It’s Not (WE) Working

Global equity markets continued their climb with the S&P 500 hitting new all time highs on Thursday before backing off.

Small Caps (IWM) and value stocks roared, ignoring a massive correction in U.S. Treasuries. Small caps ended the week up almost 5%  on good volume, while the S&P 500, the Dow and the NASDQ 100 all paused just below all time highs, up on average +1%.

We can attribute this market reaction to cause  and effect (money flowing to value stocks and overlooked small caps) with the catalyst being We Work. The privately held startup was looking at an valuation of $65 billion for it’s upcoming IPO before things started to unravel.

It’s losing oodles of cash ($1.9 billion last year) and is not projected to make money anytime soon. Transactions by its CEO with the company were called into question. WE’s weak internal controls unraveled the prospect of the IPO.

Of course with negative interest rates on trillions of  sovereign debt, losing  $1.9 billion last year seemed like a bargain considering all the hype.

However, sanity seems to have prevailed, knocking a mere $55 billion off WE’s market cap to $10 billion.  This markdown sent a message to Mr. Market that those boring value stocks (yes,those stocks that actually have a positive trackable ROI)  might be a better opportunity.

The global economy and the world’s equity markets might have a reason to breathe a sign of relief as the tariff war is easing up. Talks between China and the US are back on track for early October. China said it will resume buying some agricultural commodities as a good will gesture.

This week’s highlights are:

  • Risk Gauges are still 100% bullish (for more on this click here)
  • Value stocks could be returning to favor in a big way after languishing for over a decade
  • Copper rallied, which if it holds current levels is a positive sign for the economy
  • Semis (SMH), Transports (IYT), and Oil Services (OIH) led the rally
  • Defensive Sectors such as Utlilities and Consumer Staples have accelerated to the downside on a relative basis
  • Gold and Gold Miners continued their sell off and should find some buyers under current levels
  • Long Bonds (TLT) tanked this week down -6.34%