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Market Intelligence Report

by TIS Group

Feb. 21: Over the past several days, we have detailed some, though not all, of the actions being taken by China’s government to control the coronavirus outbreak. I was told today that roughly 50,000 people die in China each year from the flu. If the coronavirus is just another flu-like virus and the current death toll really is about 2,000, not 50,000, why then has Beijing locked down 750 million people? Why has it quarantined the 11 million people in Wuhan? Why has it instituted wartime controls in an area near Wuhan and to some extent used the same controls in Beijing? Why did Beijing refuse help from the U.S. at the beginning of the outbreak? Why is Chinese cash being disinfected? Why is bleach being used to disinfect people in the cities? This doesn’t make sense if the coronavirus is just another form of the flu and the economic damage it is causing is going to be hopscotched over by central bank injections.

Perhaps the most unpriced risk of all in this saga is the political risk forming over the Chinese leadership. If the coronavirus isn’t a garden-variety flu but something more critical, then the failure to build a modern health-care system will be an internal and external problem for the party.

—Larry E. Jeddeloh

Housing-Data Distortions

Commentary & Analysis

by Maria Fiorini Ramirez Inc.

Feb. 21: Total existing-home sales were reported to have declined by a month-to-month 1.3%, to a 5.46 million-unit seasonally adjusted annual rate in January from a 5.53 million-unit pace in December. The January result was very close to the median forecast of 5.44 million units.…

Complicating analysis of the data is the increased prevalence of transactions taking place outside of conventional sales channels (i.e., direct sales from listings on websites like Zillow and from other nontraditional sources). If, as seems to be the case, these types of transactions are gaining market share, it would reduce the accuracy and usefulness of data based on traditional multiple-listing-service, or MLS, sources. The National Association of Realtors periodically benchmarks its pending and actual sales data to attempt to account for this (and other) factors that can affect the accuracy of their data, but it is unlikely that even this benchmark process can fully deal with the effects of such market changes. So, while the NAR cites tight inventory as a big problem for existing-home sales, it is unclear whether their data accurately reflect reality.

—Joshua Shapiro

Gauging Chinese Oil Demand

Global Commodity Strategy Research

by RBC Capital Markets

Feb. 19: The upside oil-price catalyst that we are watching is first, the tightening of Asian product balances, followed by refinery margin expansion (which would lead to higher refinery utilization), and finally, increased crude demand, in that order. It may be early days of the coronavirus impact on demand, but if refinery margins remain firm, we can say with a reasonable degree of conviction that the most bearish market overhang has turned.

We have been advocates of [refinery] run cuts, given that Asian refining margins have been soft since the fall, but margins have rallied markedly over recent sessions, which is indicative of tightening product balances. Either Chinese refinery run cuts are deeper than the market realizes, or domestic product demand destruction has been overstated. The former is likely true, given that global crude balances remain soggy and real-time indicators of economic data using Baidu and Tom Tom GPS [global positioning systems] suggest a minimal amount of activity in major cities like Beijing over recent days. Improving margins is a material tailwind for what has otherwise been a major hurdle for the struggling physical oil market. As the Chinese government looks to stimulate the economy, a pickup in distillate and gasoline demand will fortify margins in the second quarter and beyond, which should lead to increased crude demand.

—Michael Tran

Bullish Move for Health Stocks

Quick Takes

by The Institutional View

Feb. 19: The S&P 1500 Managed Health index is preparing to accelerate. The monthly closing chart shows a mild 10-month correction that ended in September.

With its strong advance off the September low, the group surged to new highs into year end. After a brief consolidation in January, the group is about to accelerate. Closing above 1910 would project an advance to the 2300 area.

Managed Health appears to believe that either Sen. Bernie Sanders won’t get the nomination, or he would lose in the election. And there is growing support from both parties to tackle prescription-drug prices.

—Andrew Addison

Tech Bubble II

RBA Quick Insights

by Richard Bernstein Advisors

Feb. 18: As we approach the 20th anniversary of the tech-bubble peak, valuations have returned to levels not seen since. Is irrational euphoria coming back? A broad-based look at sentiment and valuation suggests that capital is becoming more abundant (i.e., optimism is building), which is generally a headwind to future returns (returns are greatest when capital is scarce). Many investors justify today’s higher valuations based on interest rates being low, but investors need to ask: 1) Why are rates low? 2) Will they stay low? And 3) What does the empirical data suggest?

If rates are low because they are discounting lower long-term growth prospects, it probably doesn’t warrant paying a higher multiple. Also, if current rates don’t stay low for at least the next decade (a very underappreciated risk, in our view), then the low-rate argument loses credibility. But most important is the empirical data. History suggests that adjusting valuations for interest rates adds no value in predicting future stock returns; in fact, it makes predictions much worse.

—Dan Suzuki

Gold Rally Has Room to Run

Gold & Silver Stock Report

by Clif Droke Market Analysis

Feb. 18: The gold versus Treasury-bond ratio is trending higher above its 50-day line. This is technical confirmation that gold’s outperformance is more than just a temporary anomaly. Indeed, gold’s relative strength versus T-bonds has been ongoing since late 2019, telling us that there’s a clear preference for gold vis-à-vis T-bonds as a safety hedge among defense-minded investors.…As long as gold’s relative strength versus the iShares 10-20 Year Treasury Bond exchange-traded fund continues, investors are justified in maintaining long positions in the metal.

--Clif Droke

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