Market Overview

26 October 2020

The Market Is Especially Cautious After Pennsylvania News and FBI-Involved Story

Important political news came from Pennsylvania, the “Keystone State” or the "Quaker Province", two nicknames of the state since the colonial times. The Independence Hall, where the United States Declaration of Independence was drafted and signed, is located in Philadelphia, the state's largest city. And now, Pennsylvania may confirm its status of a real keystone, which crowns the arc of a traditional American democracy holding all the other stones again as Philadelphia’s Board of Elections plans to move its counting operations for hundreds of thousands of mail-in ballots to a 125,000-square foot space in the city’s convention centre, under intense and transparent scrutiny from partisan observers from both rival camps. But the final name of the U.S. elections winner, as well as the Congress composition, have a big chance to be delayed for weeks. Pennsylvania gives 20 of the necessary 270 presidential electors for the final decision. The contribution of Florida, just one of the other main battlefield states, would be as much as 29 of Electoral College votes. Those 49 Electoral College votes would be the key to victory for both sitting president Donald Trump or his Democratic opponent, former Vice President Joe Biden, with other battleground states could also take days to count mail ballots. 

Two of the Trump campaign officials already said they are going to place an observer at each of the more than 20 tables where ballots are opened and certified, as they are planning to staff them around the clock, and the Biden campaign will probably do the similar moves. Dozens of staffers hired by the governor's Board of Elections will spend days tallying votes, feeding expensive new machines to open envelopes and process mail-in ballots and discarding thousands of ballots that are not properly completed or do not arrive in a special “secrecy envelope”. Outside, police officers redeployed from their neighbourhood districts are also going to conduct round-the-clock patrols to guard against possible acts of violence. Philadelphia’s District Attorney, a Democrat, already said he was studying the laws governing militias, in case gun-toting extremists show up at the polls to intimidate voters. If that happens, he warned: “We’ve got a jail cell for you”. 

The prospect of a suspended election result at least in Pennsylvania already caused the investment community to be more cautious, and the U.S. broad market S&P 500 index futures slipped below 3420 points on Monday morning after a rather positive last week's closing within 3460-3470 points. Since October 13, the S&P 500 stock index has been under regular but volatile pressure: without severe sales-off, but within a slowly descending technical channel. European indexes also reacted with a decline in the first hour after the opening bell, although before that on Thursday and Friday they held up well and even gained a little against the background of local viral restrictions in some parts of the countries with strongest economies across the continent. German manufacturing purchasing managers index (PMI) was shining at 58.0 on Friday, compensating a weaker service PMI at 48.9, which gave the composite German PMI at 54.5 altogether. French and Spanish data were not so impressive too. The pan-European composite PMI showed a reading of just 49.4 points, while a level above 50.0 signals an improvement, but any level below 50.0 means a contraction. The manufacturing component of PMI across Europe was rather high at 54.4 points but the service component was poor at 46.2 points only. The American readings were 56.0 for the service PMI and 53.3 for the manufacturing PMI the same Friday, resulting in 55.5 points for the composite PMI. So, potentially the American economy and stock indexes may be a positive driver for Europe but for now any market gains across the pond are limited: many of the market participants just prefer to wait or even to go into cash for a while because of the growing pre-election uncertainty. 

Going back to the USA with its very specific political factors, in addition to Philadelphia and Florida, other U.S. tossups are represented by Ohio (18 electors), North Carolina (15 electors), Arizona (11 electors) and Wisconsin (10 electors). Nervous Michigan (16 electors) where the population of Great Lakes coast is angry for the excessive coronavirus restriction orders by Democratic governor Gretchen Whitmer, who just talked about the possibility of a second shutdown during an interview with Local 4 News Sunday morning. She was badly blamed by Donald Trump for the alleged miss-use of her status in spring when the first restrictions were lifted for the boats of her husband's transport company. Many families in the states with a concentrated oil industry may vote now against Joe Biden after he carelessly spoke a lot of words during debates last Thursday, revealing a clear intention to change for green energy without proper subsidies of the traditional oil production. This group of voters includes not only likely Republican Texas (38 electors) and Oklahoma (7 electors) but also Ohio and Pennsylvania workers. 

Another interesting development is that early voting data show, preliminary by polls, that Democrats vote by mail in far greater numbers than Republicans. Therefore, the percentage of Trump supporters would be probably bigger than his average results in a regular voting on November 3. Some states like Pennsylvania or Wisconsin don't count any mail-in ballots before election day at all, so the initial results may be shifted significantly just in favour of Trump, while mail-in ballots and other early ballots counted more slowly are expected to favour Biden. So, some Democrats have expressed concern that Trump could declare victory just after election night relying on preliminary results without mail-in ballots, and then he could easily claim that ballots counted by mail in subsequent days are tainted by fraud. In case of further disputes, a recount of mail-in votes would be ordered with the Supreme Court, which is due to make the final legal decision, now totally on the side of Trump by a ratio of 6 to 3. Before the Election Day the highlight of the whole performance may be the U.S. Navy retired lieutenant Tony Bobulinski senate testimony after he already provided copies of his electronic devices and business records on FBI request. Senator Ron Johnson, the head of the Homeland Security and Governmental Affairs Committee, announced: “I expect that Mr. Bobulinski will speak with our committee as soon as possible and fully share his insights into the Biden family’s business dealings.” 

Bobulinski, a former business partner of Biden's family in China, was invited by Trump's team to attend Thursday night’s debate as a special guest, when Trump said loudly from the scene to face of his rival Joe Biden: "His son didn’t have a job for a long time, was, sadly, no longer in the military service, I won’t get into that, and he didn’t have a job. As soon as he became vice-president, Burisma [Ukrainian gas company], not the best reputation in the world, I heard they paid him $183,000 a month, listen to this, $183,000, and they gave him a $3 million upfront payment, and he had no energy experience. That’s 100% dishonest. Number two, I don’t make money from China. You do. I don’t make money from Ukraine. You do. I don’t make money from Russia. You made $3.5 million, Joe, and your son gave you, they even have a statement that we have to give 10% to the "big man". You’re the "big man", I think. I don’t know, maybe you’re not, but you’re the "big man", I think. Your son said we have to give 10% to the "big man". Joe, what’s that all about? It’s terrible." Speaking of those 10% for the "big men," Trump relies on recordings from a laptop allegedly owned by Biden's son, and Mr. Bobulinski is likely to confirm in the Senate and for the FBI the following days that he was a witness to this strange business scheme, while Joe Biden is probably that "big man" from Hunter Biden's E-mails. The piquancy of the situation was added by the fact that Mr. Bobulinsky is rather a supporter of the Democrats and even made donations in the past for the Democratic Party only. So, if these facts would become public in the Senate, or matters became hairy for Biden's family than it may hurt Joe Biden as a presidential nominee in eyes of some part of his own electorate. 

Be as it may, Mr. Biden was clearly weak on the defensive on Thursday evening, not publicly denying any specific details. He said: "Nothing was unethical. Here’s what the deal is. With regard to Ukraine. We had this whole question about whether or not, because he was on the board, I later learned of Burisma, a company that somehow, I had done something wrong, yet every single solitary person, when he was going through his impeachment, testifying under oath, who work for him, said I did my job impeccably. I carried out U.S. policy, not one single solitary thing was out of line, not a single thing, number one. Number two, the guy who got in trouble in Ukraine was this guy trying to bribe the Ukrainian government to say something negative about me, which they would not do and did not do because it never ever, ever happened. My son has not made money in terms of this thing, what are you talking about, China. I have not had… the only guy who made money from China is this guy. He’s the only one. Nobody else has made money from China". Saying "the only guy who made money", he certainly meant Trump, but that was all the explanatory text by Mr Joe Biden. Maybe he shot his mouth off especially for not to tell unnecessary things that may be classified later as perjured witness and even become a base for an impeachment procedure if Biden would be elected. But, in this regard, and with the FBI involved in the case already, the election result becomes even more unpredictable, despite all the official polls that Biden leads about the same magical 10% nationwide. According to the last polls, Biden leads by 12 points in Michigan (52% vs 40%), but only 5 points in a battleground state of Pennsylvania (50% vs 45%), and 5 points in Wisconsin (49% vs 44%). 

While all this pre-election agenda is developing, not only stock indexes, but also gold prices are sitting down around $1,900 per troy ounce or even lower, as gold assets have increasingly been part of stock portfolios recently. Gold prices have risen strongly this year. But even if they are far from its highs many portfolio managers are used to investing in gold only together with shares of some companies, not separately. As a safe haven asset, rather, the Treasury bonds of the American government are considered, which will be reliable financially regardless of who will lead the country politically. 

As for the shares of individual companies, even with the release of excellent corporate reports somehow, the prices of individual companies may quickly jump but then slip soon in many particular cases. After the excellent presentation of the new iPhones 12 line on October 13, Apple Co shares did not hold at their $125 levels of over-expectations and are now balancing around $115 per share. The number of new subscribers to the Netflix stream service increased by 2.2 million users instead of the average analytical expectations of 3.4 million, and this was enough to move down Netflix shares from $525 per share at Tuesday's close before the earning report to $488 per share by the end of the week. 

The fabulous Tesla electric vehicle producer posted its fifth straight profit in Q3 2020 with absolute record revenue of $8.77 billion. The revenue rose about 40% year-on-year, up from $6.30 billion registered in Q3 2019, and higher than the average market expectations of $8.36 billion. Third-quarter deliveries were up by 43.6% to 139,593, free cash flow for the quarter was solid at about $1.4 billion, up about $1 billion year-over-year. These figures got help from only $397 million in emission credit sales, which before was met with scepticism as a potential unsafe source of income for the future. 

"Thanks to the September $5 billion equity offering, Tesla’s second of the year, cash at quarter-end was very strong at $14.5 billion and management guided for 2021 and 2022 capital expenditure to be incrementally higher (we assume from 2020 levels) by $2 billion to $2.5 billion. We don’t see Tesla in a liquidity crisis next year and if it was running short of funds, we think it can easily raise capital. Possible inclusion to the S&P 500 index remains a catalyst to the stock in our opinion, but we do not think it’s a sure thing due to credit sales and Tesla’s small profits for a company with its large market capitalization,” said David Whiston, sector strategist at Morningstar. 

However, all these generally positive considerations were only enough to open Tesla trade with a gap of more than 5% up in the premarket on Thursday morning in New York, just above the $444 mark. But in the next 24 hours, Tesla shares were only falling from the hill easily reaching the dip below $408. Morgan Stanley gave a base target price forecast for Tesla of $333 in 12 months with a highest of $716 under an extremely bullish scenario and $108 under the worst-case scenario. Tesla also received a $450 price objective from analysts at Goldman Sachs Group. The spread of expectations is very large, but in this case, Tesla, or Apple, or Netflix were just examples to show how cautious investors are about including the assets now in their portfolios. Too many Wall Street habitues are waiting for either lower prices or a more peaceful moment.

 

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