Tech Leads The Market Higher On Tuesday
Tech has recovered strongly from its Monday bottom. Fact that it is in a bubble has not impacted its returns yet. If this was a normal bull market, a greater than 10% correction would be enough for me to turn bullish. However, tech was in a bubble. If the bubble continues, we could have a face ripping final rally where the Nasdaq hits a new record high within a couple weeks. It’s impossible to tell where this index will go in the near term, but wherever it lands will likely be far different than where it is today.
Nasdaq 100 is already up 5% from Monday’s low. On the other hand, small cap value is very close to its low as it has had a disastrous week. Recent action favors COVID-19 slowing the economy again. It doesn’t really matter to the economy if deaths are falling rapidly because people still aren’t flying and businesses aren’t bringing people to the office if there are positive tests.
Realistically, just having a few positive tests doesn’t even mean anyone is getting sick. Not bringing people back is overkill. However, firms don’t want to take the liability risk. People and firms have adapted to this COVID-19 world for a few months. Nothing seems to indicate the world is going back to normal within the next few weeks given the slower than expected rollout of the mass testing kits from Abbott.
Brutal Returns Of European Banks
As you can see from the chart below, the European bank index is at the lowest price since 1988. HCBC stock is down 53.4% year to date. It’s at its lowest price since 1995. It is one of the banks reported to have moved large sums of illicit cash for 2 decades. In the past 5 years, Deutsche Bank stock is down 70.3%.
European banks have low net interest margins because the central banks have set interest rates negative. As long as rates stay positive in America, its banks will outperform. Even the worst big bank, Wells Fargo, is better than all the European and Japanese banks. 10 year yield has barely moved for 6 months. It’s current at 67 basis points. In the past 6 months, the high is 90 basis points and the low is 51 basis points.
You could argue it’s building a base technically. Things would have to go horribly wrong for the 10 year yield to make a new low. We’d need to see another spike in COVID-19 cases, no stimulus, and all the attempts to fight COVID-19 fail. Besides the weakness in value stocks, the 10 year yield shows you that an economic recovery isn’t priced in.
Low yields aren’t the only reason why European banks are terrible. They also haven’t closed enough physical branches which is important as people shift to banking online. And they also have worse capital ratios to make up for low net interest margins.
Finally, they have poor governance and the government is always trying to fine them. It’s tough be a European bank where you aren’t making much profits and the government is taking the profits you do make. They are like zombies because they are systemically important.
Details Of Tuesday’s Action
Growth won the day, with Tesla being the exception to the rule. Nasdaq was up 1.7%, while the S&P 500 and the Russell 2000 were up 1.1% and 0.8%. Amazon was up a massive 5.7% as it is up 8.5% from Monday’s low. Penn National Gaming was up 6.1% to a new record high as it is up 1,545% since its March low.
Zoom was up 5.2% to a new record high. It’s up 74.5% in 1 month. It has a massive $140 billion market cap. It’s rare in normal markets to see such a rally in a big cap name. It’s common in this one.
Cloud index was up 2.1% again which means it’s up 6.2% since September 11th. Regional banks were destroyed again. This has been a massacre as it is down 13.1% since September 6th and 15.9% since August 11th. Exxon is in a death spiral as it is down 6% in its recent 4 day losing streak. The stock is down 18 of the past 20 days.
Small cap value index was up 15 basis points which is a huge underperformance versus large cap tech as the Nasdaq 100 was up 1.9%. Small cap value index is only up 1% from its Monday low.
Tesla Battery Day A Dud
Tesla’s Battery Day was an outdoor event after the annual shareholder meeting. The stock had already fallen 5.6% on Tuesday because Elon said the innovations wouldn’t launch until 2022. And the stock fell an additional 6.9% after hours because the event was a disappointment.
Most have never seen such active trading in a stock after 6PM in the after-hours session. Investors were disappointed because the only new product announced was the Model S plaid edition which costs $140,000. Tesla claimed it will go on sale in late 2021.
A problem with this release is that the firm still hasn’t released the Roadster which it announced about 2 years ago. At this point, we didn't even see the Roadster coming out by the time plaid is supposed to come out. Tesla is in a really tough spot because it can’t hype up any new products without first delivering on its previous promises which are the semi and the Roadster. They are very late with no updated time horizon.
Cybertruck isn’t late yet, but Tesla has its hands full boosting production for its launch next year. Tesla knows investors won’t believe it when it promises a new product until those come out. That’s why Elon only was able to tease a $25,000 compact sedan. He said one would come out in 3 years in 2018. That would make next year the launch date. Unfortunately, he repeated that 3 year time frame again at this event. That’s a 2 year delay.