Episode 12: Apple sales and the Coronavirus

This is before and after from Refinitiv. I'm your host Johanna Botta. 

World markets are trying to figure out how to react to the Coronavirus, and this week we saw risk return to the markets with a pop in volatility. Of course, events in China have moved the markets for quite a while now. Whether it's trade wars or the new possibility of a pandemic, investors have been concerned about China for some time. That's because China has driven the global slowdown in manufacturing, and the case for the global recession starts there. 

So this week, we'll focus our attention on China's Caixin Manufacturing PMI numbers, which come out on Monday. These figures provide a snapshot of China's small and medium sized companies, and many investors believe that this data can end up being more reliable than the country's official manufacturing PMI. Investors may be concerned if the Caixin numbers already indicate that activity is slowing down because of the Coronavirus. But a clear look at the current condition of the Chinese economy, could offer some useful guidance about the country's ability to weather the storm. 

Earlier this week, global indices had a serious wobble when Chinese officials announced that the number of patients infected with the Corona virus had hit 6,000, and that more than 130 people were confirmed dead. The New Year break also got extended from January 30th to February 2nd - another blow to productivity. 

Keep in mind, though, that a PMI reading higher than 50 indicates growth. The last Caixin Manufacturing PMI was 51.5, a signal of Chinese expansion. Historically, the readings in January are a little softer because of the Lunar New Year. And there's no reason why this year's reading would buck that trend. Remember, that weakness below the expected amount is what we're looking for. 

The expectation for January is half a point lower than December's reading at 51.0. So still in expansion territory, but only just. Meanwhile, the services PMI has been stronger during China's recent down cycle. Last month it came in at 52.5. but the services sector is also more likely to feel the impact of the Coronavirus quickly. So some negative effects should be expected. The forecast for January is 52. That's also a half point lower than in the previous month. 

Bottom line - Chinese Manufacturing PMI numbers spent most of the early 2019 below 50, and at one point hit a low of 48.3. A shock reading would be anything below 50, especially if it fell below the 49.4 reading of June last year. The Shanghai market has been closed this past week because of the Lunar New Year, and although headlines out of Wuhan may have lowered most people's expectations, a PMI reading that's firmly in expansion territory could help set a more positive tone for when markets reopen. 

So we've had a week of international markets trying to price Shanghai's expected drop, and a week's worth of trading could carve out a significant range on the re-open. So it will be really difficult for the short term traders. 

ASHR the U.S. listed A shares ETF priced in a 5% decline in Chinese A-Shares after Shanghai's last trading day. A 5% drop would put the Shanghai Composite Index at the 2,820 level. A further drop of 13.7% would have to happen to reach the 2019 low point of 2,440. And if it hits that number, it would mean the Shanghai Comp would already be down 20% for this year. That's not a short-term expectation, but we do know risk can price quickly. The caveat would be an unexpectedly strong reading showing growth, which would mean that previous government initiatives have taken hold and have been helping the economy endure. 

Of course, our world is so deeply intertwined, that what happens in China has an impact on major U.S. companies. This week we're looking at Caterpillar or CAT, as it's often known. The company is the world's largest construction equipment manufacturer, and designs and builds forest, mining and construction machinery. 

55% of its revenues come from outside the United States, so they're more exposed to international conditions than almost any other American corporation. Caterpillar's earnings had been growing by double digits in 2017 and 2018. But then in 2019, global trade tensions restricted everything, and forced CAT to confront a major challenge. Construction equipment was the most directly impacted vertical by China's demand slowdown, and mining equipment was down some 30% in 2019 as well. 

CAT's recent sell off in 2020 has been more pronounced than the broader market. And that's what the S&P still within striking distance of its all-time high. We can see CAT hit a five year high back in January 2018, but its share price is now 20% lower. Last quarter, CAT missed estimates for its earnings per share, and came in at two dollars and 70 cents, rather than the expected two dollars and 87 cents. The next day, the stock still rallied 1.3%. 

CAT has lagged the market by a wide margin early on in 2020. And if the market stays firm, and that's a big if, given the current news cycle, then there are many scenarios that could lead to a short-term squeeze. And an earnings miss is one such scenario. On the other hand, one caveat for the upside trade would be a horrific guidance picture for the remainder of 2020. 

The bottom line - a meaningful break under the 135 level could see CAT soon visiting the 2019 lows around 115. 

New Home Sales in December came in lighter than expected at six hundred and ninety four thousand, versus the expected seven hundred and twenty eight thousand. And what did Lennar do? It rallied, of course! Finishing Monday up .98%, which was super impressive considering the S&P traded down 1.57% on the day. As of this recording, Lennar is the top performing stock in the S&P 500 for 2020. And as we pointed out in the last episode, it could remain a real market leader for the rest of Q1. 

There it is, China Manufacturing PMI and Caterpillar in the Before section. And New Home Sales in the After. Refinitiv Data throughout. 

This has been the Friday episode of Before and After. 

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