Modest Rally On Stimulus Murmurs
The stock market rallied sharply on Tuesday before giving up much of the gains in the afternoon. At the peak, the market was up 1.4% and it closed up 47 basis points. Rumors are swirling about vaccines, treatments, and a stimulus deal. Pelosi changed her deadline from Tuesday to the end of the week like many thought was possible. It seems like she is running out the clock until most people vote so a stimulus doesn’t help the President.
She can’t outright deny the President’s plan because it makes her look bad. White House is offering just $300 billion below her offer. Surely, she can lower her offer slightly. It seems the stock market knows either a deal will get done soon or the Dems will pass an even bigger package (assuming they win) next year.
Even if Trump and the GOP wins, a stimulus will pass. There is no way a stimulus doesn’t pass within the next 4 months.
Treasuries Selloff
The most important action wasn’t in the stock market. It was in the treasury market. Long bond sold off and the yield curve steepened which is great for banks. As of early Wednesday morning, the 10 year yield was at 82.3 basis points which surpassed the high on October 7th. Next threshold to hit is 90.2 basis points which is the June 5th high. It will likely surpass that this month, and can finally hit the target of 1%.
Yield is being pushed higher by the stimulus talks and the potential for the economy to reopen. Fed being extremely dovish and welcoming inflation is also a plus. As you can see from the chart below, the 5 year 30 year curve has been steepening which is great for net interest spreads.
Tegional bank index was up 2.3% because of this great news. It should rally on Wednesday as well. This index is down about 13% from its June high. It should surpass that if the 10 year yield gets past its June high.
Speculators Are Here
With the S&P 500 hovering near its record high, it’s no surprise there are still individual speculators. Best way to get rid of them would be for treasury yields to spike. Money losing companies would be wiped away. It’s difficult to tell their sensitivity to an increase in yields, but they will feel the pain at a 10 year yield of 1%.
If it were to rise to 2%, there would be a massive bear market in the worst stocks such as the SPACs. FAAMNG stocks need yields to go even higher before they fall. Obviously, they are much stronger companies.
We can see the individual speculators in the options market. Last week, small options traders spent more than 50% of their total volume on speculative (out of the money) call options. This is a historic amount of aggression.
As you can see from the chart below, there has been yet another spike in single stock call options in relation to puts. 2.6 calls for every put is near the two peaks this year. It’s higher than any other point since the end of 2015.
Details Of Tuesday’s Trading Session
Nasdaq increased 33 basis points and the Russell 2000 was up 25 basis points. Tech index didn’t feel the heat from rising yields yet. Small cap growth stocks fell 27 basis points. Small cap value index was up 80 basis points.
Energy sector in the S&P 500 rose 1.18%. Cloud index fell 1.46%. Zoom was down 5.5%. This is good if you’re hoping the economy reopens. Draftkings fell another 4.6% as it is down 33.3% from its record. Even Tesla fell 2.1%. It’s down 8.5% in the past 4 days. That pesky Nio still managed to be up as it increased 1.2%.
Netflix Falls After Its Earnings
Netflix disappointed investors on EPS and new subscribers. This is a bad sign for the stay at home stocks. They can’t grow at the clip they did in the first half of 2020. There are only a certain number of new people left to subscribe. Business is saturated. Many people will likely leave the service in 2021 if the economy reopens.
Specifically, EPS was $1.74 which missed estimates for $2.14. Sales were $6.44 billion which beat estimates for $6.38 billion. It's likely there was a higher ARPU for the company to beat on sales and miss on new subs. As you can see from the chart above, sales growth fell to 22.8%.
Growth is going to be even weaker in Q4 and Q1 which have tougher comps. The firm added 2.2 million global paid subs which missed estimates for 3.57 million. This isn’t the Netflix of old. This company is losing its momentum. As a result of this weak report, the stock fell 5.7% after hours.
Snap Explodes After Hours
Snap beat estimates which sent it stock up 24% after hours. We're not going to pretend like this was actually a good report. The company still can’t turn a profit. Specifically, it had 1 cent in adjusted EPS which bet estimates for a 5 cent loss. However, it lost $200 million in real money. That adjustment puts lipstick on a pig. The firm had $679 million in sales which destroyed estimates for $555.9 million.
As you can see from the chart below, sales growth spiked from 17% to 52% which is the fastest growth rate since early 2018. It was helped by its anime lens. And the firm had $2.73 in average sales per user which beast estimates for $2.27.
Investors don’t see how this is a real company. Even after being public for 3.5 years, it still can’t make a profit. Last quarter it was hurt by ad budgets being cut, but even with spending coming back, it’s still losing money. Its daily active users rose 4% from last quarter to 249 million (19% yearly growth).
That’s very impressive because less people were stuck inside this quarter. Users stuck with the platform. Being popular among young people isn’t the problem. A problem is monetizing users profitably, which it can’t do.