Stock market seems decoupled with economy: 5 reasons to explain.

Worldwide pandemic strike has later resulted asset market melt-down. The factories in China had labor shortages which reduced global supplies. After the COVID-19 punched American and European countries, the biggest shutdown or so called 'Great Lockdown' in world history, their demand has shrank extraordinarily enough to slow down international trade. The fear of loss of demand and supply would bring to the exacerbation of world economy and the stock responded accordingly. The coronavirus recession, which seemed like a bear market rally, has led to investor disposition effect. Margin calls negatively granted fear to investors to sell off their assets. 

However, the asset market such as stocks, bonds, and commodities, and so on started to revive while the fundamentals were still low. The media has attracted attention to the stock market in which mom-and-pop investors could have opportunity to buy the stocks cheaply from the lessons of dot-com bubble and great recession in 2008. The sensation so called 'FOMO (fear of missing out)' triggered melt-up markets. See my blog https://techongstudy.blogspot.com/2020/08/fomo-fear-of-missing-out.html. 

However, why does this phenomenon happen? What made the ‘fear of having asset’ to ‘fear of missing out’? Why are there so many day-traders (or sometimes called momentum traders) who think they can beat the stock market?

1. There is no alternatives (TINA)

The great shutdown has halted sports games to prevent people from mass gatherings. Sports association did not intend to cease but to sustain the games without crowds. However, as sports stars were exposed to the disease, the games were more than a month delayed. Quarantining at home as lockdowns continues, gamblers were seeking for attractive and thrilling bets. Dave Portnoy was at the lead, showing off his gains through selling and buying stocks. Robinhood investors were deceived by ‘mister market’ (which Benjamin Graham introduced) and started their speculative activities. The liquidity from sports gamble to the stock market has moved the index upwards. 

2. Signals for economic recovery

Crowds believed that the worst has passed. As stock market index is a leading indicator to the economy, multitudes assumed in a strong bounce back. More positive news on real economy such as PMI or unemployment rates are alluring mom-and-pop investors to the market. Anticipation on corporate earnings recuperation can be a strong reason for holding the shares in case of rising in the future. “If the economy continues its recovery and real GDP growth is anywhere close to the current consensus view, the stock-market bull may just be getting warmed up”, says Jim Paulsen, chief investment strategist at Leuthold (WSJ). 

3. Monetary Policy

Federal Reserve and U.S Treasury have been responding to the pandemic crises more rapidly than the previous catastrophes such as financial crisis in 2008 or great depression in 1929. Fed has cut its federal funds rate to near-zero and reported its lending powers by financing into special purpose vehicle (SPV) leading market reflation. Low interest rate is good for ‘gold-and-silver class’ wealthy people since they borrow money at discounted price and invest on asset markets to seek for more wealth. According to the Federal Reserve about top 10% of wealthy Americans owned 87% of all stock in the first quarter. Also, the banks seem to lend cash in accordance with reliability and ability to pay back. Moreover, low interest rate results in low real yield of treasury bills, notes, and bonds (regarding inflation), which would boost asset market such as stocks and gold to benefit more gains. See my blog: 

https://techongstudy.blogspot.com/2020/09/real-yield-is-reason-for-market-mover.html. 

However, this does not only apply to Fed but also to Bank of Japan, European Central Bank, and the banks all over the world. BOJ and ECB both revealed to give incentives to the commercial banks whenever their lending activities to the firms outperforms. Programs such as SLF, PEPP, TLTRO III were announced to bring the stability of their asset market.

4. Fiscal Policy

U.S. Department of Treasury has announced fiscal policy, CARES Act, which “provides fast and direct economic assistance for American workers and families, small businesses, and preserves jobs for American industries.” This includes PMCCF or SMCCF, MNLF, etc. Companies such as YRC, MCH, and Juniata received bailouts of loans from government. Lending programs such as 150 million stimulus package and payroll protection program were also revealed by U.S. Treasury, helping for firms to maintain employments or furloughed ones. HEALS (Health, Economic Assistance, Liability Protection and Schools) Act was additionally mentioned. These are later having ‘announcement effect’, which means Fed's bond-buying program (CCF) has affected investors’ psychology to buy the assets believing lending program will help them buying later according to New York Fed’s report ‘It’s What You Say and What You Buy : A Holistic Evaluation of the Corporate Credit Facilities’. “The effect of the programmes is more psychological than financial... The Fed has totally achieved their target.” 

5. Dominance of Tech Giants

The out-performance of the tech giants laid the disparity between the stock market winners and losers. The gap between them has resulted inequality in the market; companies which concentrate on contactless business such as Paypal, Shopify or Zoom had best performances during the pandemic since many people were staying at home. However, energy, financials, utilities, real-estate and industrial segments were still in the red. Most of tech giants have market capital dominance, which makes stock markets such as Nasdaq and S&P 500 moving upwards since the index is calculated in weighting method, giving a higher percentage allocation to companies with the largest market capitalization. Big market capitalization is dominated by companies with contactless business tools which makes stock market inflated.

Source

https://www.visualcapitalist.com/how-big-tech-makes-their-billions-2020/

https://research.stlouisfed.org/publications/economic-synopses/2020/04/21/central-bank-responses-to-covid-19

https://www.wsj.com/articles/why-did-stock-markets-rebound-from-covid-in-record-time-here-are-five-reasons-11600182704

https://www.wsj.com/articles/should-you-buy-stocks-because-interest-rates-are-low-11600263713

https://www.wsj.com/articles/when-the-stock-market-and-economy-seem-disconnected-11598002220

https://www.wsj.com/articles/this-market-is-a-tech-market-if-bond-yields-rise-watch-out-11598101689

https://www.marketwatch.com/story/robert-shiller-explains-the-pandemic-stock-market-and-why-its-decoupled-from-the-economy-2020-07-07

What makes oil prices volatile? History explains.

Crude oil prices had many rise and fall in history. After crude oil attracted media attention in the 1850s, the price now has been lower than the average price. Energy and petroleum expert, Daniel Yegin indicated that crude oil could be the most popular speculative option for investors to bet against the volatility. 

Rise of Crude Oil

Crude oil was the first discovered by Edwin Drake and was industrialized by John D. Rockfeller. The oil started to be used in many different areas. By 1890, Standard Oil Co. controlled almost 88 percent of the refined oil flows in United States which triggered to face antitrust legislation that restricted the market monopoly. In March of 1908, geologist George Bernad Reynolds started to explore other than U.S. and founded out the possibility the oil could be discovered in Persian area (which is now considered Iran). 

As crude oil production places increased, the supply of crude oil also surged. According to the law of supply and demand, demand remains the same, but when supply increases, prices go down.

Automobile

Oil prices, which had been cut in half due to increased supply in oil, doubled again in around 1910. This is the time when Henry Ford installed first moving assembly line for the mass production by applying the conveyor belt system to the automobile plant. The innovation contributed automobiles to be widely popularized. Demand for crude oil soared as demand in automobile fueled.

WWI and Great Depression

However and the supply of crude oil became unstable due to World War I, which pushed the oil price higher. With the onset of the Great Depression, oil prices fell again due to the loss of demand and more countries started to extract more oil. In the early days of oil market, short-term prices were determined by supply and demand, and in a longer-term, the rise of crude oil supply made the prices fall gradually and steadily. 

Aramco and OPEC

However, things got different after significant amount of oil was discovered on March 4, 1938. The name Aramco (short meaning of Arabian American Oil Company) started to be famous in the beginning of 1944 and the company reached the milestone of supplying 500,000 barrels a day in 1949 and later, one million barrels a day in 1953. As Aramco had a domination of global oil market in 1960 which later came up with foundation of Organization of Petroleum Exporting Countries. OPEC’s objective of formation is “to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers.” 

Wars in Middle East

However, political issues happened in 1970s. In 1973, oil-producing Arab nations cut off supply of crude oil to U.S in retaliation for supporting Israel in the Yom Kippur War ($24  $56). In 1979, Iranian revolution resulted in sharp drop in oil production which lifted oil price from $56 to $125. After that President Reagan controlled the price of oil to $26 from $113 in 1986 by abolishing last price controls on U.S. produced oil. Gulf War lifted $34 to $77 in August 1990 when Iraq invaded Kuwait. Later the price fell back to $37 after U.S. military success in removing Iraqi forces that Saddam Hussein regulated. 

Expansion of Emerging Market

From 2004 to 2007, oil prices continue to rise and reach $74 because emerging economies such as China, India, and Southeast Asia spurred industrialization, resulting in enormous energy demand, while the supply remained stable. It was because oil-producing countries did not increase production to have more gains by benefiting high oil price. 

Great Recession

However, in 2007 and 2008, series of event such as Venezula cutting oil production to Exxon Mobile, slow recovery of Iraq’s export on oil, labor strikes in Nigeria and the U.K.’s North Sea oil fields, and Mexico’s decline in oil. The price of oil reach in $118 in December 2007, and peaks $165 in mid 2008s. However, after weak demand of oil during great recession caused by financial crisis, the price sank till $50s. 

Shale Revolution

Recovery from global economic crisis made oil price rebound to nearly $95 until huge increase in shale gas production. The revolution of fracking the oil led oil price plummet in 2015. It was a strategy to increase the market share in the long run, bearing short term low oil price. Afterwards, OPEC reduced production again until 2018, and oil prices recovered.

COVID-19

In April of this year, Western Texas Oil's May futures price hit an unprecedented oil price of negative $37.63. It means that the future price (May) for crude oil has fallen to negative as of April. The price of crude oil was too low that the seller had to give more premium to the buyer. The demand for crude oil dropped sharply as COVID-19 spreads globally. Shutdown of factories and lockdown sharply reduced oil but supply remained the same, creating a huge gap between supply and demand. This situation is regarded as contango where future price of commodity is higher than the sport price. (Backwardation has opposite meaning)

Warehouses that handle oil inventory were insufficient, which increased more on storage fees. However oil producing countries did not reduce production. (China used it as chance to buy crude oil cheaply) OPEC+, a group of oil producing countries no matter they are in OPEC or not, failed to reach an agreement to reduce production. Rather than cutting production, Saudi Arabia and Russia increased their production, and the rest of the countries were also struggling to increase their production, which made refinery companies in danger. 

If the price of crude oil went down too much, it would be a big problem for each countries. In particular, Russia was worried American shale oil would take over market share. Afterwards, with the agreement to cut production gradually, the oil price slowly recovered. However, anxiety still remains since oil cut tapering puts pressure on OPEC+’s economy such as unemployment and GDP. 

Summary

Oil prices move according to supply and demand in this way and it is also closely related to international political abuse. 

• Increase in oil-producing countries

• Significant increase or decrease in demand for external reasons such as political and economical issue.

• Rise of industries that replace crude oil such as shale gas

Future

The shifting to the energy industry also has an impact on crude oil market in the future. Alternative energies such as solar power, electrical energy, hydrogen fuel, and nuclear power, are threatening the crude oil market. Will they change the frame? Well nobody knows for sure, but decline in need for crude oil is now on process.

Source

https://www.wsj.com/articles/oil-prices-drop-on-faltering-recovery-in-demand-11599562101

https://www.investopedia.com/history-of-oil-prices-4842834

https://courses.lumenlearning.com/suny-hccc-worldhistory2/chapter/the-discovery-of-oil-in-the-middle-east/

https://www.businessinsider.com/the-history-of-saudi-aramco-timeline-2017-11#aramco-gradually-increased-its-production-throughout-the-course-of-the-1940s-reaching-the-milestone-of-500000-barrels-per-day-in-1949-11

'Real' yield is the core of market mover.

Economists regards real yields as a market mover in this summer. Real yields are linked with the yields on Treasury inflation protected securities, or TIPS. They can be measured as alternatives by looking at the yields on TIPS. 

"TIPS is a type of Treasury security issued by the U.S. government that is indexed to inflation in order to protect investors from a decline in the purchasing power of their money. The principal value of TIPS rises as inflation rises while the interest payment varies with the adjusted principal value of the bond. The principal amount is protected since investors will never receive less than the originally invested principal." - Investopedia

*Nominal yield = Real yield + (break-even) inflation rate 

*Real yield = Nominal yield - (break-even) inflation rate

*Break-even inflation rate = Nominal yield - Real yield

For example, if an investor buys an ordinary 10-year treasury notes, he can have possibility to lose about -0.9% in annualized basis since nominal yields on 10-year treasury notes is 0.67% and break-even inflation rate is 1.65% according to Federal Reserve Bank of St.Louis. 

However, it is very difficult for the nominal interest rate to fall below 0.10%, since interest rates on excessive reserves(IOER) on Fed is set at the target. If yields on Treasury notes falls below 0.10%, banks may be reluctant to buy any bond; they will rather lend it to the Fed. (The bond interest rate, the market rate, the yield on treasury notes, etc. are all applied in the same concept)

Of course, not everyone can deposit at a 0.10% interest rate in the Fed, so it would not be impossible for nominal interest rates to fall below 0.10%. Financial institutions, which are not eligible to save their capital to the central bank, must somehow keep large amounts of cash in a safe place and keep them in line with their debt structure for quite a long time; there is no alternatives than government bonds. But anyway, assuming that 0.10% is the primary lower limit of nominal interest rates, real interest rates are principally determined by (break-even) inflation rate.

For example, if the nominal 10-year treasury note yield falls to 0.10%, break-even inflation rate in the bond market will rise to 2.10% then the real return on the same maturity falls to -2.0%.

In August, real yields were likely to reach the downward limit. When the minutes of the FOMC discussions were released in July, the US mid- to long-term treasury bond yields jumped. The yield on TIPS has risen even more. Naturally, the government bond market's expected inflation declined. In other words, a dis-inflationary movements were unfolded as the financial market environment tightened after the announcement of the FOMC minutes. The dollar jumped and the gold price plummeted.

The financial market had been expecting the FOMC to clarify its forward guidance on zero interest rates and more of supportive asset purchase policies on upcoming September. Keeping zero interest rates until inflation exceeds the 2% target was almost certain. 

Yet, Fed only suggested the time to clarify the guidance on the path of interest rate policy as "at some point." It became unclear that Fed will ease the monetary policy this September. There could be no lower interest rate, and even if the Fed alone does something more, it won't help the unemployed who worked in restaurants, bars, hotels and theaters. The absence of Fed's leadership of economic stimulus eventually produced graphs of lowering break-even inflation rate whereas real yields rise slightly.

Nonetheless, Fed announced about monetary policy plans, remaining federal funds rate near zero until average inflation reaches and remains over 2 percent "over time".  Please see my blog down below.

https://techongstudy.blogspot.com/2020/08/review-of-monetary-policy-strategy-fed.html

This overall means owning Treasurys are not considered attractive since the stocks, gold, or corporate bonds can be an alternative that is likely to have more potential positive return. After Fed's super dovish monetary policy which is also supported by U.S. Treasury's fiscal policy, real yields have turn negative due to the short term interest rate near zero. This factor has encouraged investors to take risk-on mode and expose themselves to stock market, commodities or riskier trading field.

There are several reasons that real yields matter to the consequences below:

After Fed cuts FFR to zero due to pandemic hit, negative real yields were purposely driven, since the central bank has been buying Treasury bills and has given the signal targeting above 2% average inflation target(AIT) over time. The stance of Fed has given the effect of capping Treasury yields since long-term yields tend to follow short-term interest rates. This has given investors more confidence that Fed will allow inflation for long period of time, so the real yields have dropped.

Stocks & High yields

For the Fed, low real yields aren’t the only weapon for hiking asset price. For the anticipation of Fed's intervention on economy cushion, yield spread between Treasury  and investment-grade corporate bond is below its 10-year average, despite the pandemic. It helped companies to issue more amount of bonds in that short period of time, which enabled companies to keep on paying the workers and investments. Stocks also skyrocketed by negative real yields.

Dollar & Gold

Lower yields drop lays consequences on weakening dollar. The interest rate is the price of money. The quantity of money increases and decreases in the movement of the interest rate. When the money is overly supplied, then the value diminishes putting the price downwards. When the real yield of U.S. is higher than other countries, then the dollar gains its strength.

Thus, the decline of in U.S. real yields compared with German real yields has helped strengthen the euro against the dollar. Similar to bonds, gold is an asset that investors seek for safety. It also tends to soar during acceleration of inflation. because it then takes more dollars to purchase the same amount of the precious metal. Please see my blog below.

https://techongstudy.blogspot.com/2020/08/can-gold-and-silver-be-considered-as.html

Source: Global Monitor, WSJ 

https://www.facebook.com/globalmonitor.kr.1?epa=SEARCH_BOX

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

https://www.wsj.com/articles/real-bond-yields-help-explain-surprising-market-moves-11600090704?mod=markets_lead_pos3

"Oracle is begging for TikTok's U.S business. Are you sure?"

Oracle Corp, one of the most lucrative but unflashy company in Silicon Valley, acquired TikTok US business in the battlefield against Microsoft and Walmart. At first, Microsoft's acquisition seemed promising, but it was overturned during the last minute negotiations. The relation between Oracle, which provides business software and consulting service for enterprises, and TikTok, a 15-second video sharing platform which is popular among teenagers, seems very awkward for investors or businesspeople. However, the most important factor ‘data’ lies behind this awkward encounter between both firms.

Timeline

According to WSJ, Oracle has been selected as a technology partner for TikTok's US business. The deal is quite far from the previously known acquisition of the entire business ever since Oracle has been founded in 1977. NYT cited that Oracle is most likely to gain a stake in TikTok, yet the size of investment is unclear. However, it is clear that this negotiation will bring Oracle deeply involved in TikTok's US business.

The rise of acquisition issue of TikTok's US business was due to a conflict between the US and China. Earlier, US President Donald Trump announced on July 31 that he would ban the use of TikTok in the United States. The reason was that ByteDance, a TikTok operator based in China, leaked personal information of Americans to the Communist Party in China, which could harm national security. On August 6, he signed an executive order to block all the transactions with ByteDance to US companies within 45 days. In addition, it issued a follow-up order to sell ByteDance's TikTok US business within 90 days. Since then, Microsoft has emerged as a prominent takeover negotiator, Walmart later joined the combat. I personally regarded Walmart was suitable for acquiring TikTok platform for the synergy of its e-commerce sales by live streaming).

However, Microsoft issued an official statement indicating that ByteDance will not sell TikTok to Microsoft, in that protecting TikTok user data and US security is need to be more prioritized. An hour later, news about Oracle's acquisition of TikTok came out. 

Oracle's bet on TikTok

Oracle is a traditional business-to-business (B2B) operating corporate. It has grown into a global software company based on the enterprise database market. There seems to be a distant business relationship with TikTok, a B2C business targeting consumers, especially youngsters. This is one of the backgrounds in which Microsoft, which has relatively rich B2C business experience, was superior in the acquisition competition. However, given that Oracle is trying to grow its cloud computing and consumer data business, acquiring TikTok US business can create business synergies.

First of all, TikTok can become an excellent anchor tenant of Oracle’s cloud infrastructure. This is because new space is needed to store the enormous amount of data that users create when separating the TikTok US business from ByteDance. TikTok has more than 100 million users in the United States. Oracle has struggled to compete its cloud business with Azure and AWS. According to market research firm Gartner, last year, Oracle was not in the top five cloud-computing companies by revenue. Microsoft is in second place.

<Bloomberg> pointed out that TikTok will be one of the greatest company to support Oracle in building its cloud infrastructure and enhance the user base ecosystem. In addition, Oracle proposed to make 20,000 new jobs in TikTok global business, Mnuchin said.

It is unclear whether Oracle will fully acquire TikTok's US business. It may remain one of the major partners. However, as it has been selected as a technology partner, Oracle is expected to use the TikTok platform to enhance its cloud business capabilities.

Source: WSJ, NYT, Bloomberg

https://www.wsj.com/articles/microsoft-drops-out-of-bidding-for-tiktoks-u-s-operations-11600039821

https://www.wsj.com/articles/walmart-joins-microsofts-pursuit-of-tiktok-11598544354

https://www.nytimes.com/2020/08/28/technology/tiktok-walmart-ecommerce.html

https://www.nytimes.com/2020/09/14/technology/deal-tiktok-us-china-trump.html

https://www.bloomberg.com/news/articles/2020-09-13/oracle-is-said-to-gain-advantage-in-deal-for-tiktok-in-u-s

https://www.wsj.com/articles/oracle-tiktok-deal-trump-politics-microsoft-11600129980?mod=hp_lead_pos2

Nvidia, ARM and Softbank. What should we know about the mega-deal.

Softbank Group, which has the leading investment vehicle Vision Fund, is about to sell ARM holdings to Nvidia Corp. Selling British chip designing company in $40 billion to a GPU company is almost near a deal. Most people may or may not know what those companies are doing (except investors or tech-savvy geeks) even though they are using them unconsciously. Wall Street Journal reporter Asa Fitch and Stu Woo kindly explains about them.

ARM Holdings

ARM plays the valuable key role in semiconductor sectors, which WSJ calls "world's most important behind-the-scenes chip companies".  It provides basic blueprints of the semiconductor by designing and licensing, and dominates more than 95% of world's smartphone.

Cambridge-based firm, Arm was founded in 1990 in collaboration with Apple Inc. and the Acorn Computer Group. It took a different strategy from its rival Intel. Arm focused on designing rather than energy consumption. Arm was in a position to take advantage of the 2000s smartphone revolution, as Apple, Samsung and other device manufacturers were looking for chips that would take a sip instead of wasting battery life. Softbank Group acquired 25% stake (32 U.S billion) of ARM, indicating the technology can lift the future of IoT. 

Nvidia Corp

Nvidia is famous for its graphic chips especially in video-games. During the pandemic, as console games such as Nintendo Switch was hot in demand, the GPU was widely used in it. Nvidia does not only concentrate on graphic chips for games but also for the data centers as the chip plays critical role in AI calculation as the automation industry sparks up. Nvidia has the highest market capital (300 billion) among U.S. semiconductor firms, outstanding Intel. 

Nvidia was founded in 1993, just 3 years after ARM's appearance and is located in Santa Clara, California. Its vision for the future demand of graphic games and multimedia content from consumers was firm and stubborn as personal computers have been supplied more widely. Jensen Huang is the CEO and co-founder of the company, who previously worked in AMD, which is now rival.

Acquisition

The pressure from shareholders presumably Elliot Management has made up Softbank's mind to sell its asset that is flagging its stock price. To shore up its stocks, Masayoshi Son announced to sell $40 billion of ARM, which made the share more than 20% this year. 

For Nvidia, the deal could grant a dominant role of its lucrative business on providing chips to the smartphone companies such as Apple. It could make Nvidia more powerful company against its rival competitor such as Intel or AMD as they try to adapt Arm desings in servers and personal computers. Apple has transferred its CPU from Intel to Arm based technology to make Mac more efficient. 

"Nvidia will pay $21.5 billion in stock and $12 billion in cash. SoftBank may also receive up to $5 billion in cash or stock subject to Arm hitting financial-performance targets. Nvidia will also issue $1.5 billion in stock to Arm employees", reports WSJ.

Threats

Since the acquisition of Arm Holdings is the biggest ever, there are 3 risks that Nvidia need to bear in mind. 

1. Battlefield between U.S. and China over the dominance of techno-hegemony can lead into the trouble of the whole semiconductor industry. With these in regards, regulators in both parties of the country need to agree on the sign off completely. In the past, Broadcom's acquisition over Qualcomm has been nullified as Trump administration fears geopolitical considerations. 

2. Job losses can be another reasons that some politicians in the U.K worry about. When SoftBank bought Arm, it guaranteed to grow jobs in Britain. Labour Party warned recently that Nvidia's acquisition of Arm could lead for unemployment as the pledge will also be invalidated.

3. Arm has been in partnership with many customers in neutral position. However, Nvidia's acquisition can raise the concern from Arm's customers that it can exploit using monopoly rights to the existing clients.

Source WSJ NYT FT

https://www.nytimes.com/2020/09/13/technology/nvidia-arm-softbank.html

https://www.wsj.com/articles/who-are-nvidia-and-arm-and-why-are-they-talking-about-getting-together-11599938641

https://www.ft.com/content/6bfe40a5-2426-4743-98cd-6fed9dd01b98