One of the main tenants of being a successful investor is to look out for what is critical in the market while filtering out all the unnecessary noise. With all the hoopla behind FAANG stocks, to the sudden rise and correction of Bitcoin, and the most recent news about Amazon’s acquisition of Whole Foods, the financial media is giving very little attention to some of the other very significant details that are happening in the markets. Here are some observations:
Defense and Aerospace
The Dow Jones US Aerospace and Defense Index has been in the green for the past couple of trading sessions. In fact, there were a few days where this index was one of the top percentage gainers for the respective trading days. Surprisingly, none of this info made it to the main financial news cycle.
We all heard about President Trump signing a monumental $350 billion arms deal with Saudi Arabia, in which $110 billion worth of defense contracts and weapon sales would take effect immediately, and the remaining $240 billion would be spread over the next decade. There was also buzz about how the Pentagon just agreed to sell $12 billion worth of F-15’s to Qatar. To top this all off, there were four separate terrorist attacks in the UK, for the past few months. Obviously, this is horrible news for making Peace on Earth, but this is great news for the Defense sector. Very few people are paying attention to this sector because most of us are fixated on what’s happening with the Russian investigations, which I personally think is a waste of time. This is the equivalent of the Benghazi Investigation on Hillary Clinton done to Donald Trump.
Most of the gains and movement have been happening with the biotechnology realm. For those who are not aware, the healthcare sector is the second largest percentage gainer year-to-date, right behind technology. There are a few biotech companies with potential blockbuster drugs in their pipelines. For example, Kite Pharmaceuticals is planning to roll out their first ever CAR-T cancer drug, KTE-C19, this year. KTE-C19 is being touted to be the “next big thing in immunotherapies”. Kite Pharmaceuticals stock has surged over 100%, year-to-date.
Concerns about Trump’s threats to speed up the FDA approval process, which would allow more drugs to enter the marketplace – thereby lowering drug prices via competition – have been temporarily alleviated. The current Administration, along with the Republican Congress, seems to be bogged down with multiple investigations, and have bigger fish on their plates to fry (i.e. – healthcare insurance, tax reform, and infrastructure spending). Before they can get to drug price reduction, they still have a lot of work ahead of them. So, until we see any kind of legislative accomplishments from our current Administration, healthcare stocks are good to go.
With all the talk about FAANG, we are missing out on a lot of the news regarding Chinese Stocks. Inadequate buzz has been generated about MSCI’s decision to include Chinese Blue Chips (A shares) into their Emerging Markets Index. Admission to the MSCI Index would mean increased accessibility to these Chinese companies in the global stock exchanges in addition to potential stock price increases due to ETF and mutual fund purchases. This is very big news in the Eastern part of the world, but very little exposure is given from this side of the world.
Current estimates say that there’s a 50-50 chance for MSCI admission. Chinese stocks were rejected last year, however changes made this year by reducing the number of applicant companies, along with better price and company operations performance, could tip the scale to the positive. We shall find out after market close, today.
The Fed will be conducting the Dodd Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis and Review (CCAR) on the big banks in the coming days. According to the latest numbers, the big banks are sitting on approximately $120 billion in excess capital, waiting to be distributed to shareholders. Anticipated upcoming legislation from the Trump Administration would relieve Dodd Frank imposed capital requirements for big banks to operate. A large majority portion of the excess capital would either be distributed to shareholders or result in company share buy-backs.
As far as substantial capital appreciation and earnings growth for financial stocks, I do not see much movement. The yield curve is just currently too flat for banks to make any big profits for the time being. However, any rise in financial stocks would most likely be the result of the easing of operating capital requirements and the financial industry’s deregulation.
Light Volume Trading Sessions
Since the tech sell off in June 9th, most of the market gains were predicated on light volume. This could mean that institutional investors rotated out of the tech sector into more fairly valued ones. Most of the current light buying, resulting in the tech stocks’ rebound, is probably made by individual and retail investors, who are snatching up shares thinking that the tech sector is at a bargain. Yesterday marks the NASDAQ’s best performance, year-to-date. However, the gains were a result of light buying, with very little selling, which is a big indicator that the institutions are out and the retail investors are in.
Adobe will be reporting earnings after market close, this evening. Adobe is a heavy hitter in the cloud computing and tech space. Perhaps, a significant top-line and earnings beat would reinvigorate institutions’ appetite for tech. We shall see…