Energy, Apple, & Dem Election

Coronavirus Continues To Cause Trouble

Predictions that energy would do well this year were blown out by the coronavirus which lowered Chinese demand for commodities. Furthermore, even though Apple has a big presence in China, its stock hasn’t reacted negatively to the news. That’s the worst case scenario for the trade. It went wrong due to an unforeseeable event. Energy sector is down 11.22% year to date and the tech sector is up 10%. Apple is up 9.5%.

The death toll in China was updated as now 1,016 people have died. SARS outbreak killed 774 people in 2003. That means any economic comparison between the 2 needs to work in the assumption that this outbreak is worse. 42,638 cases have been confirmed. Most of the 2,478 new cases and the 108 added deaths occurred in the Hubei province. The chart below shows the growth in global cases since late January.

Impact on the Chinese economy will be severe in Q1. Evercore ISI’s top economist stated China’s GDP growth will be 0% in Q1. I wouldn’t be surprised if it’s negative. And the impact on the global economy is much bigger than SARS. Mostly because the Chinese economy is more important to the world than it was in 2003. 

In 2003, China was about 4% of global GDP and in 2018 it was about 16% of the economy. Imports grew from a 4% share to about 10%. Non-food and non-energy intermediate imports went from 4% to above 12%.

Estimates for American GDP growth have fallen to just 1.2% because of the coronavirus. This might end up being too negative if the consumer has a solid January. Based on sentiment, I see no reason to expect the consumer to have a weak Q1. Stlanta Fed Nowcast, which uses only economic data not prognostications about the impact of the coronavirus, expects 2.7% growth. It was last updated on February 7th in which it was lowered 0.2%. 

Latest economic data lowered the expectation for real personal consumption growth from 3% to 2.9% and real gross private domestic investment from 5.9% to 5%. NY Fed Nowcast estimate was raised from 1.55% to 1.67%. Even the bearish NY Fed is above the consensus because the weakness expected from the coronavirus isn’t in the data yet.

Impact On Commodities

Impact on oil prices has been sharp. As you can see from the table below, WTI oil fell 18.5% because of the coronavirus which is slightly less than the 23.4% decline related to SARS. There has been a 5.1% decline in soybean prices because of the coronavirus and a 2.6% decline related to SARS. This table shows the CRB Commodities index is up slightly. 

However, from January 21st to February 10, the CRB core commodity index is down from 181.56 to 168.87. That’s a 7% drop in about 3 weeks.

It’s very common now to refer to how bad the energy sector has done. It’s easy to say fossil fuels will lose out to renewables, but the reality is when fossil fuel prices fall, it makes them more competitive with renewables. It’s the hot trade right now to go short Exxon Mobile and long Tesla, but Exxon still has years of profitability left before fossil fuel usage ends. 

Markets tend to swing too far in each direction. In the past year, Exxon Mobile stock is down 19.08% and Tesla is up 146.54%. Tesla shorts have lost $8.4 billion in the past 5 weeks. Personally, I’m not a short seller as I think the company will successfully launch the Model Y. However, it doesn’t take a sophisticated DCF model to show the valuation is too high.

Apple Subscription Story

The chart below shows an in-depth historical look at Apple’s subscription services in comparison to the firm’s revenues and Amazon Prime subscribers. As you can see, the latest update shows there are 1.5 million active Apple devices and 900 million iPhones. If you keep following the trend, there are more. Latest update a few years ago shows there were 885 million iTunes accounts. There are 500 million paid subscribers which dwarfs Amazon Prime which has 100 million subs. 

If you extrapolate past growth, there will be 600 million Apple subscribers by the end of 2020. This is why Apple has a higher multiple than it did a few years ago before the subscription business took hold.

Tuesday Is The New Hampshire Primary

It was correct to say that Bernie Sanders had a lot of momentum in the Democrat primary. However, investors have completely ignored it. Mostly ecause they think if Sanders wins, then Donald Trump will win the re-election. If that’s the case, many the S&P 500 will rally 7% in 2020. 

If Bernie wins, I think the market can fall over 10%. It’s a binary event and the market is betting on the winning side. According to 538, Bernie has a 56% chance of winning the plurality of delegates. He has a 44% chance of winning the majority which is not far above no one winning which has 28% odds. I strongly think Bernie will win the plurality and the majority.

PredictIt shows he has a 46% chance of being the nominee. Bloomberg is in second at 28% even though he hasn’t debated yet and won’t compete in any of the first 4 states. It’s likely Bloomberg will be in the debate on February 19th because you need 4 national polls with above 10% and his polling average is 12.7%. He’s in 4th place. 

Biggest news on Monday was that Bernie led the Quinnipiac national poll by 8% over Biden. Buttigieg only had 4% support from African Americans. Therefore, he won’t win. I care more about this latest national poll because there haven’t been that many national polls lately as everyone is focused on the New Hampshire primary. 

Many think Bernie will win the primary as the average of polls gives him a 7.4 point edge. A main question will be who comes in 2nd. Personally, I think it will be either Mayor Pete or Senator Amy Klobuchar. PredictIt shows Bernie has an 82% chance of winning New Hampshire.

A scary aspect for the bulls is that the Quinnipiac poll showed Bernie Sanders beating Trump by 8 points in a head to head match up. Stocks are completely ignoring the possibility of Bernie winning. 

The post Energy, Apple, & Dem Election appeared first on Theo Trade.

Source: First Rebuttal

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