Apr 8, 2019

Axios Markets

Congratulations to Kofi Kingston on winning the WWE Championship at Wrestlemania last night in dramatic fashion.🥇

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Situational awareness:

  • Pinterest set its IPO price range at $15–$17 per share. Pricing in the middle of that range puts the company's market cap at $8.5 billion — lower than its $12.3 billion private valuation. (Axios)
  • Nissan Motor's shareholders voted to strip Carlos Ghosn of his board title, severing Ghosn's final tie to the company days after he was re-arrested in Tokyo. (Reuters)
  • "The Bank of Japan on Monday cut its assessment for three of the country’s nine regions, the biggest number of downgrades in six years." (Reuters)
1 big thing: The Fed is already full of Trump's picks

Illustration: Lazaro Gamio/Axios

It's a strange Trumpian irony that the president is so upset with the Federal Reserve, because he picked many of its current members.

Why it matters: If officially nominated and confirmed, pundit Stephen Moore and former CEO and presidential candidate Herman Cain would put 6 Trump nominees out of 12 voting members on the Federal Open Market Committee. But his previous nominees haven't been like Moore and Cain.

  • Trump replaced Janet Yellen, known as a policy dove who favored lower U.S. interest rates, with Jerome Powell, a lawyer with significant Fed experience who was considered more of a rate hiking hawk.
  • Trump also replaced outgoing vice chair Stanley Fischer with Richard Clarida and has already nominated Randal Quarles, Marvin Goodfriend, Nellie Liang and Michelle Bowman to the Fed. (Goodfriend's nomination expired when the last Congress expired and Liang removed herself from consideration.)

"Trump so far has picked a moderate as Fed chair, and the rest of his nominees include two hawks, one unknown, and one moderate dove," Adam Ozimek, an economist at Moody's wrote last year when Trump first began making the case for lower rates. "If you wanted rates to stay lower for longer, why would your nominees look like this?"

The big picture: All of them are well-respected economic professionals, and normally that would be enough.

  • "If Trump were a normal president, appointing highly regarded individuals who can ensure effective policy making would be business as usual," Kenneth Rogoff, a professor of economics at Harvard and a previous IMF chief economist, wrote in 2018.
  • "But here is a president who has often chosen officials with little government experience, and then seems to task them with creating the most disruption possible in the departments they are selected to run."

So, why the change? I suspect it's because Trump doesn't understand monetary policy but realizes the economy isn't going to grow the way he promised on the campaign trail and may even fall into recession, so he's setting the Fed up as a scapegoat.

Axios' Jonathan Swan tells me via email that it's much simpler: "People close to the president say Trump is pissed at Powell and views the Powell-led Fed as the biggest threat to markets and the economy. So he’s throwing some bombs into the building."

2. Here's why now is a good time to work in retail
Expand chart
Data: Deutsche Bank Research; Chart: Axios

The March jobs report showed that nationwide, wage growth is settling in right above 3%, but it has been growing much faster for retail workers. Unlike most segments of the economy, retail workers' wages are now growing faster than they were during the boom years of the early 2000s.

The big picture: The outperformance is being driven by a combination of state-by-state legislation and a shrinking talent pool.

Target, which employs more than 300,000 workers and operates 1,845 stores in the U.S., announced last week that it was raising its minimum wage to $13 an hour. It raised it to $12 an hour, from $11, just last year. Pressure is now going on Walmart, the world's largest retailer, to likewise increase its $11 hourly minimum wage.

Companies like Amazon and Costco are paying workers a $15 an hour minimum.

The impact: Retail wages stand apart from the crowd, but data shows that broadly low-wage workers are beginning to see higher wage gains, on a percentage basis, than high-wage workers.

  • In March, Goldman Sachs analysts pointed out in a note to clients that "wage growth has picked up sharply in the bottom half of the wage distribution, with considerably slower growth in the upper half."
  • "This pattern is consistent with our prior finding that lower income wage growth is more sensitive to slack, while higher income wage growth is more sensitive to corporate profitability."

Conor Sen, a portfolio manager for New River Investments, writes for Bloomberg that the trend looks likely to continue.

  • "As long as the economic expansion continues, because of these dynamics, we should expect service labor wage growth to continue outpacing knowledge worker wage growth."
  • "You can't outsource a line cook or an Uber driver to another city, but companies can shift their knowledge jobs to lower-cost metros."
3. Investors are selling stocks, but the market keeps rising

The Dow gained nearly 500 points last week to close at 26,424. It's now just "1.5% shy of its all-time high of 26,828.39, set on Oct. 3, 2018," Barron's notes. The S&P 500 is just 1.3% from its record close, and the Nasdaq is just 2.1% away from a record high.

Why it matters: U.S. stocks have shaken off almost all of their December sell-off, yet banks continue to report that investors are selling, not buying, equities.

  • "Fund flows continue to rotate towards bonds and out of equities. Bonds funds have continued to rake in flows ($11.4 billion this week) across almost every category, while large equity outflows persist (-$7.7 billion this week)," analysts at Deutsche Bank said in a Sunday note to clients.
  • So far in 2019, bond funds have seen almost $150 billion of inflows while equity funds have recorded $50 billion of outflows.

"The persistent outflows despite the strong equity rally are unusual but as we noted last week, have been driven by investors chasing falling yields," Deutsche analysts added.

Yes, but: Data from Lipper also shows money moving out of equities (-$11 billion) and into not just bonds but safe-haven money market funds, which took in $31.6 billion in net new money at the end of March, according to the most recently released report.

The bottom line: Aside from hedge funds, real money has largely been on the sidelines during the equity market's run, a theme that has been in place all year. What seems to really be pushing the stock market higher is corporate buybacks, which are on pace to surpass last year's record total.

  • But buybacks have long been a major part of U.S. stocks' rise. A recent study from researchers at the Abu Dhabi Investment Authority found that from 1997 to 2017, net buybacks explain 80% of the difference in countries’ stock market returns.
4. Bears are out for bitcoin

The latest report from the CFTC shows net shorts on bitcoin Cboe futures rose to 1,343 contracts, from 1,244 the previous week, after the cryptocurrency's recent surge.

Driving the news: Bitcoin jumped 20% to its highest level since November last week, moving briefly above the $5,000 mark. A Reuters report credited the surge largely to "an order worth about $100 million spread across U.S.-based exchanges Coinbase and Kraken and Luxembourg’s Bitstamp."

  • The cryptocurrency has bounced back after being left for dead by most investors. In February, traders raised long bets on bitcoin to the highest level in 11 months, and prices crossed above the 100-day moving average for the first time in more than 4 months.

What they're saying: Bitcoin bull Yves Lamoureux, president and chief behavioral strategist of research firm Lamoureux & Co., believes bitcoin is primed for a spike.

  • "6,000 is the first target coming up as funds try to cover for their life," he tells Axios via email. "Time compression is where things now happen faster. 40,000 to 50,000 is the target by 2021."

Short sellers will certainly have more trouble betting against bitcoin going forward. Cboe Global Markets said last month it plans to phase out bitcoin futures contracts. However, CME Group, which has seen higher trading volumes than Cboe, told CoinDesk it has "no changes" to announce about bitcoin futures contracts.

Bonus: Also in last week's CFTC data: "Long positioning in the dollar jumped this week to a 3-year high as Euro shorts rose to the highest since Dec 2016."

5. Expect to see a lot more M&A in the cannabis industry

Photo: p_saranya/Getty Images

The cannabis market is quickly maturing, and as it gets legal footing nationally in Canada, many of the bigger players are starting to take bigger chunks of the market through mergers and acquisitions.

  • "The cannabis market is ripe for significant consolidation, and the pickup we have experienced recently is likely only the beginning," cannabis industry investor and analyst Alan Brochstein writes in Fortune.

Details: Consumer spending on legal cannabis is expected to rise to $16.9 billion this year after reaching an estimated $12.2 billion in 2018, according to a report from industry proponents Arcview Market Research and BDS Analytics.

  • The market saw large tie-ups last year with Constellation Brands’ $4 billion investment in Canopy Growth and Altria's $1.8 billion buy-in of a 45% stake in Cronos.

Last week, Cresco Labs announced it would acquire CannaRoyalty, "the largest acquisition of a public company operating in the American cannabis industry to date," Brochstein wrote.

  • "We should expect to see more transactions. ... The reasons they are consolidating is to gain scale in their operations as well as to lower their cost of capital. Additionally, the expanded presence helps them to extend and leverage their branding."
  • "While many of these companies will likely fade away over time as they are unable to compete and ultimately to justify their valuations, it is likely that we will see continued consolidation."

Watch this space: The most recent U.S. Farm Bill also is driving much of the industry's growth as American companies can now sell and market hemp products.