Jun 22, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “I do not feel obliged to believe that the same God who has endowed us with sense, reason, and intellect has intended us to forgo their use.” - See who said it and why it matters at the bottom.

1 big thing: Robinhooders are becoming a force

Illustration: Sarah Grillo/Axios

Call it the "Robinhood effect." Video games and sports betting have taken a back seat in popular culture of late as millennials and Gen Zers have found a new craze: the stock market.

Why it matters: While many have wagged their fingers at what they see as overconfident and underprepared youngsters day trading on their smartphones, the stock market's new school — a collection of sports bettors, the newly unemployed, Reddit aficionados and eager young investors — is growing into a force on Wall Street.

  • In fact, they are beating professional money managers so far this year. By a sizable margin.

What we're hearing: A top strategist at a major Wall Street investment bank tells Axios that it closely tracks a basket of securities most commonly traded by hedge funds, a basket for institutional asset managers and one for retail day traders — and is seeing clear outperformance from retail.

  • "I’m just looking at the scoreboard on the year," he says. "And the work-from-home trader has been a pretty good performer."

Between the lines: Those who follow the markets say stock trading's booming popularity makes perfect sense given the actions of the Federal Reserve.

  • The new Robinhood cohort is simply following the advice of sophisticated investors over the past decade — "Don't fight the Fed" and always #BTFD, "Buy the f***ing dip," meaning buy stocks whenever prices fall.

Keep it 💯: "When the Fed takes risk out of the equation this is the result," Phil Bak, an equities strategist and founder and CEO of SecLenX Capital Markets, tells Axios.

Where it stands: The Fed's unprecedented actions — which some argue violate the terms of its founding document, the Federal Reserve Act — have reinforced the so-called Fed put, or the idea that if stock prices fall enough the central bank will step in and flood the market with money, experts say.

  • "The product of the maximization of the Fed put and 'Don’t Fight the Fed' spawned Robinhooders, a new generation of investors keen on buying worthless companies backstopped by the Fed," Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, tells Axios.

The bottom line: The Robinhood cohort is winning right now, not by ignoring the lessons of the past but by embracing them and taking those lessons to the next level.

Bonus content: How we got here

When the S&P 500 fell by 34% in March, traditional money managers pulled funds out of stocks and even safe-haven U.S. government debt and went into money market funds, or savings accounts.

  • The new crop of retail investors, on the other hand, saw opportunity and signed up in record numbers to buy stocks.
  • On Robinhood, traders primarily had been buying Big Tech names like Amazon, Apple and Zoom, but have moved over the past month to speculative bets like cruise ships, bankrupt companies and leveraged oil ETFs.

The big picture: From March 2009 to March 2020, U.S. stocks went on a historic bull market run. Now, even as unemployment has remained near Great Depression levels and bankruptcies have spiked, the stock market has improbably bounced back to record highs.

  • The S&P is up 39% since the Fed stepped in on March 23 and pledged to buy an unlimited amount of U.S. government debt through its QE4ever or QEinfinity program.
  • It has since started purchasing bonds from U.S. companies, and announced it will make loans to medium-sized businesses and buy debt from every state in the country.
2. Catch up quick

The U.S. reported more than 30,000 new coronavirus cases on Friday and Saturday, the highest daily totals since May 1, and White House trade adviser Peter Navarro said Sunday the Trump administration is preparing for a potential second wave in the fall. (Axios)

United Airlines may launch a $5 billion debt offering as soon as today, led by Goldman Sachs, and a $2 billion bond sale from American Airlines could be coming later in the week. (Bloomberg)

Chuck E. Cheese is fielding interest from creditors and other potential suitors and is in talks with a group of bondholders who have offered to invest more than $100 million to help the company avoid bankruptcy. (WSJ)

China's proposed national security law would allow Beijing to override Hong Kong's independent legal system, according to a draft of the law. (Bloomberg)

3. Americans increase deposits as banks cut back on lending

Data: Federal Reserve; Chart: Axios Visuals

U.S. banks are seeing deposits skyrocket and are pulling back on loans in the face of the coronavirus pandemic, newly released data from the Federal Reserve show.

Why it matters: It's the latest sign of trouble for the banking sector and the economy — a signal that consumers and businesses aren't starting new projects or focusing on growth, and are instead socking away cash.

By the numbers: The Fed's latest report on assets and liabilities of commercial banks shows that while banks have radically stepped up commercial and industrial loans, consumer loans have fallen precipitously.

  • Commercial and industrial loans rose year over year by 116.8% in March, 170.4% in April and 37.6% in May, in large part because businesses have been drawing on lines of credit.
  • Overall, consumer loans declined by 24.7% in May after a 41.7% decline in April.
  • Credit cards and other revolving plans saw 73.7% and 43.7% year-over-year declines in April and May.
  • Residential real estate loans and real estate loans overall also ticked down notably in May.

At the same time, deposits rose at a historic pace, adding to the $1.85 trillion of deposits reported by just the top 50 U.S. banks in the first quarter.

  • In April alone, deposits rose by $865 billion, more than the previous record for an entire year. In May, deposits gained again, rising by $604 billion.
  • After a brief decline during the week ended June 3, deposits again increased during the week ended June 10 by $85 billion.

Between the lines: It's more bad news for banks following a quarter in which profits fell 70%.

  • The FDIC noted in a recent report that “deteriorating economic activity” caused lenders to write off 15% more delinquent debt than the previous year and set aside $38.8 billion to cover potential loan losses, up nearly 280% from the prior year.
  • More than half of all banks reported a profit decline, and 7.3% of lenders were unprofitable in Q1. The amount of non-current loans rose 7.3% from the previous quarter, the biggest increase since 2010, according to the FDIC data.

The big picture: In addition to skittish consumers, banks have tightened their lending standards and are being "as conservative as possible, especially with people that aren't existing customers," Stephen Scouten, a bank analyst with Piper Sandler, said in an S&P Global Market Intelligence report last week.

  • "Bankers don't really have a clue yet what losses are going to look like."
  • "In terms of true new business, new customer production, they're going to be extremely cautious."
4. Foreigners bought a record amount of Chinese local bonds in May

The amount of foreign money flowing into onshore Chinese bonds more than doubled in May from its previous monthly total and the proportion of the bonds held by foreign investors rose to the highest level on record, Chinese government data showed.

  • The increase from April to May was the largest in 18 months, South China Morning Post reported.

What's happening: Ultra-low bond yields in the U.S., eurozone and other developed markets seem to be driving money to China, even as its yuan currency depreciates below 7-to-1 against the dollar.

  • “Overseas investors are showing great interest in the Chinese bond market because its sovereign treasury bonds have relatively strong returns,” Robin Xing, Morgan Stanley’s chief China economist, told SCMP.

Yes, but: The numbers are still very small. The outstanding positions of onshore Chinese bonds owned by non-mainland investors was only $343.4 billion at the end of May, or 2.6% of the total.

Of note: In April, data showed foreign investors holdings of U.S. Treasury bonds fell to its lowest level since December, while foreign holdings of U.S. corporate bonds rose to the highest since September, another sign investors are willing to trade safety for yield.

Dion Rabouin

Thanks for reading!

Quote: “I do not feel obliged to believe that the same God who has endowed us with sense, reason, and intellect has intended us to forgo their use.”

Why it matters: On June 22, 1633, astronomer Galileo Galilei was forced by the Pope to recant his view that the Earth orbited the sun. He said the quote above in a 1615 letter to the Grand Duchess Christina seeking to accommodate Copernicanism, or the idea that the sun was the center of the solar system and Earth rotated around it, rather than the other way around.

  • It wasn't until 1992 that the Roman Catholic Church admitted it had been wrong.