The Fed Sells Sanctuary
“Oh, the heads that turn make my back burn.” — The Cult, She Sells Sanctuary
As the coronavirus began to spread in the U.S. over the weekend, we got our first look at just how economically devastating the disease can be … in China.
In fact, Chinese manufacturing all but evaporated in February, with the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) plunging to 40.3. Economists were looking for a reading of 45.7 from this economic bellwether.
Official numbers were even worse, as the Chinese government reported a PMI reading of 35.7 for the month. Readings above 50 indicate economic expansion, while readings below indicate contraction.
And if that wasn’t enough, data also revealed that gaming revenue in Macau fell 88% in February.
China is in a bad way — that much is clear. But there’s hope on the horizon…
World central banks appear to be on the verge of diving into the fray to help assuage economic conditions, and investors. On Friday, Federal Reserve Chairman Jerome Powell said the U.S. central bank would “use our tools and act as appropriate to support the economy.”
Italy’s economic minister said Sunday that the government would drop $4 billion to ease the COVID-19 impact on the economy, while the Bank of England said this morning that it would take “all necessary steps.”
It’s like some international-banking version of Voltron is forming here to battle the evil coronavirus forces!
Analysts at Goldman Sachs Group Inc. (NYSE: GS) even said that they believe the U.S. Fed would cut interest rates sooner rather than later to prevent a virus-induced financial meltdown.
“There will be a coordinated easing across the major central banks and, possibly, the People’s Bank of China and the [Hong Kong Monetary Authority],” said Bank Policy Institiute’s chief economist Bill Nelson. “The cut will be substantial, at least 50 and possibly 75 basis points.”
First off, let’s applaud the market and global central banks for finally taking COVID-19 seriously. I mean, after seeing how the virus devastated China’s manufacturing output, it’s kind of hard not to.
It’s important to note, however, that this thing’s just getting started. Economies around the globe will be tested. The Federal Reserve can cut interest rates all it wants (well … with rates sitting at 1.5%, not all it wants), and that may calm investors. But interest rate cuts won’t keep thousands of workers from getting sick, which would affect economic growth and consumer spending.
Here’s what I’m getting at: While the markets corrected nearly 12% across the board in the past week, we’re likely to see a few more jitters going forward. Last week’s shocker was Wall Street’s attempt to price in COVID-19’s impact on growth.
Barring any major catastrophes, there will be a few more adjustments here or there as the market adjusts to the reality of COVID-19 in the U.S. market. But, all in all, the worst for the market should be over.
I could be wrong — I hope I’m not wrong — but now appears to be a good time to start bargain hunting. I’m not talking speculation on momentum stocks. I’m talking snapping up long-term growth companies that will endure even after the coronavirus is gone.
There are quite a few of these out there right now, and Banyan Hill expert Jeff Yastine is the man to follow.
With the whole biotech sector screaming “pandemic!” there’s never been a better time to find undiscovered biotech diamonds. Today, Jeff has his eye on one biotech stock that he believes is set to soar — and it still trades at bargain-basement prices.
Good: Refresh Your Memory
In the past week, few sectors have been hit harder than tech. With many tech supply lines running through China, it’s understandable. But Baird analyst Tristan Gerra would like you to … ahem … refresh your memory.
Gerra turned bullish on a trio of DRAM/NAND flash memory makers this morning, noting that “flash pricing positive outlooks remain unchanged despite current demand weakness in China.”
In a note to clients, Gerra upgraded Micron Technology Inc. (Nasdaq: MU) to neutral, lifted Seagate Technology PLC (Nasdaq: STX) to outperform and boosted Western Digital Corp. (Nasdaq: WDC) two notches to overweight.
I have to believe that Gerra is onto something here. We have a smartphone upgrade cycle coming with 5G, and we have a game console upgrade cycle coming with the PlayStation 5 from Sony Corp. (NYSE: SNE) and the Xbox Series X from Microsoft Corp. (Nasdaq: MSFT) — both of which use drives that run on flash memory.
There’s some inventory at flash memory suppliers still in the pipeline. However, with supply chain disruptions across China, that inventory will only last so long. This means pricing power for flash makers such as Micron, Seagate and Western Digital. And pricing power is good.
Better: Bear Turns Bull on GE
It seems the predictions for General Electric Co.’s (NYSE: GE) demise were overly exaggerated. As a result, many in the brokerage bunch are now singing a different tune on the company.
This morning, Stephen Tusa, a JPMorgan analyst and a longtime GE bear, joined the bullish choir with three simple words: “We were wrong.”
Tusa lifted his rating on GE to neutral and raised his price target to $8, citing GE’s better-than-expected performance in 2019. But, while Tusa may no longer be a GE bear, you’ll notice that his target is about 26% below GE’s current trading range.
The JPMorgan analyst may have admitted that GE isn’t as bad as he expected, but he noted that “we continue to see structural concerns in the key power market, as well as peakish fundamentals in aviation.”
So, GE isn’t out of the woods just yet. But the company has potential if it remains on its current growth and restructruing path. As such, GE looks like a bargain at these levels.
Best: A Little Bird Told Me…
… that running two companies at once might not be the most productive thing in the world. That little bird? Elliott Management Corp.
According to The Wall Street Journal, Elliott has taken a $1 billion stake in Twitter Inc. (Nasdaq: TWTR). The activist investment firm looks to flood Twitter’s board with its own nominees … reportedly in hopes of ousting CEO Jack Dorsey.
Dorsey also heads payment processor and point-of-sale disruptor Square Inc. (NYSE: SQ).
The oddity of Elliott’s move is that it comes just after Twitter’s quarterly revenue topped $1 billion for the first time ever last quarter. However, earnings on the quarter fell 50% year over year, which means Dorsey’s Twitter is spending quite a bit of cash.
Apparently, Elliott thinks Twitter can do better at returning some of that cash to investors. This will be an interesting and potentially lucrative situation to watch.
Look, in order to be a stock market investor you HAVE to have some level of optimism about the future. Remember: more people wake up trying to make the World better than make it worse and that, my friends, is worth investing in.
I know that Great Stuff has been all over the “doom and gloom” on the coronavirus lately. But I feel the need to set the record straight. I’m not a bear at heart.
I’m a market bull … but I’m a realistic bull.
Great Stuff’s goal over the past month was to prepare you for the 12% dip that followed the COVID-19 outbreak. We knew that, once Wall Street finally woke up to the risk that this virus posed, things would get bad quickly … and you needed to be prepared.
If you’re a buy-and-hold type, you needed to know what was coming so you could hedge your positions over the short term. If you’re a short-term speculative investor who likes to jump on red-hot momentum stocks, you needed to know so you could take profits and get out of Dodge.
What I like about today’s Quote of the Week is the optimism behind it.
People are, on the whole, trying to better themselves and make the world a better place. Stocks and markets always trend higher over the long term. These are important things to remember — especially in the middle of a possible pandemic such as the coronavirus.
That said, you can have a positive, long-term bullish outlook and still protect yourself over the short term. It’s just common sense. And that’s Great Stuff’s ultimate goal, I think: common sense. (Though, a heavy dose of humor makes it all go down more easily.)
Until next time, good trading!
Editor, Great Stuff