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Episode 8: FedEx, Aramco and the 2020 stock market

Episode 8 - Part 1

FedEx's abysmal performance, Saudi Aramco’s IPO, & US-China Trade Deal 

Published on: December 17th, 2019 • Duration: 7 minutes

In this episode, we examine how FedEx ending their relationship with Amazon has affected FedEx stock prices and what sort of investing opportunity there will be when they announce their earnings report. We also discuss whether Saudi Aramco’s recent listing is true price discovery and how it’ll affect other stocks when it will be added to the MSCI Emerging Market Index. Finally, we will review how the negotiations for the US-China trade deal have panned out.

  • [00:00:04] Hello, I am Jamie Macdonald. Your host for before and after powered by Refinitiv. The word bellwether is defined as the leading sheep of a flock. It is formed by a combination of the middle English words belle as in bell ding ding and wether a word that refers to a castrated male sheep. Over time it has come to mean an indicator or predictor of events or actions. It is a word that comes to mind when talking about our first before segment. The upcoming FedEx earnings announcement. Our second before segment looks at the addition of Aramco to the MSCI index. Our After segment begins with a nice serving of crow as we talk trade deal. Let's get to it. Since its founding in 1971, FedEx has become ubiquitous with shipping and as far back as 1980 the stock has been a leading market indicator. Tightly tethered to the broader S&P. That has changed as the S&P has continued to climb through all time highs. FedEx has decreased 31 percent in 2019 alone. When FedEx made their tactical decision to end their domestic express and ground delivery agreement for Amazon, they were already in the weeds and facing devastating margin compression on the deal. It represents a loss of 900 million dollars in revenue and has largely been priced in on FedEx. Amazon didn't miss a beat when this happened and simply developed their own ground fleet distribution system. Compounding the trouble is the fact that FedEx is stuck directly in the middle of the US China trade war. Beijing considers FedEx a potentially unreliable foreign company and has been investigating them for illegal shipments of knives in Hong Kong. Throw in some diverted while away shipments, a lawsuit with the Commerce Department and a spat with the New York Times and it gives us a lot of reasons not to be confident in this upcoming earnings report, which is why it may be ripe for long term investment. Realizing there is a difference between trading and investing can allow us to sometimes act based purely on price action and timing to great result. FedEx's narrative and earnings momentum is, to put it bluntly, horrific. And yet, the stock finds a baseline support level near a hundred and fifty dollars a share. From the long side, the risk/reward has an investor risking 5 percent for a 15 percent return should it return to May levels of one hundred ninety dollars. A look at how FedEx has lagged main competitor U.P.S. in 2019, makes a long short spread very compelling. The spread covers all bases should the global macro conditions and broader markets deteriorate, as it's safe to assume U.P.S. will not be immune. Much has been made about the recent listing of Saudi Arabia's Aramco, the world's largest company by market value. While the focus has been directed primarily on Aramco's nearly two trillion dollar valuation, albeit on a one and a half per cent float, we are going to look at how Aramco affects other stocks and countries with its upcoming additions to the MSCI index. Last week, Aramco listed shares in Saudi Arabia and the stock jumped 10 percent in the first day of trading, achieving the eye popping valuation.  We need to question if this is real price discovery for a couple of reasons. First, only two hundred and forty million dollars worth of shares traded. And yet the company added nearly 200 billion in market cap. Second, the buying was mainly domestic retail, with two thirds of the IPO being held by Saudi locals who are encouraged to hold their shares for six months to receive a bonus. This makes for sexy headlines and marginal impact for Western investors. We don't expect Aramco to be a big factor in your ETF holdings anytime soon, given that most ETF operates on a float adjusted basis. The adjustment in Aramco case is twenty nine billion dollars. Even in the MSCI Emerging Market Index, which had a total market cap at nearly six point five trillion, Aramco makes a small impact coming in nought point zero five percent of the index putting it in 25th place. We should be looking for some index Arb players selling the larger emerging market countries in anticipation of Saudi Arabia getting a bigger slice of the pie and any excess selling in China or Korea would be an opportunity for a long trade. Also, within ETF like EEM, Aramco could lead to selling in other emerging oil names such as Petrobras and Gazprom, which could set up nicely for quick, long swing trade. When you do a segment like the one we did on the tariffs cliff deadline that can be resolved at any moment, you speculate and you run a risk. I believe my exact words were "and least likely at this stage, something no one is expecting. A comprehensive deal is announced. Euphoric risk on would ensue. But please don't hold your breath. Seriously." And so right on cue in the short window between filming the segment and airing it, phase one of the trade deal was completed. So some days you eat the bear and well, you know the rest. The deal for Phase 1 was more decisive language than we would have anticipated. In addition to deferring any further tariffs, it lightened the burden of some existing ones. Early reports claim we could see cuts of as much as half of the current tariffs on Chinese goods. It is also predicated on the Chinese purchasing an extra 50 billion of agriculture from the US. And of course, they promised to crackdown on intellectual property theft and the markets once again, did not care. A garden variety bump of 30 basis points in the S&P. The precarious nature of the promises is probably why the markets simply shrugged. This has been before and after the twice weekly market show powered by Refinitiv. I am your host, Jamie Macdonald. Dion will be with you next episode and I will see you after the holidays. Be sure to like, subscribe and share us with your friends. Click the bell if you want to be notified of new episodes. Happy holidays. 

Episode 8 - Part 2

Will the stock market rally continue in 2020?

Published on: December 20th, 2019 • Duration: 5 minutes

In this episode, we reflect on yet another strong year for the U.S. stock market. We examine the performance of several indices, such as the NASDAQ Composite, S&P 500, as well as the Philadelphia Semiconductor Index, and compare their meteoric rise to the one observed between 1997 and 1999. Will this pattern continue, or will the cycle come revert to a bearish phase?

  • [00:00:04] I am Dion Rabouin, and this is before and after powered by Refinitiv. This will be the final episode of Before and After for 2019. And with all due respect to J. Paul Getty, we are not going to allow our nostalgia to lead to idle speculation but rather use this episode as an opportunity to look back at assumptions about the markets that reveal themselves as inconsequential and therefore a missed opportunity. 

    [00:00:27]  As we close out the year with markets near all time highs, it's easy to recall the calamity of December 2018 and how certain the prospect of a recession seemed. Giving into these assumptions, many may have missed out on a stellar year of market gains. Look at the VIX at the close of 2018. The VIX started last December, elevating into the high teens. Then a double digit sell off of the S&P happens with extreme velocity and the VIX springs to 36 as Christmas arrives. One year later, we've learned a lot. For example, we've learned that the unknown effects of the trade war were not as severe as many thought. In fact, the reconciliation of the trade war has become seemingly irrelevant as the effects have been broadly marginalized from market standpoints. The U.S. economy seemingly in that just right Goldilocks territory, does not appear negatively affected by the trade tensions either. Consider the recent jobs numbers are the best in years, and U.S. homebuilder sentiment is at the highest since 1999, all this as the U.S. was supposed to be collapsing into recession. Looking at the past decade, one that started in an economic abyss. Stocks have risen and just keep rising. As we approach the new year, we are coming to the end of the best performing decade since the 1950s, from a risk adjusted perspective. The S&P 500 had a sharp ratio above one for the 2010s and returned a ridiculous two hundred forty nine percent or one point two times average. We did endure six corrections of more than 10 percent and all of them felt like the big reversal, but it never reached 20 percent on a close to close basis and amounts to the longest bull market in history. 

    [00:02:08] Some individual stock returns were insane. If at the start of the great financial crisis, you looked at Netflix and thought that's a good buy. Congratulations on realizing a three thousand four hundred seventy three percent return, an S&P best this decade. That said, this rally has not been universally beloved and the disconnect between economic expectation and the market has never been wider. There's still two weeks left in which it could all come undone. Or maybe a new year and decade will inspire cautiousness. 2019 was the year with a risk on spirit was spread all over the globe. So maybe 2020 will be a return to varied returns in different asset classes. We should look at some key market movers of the fourth quarter and anticipate with the close of 2019 and the start of 2020 could mean. 

    [00:02:56] We are not saying that it is an apples to apples comparison. But the Nasdaq in the late 90s was on fire and there was a lot of late money chasing stock returns. From 97 to 99 the Nasdaq almost tripled an almost unprecedented parabolic move for a U.S. index. So it is worth looking at how 2000 played out because those that are old enough remember the Nasdaq blowup of the early 2000s. It wasn't an instant deflation. From the close of ninety nine through March of 2000, there was an additional 25 percent gain in Q1, climbing from four thousand sixty nine to a shade above 5000. So we should not expect an instant reversal on New Year's Day. The reality is Q1 2020 may have some extreme upside action before a violent reversal. And as in 2000, it is the tech sector that's catching the chase trade bid. Semiconductors in particular. 

    [00:03:50] The Sox is setting new highs. It is up 90 percent in 2019 and 19 percent in Q4. We have to determine how much longer and how much higher the sector can run or if 2020 will be the year the cyclical nature of the sector becomes apparent. Looking at the SMH ETF and applying a similar pattern as 1999, the ETF could shoot up to 170 before falling and falling fast. The 38 percent retracement from the 170 level could see the SMH back under 110. So there you have it, nostalgia fueled non idle speculation in a sector full of opportunities because as Patton said, "Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable". Yes, he was talking about invasion, but it is just as applicable to investing. 

    [00:04:43]  Brexit to U.S. jobs, to the German manufacturing conundrum, to the U.S. China trade war; onward into 2020 before and after powered by Refinitiv, will continue to look forward to the events that will hone the edges and mitigate the swings. Happy holidays and we'll see you in the new year.

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