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Week of July 18th Macro Report
U.S. Data Snapshot S&P 500: 3,961.63 (+2%) NASDAQ: 11,834.11 (-1.87%) 10-2 Treasury Yield Spread: -19 bps Initial Jobless Claims: 251K (E. 240K) EuroZone Data Snapshot EURO STOXX 50: 3,600.31 (+3.45%) Italian-German 10 Year Bond Spread: 242 bps S&P Composite Eurozone PMI: 49.4 (E. 51.0) ———————————————————————————————————— Market Overview US equities higher despite mixed performance out of utilities, insurance, and communications during the beginning of the week. Growth has seen additional momentum this week as it outperformed value by ~550+ bp over the last month. Treasuries rallied across the curve this week, with 10s back below 3%. The 2/10 spread remains inverted, inching towards its most negative levels since 2000. Q2 earnings metrics are somewhat underwhelming with just over 71% of reporters beating consensus EPS, alongside an aggregate surprise to the upside by ~4%. Inflation remains a headwind across nearly every industry, though some companies flagged expectations for some 2H moderation. Despite Tesla noting a strong consumer, consumer resilience has been under scrutiny with talk of higher bad debt and extended cash collection cycles. ABB management sees lower inflation ahead as commodity prices decline as interest rate hikes start to weigh on global demand. Peak inflation narrative has gained some renewed traction with the decline in breakeven rates, the softening commodity prices, along with retail discounting to clear excess inventory and some supply chain improvements. Peak inflation puts the focus on peak Fed with the market looking for a policy pivot in 2023. BofA Bull & Bear Indicator "max bearish" at 0 for several weeks while according to JPMorgan, long leverage below the 5th percentile and short leverage around 70th percentile. US equities saw second straight week of outflows though BofA said still no sign of investor pessimism in flow data. Despite this week’s outflow, US equity inflows sit at nearly $120B ytd, lending skepticism towards capitulation. Buybacks, the biggest source of demand for stocks, are about to pass the peak blackout period associated with earnings. Bearish talking points have mainly revolved around the housing market, with signs of softening as the surge in rates pushes mortgage demand to a 22-year low. Hiring freezes continue to get a lot of attention in the press though some pushback against the notion that meaningful cracks are forming in a tight labor market. Initial jobless claims beat consensus estimates by ~11K, layoffs have increased significantly, alongside hiring freezes as corporations attempt to maintain margins. ———————————————————————————————————— Fed Status Last week’s hike expectations have fallen significantly, from a 90% chance of a 100 bp hike to a ~15% chance. Weaker inflation dynamics have also shifted market pricing of future rate path lower, with peak fed funds rate of 3.25-3.50% by December, before 50 bp of cuts through Jul-23. US flash manufacturing PMI down 0.4 points to 52.3, slightly above 52.2 consensus, though still lowest print in two years. Output fell below 50 for the first time since June-20, though rate of cost inflation softest level since Apr-21, selling price increases slowest since Feb-21. Services PMI was down 4.8 points m/m to 47.5, missing estimates for 52.1 and lowest since May-20, highlighting the sharpest output since May-20. This week’s service PMI also showed the softest input price growth since January, slowest rise in output charges since Mar-21. Despite employment growth, it grew at the slowest pace in five months. Market currently pricing in a ~62% probability of a 50 bp move, while 75 bp odds are ~34% for the September hike. Powell expected to highlight outsized focus on combating inflation but also reiterate Fed consensus that a softish landing is achievable. Next Thursday also brings the release of Q2 GDP, which is likely to contract for a second straight quarter. This release should generate a lot of recession headlines and play into broader growth concerns, though there is also likely to be a lot of pushback given the strength of the labor market and consumer balance sheets. Eurozone and UK flash PMI both fell to a 17-month low as manufacturing deteriorated further and there was a near-stalling of service sector growth. Japan manufacturing PMI weakest in tens months but remained in expansion, while service sector growth also slowed. FOMC next week, the July employment report on 5-Aug and most importantly, July CPI on 10-Aug are all likely to complicate the Fed’s decision in determining the size of July’s rate hike. ———————————————————————————————————— How to Protect Your Portfolio Markets gained ~2% this week after trading within the SPX 3700-3900 range for three weeks. Despite negative developments this week, the market managed a rally with increased consumer resilience, possible peak inflation, and decreased rate hike expectations. Despite the recent bear market relief rally, the macro climate has remained cluttered with supporting evidence from both bear and bull sides. Fintech, autos, and retailers were all stronger this week, with communications, utilities, and holding companies all considered laggards. Earnings estimates have continued to come down, potentially removing an overhang on sentiment, particularly amid thoughts that a recession scenario could be avoided. Next week’s FOMC meeting along with inflation data is likely to bring lots of volatility to an already volatile market. Keep allocation small relative to account size in order to mitigate losses as the macro climate remains unclear. ———————————————————————————————————— Macro Thesis ECB Takes Several Big Steps and Italy Undergoes a Political Crisis The European Central Bank’s (ECB) newly released Transmission Protection Instrument (TPI) has major implications for the stability of the European Union. With inflation so high, the ECB has to aggressively raise rates to stabilize prices once more. However, the central bankers’ main worry is that the “transmission” of monetary policy across member states won’t have equal effect. Countries like Spain, Portugal, and Italy are a prime concern because with less healthy economies compared to France and Germany, their sovereign debt will already be very expensive. Therefore, the ECB raising rates will put even more pressure on these countries that may lead to a debt crisis. The last time the ECB raised rates was 11 years ago and it had to immediately pull back due to a full-scale debt crisis. Now, things seem to be pointing in the same direction. The main focus point is Italy, which just saw Mario Draghi resign as prime minister. The resulting political turmoil, large existing public debt, rampant inflation, and tightening monetary policy could be too much for Italy’s economy to handle. As a result, the ECB (in addition to its more hawkish 50 bps rate hike) unveiled the TPI, which would allow them to actively manage diverging sovereign debt yields. Key things to note about the new tool: The volume of purchases is not restricted, meaning the ECB can be as aggressive as needed; The remaining maturity of the sovereign debt they will be purchasing will be between 1 and 10 years; private sector securities might also be considered, the focus will still be on public debt. Effect on Markets Moody’s and Fitch have already downgraded Italy’s debt to a notch above “junk” status (Baa/BBB), and depending how effective the TPI is, ratings (and so yields) could go either way. In terms of economic growth, the effects of high inflation on demand have revealed themselves in S&P’s Composite PMI for the Eurozone that missed expectations at 49.4 (E. 51.0), which is just in contractionary territory. European equities have huge headwinds mounting up as consumer demand continues to further weaken leading to poorer earnings. Fixed income assets also will likely suffer as the ECB begins to be more and more hawkish to rein in inflation, as it was on Wednesday. The only way for inflation to decline in the Eurozone however is for commodity prices to finally deflate, which is difficult to expect. Gas flows from Russia via the Nord Stream 1 resumed recently at 40% original capacity, which created much relief for European officials as they continue to stockpile reserves. However, Putin is still expected to cut flows this winter, which would spike inflation and be detrimental for economic growth. In terms of crude oil, a spike in Covid cases in China, coupled with slowing demand globally, has depressed oil prices. Brent Crude is at $98.34 and down about 20% from its June highs, which is a positive. Looking at U.S. stocks, a major headwind for earnings is the continued strength of the U.S. dollar. However, in the near term it's unlikely to weaken as demand destruction in China and Europe due to lockdowns and inflation have kept the U.S. as a better setting for capital inflows (making the dollar stronger). Additionally, as we approach a global recession, demand for U.S treasuries will steadily rise, another tailwind for dollar strength. ———————————————————————————————————— Communication Services Sector Overview Overview The communication services sector is comprised of companies that enable communication and other related services through terrestrial, satellite, and wireless transmission systems. These systems primarily involve fixed-line, cellular, wireless, and high bandwidth or fiber optic cable networks. Communication services can be broken down into industries that include wireless and diversified telecommunication services, media and entertainment, and interactive media and services. Telecommunication services concern the electric exchange of information over fixed-line and wireless systems that are used in applications such as cellular mobile and pager services. On the other hand, media can be broken down into advertising, broadcasting, cable and satellite, and publishing while entertainment includes movies and interactive home entertainment; this can be further classified into interactive media and services that use proprietary platforms to produce and share information and take advantage of pay-per-click advertisement revenue models. Search engines, social media networking platforms, online classifieds, and online review companies are some of the types of firms that encompass interactive media and services. Communication services are a key component to the economy because they lie in the center of the operations of all businesses and governments and can be linked to other sectors — primarily energy, information technology, financial services, emergency services, and postal and shipping. As one can deduce, communication services are a vital aspect of society given how impactful the advent of technology has been to modern human interaction. Factors to Consider Communication services that rely on digital advertising as a primary revenue source have been hit particularly hard as the tightening macroeconomic climate hurts consumer demand. This was exemplified by the poor quarter two earnings reports from social media companies this week. Snap missed revenue expectations with a year-over-year growth rate of 13% with revenue growth drastically off from the first-quarter annual growth rate of 38%. Snap also estimated that third-quarter revenues would be flat, which led to shares of Snap to plunge 39% on Friday and 78.62% year-to-date. Snap’s poor performance has largely been the result of rampant inflation and rising interest rates hurting consumer demand. This has led businesses to cut back on their marketing initiatives, damaging the revenues of companies in the digital advertising sector — a leading sign that demand in the online economy is eroding. Increased competition from growing heavyweights like TikTok in combination with Apple’s platform privacy change to allow users to opt out of targeted advertising have lowered advertisers’ willingness to pay and have added on to the macroeconomic headwinds. These conditions have led to weak earnings and substanial layoffs from other companies like Twitter that are also dealing with their own unique roadblocks, such as Elon Musk’s decision to terminate his deal to acquire Twitter. Meta’s Facebook has also been hit hard by the weakening digital advertising market as the firm’s stock price has fallen 50% year-to-date with continued analyst downgrades for Meta and search engines like Alphabet’s Google. Next week’s earnings reports from Meta and Alphabet will provide insight to how idiosyncratic these factors are to the broader digital advertising market. It is worth noting that similar reduced consumer spending and increased competition in the streaming industry have hurt companies like Netflix that experienced its first subscriber loss in more than ten years earlier this year. Regardless, businesses in the communication services sector have begun changing their business models to adapt. Netflix recently teamed up with Microsoft to introduce a lower-priced, ad-supported subscription plan and made the decision to begin cracking down on password sharing. Snap has also revamped its content strategy with the introduction of its Snapchat+ subscription plan and a web browser supported platform, although analysts remain skeptical. While some of these company changes may not prove to be successful, the businesses that can adjust to the changing economy and consumer behavior will thrive.
Jul 25, 2022 · 11 min read
BITWISE 10 CRYPTO INDEX FUND (OTC: $BITW)
KEY STATISTICS Share Price: $11.43 52-Week Range: $8.02-$84.40 Volume: 90,390 RECOMMENDATION Rating: UNDERPERFORM Price Target: $2.96 ————————————————————————————————————— INDUSTRY OVERVIEW The cryptocurrency market is a fast and advanced space. Analysts predict the space to grow to 1902.5 million in the year 2028. The market stood at just $826.6 million in 2020. The industry is expected to have a compound annual growth of about 11.1%. Cryptocurrency is a digital currency exchange that eliminates the necessary requirement for a financial middleman such as a bank. In the recent months, cryptocurrency has taken a hit. Bitcoin prices fell about 38% just in the month of June and ended with a value just under $20,000.. Ethereum prices fell by more than 42% month over month as they try to shift their platform to a more energy friendly platform. The total market capitalization of the international cryptocurrency market capitalization has hit a high of $3 trillion in November of 2021 but the recent hit has decreased the cap to around $866 billion. ————————————————————————————————————— ETF OVERVIEW The BitWise 10 Cypto index tracks the 10 most valued cryptocurrencies. They are chosen by their market risks, market capitalization, and rebalanced monthly. Examples of holdings in the index include Bitcoin, Ethereum, Cardano, Polkadot, Solana, Litecoin, and Uniswap. ————————————————————————————————————— CATALYSTS Inflationary Pressures As the consumer price index increases post pandemic, the us dollar index is expected to erode over time. As a way to hedge inflation, diversifying your portfolio through cryptocurrency is a great way to prevent a decrease in your assets. Analysts believe that cryptocurrency is a great investment against rising prices. However, the volatility and decline in crypto alongside inflation has begun to worry investors. When consumer prices increased in early 2021, Bitcoins value fell significantly and again towards the beginning of 2022, we saw another fall in the cryptocurrencies value. The rise in inflation has also hit the equity market and S&P 500 ended its worst first half of the year since 1970. Bitcoin is closely correlated with the movement of Nasdaq and other major indexes. Market experts indicated that the correlation between cryptocurrency and normal markets is at an all-time high. Experts have calculated the correlation among both to be around 0.82 which is significantly higher than previous correlation of around 0.5. Analysts predict that the direct relationship between tech stocks and cryptocurrencies is even stronger. Regulations on the Rise Ever since the launch of the space of digital currency, the government has grown speculative of its nature and has taken measures to add extra regulations. Cryptocurrency is vulnerable to ransomware attacks, market manipulation, and scams that could potentially lose companies and individuals millions of dollars. President Joe Biden has released a report asking Congressional leaders to build a support system around Stablecoins. Biden has asked for stablecoins such as the TerraUSD to be backed up and insured by financial institutions. However, regulations have not always been a great aspect of rising cryptocurrency as analysts see them as breaking into the freedom of the decentralizing blockchain. Recently, Senator Gillbrand and Senator Cynthia had layed out a plan regulate cryptocurrency. They have included tax requirements and have stricter rules on stable coins. The SEC has also not been a big fan of cryptocurrency as the chairman, Gary Gensler, has been a sharp critic for the technology citing its unreliability and abuse. An excess amount of regulation by the SEC and government would not pose well for cryptocurrency as investors will be disincentivized to invest in an asset when its main selling point is its freedom from institutions. ————————————————————————————————————— INVESTMENT RISKS Increasing Popularity in the Metaverse: Blockchain technology is the driver force behind the entire digital universe, the Metaverse. With blockchain finding its practical application in Bitcoin, the use of blockchain has took off, leading to the eventual creation of the Metaverse. With the universe growing and more coins being created that are based in the Metaverse itself, the popularity of altcoins is expected to rise. Although the holdings of the fund do not include coins based in the universe, the desire for altcoins should rise alongside the growth of the Metaverse. As altcoins take away market share from Bitcoin, the fund could grow with the growth and popularity of the Metaverse. Expanding Capabilities of Blockchain: Since the initial use of blockchain with Bitcoin, the capabilities have continued to be expanded upon. For example, other coins, like Cardano and Ethereum, have expanded their blockchain technology into some of the largest smart contract platforms. These platforms facilitate the use of smart contracts - computer programs that automatically execute events and actions according to a contract - with the hope of future applications in the quality control and governance of supply chain. These expansions are just the beginning of the capabilities of blockchain, leading to the potential of growth in the fund. ————————————————————————————————————— TECHNICAL ANALYSIS The Bitwise 10 Crypto Index Fund is currently displaying very weak technicals amidst the large scale sell-off of all cryptocurrencies. With further potential of more volatility in the markets, raging inflation leading to interest rate hikes, and increased chances of an economic slowdown, the Bitwise 10 Crypto Index Fund is a strong candidate for a short position. Currently, the Eagle Algorithm is displaying a bearish trend since the middle of April, which we expect to continue. With the Elliot Wave Oscillator consistently being in the red and Stochastics staying stagnant in the oversold territory, we are not confident in the growth potential of the Bitwise 10 Crypto Index Fund, leading to the proposal of a short position. To learn more please visit https://eagle-investors.com/
Jul 20, 2022 · 5 min read
iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: $HYG)
KEY STATISTICS Share Price: $75.50 52 - Week H/L: $72.89-$88.16 Market Cap: $16.14($B) EPS (TTM): N/A P/E Ratio: N/A EV/EBITDA: N/A RECOMMENDATION: UNDERWEIGHT Price Target: $61.81 ————————————————————————————————————— INDUSTRY OVERVIEW High-yield bonds are a growth-sensitive asset class, meaning that they benefit from positive global growth. They do best in the recovery stage of a business cycle when default rates fall and volatility trends lower. With the growing possibility of a recession, high-yield bonds are expected to perform poorly. With earnings season kicking off, negative company earnings will be an impairment for corporate bonds as well. With soaring inflation and flat consumer expenditure growth of 0.0%, many company earnings will be negatively impacted. ————————————————————————————————————— COMPANY OVERVIEW $HYG is one of the most widely used high-yield bond ETFs, that tracks a market-weighted index of US high-yield corporate debt. Active since 2006, the exchange-traded fund aims to seek higher income through investment in corporate high-yield bonds. —————————————————————————————————————- INVESTMENT THESIS Inflation Intensifying Economic Fears: U.S corporate bond prices are being significantly impacted by signs of an economic slowdown as well as due to a poor outlook on the economy. With inflation reaching 9.1% as the CPI sees an increase from rising gasoline, food, and shelter prices, investors are fearing a potential global recession which may shake the market even further. The prices of ETFs are experiencing major sell offs as well as lower investment grades. With more economic turmoil, yields tend to go up, making it more difficult for smaller companies to refinance and make debt payments, having a large impact on $HYG and other exchange traded funds. The spread on the market high yield credit default went up to over 570 basis points this past point, hitting its highest levels since early pandemic. This may continue to have an impact on $HYG if the economic situation does not improve. Covid-19 Outbreak: Recently, Covid-19 cases in the United States have been spiking. Hospitalizations in the United States due to Covid-19 have climbed by 20% in the past 2 weeks. This is mainly due to a new subvariant, BA.5. While it is difficult to determine the exact number of individuals that have contracted this new subvariant due to the rise of at-home testing, we can use hospitalization data to infer that it is rapidly spreading. New Covid-19 subvariants and outbreaks have a negative impact on companies, and in turn their bonds. When employees are not able to come into work, productivity slows. In past Covid-19 spikes, industries such as airlines, hotels, automobiles, construction, retail, and textiles have been significantly hurt. This impairment on earnings will materialize in company bonds. Interest Rate Hikes: Interest rate hikes have a detrimental effect on the value of a fixed income security. Especially in today’s economic situation where interest rate hikes are being made in efforts to control inflation, this has been impacting ETFs like $HYG depending on price sensitivity, duration. It essentially impacts the net asset value of a fund to a point where it invests floating rate debt security. In addition, it can also lead to lower trading volumes and volatility. —————————————————————————————————————- INVESTMENT RISKS Possible Peak Fed Hawkishness: If economic data begins to show a slowing down of the US economy and in turn a slowing of inflation, the Federal Reserve may begin to slow the pace of rate hikes. This would likely result in a rally in the markets. High-yield corporate bonds and stocks are oftentimes closely correlated. Therefore, any rally in stocks would most likely also cause a rally in high-yield corporate bonds. Russia/Ukraine Conflict Resolution: If Russia were to claim victory against Ukraine and begin to discuss a ceasefire, the market could see a significant rally. While western sanctions on Russia would remain, Ukraine would likely resume exports of grain, corn, steel, and other commodities. This would ease commodity prices and in turn inflation. —————————————————————————————————————- INVESTMENT RATIONALE $HYG has a duration of 3.65, meaning for every 1% rise in interest rates, the fund drops about 3.65%. Therefore, $HYG has high interest rate risk. This is an unfavorable characteristic in a time of rate hikes. As well as this, $HYG is made up of junk bonds, meaning they have a credit rating of BB[+] or lower. Lower credit ratings have higher volatility, meaning that they will be more affected by changes in the market. —————————————————————————————————————- TECHNICAL ANALYSIS Technicals for $HYG are showing a strong bearish trend. The resistance line is at $80.22 and the support line is at $73.08. While stochastics are volatile, levels have been consistently at an oversold position, indicating a strong bearish trend. In addition, there have been major decreases in EWO volumes.
Jul 19, 2022 · 4 min read
Week of July 11th Macro Report
U.S. Data Snapshot S&P 500: 3858.19 (-0.59%) NASDAQ: 11,425.49 (-0.86%) 10-2 Treasury Yield Spread: -19 bps Headline CPI YoY: 9.1% (E. 8.8%) Core CPI YoY: 5.9% (E. 5.7%) EuroZone Data Snapshot EURO STOXX 50: 3478.82 (-0.82%) Italian-German 10 Year Bond Spread: 212 bps Dutch TTF Gas Futures: $160.8/MMBtu (-2.3%%) China Data Snapshot Shanghai Composite: 3,228.06 (-3.38%) Q2 GDP YoY: 0.4% (E. 1%) ——————————————————————————————————— Market Overview Markets finished lower as the S&P declined for a fifth consecutive session. Said price action can likely be attributed to Wednesday’s CPI reading, 9.1%, along with a more aggressive, Fed-led global policy shift. Markets are now pricing in an 80%+ probability of a 100 bp Fed rate hike later this month. Greater Fed response also comes as the 2/10 spread remains most negative since November 2000, underpinning growth/recession and policy mistake fears. Numerous strategists have cut their S&P year-end price targets following lower EPS growth forecast for 2022 of +4% from +6%, while 2023 was cut from +6% to -8%, or a 10% peak-to-trough EPS decline. Piper Sandler’s strategists have cut their year-end target to 3,400 from 4,000, or a ~11% decline in 2H. Additionally, Goldman Sachs’ strategists noted forward EPS estimates could lead S&P falling to 3,150 if S&P EPS falls to $225. S&P 500 earnings are set to grow 4.1% y/y/ in Q2, representing the smallest expansion since Q4 2020. Despite the ramp in concerns surrounding 2022 and 2023 consensus earnings forecasts, there are also thoughts that the bar for Q2 earnings is already low. While firms are expecting further cuts to forward estimates, it’s argued that the market is unlikely to sell off given that the earnings risk theme is now widely understood. Additionally, there is almost no relationship between either size of aggregate earnings beats or forward estimate reductions, and the performance of S&P 500 through earnings season. Labor costs and shortages have been flagged by the highest number of early Q2 reporters as having a negative impact on earnings or revenues. Supply chain costs and distributions, the military conflict in Ukraine, China Covid lockdowns, rising rates and unfavorable FX all being noted as headwinds to EPS. When it comes to the latter, the 16% rally in the dollar over the last year translates into an 8% headwind for S&P 500 EPS growth. Bullish talking points have been few and far between recently, mainly hinging on the commodity complex. Gasoline prices have declined for 28 days, the longest stretch since the demand destruction fears in early 2020. In addition, lumber prices fell more than 40% in the first six months of the year. Recession fears have also seen some pushback with the Fed’s preferred curves (3M/10Y, 3M/18M forward 3M) still positive and the economy having created over 2.7M jobs over the last six months. Sellers have kept control in recent months, BofA Bull & Bear Indicator has been "max bearish" at 0 since 15-Jun. More than half of the Nasdaq constituents are down at least 50% from 2020 highs. ———————————————————————————————————— Fed Status This week’s hawkishness Fed commentary largely backed current rate hike expectations. Markets are pricing in an 80%+ probability of a 100 bp hike later this month, up from 0% a week ago. June headline CPI was up 1.3% m/m, above consensus for a 1.1% increase. Core CPI posted a surprise increase to 0.7%, with gas up 11.2%, while overall energy prices rose 3.5% m/m, most since 2006. Following the prints, the market has begun pricing in a 75 bp hike come September, previously 50 bp. Said hikes would bring the terminal rate up to 3.50-3.75%, though some believe inflation is set to weaken in months ahead given easing comps, falling energy prices, and retail price cuts. June headline PPI up 1.1% m/m, above consensus for 0.8% and May’s upwardly revised 0.9% (was up 0.8%), now up 11.3% y/y. Core PPI was also up 0.4%, although below forecasts for 0.5%. The release has attributed three-quarters of the headline move to goods prices, particularly energy (gas up 18.5% m/m). Weekly initial jobless claims rose to 244K, above consensus 235K. The highest initial claims reading since November 2021 with the largest increases in New York, Kentucky, Arizona, and Pennsylvania. Both Fed Waller and Fed Bullard have reiterated their calls for a 75 bp hike later this month, though leaving the 100 bp option on the table. Waller also commented on the strong labor market and its ability to prevent a recession, though unlikely given current conditions. Hawkish central bank policy has increased significantly in recent months, and certainly continued this week. The Bank of Canada increased rates by a full percentage point, 100 bp, on Wednesday, the biggest single rate hike since 1998. Both the Bank of Korea and the RBNZ delivered 50 bp hikes this week. Additionally, Singapore and Philippines both made unscheduled policy decisions as inflation prevails globally. Next week’s economic calendar will lend a clearer picture of domestic demand. While the numbers will likely be softer, it is a question of how long the already diminished demand will continue alongside worsening economic conditions. ———————————————————————————————————— How to Protect Your Portfolio Markets moved lower this week following the hotter inflation data, along with renewed hawkish Fed commentary. Domestic equities mostly lower as talk of 75 - 100 bp rate hikes dampens margins, alongside EPS headwinds. Technology equipment, renewables, and food & drug retailing were all stronger this week, with software, fintech, and banking all considered laggards. Low earnings bar has been cited as potential support for equities with Q2 estimates down ~5%, providing corporations with greater margin. S&P year-end price targets have seen significant reductions within recent months, and are likely to see further downward revisions. Most equities are facing significant headwinds, that of which are only increasing given the current macro climate. Significant volatility is likely to remain given the current hesitation and uncertainty felt amongst investors. Regardless of how you invest, sizing appropriately and taking the proper trades, and swings that fit your plan is crucial to mitigating losses. ————————————————————————————————————- Macro Thesis European Turmoil and the Erosion of Chinese Consumer Demand Italy’s prime minister Mario Draghi offered to resign his post on Thursday. The offer was quickly rejected by Italy’s president, but the news caused turmoil in the markets. The yield spread between the 10 year German and Italian sovereign bonds is a prime indicator of stress in the Eurozone, and it widened to 212 basis points due to the news. The Italian 10-Year sovereign yield is at 3.26%, and at such elevated levels many are concerned for the financial stability of Italy. The ECB is supposed to raise rates next week, which could potentially compound pressure on Italian borrowing costs. It is already a very indebted nation, with sovereign debt around 1.5x GDP. The ECB’s future anti-fragmentation device and any new geopolitical developments will help investors form a better picture of how the health of Italy and the Eurozone will be moving forward. Economic news in China was also fairly grim. Q2 GDP results depicted a narrowly missed contraction with a 0.4% expansion. China’s Zero-Covid policy still looms large over the nation. After Shanghai lockdowns were just eased, new restrictions in Macau sprung up as cases spiked again. Demand destruction in China is very evident, and the only hope for continued economic growth is for either the Zero-Covid policy to be completely abandoned, Covid cases to consistently stay down, a large fiscal stimulus bill from the Chinese government to be administered, or some combination of the three. Effect on Markets Financial stress due to rising borrowing rates and inflation in Europe will understandably create a grim outlook for fixed income and equity markets. Less confidence in the credit worthiness of government or corporate institutions coupled with waning consumer demand with likely bolster bear trends in European asset markets. In China, a similar situation with consumer demand is taking place, with Chinese retail sales in May declining 6.7% YoY. In terms of fixed income, there is no major risk with Chinese fixed income assets as of yet. Inflation should remain low with weakening demand, and eliminating any chance of rate hikes. However, rate cuts, which would be a bullish driver for Chinese bonds, are unexpected due to the PBoC fearing the loss of value of the Renminbi against the U.S. Dollar, which is steadily growing in value. The U.S dollar index (DXY) has risen 3% in the past month, creating headwinds for commodities as well as company earnings. With inflation not having peaked yet in the U.S. so far (although the July CPI potentially may peak) and the Fed hoping to quickly approach its terminal Funds Rate, equities have had many strong headwinds. On the positive side, if inflation shows signs of peaking or even materially declining, leading the Fed to be less hawkish, longer maturity bonds will increase in value over time. Thus, U.S. treasury notes and bonds may decline in yield, creating bear steepening in the yield curve, which has always been indicative of a recessionary environment. ————————————————————————————————————- Blockchain Industry Overview What is a Blockchain? A blockchain is a growing timeline of data structures called blocks that store information and are secured together with the use of cryptography, creating a database or ledger of immutable data. These blocks consist of a cryptographic hash of its own and previous block, transaction data, and a timestamp when the block is added to the chain — blocks have limited storage capacity and must be filled before closing and linking to the chain via the previous block. Typically, a peer-to-peer (P2P) network manages a blockchain protocol where the database is distributed among the nodes of a computer network that communicate with the blockchain and validate new blocks. This removes the need for a single trusted intermediary or centralized third party who typically control more traditional databases, thus creating a decentralized network that prevents records of information from being altered or deleted as nodes in the network must validate each other — hence why blockchains are known as a distributed ledger technology. Blockchain’s Role in Cryptocurrency and Business Although the idea of a cryptographically secured chain of blocks was introduced by Stuart Haber and W. Scott Stornetta in 1991, it wasn’t until 2008 when a person or group under the pseudonym Satoshi Nakamoto released a white paper conceptualizing a blockchain serving as a public ledger for transactions; then in 2009, Bitcoin was born. Since then, blockchains have enabled the proliferation of cryptocurrency systems with thousands of “altcoin” players and new technologies. These technologies include permissionless or public blockchains and private or permissioned blockchains; verification methods beyond proof of work (PoW) and the even more energy efficient proof of stake (PoS)concept; and smart contracts, secure layer ones, and faster layer two blockchain platforms that enable the development of decentralized applications (dapps). New digital asset sectors beyond cryptocurrencies have evolved as a result with the introduction of non-fungible tokens (NFTs) that allow for distinct assets to be traded on a blockchain; decentralized autonomous organizations (DAOs) that seek to decentralize the corporate governance model; asset-backed tokens like stablecoins that are pegged to the price of a fiat currency with governments experimenting with central bank digital currencies (CBDCs); and decentralized finance (DeFi) protocols that are changing the way money is transferred, raised, and invested. Blockchain technology has shown promise to change society’s current relationship with industries such as banking and finance, payment systems, currencies, Web3 and the Metaverse, gaming, supply chain management, food, healthcare, property records, voting, real estate, and more. The value proposition of using a blockchain has been higher accuracy; cost reductions without an intermediary; decentralization; efficient, private, and secure transactions; transparency; and the ability to open up financial services to the unbanked. However, there are still high costs to using a blockchain that have hindered mass adoption. These drawbacks include high technology costs and environmental issues, speed and data inefficiency with slow transaction speeds, illegal activity, and regulation. Considering the sharp crypto downturn, technology issues and liquidity problems have become apparent with market contagion leading to bankruptcy filings and paused withdrawals from hedge funds like Three Arrows Capital (3AC); exchanges like Voyager Digital; and lending protocols like Celsius, Terra/Luna, and BlockFi. Regulations have increasingly become a forefront issue to protect consumers with Russia, China, and India taking an outright ban approach while U.S. and Europe are choosing to draft regulatory frameworks such as the European Union’s Markets in Crypto-Assets (MiCA). The endeavors into crypto have shown that the infrastructure needed for mass adoption is still in its early infancy, but the future of blockchains is promising with new technologies and use cases evolving every day. More Short-term Downside Potential in the Cryptocurrency Markets The cryptocurrency market has crashed with the total cryptocurrency market capitalization falling from almost $3 trillion in November to less than $1 trillion now with Bitcoin falling 68.91% from its all-time high and Ethereum falling 72.13% since then. This downturn began earlier in the year with a tightening macroeconomic environment to combat rampant inflation with regulatory uncertainity, but this crash was further exasperated by Terra/Luna’s collapse that wiped over $400 billion in total crypto market cap. Liquidity issues and contractionary monetary policies have continued to place downward price pressures as people pull money out of high growth, high risk assets like crypto. As a result, crypto has had an increased correlation to the falling equity market that can be attributed to wider adoption and almost all crypto’s value being promised returns in the future, drastically contrasting from the beginning of the pandemic when Bitcoin was seen as a hedge to inflation and the dollar with almost zero correlation. While Bitcoin has shown trading signals that suggest the digital asset has bottomed out, given June’s over consensus consumer price index (CPI) and producer price index (PPI) numbers, we see more downside potential as an aggressive Federal Reserve works to bring down inflation. Given how Bitcoin fell 99% in 2011, 80% in 2015, 84% in 2017, and 53.97% in 2021, we expect Bitcoin’s current price to fall slightly more to the $10,000 range and anticipate price recovery only once the macroeconomic climate reverses. Despite immense price drops in the cryptocurrency market, mass layoffs across the industry, and venture capital activity drying up, the blockchain industry is undergoing a systemic shift. Blockchain technology offers utility that has yet to be realized, and investors are beginning to see the façade masking thousands of tokens that came about with the ease of initial coin offerings (ICOs) that are either scams or providing no real value. Problems with promising technologies are also beginning to rise with many scams within the NFT sector and DAOs suffering from unsuccessful corporate governance practices. As VC funding dries up, 95% of these protocols that have been propped up by easy money will disappear — a trend that can be likened to the dot-com bubble with valueless internet companies. Still, transaction volume on the blockchain continues to rise while protocols like Ethereum undergo fundamental changes with the Merge from PoW to PoS. Other blockchains like Polygon’s MATIC have continued partnerships to build the NFT marketplace infrastructures for companies such as Meta, Reddit, and Disney. At the same time, investors are continuing to search for utility in places such as Ethereum Name Service (ENS) domains with the bet on domain popularity like in the early stages of Web2 and a decentralized identity. Our recommendation is for investors to continue to search for this value in the blockchain industry.
Jul 19, 2022 · 14 min read
ISHARES JPMORGAN USD EMERGING MARKETS BOND ETF (NASDAQ: $EMB)
KEY STATISTICS Share Price: $83.85 52-Week H/L: $83.54-$113.64 Market Cap: $15.49 ($B) Yield: 6.15% YTD Daily Total Return: -19.42% Net Expense Ratio: 0.39% RECOMMENDATION UNDERPERFORM Price Target: $76.34 ————————————————————————————————————— INDUSTRY OVERVIEW The iShares JP Morgan USD Emerging Markets Bond ETF is a part of the emerging markets and bond industry. Emerging markets refers to an economy that experiences considerable economic growth and possesses some, but not all, characteristics of a developed economy. These economies often experience market volatility, but a strong dose of investment and economic growth. The main emerging markets include China and India. On the other hand, the fund is also within the government bond industry. A government bond is a debt obligation issued by a national government to support government spending. As a result, investments in government bonds allow holders to access sovereign debt of a national government. The fund brings both industries together to provide the opportunity to investors to invest in emerging market countries. ————————————————————————————————————— ETF OVERVIEW The iShares JP Morgan USD Emerging Markets Bond ETF (NASDAQ: $EMB) is an ETF with holdings in dollar-denominated government bonds issued by emerging market countries. The fund houses almost $14 billion in net assets with a total of 592 holdings. With the main issuers in the fund being Saudi Arabia, Turkey, and Qatar, the fund provides access to the sovereign debt of over 30 emerging market countries. ————————————————————————————————————— CATALYSTS Rising Interest Rates: With the onset of the COVID-19 pandemic, every economy in the world took a large hit. Emerging economies especially took a large hit due to global shutdowns. As countries have recovered from the pandemic, emerging economies often lag behind as exports are often their main source of income. With an already lagging economy, the raising of interest rates further puts pressure on emerging governments and their debt as the debt becomes more expensive as interest rates rise. Due to the reduced investment and consumption worldwide, emerging economies will not be able to pay their bond debts due to reduced capital inflow, leading to a higher probability of defaulting. Currently, the International Monetary Fund (IMF) has warned that 60 percent of low-income countries are already in or near "debt distress" - the threshold where debt payments equal half the size of their national economies. Defaults by countries such as Venezuela, Sri Lanka, and Lebanon have set the precedent for the potential future of many emerging market countries, leading to a bearish outlook on the Emerging Market Bond ETF. December Fed Funds Target Rate Potential Global Recession: In recent reports, experts have begun warning of the potential for a global recession due to rampant inflation and the subsequent raising of interest rates. Inflation has risen drastically since the COVID-19 induced recession due to the pumping of money into the economies. Supply chain issues and the war in Eastern Europe have kept prices persistent, pushing consumers into a pinch. Countries like Turkey, Brazil, and Mexico have experienced raging inflation with reported inflation at 78.6%, 11.9%, and 8% in June, respectively. With this comes global economic slowdowns that trickle down to emerging economies. Should developed economies begin falling into a recession, foreign investment and consumption will have a stark decline, leading to an accelerated slowdown in emerging economies. A global recession coupled with already struggling emerging economies does not provide a positive outlook for the Emerging Market Bond ETF as the likelihood of debt repayment continues to decline. Despite the consistent decline in the fund's price since September 2021, we are still bearish and expect the price to fall further. Emerging Market Debt ————————————————————————————————————— INVESTMENT RISKS Growth for China: In a strong and growing market, China has shown signs of recovery in the second half of 2022. China has been hit with zero-COVID policies which have contributed to a decline in economic indicators such as factory activity and PMI. However, China has pledged to bounce back from recent losses by boosting infrastructure spending to reach a GDP target of 5.5%. Additionally, unlike other emerging markets, China is cutting rates in order to increase growth. President Xi has stated that China will step up its macroeconomic policies and revert any damage that has been done by COVID-19. COVID-19 Improvements: Vaccination rollouts and infection rates have significantly slowed down in emerging markets. Countries such as Thailand, Vietnam, Indonesia, and India have all seen a more significant part of their population vaccinated and limited their restrictive lockdowns. Emerging markets were hit the hardest at the peak of the pandemic but they have done well to recover and reopen. Many are in the process of economic recovery and have learned to overcome bank credit losses. ————————————————————————————————————— TECHNICAL ANALYSIS J.P Morgan USD Emerging Markets Bond ETF has shown steady decline for the past year. Stochastics in the past have followed a peak followed by a steady decrease and then to another high. In the past month, stochastic have entered underbought territory and has increased from then indicating that in the next couple of months, the stock could be overbought. Additionally, the EMB indicator has shown periods of rise and fall and with past trends, we do expect the ETF to continue to fall. To learn more please visit https://eagle-investors.com/
Jul 11, 2022 · 5 min read