The FOMC smelled of missed opportunity for the Fed to get ahead of the curve and the complacency on the US-China trade war and recently ongoing stress in the USD repo market. Despite this backdrop US equities are close to all-time highs as we leave this central bank week and preparing for next week which will be very exciting on the macro release front. Most notably the Eurozone and US flash PMIs on Monday will move the market and for rates traders the US PCE inflation (Aug) figure on Friday will be an important data point.
We suspect next week to be a tug of war between the bulls and bears in equities. If the S&P 500 futures manage to climb to new all-time highs, then we expect shorts to vanish like water in the Sahara. This will clear the path for higher equities despite the muddy macro picture. While remain negative on macro we cannot ignore the technical price action.
As we have said
on our daily Market
Call podcast India is a train wreck with credit worsening and consumer
confidence measured by new car registrations plummeting. However, today news
broke that the Indian government is stimulating the economy through cutting the
corporate taxes for new domestic companies. The Nifty 50 Index was up 4% breaking
above the recent trading range but in the greater picture (see chart) the
technical picture looks ugly. As long as
the global economy is slowing down and the USD remains strong India is an
equity market investors should underweight.
While US
equities are flirting with record highs it is worth noting that the second
largest industry group Software & Services is now valued in the 99% percentile
on EV/EBITDA; not a good recipe for future returns. We often just talk about valuations as something abstract but the one
as to realize that EV/EBITDA just above 20x means that an implied return
expectation by investors of around 4.8%. Is that really a fair hurdle rate to
expect for your capital given where we are in the business cycle? Our view
is that valuations on software companies have reached unsustainable levels
given the outlook and the risk-reward ratio is just terrible.
While the Q3
calendar period is not over yet some companies, that are not following the strict
calendar year, are still reporting earnings. Nike reports FY20 Q1 earnings on Tuesday with analysts expecting EPS of
$0.701 up from $0.67 a year ago. Analysts expect revenue to continue growing by
high-single-digit driven by expansion in its woman’s business and e-commerce.
Nike’s margins have lately been under pressure so there will be a great focus
on this issue from analysts on the conference call. Nike’s valuation on EV/EBITDA
is 24.9x which is a steep premium to the S&P 500 ratio of 13.4x.
From a
macro point of view the FY19 Q4 earnings release from Micron Technology is of
importance as the memory manufacturer
sits in the middle of the global economic slowdown and escalating trade war.
Analysts expect Micron Technology to deliver EPS of $0.478 down from $3.53 a whopping
decline of 86.5%. Analysts are split on the company’s outlook with the current
price at the current consensus price target.
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