Friday, 10 July 2020 / Published in Equities & Indices

Global markets dropped on Friday, extending the weekly losses in response to the growing worries about the V-shaped global economic recovery as several US states posted record spike in coronavirus cases, while the World Health Organization warned that the pandemic is accelerating around the globe.

Coronavirus Update:
Global cases: More than 12.23 million
Global deaths: At least 554,304
Top five countries: United States (over 3.1 million), Brazil (over 1.75 million), India (over 767,000), Russia (over 706,000) and Peru (over 316,000)

Market Reaction:

The US markets were mixed on Thursday, with Dow Jones losing 1.4% and S&P 500 slid 0.6% after Florida reported a record number in coronavirus-related hospitalizations and a record spike in COVID-19 deaths.

The US reported more than 60,000 new COVID-19 cases on Wednesday, the biggest increase reported by a country in a single day. Data shows that more than 3 million Americans have already been infected by the COVID-19, with a death toll exceeding 133,000.

Cyclical companies such as airlines, cruise lines, casino operators, retail shops and financials that would benefit from the economy reopening had the larger losses across the board.

Fig.01: Nasdaq Composite index, Daily chart

However, Nasdaq index closed at an all-time high of 10.547 points, rising 0.5%, as Amazon jumped 3% to a record high at $3.182 per share. Other mega-tech giants such as Apple, Tesla, Nvidia and AMD finished the day in green as well, receiving massive support from investors who bet on the growth of those technology companies as they benefiting from the “at-home play”.

Crude oil:

Crude oil prices lost 1% on Friday, following the 3% losses from the previous session, on worries that the rolled back re-openings measures in many parts of the world could damage the recovery of the crude oil demand after pandemic.

Fig.02: WTI crude oil, 1-hour chart

The WTI crude oil price broke below $39 per barrel, while Brent crude dropped below $42, to their 2-week lows, despite the signs of a recovery in US gasoline demand as the US summer driving season starts to pick-up.

Precious Metals:

The recent rally in the precious metals has lost some steam since yesterday, as the prices of gold and silver lost 1% while Palladium and Platinum slid 2% in response to the recovered US dollar, lower US Treasury yields and some profit-taking actions.

Fig.03: Gold price, 15-minutes chart

Gold prices trade near the strong support level of $1.800/oz after having surged to their highest level since 2011 at $1.817/oz on Wednesday. Silver prices trade near $18.70/oz, slightly lower from their multi-month highs of $19/oz.

The precious metals received support from the fears for a second wave of pandemic after the record global coronavirus cases, the zero interest rates and the massive fiscal and monetary stimulus from the world’s governments and central banks to support their economies from the pandemic fallout.

Tuesday, 07 July 2020 / Published in Analysis

Tesla Inc. (TSLA), the California-based electric vehicle maker has become the world’s most valuable car company with $250 billion market value, with its share price climbing to record highs of $1.400 at the beginning of June. Tesla’s market capitalization is well ahead of traditional automakers such as Toyota’s $200 billion and it is almost 10-times that of Ford Motors and General Motors.

Tesla shares have surged 50% over the first days of June and up nearly 300% since the start of 2020, gaining support from the stronger-than expected Q2 delivery figures and production in a time were the global car sales dropped by more than 30% amid coronavirus pandemic.

Fig.01: TESLA share, Weekly chart

According to company’s latest report, the Q2 delivery tally was 90,650 units, as the Model 3 and Model Y deliveries hit 80,050 while Model S and Model X deliveries were pegged at 10,600. The new Model Y, an electric SUV, is expected to surpass the sales of its popular Model 3 electric four-door sedan in the next quarters, while the deliveries of the electric truck are expected for late 2021, fuelling Tesla’s exceptional sales growth and profitability for the next years.

The record deliveries came despite the 1.5-month shutdown of the company’s Freemont, California production facility and a sharp decline in overall U.S. auto sales. However, Tesla said earlier this year it would expect to deliver a combined 500,000 vehicles of Model 3 and Model Y by the end of 2020.

Another major catalyst for Tesla’s record valuation is the Chinese market, where the brand-new Tesla’s Shanghai factory is expected to be able to deliver up to 4.000 vehicles per week in the second half of the year.

Monday, 06 July 2020 / Published in Global Finance

The European Commission, amid the coronavirus outbreak, approved a Finnish guarantee plan of around $671 million (€600 million) in supporting the maritime companies.

The plan was approved by the state aid Temporary Framework and adopted in March this year.

The maritime operators that are maintaining the security of supply to Finland will have access to this scheme.

The goal of the Finnish guarantee plan is to support the companies in terms of liquidity, operations, maritime cargo traffic, supplies to Finland, and cover the working capital needs following the coronavirus outbreak.

Moreover, as per the Executive Vice-President in charge of competition policy, Margrethe Vestager, the Finnish guarantee plan will assist the companies transporting supplies to Finland to somehow cover their immediate or urgent working capital needs.

Friday, 03 July 2020 / Published in Analysis

As we closed the quarter, US markets had their best quarterly performance since 2008. Not bad considering the devastation we witnessed when COVID19 broke out. However, the bounce is not spread out evenly against all sectors or stocks.

Technology related stocks performed the best, partially because they were not affected by the pandemic, partially because they were a beneficiary of it. However, most stocks did not benefit and even more have seen losses rarely seen by most of us.

The problem with the market currently is that within the technology space, most stocks are either extremely expensive, or borderline bubble territory. In fact, most of the technology space today is simply not investable by almost any valuation method.

Then there is another very big percentage of the market that is very difficult to invest, because the COVID19 pandemic is still in play and we simply don’t know to what extent these companies will be affected (or not). Most stocks in this category are fairly valued, but we have to wait to see to what extent the pandemic has affected them. More clarity is needed for this category, and we will get this clarity after Q2 results get published.

And then there is another batch of stocks that either haven’t been affected, or have been affected very little, yet trade for scrap and no one is buying them. Yes, this is where the real value is, especially in the small cap space, but they can’t seem to get a bid.

Investors dilemma for Q3

So, the question is, do you buy in the technology game (in essence momentum trading) hoping the sky doesn’t fall under you, or do you buy stocks that have the potential to increase in value, but are out of favor?

It’s a difficult question to answer these days, because the technology trade has been successful for a while now. At the same time it’s very difficult to invest in many of these companies when one considers the balance sheet and the valuation (market cap) when you manage money for a living. Simply put, from an active manager’s perspective going with the flow and trading technology is not easy to do.

Bottom line

We think the easy money has been made during the last quarter’s bounce. There are simply too many variables and unknow factors to buy stocks blindly simply because they are in style, or because everyone else is doing the same.

So, we will keep doing what we know best, buying stocks that have value and can perform under difficult situations. Because when there is room in the balance sheet for error, eventually stocks bounce back. However, when the balance sheet is in question, and the sky falls under you, it might be a very long time before you recover.

Either way Q2 result will probably be worse than Q1 and investors have to be extra careful. And buying a good balance sheet, at a fair valuation, is always a recipe for prudence.

Friday, 03 July 2020 / Published in Analysis

For many years, many have said that the EURO is a currency destined to fail. Yet, Europe has been getting richer every year, and its citizens enjoy the highest living standards in the world. Yes, Germany’s growth is mediocre at best, however this does not mean that German citizens haven’t received above inflationary pay raises over the years. In fact, with Germany’s current account surplus of around 7% (5% for the Euro Zone), it’s difficult for the average salary to stay the same.

There are many problems in Europe, such as the banking sector, however this has nothing to do with the Euro, but with the fact that banks were never repaired to begin with post of the 2008 crisis as they were in the US. And for those who say that negative rates have not done much to fix Europe’s problem, I say negative rates have nothing to do with Europe’s problems, and are rather a consequence of Europe’s success.

The recent COVID19 crisis could be a reason for faster political union in Europe. By that I mean a Federal Army, Coast Guard, Federal Courts and prison system, banking unification and fiscal unification. Granted that these are very long-term goals in the EU, however they have been proceeding at a snail’s pace.

The 750 billion-euro joint debt plan to help Euro economies cope with the COVID19 pandemic could be a reason for unification among the bloc’s 27 member nations to roll faster.

The importance of this joint debt issue cannot be underestimated, because it is something very few thought was possible before the COVD19 crisis. Yes, European leaders who were against joint debt issues have in a way been forced to agree, however this is still a first step towards a fiscal union.

What’s next? Perhaps a European Federal Coast guard, to tackle the immigration crisis? Perhaps the long-awaited banking union, with a federal system to guarantee deposits? Perhaps a Federal Securities and Exchange Commission, that will at last replace local officials, that sometime act as cheerleaders for local companies and turning a blind eye, as the recent case of Wirecard in Germany.

The bottom line is that the COVID19 pandemic might be a reason for faster political integration in Europe. Yes, Europe still has a long way to go, but the recent joint debt issue, although being a very tiny first step, might speed things up.