Stock markets are getting smaller, perhaps permanently, says Citigroup

  • Citigroup says stock markets in the US and UK are shrinking
  • Reasons include buybacks, mergers, acquisitions, drops in IPOs, and Capex
  • Analyst Robert Buckland sees this as a rational response to changing financing costs

The US stock market has shrunk by around 2.3% since last year in a trend that has been underway for eight years. This is according to Citigroup strategists under the leadership of Robert Buckland. In the United Kingdom, the stock market is now 3% smaller than it was last year.

This “de-equitization” is being caused by several factors.

Buybacks: Buckland said that last year, 3% of the US stock market was redeemed. This happens because equity costs around 6.7% a year and debt currently costs only 4.1% in the US. In the UK, debt is 4.6% cheaper than equity. 

Mergers and acquisitions: When one company borrows $10 million to buy another one, it reduces the total number of stocks available to the public. 

Fewer IPOs: With an abundance of venture capital on the market, private companies find it easy to get funding without having to launch on the stock market. This is responsible for the drop in Initial Public Offerings seen in recent years.

Capex: In the past, major firms often issued stocks to fund large capital projects, such as new mines or plants. Global economic instability has caused a drop in these projects, and when they do occur, they are often funded via internal cash or debt.

It is often asked whether stock markets have become permanently less appealing, particularly in the presence of cheaper and less cumbersome alternatives.

Buckland responded by saying that stock markets are shrinking because businesses can find cheaper funding elsewhere, with venture capitalists and private equity investors offering alternatives to these markets.

He concluded: “But we do see it is a rational capitalist response to major divergence in the cost of debt and equity.”

Markets deliver strong performance after US grants Huawei temporary reprieve

  • Markets end higher on a wide front after US grants Huawei temporary reprieve
  • Dow Jones up 197.43 points, Nasdaq Composite up 1.1%, S&P 500 rises 0.9%
  • Huawei suppliers in particular note benefits 

US stock markets ended higher yesterday after news that the country has temporarily eased restrictions on Huawei.

A strong performance from Intel helped the Dow Jones Industrial Average climb 197.43 points to close at 25,877.33. The Nasdaq Composite ended 1.1% higher at 7,785.72, while the S&P 500 was boosted by a 1.2% increase in tech shares to end 0.9% higher at 2,864.36.

Markets also benefited from a 1.7% rise in Boeing stocks.

The U.S. Commerce Department announced on Monday night that Huawei will be allowed to buy American-made products to continue delivering software updates and maintain existing networks until August 19. 

The stocks of Huawei suppliers such as Xilinx (+4.6%) and Micron Technologies (+3%) benefited from the news. Qualcomm stocks also ended 1.5% up, while Lam Research and Nvidia gained 1.8% and 2.2% respectively.

In China, share prices also strengthened on a wide front. The Shanghai Composite ended 1.2% higher, and the Shenzhen A Shares index closed 1.8% up. In Europe, the Stoxx 600 gained 0.5%.

Despite these improvements, the Dow Jones and S&P 500 are still down well over 2% since the beginning of May, and the Nasdaq has lost 3.8%. 

According to Pence Wealth Management Chief Investment Officer Dryden Pence, the market will stay in a narrow range until the trade conflict has been resolved, at which point stock prices should start to increase.

He added: “It’s hard for the market to go a lot higher until we get some resolution on trade. But it’s hard for the market to go a lot lower because the fundamentals are there.” 

Uber and the $120bn IPO dream that didn’t come true

  • Goldman Sachs and Morgan Stanley initially valued Uber at $120bn
  • Final IPO price of $45 a share implied valuation of $82bn
  • In first two trading days, this figure dropped to $62.2bn

Last September, Uber’s top management team was pitched by two of the biggest banks in the US: Goldman Sachs and Morgan Stanley. At the time, they reached a virtually identical conclusion and valued Uber at $120 billion.

Uber CFO Nelson Chai and CEO Dara Khosrowshahi listened, and they decided to appoint the two banks to take the firm public and make the $120 billion valuation dream come true.

On Thursday, May 9, Uber finally issued 180 million stock shares in an Initial Public Offering at $45 each. At this price, the company’s market cap was around $82 billion – a rather conservative approach given all the hype.

The next morning at 11:50 am in New York, however, the stock traded about 6% down at $42. It ultimately ended 7.6% lower that day. On the second trading day, it dropped another 11% to close at $37.10, leaving Uber with a market capitalization of just $62.2 billion. 

According to private investors, this is the lowest valuation the company has had since July 2015, when it managed to raise $1 billion at a time when it was valued at $51 billion.

Other companies have also faced major challenges after their IPO, including big names such as Facebook. Uber’s less-than-impressive debut, however, makes many investors rather nervous, particularly those who forked out $45 per share or more. 

The fact that Lyft, an Uber competitor, has only gone from bad to worse since its IPO on March 29 is not helping matters. Its shares are now trading nearly 33% lower than the $72 investors paid for them on that day. 

Safe haven demand slightly boosts gold price… for now

  • Gold price slightly higher at $1,282.20, driven by safe haven demand
  • No U.S.-China deal can wreak havoc on markets, including commodities
  • July Comex Silver trading at $14.765 an ounce

Gold prices were somewhat higher in the U.S. on Thursday morning. The gold price was boosted by safe-haven demand during current geopolitical developments. The gains were, however, restricted by the slowing down of international economic growth.

June gold futures were trading at $1,282.20, while July Comex Silver was trading at $14.765 per ounce.

This took place against a background of world stock markets mostly trading lower overnight. The new higher U.S. tariffs on Chinese products will become effective at midnight on Thursday, with no significant last-minute breakthrough expected.

Yields on international government bonds are also dropping amid worries over an escalation in the U.S.-China trade war and what it will do to the global economy, including commodity markets.

The Chinese yuan dropped to the lowest level since January against the USD today. 

The U.S.-China conflict is currently at the forefront of world politics, although Iran’s government announcing this week it will no longer comply with certain undertakings it made in the 2015 UN nuclear deal is probably just as, or even more important.

China’s consumer price index, meanwhile, increased by 2.5% in April, pushed by a 14.4% increase in pork prices. Factory-gate prices increased by 0.9% in April.

From a technical point of view, the gold bears rule in the short term. On the daily bar chart, one can clearly see a 2.5-month downtrend. The next upside price target for those with a bullish view is above $1,300. 

For those with a negative market sentiment, the next support level for gold is at $1,250.

General Motors beats earnings forecasts with light sales

  • Adjusted earnings exceeded Wall Street forecasts by 30 cents
  • Revenue reported at $34.9 billion
  • Shares dropped by 2.6%

The biggest automaker in the U.S. saw its shares fall this week after earnings beat industry forecasts but revenues fell short of predictions by more than a million dollars. The good news was that General Motors’ adjusted earnings for the first quarter exceeded Wall Street forecasts by 30 cents, hitting $1.41 a share. 

The Detroit-based automobile manufacturer’s report saw its earnings over the period reach $2.2 billion, which represents $1.41 per share on an adjusted basis. Earnings of $1.11 per share had been forecast by analysts, so the result was a good win for the company.

However, the total revenue figures came in at $34.9 billion against an expected figure of $35.56 billion, and core activity automotive revenue also missed targets, with a total of $31.26 billion being reported.

In the wake of the news, General Motors stock dropped by 2.6% to reach $38.97.

In the domestic market, strong sales for U.S. pickup trucks buoyed the traditional bottom line, with the company reporting that transaction prices for the new full-sized crew cab pickup trucks saw an increase of $5,800 over the previous models. The most popular GM pickups also saw a sales hike of 20% year on year.

Overseas auto sales saw nearly 814,000 GM vehicles being delivered in China in the first quarter on the back of the Monza and Chevrolet Onix models being successfully launched in the region. However, overall vehicle sales fell by 10% in total, with U.S. sales alone dropping 7% in the quarter.

In other areas of operations, General Motors saw the benefit of a revaluation of the stock it holds in Lyft, the ride-hailing Uber rival. 

Snap shares rise sharply as revenue grows

  • First-quarter loss smaller than consensus forecasts
  • Revenue up by 39%
  • Advertising plans gain investor support

Snap Inc. shares were up on Wednesday as a smaller-than-expected loss in the first quarter saw the instant messaging group benefit from increased revenue.

The loss came in at 10 cents per share after adjustments, which was around 2 cents better than expected. Revenue growth came from a 39% increase in sales. This translated to a worth of $320 million, which also beat forecasts. This led to the pre-market share price gains, and the situation could get even better for the company as it predicts revenues will rise to as much as $360 million in the current quarter. 

Snap co-founder and CEO Evan Spiegel summed up the news in a conference call to investors late Tuesday when he said: “This is the second consecutive quarter where more than 100% of our incremental year-over-year revenue flowed through to our bottom line.” 

“There are billions of Android devices in the world that now have access to an improved Snapchat experience, and we look forward to being able to grow our Snapchat community in new markets,” Spiegel continued.

The company has seen its shares mostly in decline ever since they were priced at $25 when they were first listed back in March 2017. However, they marked 4.5% higher in pre-market trading, and that figure is the best since August and doubled the year-to-date gains.

Investors have recently been impressed with the company’s plans to broaden its advertising reach for the messaging platform by introducing new games, options for photos, and original content programming aimed at its 186 million daily users. Some of these changes were revealed at the social media firm’s first-ever ‘Partner Summit’ last month.