NASDAQ Tumble Through Just 5 Stocks.

When it comes to the ongoing technology beat-down in the stock market, it appears not all shares are created equal.

Indeed, just five names account for nearly 75 percent of the drop in the Nasdaq Composite Index, which has fallen more than 2.1 percent since June 7. Meanwhile, the Dow Jones Industrial Average and S&P 500 Index are roughly unchanged over the same time frame.

Much of this dynamic is due to giants like Apple Inc., Microsoft Corp. and Goggle parent Alphabet Inc. falling as much as 6.5 percent. Add Facebook and Amazon to the mix and those companies account for nearly 30 percent of the index’s weighting, and their outsize impact has driven the gauge lower even though the bulk of the stocks are doing fine.

This selloff was “way overdue given the extreme out-performance and positioning in technology shares,” Morgan Stanley analyst Michael Wilson wrote in a note to clients Monday, Shares of Apple, for instance, are still up 25 percent this year, giving them room to fall.

But while Wilson expects the drubbing to continue in the short-term, he doesn’t think the market has seen a peak in tech shares.

“We would be surprised if this is the end for technology stocks given the very strong earnings growth we are witnessing,” he wrote.

Analysts now believe performance in technology will depend on the economic outlook. And if conditions change, finance will be the likely beneficiary.

“If the current economic ‘Goldilocks’ environment persists, technology and other growth stocks should continue to outperform, despite today’s price declines,” Goldman Sachs Group Inc. analysts led by David Kostin wrote in a note to clients late Friday. “However, if investors recalibrate expectations for inflation and Fed policy to match the growth optimism suggested by the S&P 500 level, higher rates should lead to financial sector outperformance.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

 

Advertisements

Global Round Up

Here are some of the key events coming up:

  • More Fed officials will be speaking as the FOMC’s June 13-14 meeting approaches. Robert Kaplan will be in New York on Wednesday.
  • The U.S. jobs report Friday may bolster the case for a rate hike, with a gain of 180,000 positions expected.
  • Brazil’s central-bank decision Wednesday will probably see a cut of 75 to 100 basis points from the current 11.25 percent, according to economists.
  • The EIA is due to release its monthly supply reports Wednesday.

Here are the main movers in markets:

Stocks

  • The MSCI Asia Pacific Index dropped less than 0.1 percent, paring its advance for May to 2.6 percent. The Stoxx Europe 600 Index fell 0.1 percent, trimming a monthly gain to 0.8 percent.
  • The Shanghai Composite rose 0.2 percent, after nearly wiping out an earlier gain of 1.1 percent. The manufacturing purchasing managers index remained at 51.2 for a second straight month in May, compared with a median estimate of 51 in a Bloomberg survey of economists.
  • Hong Kong’s Hang Seng was flat, heading for a fifth straight monthly gain, the longest winning streak since 2013, as improving earnings outweighed concerns about China’s campaign to cut leverage.
  • Japan’s Topix fell 0.3 percent, following two days of gains.
  • Futures on the S&P 500 rose 0.1 percent. The benchmark index slipped 0.1 percent Tuesday, retreating for the first time in eight days. The Nasdaq 100 Index advanced for an eighth day to an all-time high.

Currencies

  • The pound dropped 0.3 percent to $1.2817. The euro was little changed, heading for a monthly gain of 2.7 percent, its best performance in more than a year.
  • The yen weakened 0.1 percent to 110.93 per dollar after rising 0.4 percent Tuesday. The South African rand strengthened 0.4 percent, after tumbling for two days.
  • The onshore yuan climbed 0.4 percent, poised for its highest closing level since November.
  • The Bloomberg Dollar Spot Index was little changed for a third straight day. The gauge is down 1.3 percent for the month.

Commodities

  • Iron-ore futures in Dalian fell 5.4 percent to 429.5 yuan a ton, the lowest since Nov. 7.
  • Gold was little changed at $1,262.69 an ounce, extending a 0.4 percent loss Tuesday.
  • Oil dropped 0.6 percent to $49.35 a barrel after retreating 0.3 percent in the previous session. OPEC and Russia’s deal last week to extend output limits through March was met with a selloff as it didn’t include deeper cuts, a plan for the rest of 2018 or a new ally.

Bonds

  • The yield on 10-year Treasuries rose two basis point to 2.23 percent, after declining four basis points in the previous session.
  • Benchmark yields in the U.K. rose one basis point, after a drop of two basis points Tuesday.
  • Australia 10-year yields fell less than one basis point to 2.39 percent.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

ETF’s – Weapons Of Mass Destruction

Exchange-traded funds are “weapons of mass destruction” that have distorted stock prices and created the potential for a market selloff, according to the managers of the FPA Capital Fund.

“When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now,” Arik Ahitov and Dennis Bryan, who run the $789 million fund, said in an April 6 letter to investors in the actively managed fund.

The flood of money into passive products is making stock prices move in lockstep and creating markets increasingly divorced from underlying fundamentals, the managers said. As the market moves ever higher, there’s the potential for a sharp decline. The U.S. ETF market has about $2.7 trillion in assets, the majority in products that track indexes. ETFs have attracted more than $160 billion in new flows so far this year.

“This new market structure hasn’t been tested,” Bryan said in a telephone interview, noting that the stock market has never gone through a major downturn when passive investors were as important as they are now. “We could get an onslaught of selling.”

For more than two decades under former manager Robert Rodriguez, Los Angeles-based FPA Capital was among the top-performing stock funds in the U.S. From 1986 to 2010, it returned 14.5 percent a year compared to 8.5 percent for the Russell 2000 Index.

The fund has struggled in recent years, in part, because the managers, finding too few attractive stocks to buy, have parked 35 percent of their money in cash. FPA Capital trailed 99 percent of peers over the past five years and the Russell 2000, with a 4 percent annual return, according to data compiled by Bloomberg. The fund is a concentrated stock fund. Its biggest equity holding as of March 31 was Western Digital Corp., which makes computer-storage devices.

While several high-profile money managers of active funds have raised concerns about ETFs, equity ETFs account for about 7 percent of the U.S. stock market’s value.

In a February letter to investors, Seth Klarman, who runs the $30 billion Baupost Group, said that as more investors opt for passive investing over active management “the more inefficient the market is likely to become.”

In the same letter, Klarman cited Nikolaos Panigirtzoglou, a global market strategist at JPMorgan Chase in London, who, according to Klarman, has warned that the inflows into ETFS will “make markets more brittle” and “susceptible to more severe crashes.”

China One Way – US The Other.

The Chinese and U.S. stock markets are going in opposite directions.

An intensifying crackdown against leverage in Asia’s biggest economy has rocked the hither-to unflappable Shanghai Composite Index over the past week, sending it to a three-month low last session. In the U.S., the largest equity market is embracing a risk rally spurred by the French election, with the S&P 500 Index continuing to build on reflation-trade gains ignited by Donald Trump’s November victory.

The divergence means the two markets are the least in tune since August 2008 — just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system.

Chinese officials have mainly kept mainland stocks on a tight rein after routs in mid-2015 and the start of 2016 reverberated through world financial markets. Until Monday’s 1.4 percent slump, the Shanghai Composite Index hadn’t fallen more than 1 percent for 86 trading days.

As Beijing’s focus on reducing risk in the financial system shifted from money-market tightening and reducing leverage to containing speculation and irregular trading, the two markets starting moving in opposite directions in the past month.

In one sense, it’s a sign that investors overseas aren’t as worried about Chinese market ructions as they were in previous years — perhaps partly thanks to underlying strength in China’s economy. Given how mainland stocks have become increasingly linked to global markets, however, the divergence may prove to be a short-term phenomenon, according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong.

“The Chinese government is squeezing speculation out of the market and while investors adjust, it will inevitably lag behind other parts of the world,” So said.

For now, the split with the U.S. is particularly marked, with the Shanghai Composite’s 30-day correlation with the Bank of New York Mellon index of Chinese American depository receipts approaching zero. The Chinese ADR market — dominated by technology companies like Alibaba Group has climbed 8.6 percent since Trump was elected U.S. president, while the state-company-led Shanghai Composite is down 0.6 percent.

China’s deleveraging drive and the renewed focus on market irregularities have put the mainland share market into a “bad mood,” but officials aren’t likely to tolerate a lot of instability ahead of the Communist Party’s twice-a-decade leadership reshuffle later this year, said George Magnus, a former adviser to UBS Group AG and current associate at the University of Oxford’s China Centre.

‘Minimum Necessary’

“The authorities are trying to calm down leverage and housing at the margin but will not go any further than the minimum necessary,” he said. “If it looks as though regulatory tightening is delivering unfavorable outcomes, and risks any form of instability, you won’t be able to say the world ‘backtrack’ fast enough.”

As long as growth remains stable, though, the regulatory moves may continue. That would be good for the economy over the longer term, said Alex Wolf, a Hong Kong-based senior emerging markets economist at Standard Life Investments Ltd. “Successful efforts at deleveraging and reducing credit to nonbank financial institutions can reduce overall systemic risk.”

Two months ago, Chinese markets were a picture of calm , with mainland stock volatility near the lowest since 2014 and bond yields falling as money-market rates subsided. Tuesday, the Shanghai Composite closed up less than 0.2 percent, after sinking 2.3 percent last week.

For Adrian Zuercher, head of Asia Pacific asset allocation at UBS’s private banking arm in Hong Kong, the weaker relationship between Chinese shares and other markets is a good thing, and is likely to become more marked.

“All these regulations that are taking place are done in a way that should make China less risky,” he said. “The economy is on a solid footing and that’s why they can do some of the measures. We will probably see more international investors coming into China on the fixed income and equity side.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

 

Chinese Volatilty

China stocks tumbled more than 1 percent on Monday and looked set for their biggest loss of the year amid signs that Beijing would tolerate more market volatility as regulators clamp down on shadow banking and speculative trading.

Recent signs of stability in China’s economy “have provided a good external environment and a window of opportunity to reduce leverage in the financial system, strengthen supervision and ward off risks,” the official Xinhua News Agency reported on Sunday.

“Over the past week, interbank rates trended higher, bond and capital markets suffered from sustained corrections and some institutions faced liquidity pressure. But these have little impact to the stability of the broader environment.”

The Shanghai Composite Index slumped 1.6 percent to 3,123.80 points by the lunch break, after posting its biggest weekly loss so far this year last week.

The blue-chip CSI300 index fell 1.3 percent to 3,423.11. Barring a rebound, the indexes looked set for their biggest one-day percentage loss since mid-December. Daily declines of more than 1 percent in the indexes have been rare for notoriously volatile Chinese markets this year.

“Even the better-than-expected Q1 data could not boost the market, as investors are concerned about regulatory risks,” wrote Larry Hu, analyst at Macquarie Capital Ltd, referring to stronger-than-expected 6.9 percent economic growth early in the year.

In the latest of a flurry of regulatory measures, China’s insurance regulator said on Sunday it will ramp up its supervision of insurance companies to make sure they comply with tighter risk controls and threatened to investigate executives who flout rules aimed at rooting out risk-taking.

The banking regulator said late on Friday that growth in Chinese wealth management products (WMPs) and interbank liabilities eased in the first quarter, suggesting authorities are making some headway in containing financial risks built up by years of debt-fuelled stimulus.

But while the clampdown is expected to continue, most analysts believe moves will be cautious to avoid hitting economic growth.

Investors are already concerned that the economy could lose momentum in coming months as local governments launch more stringent measures to cool heated property prices.

“Market risk appetites could continue to decline if financial regulation keeps tightening,” said Gao Ting, Head of China Strategy at UBS Securities.

“Investors seem to mostly be responding by adjusting their positions, particularly by rotating into high-quality blue-chips.”

Banking is the only main sector that ended the morning in positive territory, while small-caps suffered massive sell-offs, with an index tracking start-up stocks falling nearly 2 percent.

Hong Kong

In Hong Kong, stocks dipped slightly, with the bearish sentiment from China largely neutralized after the market’s favored candidate won through the first round of the French election, reducing the risk of a Brexit-like shock.

The Hang Seng Index dropped 0.1 percent to 24,016.23 points, while the Hong Kong China Enterprises Index was unchanged at 10,045.78.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Bull Not In The China Shop

Mark Mobius is tempering his bullishness toward China’s equity market.

The legendary emerging-market investor says Chinese shares traded offshore have become too pricey after an almost 20 percent jump in technology stocks helped propel the MSCI China Index to its most expensive level in more than six years.

“We won’t be adding aggressively at these levels,” Mobius, executive chairman of Templeton Emerging Markets Group, said in an interview on TV Thursday, referring to tech shares. “The problem you face now with China is that the index is so heavily weighted to tech stocks which are naturally very expensive so it pushes up the whole index.”

Chinese tech giants Tencent Holdings Ltd., Alibaba Group Holding Ltd. and NetEase Inc. have driven the MSCI China gauge up 14 percent this year, making it the best performer globally. Company earnings, meanwhile, haven’t kept up the pace, which has contributed to the index’s swelling valuation. The MSCI China traded at 14.9 times members’ reported earnings on March 20, the highest level since December 2010.

Tencent, the Internet company best known for its blockbuster WeChat messaging service, has gained 18 percent since Mobius made a bullish call on onshore Chinese shares back in November, pushing its market capitalization above that of Wells Fargo Inc. His argument then was that Beijing may be forced to speed up the pace of opening China’s markets by the threat of a trade war with President Donald Trump.

Five months on, Mobius is confident Trump will put the bluster aside when he meets Chinese President Xi Jinping for the first time Thursday in Florida. China’s intent will be to build a smooth relationship with the U.S., he said.

“The Chinese are in pretty good position because they could easily raise their exchange rate, make it stronger and still export a heck of a lot,” Mobius said Thursday.

While offshore-traded Chinese shares have outpaced their mainland brethren this year, Mobius sees greater gains onshore in the long term. MSCI Inc.’s plan to include mainland stocks in its global benchmarks will lure more foreign investors, while government stimulus should invigorate demand from locals, he said.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

HK Stock Drops 85% In One Morning !

One of the most striking things about the 85 percent plunge in Huishan Dairy Holdings Co.’s stock on Friday was how little it surprised market observers in Hong Kong.

The mysterious crash, the indefinite trading halt, the hours without a company statement explaining the move — it was all too familiar for traders who’ve had to navigate at least three similar episodes in the past two years.

While the city is upfront about its buyer-beware approach to regulation, the frequent sight of multi-billion dollar stocks collapsing in minutes has deterred investors and raised questions about Hong Kong’s role as one of Asia’s premier trading hubs. It’s one reason why the city’s benchmark Hang Seng Index commands by far the lowest valuation among counterparts in the world’s 10 largest markets.

“There are regulatory discounts to the price-earnings multiple,” said Niklas Hageback, a Hong Kong-based money manager who helps oversee about $180 million at Valkyria Kapital Ltd. “Valuation is lagging and this has become a market-wide problem.”

The Hang Seng index trades for about 13 times reported earnings, versus 22 for the MSCI World Index.

Hang Fat Ginseng Holdings Co., Hanergy Thin Film Power Group Ltd. and Tech Pro Technology Development Ltd. have all suffered crashes similar to Huishan’s in the past two years. Tech Pro, a provider of LED lighting products, fell 86 percent in 17 minutes in July, while Hang Fat Ginseng plunged 91 percent in an hour in January 2016. Eight months before that, solar panel manufacturer Hanergy dropped 47 percent, wiping out $19 billion of market value in 24 minutes.

Swift Slump

Huishan’s slump took less than 90 minutes. About 779 million shares in the company changed hands, the most during the morning session on Hong Kong’s exchange, which doesn’t have daily limits on share-price swings. By the time the stock was halted at midday in Hong Kong, it had lost $4.1 billion of market value.

The Shenyang, China-based company issued a statement about two hours after the rout began, saying it suspended trading after a “significant decrease” in the shares. Huishan said it would comment further after completing an inquiry. Chairman Yang Kai said speculation that the company’s largest shareholder misappropriated 3 billion yuan ($435 million) to invest in mainland real estate was untrue, Netease reported, citing a phone interview with Yang.

Lorraine Chan, a spokeswoman for Hong Kong Exchanges & Clearing Ltd., said the bourse operator doesn’t comment on individual companies. Ernest Kong, a spokesman at the Securities and Futures Commission, declined to comment.

The fallout spread on Monday to a Chinese bank that — like Huishan Dairy — counts Champ Harvest Ltd., a company controlled by Yang, as its largest shareholder. Jilin Jiutai Rural Commercial Bank Corp. slumped as much 11 percent in Hong Kong, the most since the lender listed in January. Jiutai Bank is Huishan Dairy’s second-biggest creditor with 1.83 billion yuan of loans, Caixin reported Saturday.

By no coincidence, there was a rally in Hong Kong gold buying.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions.