Powell Returns, China Stocks Rally Anew

Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Monday, Sept. 30. The last trading day of the third quarter! The Bottom Line segment of today’s podcast starts at (2:08) and Stocks on the Contrarian Radar©️ at (4:36) for listeners who want to skip ahead.

State of Play

As we eye our board of indicators for signs of direction at 0650, it appears that a little bit of retrenchment could be in store:

• Stock index futures are pointing to a lower open led by small caps. The Russell 2000 is down 0.7%. S&P 500 and Nasdaq are closer to the break-even point;

• Commodities are taking a bit of a breather with WTI crude oil unchanged at $68/barrel. Copper is down 0.8%;

• Cryptos also moving lower. Bitcoin down 3% to trade around $63,600;

• Bonds, too, selling off a bit. The 2-year yield is up 5 basis points to 3.61% whilst the 10-year is up 3bps to 3.78% (yields move inversely to prices).

Today’s Known Events

Fed Chair Jerome Powell returns to the limelight with a scheduled speech on the economic outlook at the National Association For Business Economics annual meeting in Nashville. Powell’s luncheon speech will be broadcast live on the NABE’s YouTube channel.

Carnival Cruise Lines (CCL 0.00%↑) reports earnings before the open at 0930.

That’s all we got today. Pretty quiet day but don’t get too comfortable because we have a mess of labor market data coming this week:

• Tuesday: JOLTS

• Wednesday: ADP payrolls

• Thursday: Initial jobless claims

• Friday: Non-farm payrolls

The Bottom Line

Would not expect Powell to say very much just because this is not the forum to announce major policy changes. (That time would have been the Fed meeting two weeks ago and indeed Powell did take the opportunity to confirm the Fed is moving to looser monetary policy, even if it is just a recalibration. Plus Powell has already spoken once since that meeting, last Thursday where he said, well, very little).

Also, the Fed has already telegraphed their next move, which is another cut in interest rates at the next FOMC meeting on Nov. 7. At the time of this writing, Fed Fund Futures were pricing in a 53% chance of another 50bps rate cut at that meeting.

Stocks on the Contrarian Radar©️

Chinese stocks continue to surge. Electric vehicle manufacturer Nio (NIO 0.00%↑) surged 13% overnight. Li Auto (LI 0.00%↑) gained 8%. Online retailers Alibaba (BABA 0.00%↑), JD.com (JD 0.00%↑), and Baidu (BIDU 0.00%↑) are also up multiple percentage points. It’s the latest in a remarkable recovery for Chinese equities:

As you can see these names have booked dramatic gains over the last month or two, to recapture all losses from the previous year — and then some. Indeed, NIO is up 67% over the last 12 months.

We know people like David Tepper are saying to pile in to Chinese equities and indeed these do seem to have a lot of momentum right now. But there are just as many reasons not to — and none of them are due to the fact that David Tepper also traded up to draft Bryce Young (American football reference). The main one is that these aren’t really Chinese stocks but so-called variable interest entities. This basically means they are a derivative of a derivative that allow US investors access to these stocks’ moves.

Okay, so US equity structure also gives you the junior-most tranche of the corporation with no recourse should there be an event like bankruptcy. Still, it’s actual ownership unlike what these Chinese ADRs offer. Then there is the little matter of valuation and the fact that these companies don’t follow GAAP but a Chinese version of it. Cynics will say this allows management to effectively make up numbers. They aren’t always wrong, either.

Finally there’s the matter that the individuals who make up the executive ranks at these Chinese companies are CCP apparatchiks. Inevitably a lot of China bulls are paid by the CCP in one form or another. So count us out on this emerging Buy China train.

Housekeeping

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