The Boock Report

By

The FAANG trade is dead

The FAANG trade is dead. Dead in the sense of it as a homogeneous group. This not long after the New York Stock Exchange created a FAANG index called the NYSE FANG+ Index where you can trade options and futures, //www.theice.com/fangplus. Now the group has completely splintered with the Apple earnings news the last straw. Each stock will now stand on its own. In other words, look for new leadership and the market is of course struggling with that prospect, along with the other well known headwinds such as monetary policy, rates, tariffs, peak profit margins and the global economy slowing.

Stocks in China and Hong Kong did buck the selling seen yesterday after the WSJ article titled “US, China resume talks to cool trade tensions.” Let’s hope for something productive. Let’s hope Peter Navarro is nowhere near the discussions. The yuan is also rallying, albeit modestly.
The NFIB small business optimism index for October did soften a touch to 107.4 from 107.9. It’s the 2nd month lower after the record high August print. Here are some of the noteworthy internals: Plans to Hire fell 1 pt to a 4 month low. Part of this is that Positions Not Able To Fill held at a record high. Compensation both today and plans for the future did moderate but off record highs. Capital spending plans were unchanged at 30 after printing the best level since 2006 back in August. Those that Expect a Better Economy was unchanged, those that Expect Higher Sales fell 1 pt and those that said it’s a Good Time to Expand fell 3 pts to a 4 month low. Positive Earnings Trends fell 2 pts to the least since March. I believe we’ve seen peak profit margins (higher rates, labor costs, tariffs, etc…). Companies will try to raise prices to compensate and Higher Selling Prices rose 1 pt to 16, back to the 6 month average. Lastly, those Planning on Increasing Inventory was up 2 pts but still 5 pts below the August spike (distorted by tariffs).
Bottom line, notwithstanding the modest drop, small business optimism is still elevated, riding the lower tax and regulation theme. The NFIB said “An unburdened small business sector is great for employment and the general economy.”
NFIB SMALL BUSINESS

There was a dramatic miss in the loan data out of China relative to expectations. Aggregate financing in October totaled 728.8b yuan, well less than the forecast of 1.3b. Much of that was another sharp reduction in the level of lending outside the official banking sector. Actual bank loans made up 697b of the total figure and this compares with the estimate of 904.5b. The main reason for the reduced pace of lending was in the local government special bonds category along with yuan denominated loans. Bottom line, while bank lending was up 5% y/o/y, it’s clear that the sharp decline in non bank lending, aka shadow banking, is not getting replaced by any notable increase from banks. The Chinese government has certainly taken plenty of steps to prevent any slowdown but you can take a horse to water but you can’t…Curing a debt overhang with more debt is now becoming an obvious challenge. Expect more bankruptcies and hopefully the Chinese government will let that happen.On the Chinese balancing act, Premier Li today said in a speech, “China won’t use excessive stimulus to boost the economy as it won’t be sustainable. But China will definitely use strong measures to boost the vitality of the market.” He also said they won’t devalue the yuan to lift exports. The market instead will likely do it for them.

In Germany, the November ZEW index, which measures economic expectations on the part of investors of the Germany economy, was little changed at -24.1 from -24.7 and that was a touch better than the estimate of -26. Notably though, Current Situation fell to 58.2 from 70.1 and that was 7 pts less than expected. The ZEW said “The figures for industrial production, retail sales and foreign trade in Germany all point towards a weak development of the German economy in the third quarter. This is reflected by the fact that the assessment of the current situation has experienced a decline. The expectations of the survey participants for the coming 6 months do not show any improvement. This means that, at the moment, they do not expect to see a speedy recovery of the currently weak development of the economy.” If there is a bellwether for global economic trade, it’s Germany with its high dependence on exports. As the IFO is a more relevant number to the markets, this data point however is not market moving. The euro is bouncing as is the DAX on the hopes for a US/China trade deal.

The UK jobs data was about as expected. The unemployment rate for the 3 months ended September did rise one tenth to 4.1% but off the lowest level since the 1970’s and the number of jobs added, 23k, were about as forecasted. Wage gains continue to improve as they grew 3.2% y/o/y ex bonus’, the best since 2008. The October jobless claims change was up 20.2k and is worth watching as we get closer to either deal or no Brexit deal. Along with other currencies, the pound is rallying and maybe the positive wage figure is part of the reason. Gilt yields are also higher.

On a story that Greece’s central bank is considering creating a special purpose vehicle to chop Greek banks bad loan exposure in half is leading to as much as an 8% rally in Greek banks and 2% rally in the Athens stock market. I remain bullish on Greece on hopes for Kyriakos Mitsotakis winning the election next year. The Athens stock market is down 88% from its 2007 peak.

In Italy today we await the government’s response to the EU questions on their budget. The Italian 10 yr yield is higher for the 6th day in the past 7 and is approaching 3.5% again.