There was no specific trigger to the selloff but after extreme bullishness driven by monetary and fiscal policies, stock prices reached levels that could no longer be justified by fundamentals,” said Hussein Sayed, chief market strategist at FXTM. “Liquidity and low interest rates alone cannot be the solution to everything, so it’s essential to see continued improvement in economic data and an end to the pandemic for sustainable upside in risk assets. ”

Germany reported a 1.2% rise in industrial production for July, which was a slower than forecast rise.

The British pound
GBPUSD,
-0.67%

weakened after the Financial Times reported the U.K. was working on legislation to override parts of the Brexit withdrawal agreement. The Sunday Express separately reported a dossier is being considered by Downing Street that would seek to limit access for European Union companies seeking to raise money in London. Talks on a post-Brexit U.K.-European Union trade deal are due to re-start Tuesday.

Associated British Foods
ABF,
+3.40%

rose 4% after saying trading in the fourth quarter ending Sept. 12 in both its food businesses and Primark exceeded expectations.



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Here’s why the stock market tumbled last week and what’s ahead for Wall Street


A bout of volatility returned to financial markets with a vengeance last week, disrupting a nearly uninterrupted climb to records for U.S. stock indexes and raising questions about the path for Wall Street headed into a hornet’s nest of challenges for investors.

Perhaps, the overarching question is, “What the heck just happened to equity markets in the 48 hours after the S&P 500 index
SPX,
-0.81%

and Nasdaq Composite Index
COMP,
-1.26%

on Wednesday notched their 22nd and 43rd closing records of 2020 respectively, and the Dow
DJIA,
-0.56%

scored its first finish above 29,000 since February, bringing it within 2% of its Feb. 12 all-time closing high?”

The bull perspective

From the bull’s perspective, not a lot has changed.

Bullish investors see the promise of lower interest rates for years to come and further injections of money by the Federal Reserve into various parts of the financial system, along with perhaps another fiscal stimulus from the government, as buttressing the market and offering a floor against future dramatic losses.

Optimists see the slump that the equity market experienced this week as a bump in the road to greater gains.

“Since the current bull market kicked off in March, there have only been two pullbacks of more than 5%. Recent bull markets have tended to have three or four setbacks over the first nine months,” wrote SunTrust Advisory chief market strategist Keith Lerner in a research note on Thursday — see chart:

Lerner also notes that the five-month winning streak for the S&P 500 since August, which has only occurred 27 times since 1950, is a good sign because it tends to imply that further returns are ahead.

So, investors may view this retreat as a natural corrective phase that removes some of the euphoric froth from equity valuations that had far exceeded the metrics that pragmatic investors use to assess an asset’s value compared against its peers.

MarketWatch’s William Watts wrote last Thursday, citing Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, that technology stocks — particularly, a cohort that includes Facebook
FB,
-2.88%
,
Amazon.com
AMZN,
-2.17%
,
Netflix
NFLX,
-1.84%
,
Microsoft
MSFT,
-1.40%
,
Apple
AAPL,
+0.06%

and Google parent Alphabet
GOOGL,
-2.96%

GOOG,
-3.09%

(or FANMAG) — had seen their valuations rise by dint of multiple expansion, or rapidly rising prices, while other segments of the market had seen earnings estimates fall out of whack with their prices, distorting the “P” portion of the commonly used priced-to-earnings metric, or P/E, used to gauge a stock’s worth.

“But these two groups of stocks have gotten more expensive for completely different reasons,” he noted. “FANMAG’s P/E has risen because their ‘P’ (prices) has gone up faster than their ‘E’ (earnings), while the P/E for the rest of the S&P 500 has expanded because ‘E’ has gone down much more than ‘P’,” wrote Suzuki.

Indeed during the period between the market’s March lows and early last week, investors have maintained a voracious appetite for technology-related stocks, and a group known as “stay-at-home companies”, including Zoom Video Communications Inc.
ZM,
-2.99%
,
due to the belief that not only are they receiving a boost from the COVID-19 pandemic but also that they are best positioned to benefit when the economy eventually emerges from the recession.

A bounce off Friday’s lows, aided by moves into financials also was viewed as constructive for the broader market, heading into the three-day Labor Day weekend.

“The move higher was mostly led by financials, which came as a result of slightly higher rates rate on the long end of the curve, notably the 10 basis point move in the 10-year Treasury,” wrote Peter Essele, head of portfolio management for Commonwealth Financial Network, via email.

Yields in the 10-year Treasury
TMUBMUSD10Y,
0.721%

benchmark bond rose to 0.72%, marking the biggest single-day rise on Friday since May 18.

It’s unusual for yields to climb as stocks are falling as they did on Friday because investors usually turn to the perceived safety of government debt, driving prices higher and yields lower, in times of uncertainty. That didn’t occur on Friday and may be interpreted by some as signaling that at least fixed-income investors see the move in stocks as indicative of a temporary pullback rather than a more significant and lasting decline.

UBS Global Wealth Management’s chief Investment Officer Mark Haefele said that he viewed this week’s market drop as investors consolidating gains. “We view the latest selloff as a bout of profit-taking after a strong run,” he wrote.

“The S&P 500 enjoyed its strongest August in 34 years, gaining 7%, and added a further 2.3% in the first two days of September, to reach a fresh record high,” he wrote. “Stocks are still well-supported by a combination of Fed liquidity, attractive equity risk premiums, and a continuing recovery as economies reopen from the lockdowns.”

The bear’s perspective

From a bearish vantage point, the outlook for stocks looks more uncertain for investors. This uncertainty may have well laid the groundwork for substantial episodes of turbulence if not gut-wrenching drops in stocks, some experts say.

“The mini-tech selloff on Thursday has left a lot of scarring; it is not overly surprising that in New York equities trading, things were relatively muted into a long weekend,” wrote Stephen Innes, chief global markets strategist at AxiCorp, in a Friday research note.

September is a notoriously weak month for investors, and even if that weakness is somewhat moderated in an election year, October also has the hallmarks of a rough patch for Wall Street, with the Nov. 3 presidential election looming.

Chris Senyek, chief investment strategist at Wolfe Research, said the possibility of a resurgence of COVID-19 headed into the fall and winter also is cause to lighten up on stocks.

“Our sense is that a similar resurgence in infection rates is likely to occur in the United States this fall as children and college students returns to school and flu season begins,” analysts at Wolfe Research wrote on Friday.

Michael Kramer, founder of Mott Capital Markets, in a blog on Friday described the recent swings in the market as “insane” and said that it is difficult to gauge what’s ahead for the market, but he notes that an explosion in volumes related to the selloff could signal a change in the uptrend for stocks.

He noted that for the first time since April 3, the S&P 500 closed below its uptrend. “This is typically not something we want to see; it would indicate that momentum is likely shifting,” he wrote (see attached chart).

Of Friday’s paring of losses into the close, Kramer said: “The rally into the close was impressive, but it could have just as easily been on the heels of short-covering as it was on real buying.”

Part of the downturn occurred as two popular companies saw their shares drop after stock splits: Apple
AAPL,
+0.06%

and Tesla
TSLA,
+2.78%
.

Tesla has been among the highest of highfliers in recent months and viewed by some as a gauge of sentiment in the overall market. Its recent retreat is something bearish investors have pointed to as a signal of weakness in the market.

On top of that, Tesla wasn’t announced as a new entrant into the S&P 500 index late Friday, which may cast a pall over the stock that has lost about 20% from its peak.

The road ahead

Looking ahead, investors turn next to the Federal Reserve’s Sept. 15-16 policy meeting, which could be important in clarifying the length of the time interest rates could be held lower but also what, if any, new quantitative easing the central bank will implement.

Fed Chairman Jerome Powell in an interview with National Public Radio conducted Friday afternoon said that the 1.4 million jobs added to the labor market in August and an unemployment rate falling to 8.4% from 10.2% as a good sign of progress in the economy.

But he did emphasize that progress is going to be slow: “We do think it will get harder from here,” Powell said.

Doubts that the government will soon provide a fresh round of fiscal stimulus for out-of-work Americans has put some pressure on the Fed to do more to dull the impact on the economy from disruptions caused by the pandemic.

The Fed’s role may be the most important feature of whether the stock market is able to continue to make progress higher. As it stands now, there are few alternatives to stocks, with long-dated government bonds yielding around 1% or less.



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