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Another day, another down open. There's a different tone to the markets in the last week or so.
It started last Tuesday, when an initial rally faded into a hard sell-off mid-morning. The next five trading sessions generally opened down.
Peter Tchir of Academy Securities, checked off a short list of concerns. There is progress on tax reform "but the reality is it's not going to be as great as everyone hoped," he said. There are questions about what the flatter yield curve means. And the recent arrests of high-ranking Saudis in an anti-corruption initiative created uncertainty in the last week and a half.
"Buyers have become a little more discriminating, it's a little more of a seller's market," Tchir said.
The S&P is less than one percent from its historic high of early last week, but elsewhere the declines have been more notable.
The most significant is a wide divergence between the S&P 500 and the small-cap Russell 2000. Since the beginning of October, the Russell is down about 1.4 percent, while the S&P 500 is up almost 2.4 percent.
That is almost a four-percentage point divergence. The only other time this happened this year was August, when despair over the prospects for tax reform drove the Russell down almost 6 percent.
Some of this underperformance is clearly related to tax reform issues. The House has inserted provisions in its tax bills that limit the deductibility of corporate debt, which may limit the ability of companies to issue debt.
But high yield has always been a bit more than just a yield play, Matt Maley from Miller Tabak tells me: "High yield is also a proxy for people's willingness to take risk."
How worrisome is all this? There are some signs the market advance is becoming more selective. Lowry's, the oldest technical analysis service in the U.S., noted to clients that the share of stocks hitting new 52-week highs has been falling, from 16 percent on October 2 to 8.7 percent last week.
But the critical NYSE advance-decline line remained near new highs, though it has not advanced for the past month because of the weakness in small-caps.
For the moment, this weakness seems contained. Lowry's sought to assure investors, saying, "The current divergences [between small- and big-cap stocks] are short term and minimal, and could be erased in a broad-based one-day rally."
But it bears watching. Remember, one of the main reasons the market keeps holding up is that many investors are sitting on handsome profits. Many are boasting gains of 20 percent or more this year. Given those gains, most would naturally be reluctant to sell now, since you can sell in January not pay taxes for 16 months, and maybe get a tax cut to boot. It makes sense to stand pat.
However, if the markets start to slip notably, the need to preserve gains will trump any tax savings. And that could lead to a broader selloff.
Every old saw about the market has been wrong this year. "Sell in May and go away:" Wrong. "September is a weak month:" Wrong. "October is a weak month:" Wrong. "November is a strong month:" The jury is still out on that one.
Reducing the dividend by 48 cents with 8.67 billion shares outstanding means shareholders are getting $4.1 billion less in dividends each year.
On an historic basis, that's a lot.
It's the eighth-largest dividend cut in the history of the S&P 500 by dollar value:
Two points to make:
That means GE's most recent cut would be the biggest cut of all time on a dollar basis outside the financial crisis, according to S&P Global data.
You have to go to Kinder Morgan, which cut its dividend by $3.4 billion in December 2015, and ConocoPhillips, which cut the dividend $2.5 billion in February 2016, to find dividend cuts around this size outside the financial crisis. Both, of course, are energy stocks.
Dividend cuts are fairly rare, and with good reason: Investors have been willing to pay a lot for higher yields.
Through Friday, 310 companies in the S&P 500 have increased their dividend this year, only nine have decreased them. GE makes it 10.
What's all this mean? For the moment, it appears that GE is a bit of a one-off.
Howard Silverblatt, who watches dividends for S&P, noted that the "overall dividend picture is very positive, as companies have record earnings, with cash also at a record, and cash-flow good; additionally the bleeding in energy related issues appears to have stopped."
Indeed, Silverblatt notes that dividend payments for the S&P 500 are at a record in Q3,'17: $105.4 billion, same for Q4. This would be a sixth-consecutive annual record.
Why is there a sudden rush of Chinese IPOs?
We have a shot at 12 IPOs this week, the busiest week of the year so far. One trend stands out: the Chinese are coming. And coming.
There are three Chinese IPOs this week. Three?
"It's a case of following the money," John Fitzgibbon of IPOScoop told me. "Earlier Chinese IPOs have done well, and they figured there is demand here, so others keep coming."
"Investors are willing to roll the dice with China," Kathleen Smith from Renaissance Capital told me. "Assuming you believe China is going to have positive GDP growth, China is the biggest opportunity for new companies, because China is so underpenetrated in many areas."
It's not a Chinese IPO flood yet, but it is sizeable, and it could get a lot bigger:
We have a shot at 12 initial public offerings this week, the busiest week of the year so far. One trend stands out: The Chinese are coming. And coming.
There are three Chinese IPOs this week. Three?
"It's a case of following the money," John Fitzgibbon, founder of research firm IPO Scoop, said. "Earlier Chinese IPOs have done well and they figured there is demand here, so others keep coming."
"Investors are willing to roll the dice with China," Kathleen Smith, co-founder of Renaissance Capital, told me. "Assuming you believe China is going to have positive GDP growth, China is the biggest opportunity for new companies because China is so underpenetrated in many areas."
It's not a Chinese IPO flood yet, but it is sizeable, and it could get a lot bigger:
Chinese IPOs in the U.S.
2017 (to date): 11
Source: Renaissance Capital
Eleven so far this year, but nine have been since September. There have been about 44 IPOs since the beginning of September, so about 20 percent of the IPOs in that period have come from China.
That is a lot.
The good news is the average return for the nine that have gone public since November has been good: up 21.9 percent above their initial offering price.
Chinese IPO Performance
They are not all necessarily instant gainers. Chinese education firm Four Seasons Education priced at $10 but closed Wednesday at $9.50, a five percent decline.
One key investment point: It helps to have a big company behind you when you're in a competitive space in China. Remember Secoo Holding, which sells luxury brands in China? It's down 38 percent since it went public in September. Good idea, but up against Alibaba and JD.com with no big backing? Tough sell.
Today the markets will be focused on Sogou (pronounced So-Go), the No. 2 mobile search engine in China, after Baidu. It is looking to price 45 million shares at a price of $13, the top end of its $11 to $13 a share range.
Sogou is competing with Baidu in mobile search, but Sogou has heavyweight backing: Tencent owns about 39 percent of the company, according to Renaissance Capital.
For American investors, the appeal of Chinese IPOs is understandable: access to the biggest consumer market in the world.
Smith also highlighted one big difference between the U.S. and China IPO markets: "Many U.S. companies are seeking to hide in private valuations, but not the Chinese. They are rushing to go public."
President Donald Trump likes to claim credit for the stock market rally, but there are other factors at work. He gets partial credit, but only partial.
The Trump trade gave a dramatic boost to the market shortly after the election one year ago Wednesday. While the components of that trade are still alive, others are arguably more important.
Let's take a look.
After the election, the market came to believe that a combination of tax cuts, infrastructure spending and regulatory reform would give an added boost to corporate profits. The S&P 500 rose roughly 6 percent in the first month after Trump's election, and that was certainly very real.
Stocks have often moved on perceptions of a tax cut. Most traders believe there is some kind of premium in the market for the cuts, so that if Trump tweeted, "There will be no tax cut deal," the market would react negatively. How negatively is debated, but a 5 percent drop in the S&P 500 is fairly frequently cited to me by traders.
Yet at the moment, it's popular to argue that tax cuts have not had any real influence on the stock market. Credit Suisse, for example, is one of many firms that developed a basket of high- tax stocks that would benefit from tax cuts. Its conclusion: "The market rewarded firms with high effective tax rates for only three weeks post-election, but not since."
Goldman Sachs' High Tax Rate basket has also posted weaker returns than the overall market, but David Kostin, the bank's chief equity strategist, had a different interpretation. He noted that stocks in the high tax basket generate a whopping 84 percent of their sales within the United States. He believes their underperformance has been hurt primarily by the weak dollar, which benefits firms with high foreign sales and penalizes those with lower foreign sales.
"The High Tax basket's performance this year has been influenced by exposures other than tax sentiment," Kostin said.
One feature of the Trump trade that is prominent is a basket of companies that get most of their sales from small- and mid-sized business customers. This basket is up 38 percent since the election, since small-business owners have been "thrilled at the prospect of deregulation under the Trump administration," Kostin wrote in a note to clients.
And tax cuts, should they materialize, definitely can influence future earnings estimates. Kostin is modeling roughly $139 for S&P earnings per share next year, a 7 percent increase from this year. But that is without tax cuts.
He figures tax cuts have the potential to add another $9 per share in earnings, to bring S&P earnings to $148 EPS next year, which would be 13 percent growth.
By the way, Kostin does believe that the market's perception of tax cuts has lifted stocks. He told me that without tax reform, the market would be closer to 2,400 than its current 2,590. That's about 8 percent lower.
What all these factors have in common is the perception that the administration is far more business friendly than the previous administration. Tim Anderson at MND Partners is one of many who believe that perception is a factor in the rally.
"Businesses are spending at a faster pace than they have in years, and there is no doubt that a more business friendly regulatory climate is a big catalyst," he said. "It's something the economists have a very difficult time plugging into their model."
While the whole infrastructure story has fallen by the wayside, Treasury Secretary Steve Mnuchin said last week the Trump administration would focus on infrastructure spending right after tax reform.
The U.S. stock market also is at a record high because earnings are at record highs and because the market believes that record high earnings will continue for at least the next couple quarters.
S&P 500 EPS
2017 (est) $130.90
Source: Thomson Reuters
Estimates are north of $140 for 2018.
Global growth has also returned. This is the largest contributor to the global rally we have seen this year. Upon surveying this landscape, Goldman Sachs concluded, "Most foreign equity markets have benefited from an upswing in global growth."
It's a rare event when the major global markets are all — almost without exception — up double digits, but that is indeed what has happened:
Global markets 2017
Hong Kong: up 32 percent
Vietnam: up 27.9 percent
Korea: up 25.6 percent
India: up 25 percent
Japan: up 20 percent
Germany: up 16.5 percent
Indonesia: up 14 percent
France: up 12.7 percent
Thailand: up 11 percent
Shanghai: up 10 percent
The only laggard is the U.K., up only 5 percent on Brexit concerns.
You can give credit to the ocean of liquidity provided by central banks if you want, but one key point is that the U.S. has dramatically outperformed the rest of the world over the past five years. The better growth this year was really overseas. Several traders noted to me that emerging markets went through a vicious bear market from 2011 to 2016. Japan badly lagged until this year. Even Germany didn't make a new high until this year.
Some have argued that the market is ignoring the Fed's raising of interest rates, but that is a stretch, since the Fed has been moving at a glacial pace, and its intentions have been well telegraphed. There's no reason to believe that incoming Fed Chairman Jerome Powell will mark a radical departure from this policy. Next year, though, is a different question, and I do agree that a key risk to the market is the Fed moving to tighten too fast.
The bottom line is Trump gets some credit for the rally, but only some. And a lot of it could vanish if we don't get more progress on tax reform.
You know what we need? A FANG product.
And we are going to get one on Wednesday, when the Intercontinental Exchange, the parent of the New York Stock Exchange, introduces NYSE FANG-plus index futures under the symbol NYFANG.
There's a few twists here. First, it's a quarterly futures contract, and second, it's broader than the just the FANG stocks. And OK, maybe it would have been more topical if we got this a year ago, but better late than never.
It will consist of the quarterly futures contracts of Facebook, Apple, Amazon, Netflix and Google's Alphabet plus another five actively-traded technology growth stocks: Alibaba, Baidu, Nvidia, Tesla and Twitter.
It is also equally-weighted: each stock contributes 10 percent, regardless of market capitalization. It will have at least 10 stocks, but could contain more.
FANG are still hot stocks, despite their run-up this year. The exchanges and the whole trading community are grappling with low volume and low volatility, and they are desperately seeking ways to get products that people want to trade into the marketplace.
ICE was obviously listening: "Given their size, performance and innovation, the FANG stocks are among the most widely traded stocks and we're pleased to offer a capital efficient means of accessing and hedging these growth stocks in a cost-effective way," Trabue Bland, president of ICE Futures U.S., said in a press release.
But Vanguard founder Jack Bogle appeared on CNBC on Tuesday and, not surprisingly, said he was skeptical. "Wall Street is looking for new vehicles to get investors to trade, but traders trading is a loser's game."
The man who popularized index investing added, "Anything that gets investors into trading is a negative, because trading costs detract from the return on the markets. This is the classic mathematics of indexing. If you buy the market at 5 basis points, 4 basis points, and don't trade, you'll get 99.96 points out of the market. And that's got to be a winning strategy."
He may be right, but don't underestimate the power of a new idea. Certain niche ETFs took off when the investing public suddenly decided it needed the product. Look at the Wisdom Tree Japan Hedged Equity (DXJ), which took off when everyone wanted exposure to Japan without the currency risk.
I know for sure the ETF community is involved in this discussion, trying to figure out how they can get ETFs with smaller groups of stocks in hot sectors out there faster than current SEC rules allow. Right now it's very difficult to get an ETF that consists of only a few stocks.
One thing's for sure. If it's successful, you can expect other products like this in the future.
ICE has even thought about what happens if FANG stocks fade in a year. They can review the composition of the fund every quarter with the objective to represent "a segment of the technology and consumer discretionary sectors consisting of the most highly-traded and high-growth technology and internet/media stocks."
Bottom line: This sounds like it could evolve into an all-purpose technology momentum fund.
OPEC meets next week and the elephant in the room is the U.S. shale sector, ramping up production, as OPEC and Russia cut back.
Minutes from the Oct. 31-Nov. 1 FOMC meeting indicate some worry about rising financial markets.
If a deal materializes it could be another big win for activist hedge fund Jana Partners.