While there maybe 497 S&P companies that have exposure to China’s 6.9% GDP growth, there are 3 that certainly do not. Google (Alphabet), Amazon and Microsoft all reported fantastic earnings on Thursday. Those three companies alone gained $100Bn in market cap from the closing on Thursday to the opening on Friday.
It feels good to cheer on the bulls for a change!
Amazon earned $0.17 per $564 share and the stock jumped $55 on that news. Based on an EPS of $0.17 Amazon was priced at 3,317 times earnings before the news, and on the news they added a staggering additional 323 times earnings! Based on Friday’s opening stock prices, if Google had Amazons valuation it would be trading at $18,000 per share with their $30 in earnings. Apple would $6,000 with their $10 earnings per share, and with $3 per share earnings Microsoft stock would be $1,800 per share!
It would seem that we are not cheering on bulls, but cheering on unicorns!
Lots of sectors and companies are priced at crazy valuations, the tech sector, pharmaceuticals, and bio-tech to name a few. Low rates and stimulus is not directly causing big valuations, what low rates and stimulus are doing is indirectly fueling bubble building. Cheap money has to go somewhere, and that money is chasing growth and yield, and that is not only causing bubbles, but causing them to grow. This is not new stuff, Isaac Newton published his laws of motion in 1686, and just like the 3rd law states, forces cause an equal and opposite reaction. Just like the law, there is an opposite force, and low rates and stimulus just so happens to have a reaction of building extreme bubble valuations in unintended areas.
This is the no-win bubble trap the Fed is caught in. Why, and how can the Fed raise rates when the rest of the world is looking for ways to stimulate growth? Europe is prepared to do whatever is necessary to keep the economic machine chugging along. Mario Draghi, the President of the European Central Bank signaled Thursday that the bank is prepared to undertake another large stimulus package that could include more bond purchases and a cut to the already negative deposit rate, as Europe continues to struggle with ultralow inflation and a tepid recovery. The finger pointing for global slowdown keeps coming back to China. How can China be the problem when their GDP is growing at staggering clip of 6.9%.
Almost any economy in the world would be thrilled to have 6.9% growth as even the strongest countries are struggling to achieve 3% growth rates. If China is growing at 6.9% then why is the Fed and the ECB concerned with Chinese markets? Why is Germany lowering their own GDP forecast to 1.7% citing China weakness when China is growing at 6.9%? Why have South Korea’s exports dropped 8.4% when China is growing at 6.9? Why is Japan facing yet another recession if China’s GDP is growing at 6.9%? The real question is if China’s GDP is growing at 6.9% why did the People’s Bank of China cut rates 0.25 point and reserve requirements 50 to 100 basis points on Friday?
Sarcasm aside, China is not growing at 6.9%. Regardless of crazy stock valuations, there are many companies that are doing very well. The American automotive sector is doing very well, and from Apple to Amazon, the technology sector is doing well. Cheap money is fueling a rally and building a bubble of companies and sectors actually where there is a remote hope of earnings growth. The problem is that there only seems to be very white hot bright spots and very dark spots in the market right now.
Many have never recovered from the financial crisis, and that along with whatever the true numbers are in China has slowed consumption which has slowed manufacturing, which has slowed commodity demand. We are throwing stimulus at the market in hopes that the dark sports turn light, but in reality all we are doing is making those bright spots burn hotter.
The chances are now near 0% that the Fed will raise rates at the FMOC meeting on October 27th-28th. Big rallies in equity markets and valuations in many sectors are now eerily reminiscent to the Dot-Com bubble levels at the end of the 90s and early 2000’s. Since low rates are fueling bubbles, a rate hike could just be the medicine that is needed to calm down valuations.
It would seem that no measure of stimulus is going to help beat-down sectors like manufacturing and commodities, so the great debate continues. If stimulus is not working where it is needed, and it is building unintended bubbles in other areas, when and how do you return to normalization without major economic consequences?