Feb 12, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

🌵Hello from Phoenix! I'm in town watching Arizona's No. 1 ranked girls high school basketball player, senior point guard Senya Rabouin (look at these numbers), and the Shadow Mountain Matadors begin their playoff run.

Situational Awareness: Eurozone industrial output fell by 2.1% in December — the most in four years. It's a worrying sign as the drop took place before the novel coronavirus outbreak. (Bloomberg)

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1 big thing: Gentlemen (and ladies) prefer bonds

Illustration: Aïda Amer/Axios. Photo: Sunset Boulevard/Getty Contributor

After pouring record inflows into bond funds last year, investors are doing so at an even faster pace in 2020 — pushing 10 times more money into bonds than stocks.

By the numbers: More than $65 billion has flowed into bond funds this year, according to Lipper Refinitiv data provided to Axios, outpacing inflows through 2019's record pace when bond funds took in $316 billion.

Why it matters: As of Tuesday's close the S&P 500 had made 10 record highs in just six weeks this year, and has risen and held above 3350, a level many investment managers targeted in their 2019 end-of-year outlooks.

  • The Nasdaq made its 12th record close Tuesday, but investors still don't seem to want equities, as stock funds have seen just $5.7 billion of inflows, year to date.

What's happening: Experts tell Axios that a confluence of issues are behind the bond-buying binge that has elevated purchases of investment-grade corporates and U.S. Treasuries over equities despite the stock market's strong performance.

  • Price-to-earnings ratios on U.S. stocks are at historically high levels, and traders continue to brace for a downturn, especially with worries growing over the novel coronavirus outbreak.
  • A growing number of baby boomers are switching their allocation to safer assets like fixed income as they near and enter retirement.
  • Foreign buyers — especially from Japan, which is the top overseas holder of U.S. government debt — have increased buys since a September decision allowing pension funds to buy U.S. and international debt.

Yes, but: When removing equity mutual funds, the allocation to stocks so far in 2020 is significantly higher. Investors have been moving out of higher cost mutual funds and into low-fee (and even negative-fee) ETFs for years.

  • Equity ETFs have seen $38.5 billion of inflows this year.

Still, that number is only a bit more than half of the bond fund inflow total, and bonds have seen a much higher volume of flows to funds excluding ETFs ($47.7 billion) than to ETFs ($17.9 billion).

The big picture: Thanks in no small part to the Fed holding interest rates at historically low levels and continuing its bond buying program, investors have piled into debt over the past two years.

  • More than $382 billion has flowed into bonds since the start of 2019, Lipper's data shows, while $191 billion has flowed out of equity funds.
Bonus: Missed gains

Since 2010, more than three times as much money has flowed into bonds as into stocks — $1.5 trillion vs. $428 billion.

Fun fact: During that time, the value of stock funds held by investors has gone from $5.7 trillion to $14 trillion, while the value of bond fund holdings has gone from $2.7 trillion to $5.7 trillion, per Lipper. This is largely because equities have outperformed bonds by so much.

2. Catch up quick

China announced additional tax breaks and subsidies, including exempting people participating in epidemic prevention and control from personal income tax, and waiving value-added tax for workers in sectors like transportation and delivery. (Xinhua)

Dish executives have told some on Wall Street that the company has held talks with Google and Amazon about building a new wireless carrier. (NY Post)

Huawei can covertly access mobile networks through back door channels meant for law enforcement, U.S. officials say. (WSJ)

China's Hubei province reported 1,068 new confirmed cases of the novel coronavirus, down from a peak of more than 3,000 and the lowest number since Jan. 31 (Reuters)

3. Job openings in 2019 fell by the most since the financial crisis
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Data: BLS via Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The number of job openings in the U.S. declined consistently throughout 2019 and took a nose dive in the last two months of the year, the government's December Job Openings and Labor Turnover Survey (JOLTS) showed.

  • Job openings declined by 364,000 in December after a decline of 561,000 in November.
  • The total number of openings fell to 6.4 million, the lowest in nearly two years, and the decline over the past year is the largest since the financial crisis.

Why it matters: “Net, net, job openings around the country are plummeting in a way that we hate to say looks like a recession,” Chris Rupkey, chief financial economist at MUFG Union Bank, told CNBC.

  • Peter Boockvar, chief investment officer at Bleakley Advisory Group, told Barron's “It’s clear here that with a 2%-type GDP economy rather than something near 3% has resulted in a lesser demand for labor.”

Yes, but: The numbers in the rest of the JOLTS report tell a different story.

  • The total hire rate increased for the month, from 3.8% to 3.9%, and separations increased just 0.1 percentage point, to 3.8%.
  • The all-important quits rate, seen as a top measure of worker confidence, held steady at 2.3%, still near the highest level on record.
4. U.S. household debt tops $14T for first time

Household debt increased by more than $600 billion last year, topping $14 trillion for the first time, and marking the largest one-year jump since 2007, new data from the New York Fed shows.

  • The growth was driven mainly by a large increase in mortgage debt balances, which rose by $433 billion.

Between the lines: More young people are taking on credit cards and there has been an increase in delinquencies since 2016, "notably among younger borrowers,” Wilbert Van Der Klaauw, SVP at the New York Fed, said in a statement.

  • About 41% of eligible Gen Zers (those born in the mid-1990s or later) had a credit card last year, compared to 34% of millennials reaching the same age in 2012, according to a new survey from TransUnion, per Bloomberg.
  • The average 24-year-old last year, owed about $2,000 on credit cards, about one-third more than millennials at that age in 2012, the study found.

But, but, but: While total household debt has risen, the level of household debt service as a percentage of disposable income has fallen to an all-time low, according to St. Louis Fed data.

5. Where UnitedHealth is making its money
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Data: Company documents; Chart: Axios Visuals

UnitedHealth Group is mostly known as one of the country's largest health insurance carriers, but the massive conglomerate is increasingly making its money from things that have nothing to do with health insurance, Axios' Bob Herman reports.

The bottom line: UnitedHealth doesn't just want to be your health insurer. It wants to be your doctor, your outpatient surgery center, your mail-order pharmacy and your drug price negotiator.

By the numbers: UnitedHealthcare is still UnitedHealth's most profitable unit, generating more than $10 billion in operating earnings in 2019 as a major carrier of employer and Medicare Advantage plans.

  • But UnitedHealth's Optum subsidiaries are close behind. Optum collected more profit in the fourth quarter of 2019 ($3 billion) than UnitedHealthcare ($2.1 billion). And that's not new: Optum has had a stronger Q4 than UnitedHealthcare in each of the past five years.

Between the lines: The most profitable segment within Optum is OptumRx, which is part of the pharmacy benefit manager oligopoly that controls how drugs are paid for and which drugs are covered.

  • Rebates negotiated from drug companies, and other behind-the-scenes fees, have turned OptumRx into a cash cow — often at the expense of employers and their workers.
  • Optum's other units also are growing. They include a bank for health savings accounts, physician practices, urgent care clinics, surgery centers and almost any conceivable piece of technology and consulting used in health care.
6. Big gains after the T-Mobile-Sprint merger approved
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Data: Investing.com; Chart: Axios Visuals

A federal judge approved the T-Mobile and Sprint merger without conditions on Tuesday and the market took it as a green light to buy stock from every company involved, as the DOJ and FCC had also already approved the deal.

  • T-Mobile said it expects the merger to close "as early as April 1."

What happened: Sprint stock rose a staggering 77.5%, T-Mobile's stock jumped 11.8% to $94.49 and Dish Network's stock, the company that will create a cellphone company to compete with the newly combined Sprint-T-Mobile behemoth, gained 7.1% to $39.48.

Dion Rabouin

Wangari Maathai was an environmental and political activist who founded the Green Belt Movement in 1977 and became the first African woman to win the Nobel Prize.

  • Maathai planted more than 45 million trees around Kenya and in 1984 was awarded the Right Livelihood Award for "converting the Kenyan ecological debate into mass action for reforestation."
  • She was later elected to Parliament and served as assistant minister for environment and natural resources to the president from January 2003 and November 2005.