Feb 6, 2019

Axios Markets

Was this email forwarded to you? Sign up here.

I dropped by the Pro Rata podcast hosted by the incomparable Dan Primack yesterday. Check it out here. Also, get more market insight by following me on Twitter. Or don't. Your choice.

Situational awareness:

  • Goldman Sachs is considering cuts to its commodities business, once a huge moneymaker and training ground for outgoing CEO Lloyd Blankfein. (WSJ)
  • Snap Inc. saw its stock rise more than 20% in after-hours trading Wednesday, after the company reported record revenues and lowered the margins on its losses. (Axios)
  • Apple's head of retail and online stores, Angela Ahrendts, is leaving in April after 5 years at the company. (CNN)
  • Spotify is buying 2 podcasting companies, Gimlet Media and Anchor — terms of the deals were not disclosed. (Axios)
  • The Fed's 2019 bank stress tests will assume the biggest jump in U.S. unemployment ever envisioned, but will also increase transparency. (Bloomberg)
1 big thing: The lingering effects of the shutdown

Illustration: Rebecca Zisser/Axios

The economy is slowing down. But no one is entirely sure by how much.

It's been harder than usual to determine for the U.S. because the 35-day government shutdown pushed back or halted important economic releases that inform policymakers and market participants.

Driving the news: This short week has already produced some less-than-stellar shutdown-delayed data points.

  • The November reading of U.S. factory orders was -0.6%, missing expectations by almost a full percentage point.
  • November's durable goods orders also missed economists' expectations by nearly a percentage point.
  • Both surveys were released on Monday, 2 months behind schedule.

Tuesday's reading on the health of the consumer sector, the ISM non-manufacturing index, was the lowest since July.

  • Employment rose but business activity was one-and-a-half points lower, new orders fell to the lowest in 13 months and new export orders fell 9 points to the lowest in 2 years.

What they're saying: "It's possible, if not likely, that the economy weakened during the shutdown and the data that would have given us a heads up on the turn in the economy was unreported because of the shutdown," Lou Brien, market strategist at DRW Trading tells Axios.

Remember: Consumer sentiment data has been substantially weaker of late, and as Charles Schwab fixed income analyst Kathy Jones noted yesterday, it can take 3–6 months for economic data to catch up to sentiment.

  • "The more the hard data softens or gets weaker the more concerned we get," Jones says.

For now, anxious investors are left waiting for data like factory orders, home sales, business inventories and international trade figures from November and December.

  • The December retail sales report, tracking the health of the American consumer during the crucial Christmas holiday shopping season won't be released at all because of the shutdown.
  • The advance economic indicators report for November also has been canceled,

Be smart: New dates have yet to be announced for the advance fourth quarter GDP report, December personal income and spending data and the December international trade report.

  • "Some of the recent private sector data was notably weak and now we wait for the government statistics to catch up and reveal a fuller description of the economy," Brien said.
  • "We need more data and time to see if this is a wiggle or a new trend."
1 bonus chart: The shutdown in services
Expand chart
Data: ISM, NMI Report on Business; Chart: Naema Ahmed/Axios

The January reading of the ISM non-manufacturing composite index missed expectations, matching its lowest point in 2018, hit in July.

More notably, the index's new orders and exports data fell significantly, with many of those surveyed citing the partial U.S. government shutdown as a primary cause for slowing business.

"Business has slowed well below expectations as our customers deal with the effects of economic situations exacerbated by the government shutdown," noted one survey respondent who works in construction.

2. "The third leg of the growth cycle"
"I tend to think of the U.S. as being in the third leg of the growth cycle. So, 2009-2011 being the first leg, which you could think of as quantitative easing, fiscal stimulus and bank recapitalization.
"The second leg was 2012-2014, it was corporate profits recovering and it was financial wealth effects.
"What was missing in that was the middle-class consumer, you might say the working American. From 2015 onward we moved into that third leg where tighter labor markets lead to higher wage growth, which leads to higher consumer confidence and higher consumer spending.
"I tend to think of it as being the last phase of the growth cycle because you've already had the corporate profit recovery, you've got the consumer recovery, so it's not clear what would drive growth after that.
"I do agree that recoveries don’t die of old age … but I am keenly aware that even though I'm optimistic, I'm recognizing that at some point this story will end.
"So what I'm more focused on in the market is identifying the companies that have high sustainable returns on capital and yet are trading on valuations that might not reflect that sustainability.
"If you think back to basic finance theory, when a company has high returns on capital, more capital comes into that industry and competes away those high returns. What we've found in our empirical analysis over the last 20 years is in many cases that does not happen.
"There can be things like brand value or the value of a network or a range of characteristics we've identified that can help companies sustain returns longer than the market expects and I think those are the kind of companies that are most attractive when you’re this far into an economic recovery."
— Ron Temple, managing director and head of US equities at Lazard Asset Management
3. Optimism on IPOs
Expand chart
Adapted from a BDO report; Chart: Axios Visuals

Despite messaging app Slack reportedly opting for a direct listing rather than an initial public offering, investors still expect 2019 to be a good year for IPOs.

What they're saying: Of the 100 bankers polled for BDO's 2019 IPO Outlook Survey, 71% expected that 2019 would match or outpace 2018's IPO activity.

Tech is expected to lead the way with 71% of respondents saying they see the number of IPOs in the sector increasing, followed by biotech and healthcare. Conversely, 49% of those polled expect consumer retail to see a reduced number of IPOs this year.

Yes, but: The optimism came in the face of declining data and expectations by 52% of bankers for a market correction in 2019. The survey was taken during December's stock market swoon, the worst month for the S&P since the Great Depression.

Other takeaways from BDO's survey:

  • 42% of bankers believe IPO activity in 2019 will increase, 29% expect it to stay roughly the same as 2018, and 28% expect IPO activity to decrease.
  • 12% of bankers say the pricing of a Unicorn like Uber or Lyft will be the most likely factor to spur increased IPO activity overall this year.
  • 37% expect private equity portfolios to generate the most IPOs this year; 35% see venture capital as the top source.
  • 12% of bankers view ICOs as a threat to traditional IPOs, down from 19% in 2017.
  • 61% of bankers expect the average size of U.S. IPOs will be between $200 million–$299 million, on par with 2018 averages.

More than half of those surveyed said it was the pro-business climate of the Trump administration and increased confidence in the U.S. economy that would spur the increase in newly public companies this year.

4. The State of the Union in four tweets





History: Born a slave in Crawford County, Ark., Bass Reeves became the first deputy U.S. marshal of African descent in the American West, and is credited with arresting more than 3,000 felons. He shot and killed 14 outlaws in self-defense.

Reeves beat up his master after a card game and fled into territory belonging to Cherokee, Seminole and Creek tribes, learning their languages. He remained hidden until he was freed by the 13th Amendment, which abolished slavery, in 1865.

He was later hired as a deputy because he knew the territory and could speak several languages of the indigenous people. Reeves brought in some of the most dangerous criminals of the time, but was never wounded, despite having his hat and belt shot off on separate occasions.

He is rumored to have been the inspiration for the fictional character the Lone Ranger.