Breaking up is hard to do. A slice of the whole slowing global growth story is directly attributable to the ongoing Brexit story. Though all will be impacted to some degree, the greatest impact felt on this side of the Atlantic, at least at first, would likely be felt in volatile currency markets. As uncertainty increases, one might expect greater demand to be more evident for safe haven assets.
Headline-reading algorithms did respond to the failure of Prime Minister Theresa May's deal with the EU to pass muster in Parliament. Momentum algos, however, did not join, and from a U.S. equity markets perspective, the event would not even have gained the attention of investors engaged in doing something other than market watching occupationally.
As the UK barrels toward a confidence vote Wednesday evening, ongoing developments emanating from that nation will remain atop the news cycle for now. One must wonder. Just who needs who over there? The European economy is not exactly kicking in doors. Would the freedom to negotiate trade deals on their own benefit the UK? The reworking of NAFTA did remove the NA from the deal's title. On the other hand, does a hard Brexit by March 29 put into motion the break-up, for all intents and purposes, of the UK itself? Irish unification? A new Scottish referendum? There are tough decisions ahead for the people of the UK and their representatives. No easy answers.
As an American, I have no right to a public opinion. That said, in curiosity, I must ask myself, as we all should, at what price does one surrender sovereign control? At what price their honor?
When Doves Cry
Just how bad is the data expected to get? Last month, the European Central Bank set the stage for policy normalization. The end of quantitative easing. Rising interest rates on the horizon. Out of the woods? Nope. Blaming everything (but, certainly not the eurozone) from a slowing Chinese economy to Brexit to tensions over global trade, ECB President Mario Draghi turned a few heads on Tuesday.
In response to a string of softer macroeconomic data-points, not just for the broader eurozone, but in specificity, the engine behind it, Germany, Draghi addressed the European Parliament. "There is no room for complacency." The ECB leader went on "A significant amount of monetary policy stimulus is still needed to support the further buildup of domestic price pressure and headline inflation." Hmm. You okay there, Sparky?
German full-year GDP estimates do suggest that the nation did narrowly avoid falling into an actual recession, by definition, over the second half of the year. Still, December industrial production data, actually not just for December, but for several months now, have simply driven off of a cliff. Just wonderful for a manufacturing/export-driven economy. Will the ECB backtrack on plans to normalize? My guess... the ECB will buy everything under the sun in order to postpone a spark that ignites a crisis that could threaten to end to the global super-cycle of credit/debt dependency. Oh joy.
Birds Of A Feather
Ever since replacing Tom Hoenig (who was considered to be a hawk, and who, unlike most central bankers, was actually Sarge approved) ) at the helm of the Kansas City Fed, Esther George has been considered perhaps the most hawkish district president at the central bank. (Sort of sharing that title with Loretta Mester of Cleveland.) Every time the Janet Yellen Fed watched a fat pitch down the middle with their bat on their shoulder, George dissented. Now, George is a voting member of the FOMC this year, and she spoke on Tuesday. Has the hawk shed her hawkish outlook? Might I ask again. Just how bad is the data expected to get?
Read on. "Has the FOMC raised rates back to a neutral or normal level so that they are no longer either stimulating or restraining economic activity? Have we reached the proverbial soft landing where the economy has achieved maximum employment, stable prices, growth at potential and monetary policy neutrality?" George asked her audience. George, in answering her own compound question, seems to think that the FOMC is close and should only proceed on policy normalization with caution. On top of making a case for a pause in the normalization of policy, she also ponders the impact of balance sheet management (quantitative tightening) upon the economy. Don't we all?
Very interesting. Very interesting indeed. Starting to sound like the fire squad is standing by with buckets of kerosene just in case the magical blaze (that was artificially created to begin with) suddenly flickers.
FANG Strikes Back
Canaccord Genuity's Michael Graham likes the original FANG names right here. Graham's opinion was made public on Tuesday, adding to the positive vibe felt across the space, and thus across equity markets after Netflix (NFLX) announced price hikes on Tuesday morning. Graham, like your author, thinks Amazon (AMZN) to be in the best position among those four names.
Quite honestly, I think that there is a lot to like at planet earth's leading e-tailer, and leading cloud services provider. Anyone think that perhaps businesses will start moving away from the cloud, or that shoppers will forsake increased convenience at lower prices? Me neither. Do we even get started on the beast that is Amazon's advertising business? Graham's target price for Amazon stands at $2250. Your author, who is long the name, targets a more conservative level of $2100. The most significant threat? CEO Jeff Bezos' very public divorce. Could distract. Could force unexpected pressure on the shares at some point.
Graham also goes on to speak positively on the other three names. My thought is that of the other three names, Alphabet (GOOGL) could be a successful long. The advertising business is a plus here as well, not to mention the firm's development along the lines of artificial intelligence -- and subsequently, autonomous driving. Alphabet, however needs to stay out of their own way.
The other two names, Facebook (FB) and Netflix (NFLX) , are less compelling for me at this time. Facebook, in my opinion a poorly managed company has really done nothing to earn my investment. In terms of managing the firm, is there real improvement? To be fair, JP Morgan has named this stock one of their best internet ideas of 2019, so my opinion is not the only one. Facebook is fundamentally cheap relative to its FANG siblings, does not face significant competition, and benefits from broad appeal that brings with it tremendous scale. With a different crew at the top, I might be interested.
Netflix reports on Thursday. My short may or may not have been fundamentally correct. The fact is that this has been a poor trade. The price increase takes a significant step toward addressing the balance sheet and expected margin compression -- or basically the reasons why I was short in the first place. Yes, Amazon bailed my P/L out, so that from 10,000 feet this position presents as a drag and not as catastrophic. That said, obviously, I will have to take steps to either reduce this exposure or go through the expense of a proper hedge ahead of Thursday's digits.
Regardless, I remain a satisfied consumer of the product. That begs one to ask... just how much elasticity is there in regards to what Netflix can ask? Then if they can pull this off... did you watch Jim Cramer on Mad Money Tuesday night? Might Amazon, Apple (AAPL) , and a myriad of others like Disney (DIS) , and AT&T (T) raise prices for services? Food for thought, gang.
Economics (All Times Eastern)
08:30 - Import Prices (Dec): Expecting -1.1% m/m, Last -1.6% m/m.
08:30 - Export Prices (Dec): Expecting -0.5% m/m, Last -0.9% m/m.
10:00 -NAHB Housing Market Index (March-F): Expecting 57 , Last 56.
10:30 - Oil Inventories (Weekly): Last -1.68M.
10:30 - Gasoline Stocks (Weekly): Last +8.066M
13:00 - Fed Speaker: Minneapolis Fed Pres. Neel Kashkari.
14:00 - Beige Book.