Two months ago a short selling research firm alleged that there was misreporting of financials at the Chinese coffee giant, Luckin Coffee. The company denied the report as unsubstantiated speculation with malicious intent.
This morning the company reported that it has suspended its COO and several other employees for misconduct related to fabricating transactions. These are precisely the claims that were made two months ago.
The stock was down more than 80% this morning.
Who was the biggest loser?
It’s the top shareholder and angel investor in Luckin, the Chinese billionaire Lu Zhengyao.
Zhengyao is a serial entrepreneur. He founded the rental car company Car Inc. in 2007 and took it public in 2014 on the Hong Kong Stock Exchange. His former COO is credited with founding the Starbucks competitor, Luckin Coffee in 2017. In 2019, the company IPO’d on the Nasdaq.
Zhengyao was the angel investor behind the company and holds 484 million shares. At yesterday’s close, that stake was valued at over $12 billion. At the lows this morning, it was valued at $2.2 billion. Learn more about the stakes of billionaire investors here.
With this morning’s third quarter GDP number, the economy is officially growing at the fastest pace since 2006.
And yet stocks are now flat on the year.
Let’s look at some key charts as we head into the weekend.
We’ve looked at this big trendline in the S&P 500 futures. We got very close today.
We have a similar line coming in here for the Dow. A touch of that line would be a 10% correction on the nose.
Remember, the core of this correction is about a re-pricing of the tech stocks. We looked at this chart on Amazon earlier this month.
And now we have this…
Amazon topped the day it crossed the trillion-dollar valuation threshold and is now down 20%. But also remember, at the peak, the stock had more than doubled in a year. Even after this decline, and after blow out earnings, the stock still trades at 161 times earnings.
As we know, Trump is leveling the playing field internationally,and domestically. And the tech giants, which have been priced like monopolies, are coming back down to Earth.
This correction gives us a chance to buy the broader stock market into a 10% correction, at 15 times earnings (cheaper than the long term average) in a 3% economy, with 20% year-over-year corporate earnings and corporate sales growth running double the rates of the past twenty years. Don’t run out of the store when stocks are on sale.
Finally, among the many interesting charts this week is gold. In the chart below, you can see gold has held the big trendline from that dates back to the inception of QE. With inflation finally showing some life, and with signficant wealth in Saudi Arabia looking for a safe hiding place, gold should be the natural winner.
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Those that look for reasons to pick apart the bull case for the economy and markets were disappointed by the ECB this morning.
As we discussed earlier in the week, the improvements in the U.S. economy and the trajectory of U.S. rates has cleared the path for Europe to finally exit QE. And the ECB confirmed this morning that they remain on that path — to end QE into the year end.
The idea that Europe can exit QE is a huge positive for both the European economy and the global economy – a confidence signal.
With that, German stocks are a big buy here. As you can see in the chart below, while the S&P 500 is on record highs, the DAX has been well underwater on the year (down more than 6%).
The index also trades well under the 200 day moving average (the purple line). To close the performance gap in this chart, German stocks could be in the early stages of a 13%-15% run.
And stocks in Europe should be supported by a strengthening euro.
Remember, as the global economy improves, the dollar should get weaker. The growth and rate gap (between the U.S. and the rest of the world) will be narrowing from here, which will promote foreign capital to flow into currencies like the euro. But most importantly, the exit of QE means Europe has escaped the dangerous crisis era, which means money will flow “back home“ out of/from the world’s safe-haven asset (dollar-denominated U.S. Treasury market).
I suspect the euro will trade closer to 1.30 by this time next year, as the ECB will begin raising rates in 2019, and likely follow the U.S. lead on fiscal stimulus to drive growth.
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As we’ve discussed, tech and small-caps (the Nasdaq and the Russell 2000) have been big outperformers on the year, compared to blue-chip stocks. But today seemed like an exhaustive move in that divergence.
There was a clear rotation out of the small-caps (which finished down on the day) and into the blue chips (the Dow finished up nicely on the day). And the red-hot Nasdaq reversed from new record highs to finish flat.
Trump tweeted this morning that tariffs are bringing trade parters to the negotiating table. He seems to be confident that his meeting with EU Chief Jean-Claude Juncker tomorrow will result in concessions from Europe. And there seems to be movement on a new NAFTA deal too. Add this to more good earnings hitting from second quarter earnings season, and it’s enough to get big investment managers moving back into the blue-chip multinationals.
Remember, we’ve been watching this chart. The Dow still has a long way to go, to recover the record highs of earlier this year. But the technical breakout of this corrective downtrend has broken.
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Last Thursday we talked about the important Supreme Court ruling, which would subject internet sales to state tax. As I said, this was another “level the playing field” step for the Trump administration. And another shot across the bow of the tech giants — the near monopolies that have destroyed industries over past decade, in large part to the regulatory advantages they’ve enjoyed relative to their old-line industry peers.
With that, on Thursday, we looked at this big reversal signal that developed in the tech-heavy Nasdaq — an ominous signal for the tech giants.
Today, we got this …
And this, in Amazon…
Meanwhile, what was UP on the day? Brick and mortar retail. Walmart was up 2%. Target was up 1%.
A lot of attention on the day, from the financial media, was given to trade threats. But this domestic “level of the playing field” is the real story.
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We talked yesterday about the big influence of oil. And how the swings of the past few years have directly impacted the global economy.
Too low was threatening another global financial crisis. Now, too high is threatening to choke off the strength of the economic recovery.
Both high and low prices have been manipulated by OPEC. And we now await a decision from OPEC nations on whether or not a they will hike production to curb the level of oil prices. For a group that operates for their best interest, it doesn’t seem to be in their best interest. That decision will be announced tomorrow at a press conference.
Given the attention the Trump has given to OPEC and oil prices recently, a negative surprise (i.e. no production hike) may trigger the oil price/stock market inverse correlation trade (oil goes up, stocks go down).
On that note, we have some negative momentum going into tomorrow. Before today’s close, the Nasdaq was up 14% year-to-date. Meanwhile, the S&P 500 is up just around 3%. That’s a lopsided market.
But today we get a big outside day (key reversal signal) in the Nasdaq futures.
And the catalyst for this technical reversal setup was the Supreme Court ruling today that internet sales should be subject to state tax.
We’ve talked about the building scrutiny from the Trump administration facing the tech giants. This is another “level the playing field” step. If Amazon is pricing in the prospects of taking over everything (i.e. monopoly), this is the shot across the bow.
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On Friday, we talked about the building momentum in the economy. We’ve already had huge positive surprises in corporate earnings for the first quarter. And we’re probably just beginning to see the positive surprises on economic data roll in.
Remember, despite the execution success on Trumponomics over the past year (deregulation, repatriation, tax cuts and $400 billion in new government spending approved), the Fed is still expecting growth to come in well below trend (3%), at 2.7%. That’s just 20 basis points higher than they projected prior to the execution of massive tax cuts in late December.
The good news: Positive surprises are fuel for confidence and fuel for stocks.
Remember, we’ve yet to have a return of ‘animal spirits’–a level of trust and confidence in the economy that fuels more aggressive hiring, spending and investing. We should see this reflected in wage growth. Wage growth has been the missing piece of the economic recovery puzzle.
On that note, we’re now near the best wage growth in nine years, and that tax rate cut is still in the early stages of working through the economy.
Don’t underestimate the value of confidence in the outlook (and the return of “animal spirits”) to drive economic growth higher than the number crunchers in Washington can imagine. Remember, these are the same experts that couldn’t project the credit bubble, and didn’t project the sluggish ten years that have followed.
Remember, while we’re in the second longest post-War economic expansion, we’ve yet to have the aggressive bounceback in growth that is characteristic of post-recession recoveries. We now have the pieces in place to finally get it.
So, as we’ve discussed throughout the year, the backdrop continues to get better and better for stocks.
We talked yesterday about the important inflation data. That was in line this morning. And with that, the big 3% level on the benchmark 10-year government bond yield remains well preserved.
But stocks soured anyway on the day, and it was led by the Nasdaq.
Let’s take a closer look at the Nasdaq.
This is where the big tech giants, Apple, Microsoft and Amazon have led the charge back in the index back to new record highs over the past couple of days. Those three stocks represent about a third of the index (and contribute heavily to the S&P 500 too).
But as the three tech giants led the way up, they cracked today, and we now have some very compelling signals that another down leg for stocks may be here.
First, as the broader financial markets are still licking the wounds of the sharp correction, and still jittery, Apple hit a record high valuation of $925 billion this week (sniffing near the trillion dollar valuation mark). And then it did this today…
As you can see in this chart above, Apple put in a huge bearish reversal signal (an outside day).
So did Microsoft (a huge bearish reversal signal).
So did Amazon, after breaching record levels of $1600 over the past two days …
And, not surprisingly, same is said for the Nasdaq – a big reversal signal…
The S&P 500 had the same reversal pattern.
For perspective, if we avoided the distraction of the big cap weighted indices, the Dow chart tells us the downtrend in stocks from the late January highs remains well intact.
Rates continue to run higher. As we’ve discussed, the move higher in rates is likely to stifle the runup in stocks, until we start seeing the fiscal stimulus benefits reflected in the data. That will be a couple of months away.
Globally, there are already some technical signals indicating a lower path for stocks (NYSE:SPY).
Here’s a look at China …
Chinese stocks (NYSE:FXI) ran up over 8% and have already given back 4% in just four days (marked by an outside day at the top).
Japanese stocks (NYSE:DJX) have soared 25% just in the past four months. And this big trend broke down just a few days ago.
German stocks are 4.5% off of record highs just over the past nine days.
And stocks in the UK were the first to top out in the middle of January, now off almost 4% from the record highs. Canadian stocks are down 3.3% in the past week, from record highs. Both the Bank of England and the Bank of Canada are already on the move on normalizing interest rates.
This all continues to look like a world that is pricing in the end of QE, as we’ve discussed. And it’s happening because fiscal stimulus in the U.S. is expected to lift all boats, leading ultimately to major central banks and governments following the path of the U.S. — exiting emergency monetary policy, and stoking the recovery by adding fiscal stimulus.
Ultimately, that gives the global economy the best chance to sustainably recover from the economic slog of the past decade. But again, expect the “prove it to me period” to be coming (if not underway) for stocks, waiting to see the better growth justify the “end of QE” theme.
With this in mind, we had some spotty earnings from the stock market giants after the bell: Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). The FAANG trade is up 15% this year alone, and up huge since the election (about 75%). But remember, the administration’s regulatory outlook isn’t so favorable to the tech giants. We may some cracks in the armor starting to show.
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As I said on Friday, people continue to look for what could bust the economy from here, and are missing out on what looks like the early stages of a boom.
We constantly hear about how the fundamentals don’t support the move in stocks. Yet, we’ve looked at plenty of fundamental reasons to believe that view (the gloom view) just doesn’t match the facts.
Remember, the two primary sources that carry the megahorn to feed the public’s appetite for market information both live in economic depression, relative to the pre-crisis days. That’s 1) traditional media, and 2) Wall Street.
As we know, the traditional media business, has been made more and more obsolete. And both the media, and Wall Street, continue to suffer from what I call “bubble bias.” Not the bubble of excess, but the bubble surrounding them that prevents them from understanding the real world and the real economy.
As I’ve said before, the Wall Street bubble for a very long time was a fat and happy one. But the for the past ten years, they came to the realization that Wall Street cash cow wasn’t going to return to the glory days. And their buddies weren’t getting their jobs back. And they’ve had market and economic crash goggles on ever since. Every data point they look at, every news item they see, every chart they study, seems to be viewed through the lens of “crash goggles.” Their bubble has been and continues to be dark.
Also, when we hear all of the messaging, we have to remember that many of the “veterans” on the trading and the news desks have no career or real-world experience prior to the great recession. Those in the low to mid 30s onlyknow the horrors of the financial crisis and the global central bank sponsored economic world that we continue to live in today. What is viewed as a black swan event for the average person, is viewed as a high probability event for them. And why shouldn’t it? They’ve seen the near collapse of the global economy and all of the calamity that has followed. Everything else looks quite possible!
Still, as I’ve said, if you awoke today from a decade-long slumber, and I told you that unemployment was under 5%, inflation was ultra-low, gas was $2.60, mortgage rates were under 4%, you could finance a new car for 2% and the stock market was at record highs, you would probably say, 1) that makes sense (for stocks), and 2) things must be going really well! Add to that, what we discussed on Friday: household net worth is at record highs, credit growth is at record highs and credit worthiness is at record highs.
We had nearly all of the same conditions a year ago. And I wrote precisely the same thing in one of my August Pro Perspective pieces. Stocks are up 17% since.
And now we can add to this mix: We have fiscal stimulus, which I think (for the reasons we’ve discussed over past weeks) is coming closer to fruition.
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As I said