Mar 25, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

There will be zero news here about the Mueller report. None.

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Situational awareness:

  • After months of rumors and speculation, Apple is finally unveiling its plans to take on Hollywood and the news business. (Axios)
  • Nearly 80% of parents give some financial support to their adult children, totaling $500 billion a year, more than double what they put in retirement accounts. (Barron's)
  • Close to 95% of all reported trading in bitcoin is artificially created by unregulated exchanges, a Bitwise survey finds. (WSJ)
1 big thing: Investor FOMO is driving Lyft's valuation sky high
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Not only is Lyft not profitable now and losing $911 million a year ("it would appear to be the largest-ever net loss for a company entering the public markets for the first time," Axios' Dan Primack points out), the company has said it's not sure how it ever will be profitable. But investors don't care.

Driving the news: Lyft is expected to price on Thursday and go public Friday, with estimates for the company's market cap having risen to $25 billion.

  • That's $10 billion higher than its most recent private valuation of $15.1 billion, which was double its value as recently as April 2017 of $7.5 billion.

What's happening: Lyft's IPO is perfectly timed at the intersection of 3 concurrent market themes that are driving investor FOMO.

  • Private companies are staying private for longer and growing larger than they have before. Despite a recent uptick, fewer companies than ever are going public.
  • Private equity managers are holding more dry powder, or money on the sidelines, than ever before. That's a function of more money flowing into private equity as its returns have beaten public markets' and a lack of new businesses deemed worthy of that capital.
  • The stock market is rising again, headlined by big technology names, toward all-time highs with rich valuations that's even got Warren Buffett saying he can't find anything to buy.

The intrigue: This is a wide-ranging phenomenon that's even demonstrated itself in Tajikistan government bonds.

Despite being a country most investors couldn't find on a map, Tajikistan's $500 million bond offering in 2017 received $4 billion worth of bids, or 8 times more than it offered. That was with a credit rating well below investment grade and absolutely no track record.

As I wrote not long after the Tajikistan deal, emerging market debt was so in demand from buyers in search of high yields and whatever was hot at the moment that dedicated EM investors literally weren't able to get bonds they wanted.

  • "It's frustrating for me as an investor," Josephine Shea, portfolio manager at Standish Mellon Asset Management said at the time. "There seems to be quite a bit of indiscriminate buying without looking into underlying fundamentals."

The theme continued this year as Uzbekistan, another former Soviet country that has never before sold bonds to the international market, produced a $1 billion bond offering at a 4.75% coupon (well below average) that received $5.5 billion of bids.

The bottom line: Whether it makes money or not, Lyft is a hot name that's part of a successful sector. It has been just the latest beneficiary of investor FOMO. That's driving Lyft's valuation to potentially double what it was just 9 months ago and more than triple what it was 2 years ago.

  • Barring a recession or some cataclysmic error or scandal, the rest of the LUPAS (Lyft, Uber, Pinterest, Airbnb and Slack) will probably see similar valuation bulge.
2. Bond yields are at historic lows

Following the inversion of the U.S. Treasury yield curve, developed market government bond yields are all moving lower as investors seek safe havens.

  • German 10-year bond yields fell below zero for the first time since 2016.
  • Japan's 10-year yield is near -0.10, the lowest since 2016.
  • Australia's 10-year bond yield fell to an all-time low of 1.772% and New Zealand's 10-year bond also hit its lowest level on record.

U.S. 10-year bond yields have fallen more than 15 basis points since last week's Fed meeting and are more than 30 basis points below their early March levels, notes Deutsche Bank.

Marc Chandler, chief market strategist at Bannockburn Global Forex, points out that German, French, Italian and Spanish yields recently have fallen 25–35 basis points, while Portuguese and Australian bond yields have fallen around 45 basis points and 50 basis points, respectively.

  • "The sharp decline in interest rates is a significant development," Chandler said in a note to clients. 
3. Global manufacturing data is contracting

Factory activity in the eurozone contracted at the fastest pace in nearly 6 years. The bloc's aggregate PMI fell to 47.6 in March from 49.3, well below the 50 threshold that is the baseline for whether the sector is expanding or contracting.

  • In Germany, Europe's largest economy, new orders fell to the lowest level in a decade. 
  • In France, both manufacturing and service sector PMIs are now in the red.

Japan's manufacturing PMI also has fallen into contraction territory, following China's weakening readings that started falling below 50 late last year.

What's next: The market will likely be on pins and needles for the rest of this week awaiting readings on the U.S. economy. February's core PCE report will be released on Friday and other major U.S. data releases won't come until the week of April 1.  

  • February retail sales, the ADP private sector jobs report and the March U.S. jobs report will be released next week. March's ISM manufacturing PMI report will come out the following Monday, followed by March CPI and PPI data the week of April 8.

The dramatic fall in bond yields can be traced back to the Fed's incredibly dovish March meeting, says Win Thin, global head of currency strategy at Brown Brothers Harriman, because investors "need to see confidence emanating from policymakers to feel confident as well."

  • "Markets are left wondering 'what does the Fed know that we don't?' Thus, it all comes back to the data."
4. Credit Suisse double revises its S&P target
Expand chart

Data: Axios analysis of Wall Street outlooks; Chart: Andrew Witherspoon/Axios

Wall Street dialed back its bullish S&P targets after 2018's end-of-year selloff. Now a few analysts are starting to ratchet their targets back up, Axios' Courtenay Brown writes.

What's happening: Credit Suisse is the only major firm that's "double revised" so far — meaning the firm cut its initial price target late last year and revised it back up this month. Its most recent target reflects an 8% upside from the S&P's current level.

  • The firm's target — calculated by multiplying the implied price-to-earnings ratio and the earnings per share estimate — could have been higher, but Credit Suisse also lowered its earnings estimates for S&P companies to $170 from $174 thanks to projected declines in the "energy sector and Apple." That target is among the lowest on the Wall Street.
  • RBC has revised its S&P target just once. Last week, it said the S&P would end the year at 2,950 versus its initial 2900 estimate because the economy will "get back on track." It didn't change its $171 earnings estimate.

Between the lines: Credit Suisse is banking on a dovish Fed and a trade deal, rather than stellar earnings growth, to push the market higher.

5. It's been a good year for the markets, so far
Screenshot from investor Charlie Bilello's Twitter feed. (h/t to @danprimack)

Everything from commodities to U.S. large cap stocks has been in the green for 2019.

Dion Rabouin