Equities rebound on positive trade news

Momentum crash and value pops

Beneath the surface of equity markets yesterday a quant quake 2.0 escalated in US session with neutral momentum (long stocks with the highest momentum and short those with the lowest momentum) strategies experiencing massive losses. Bigger than the first quant quake in August 2007. As the chart shows the reverse has happened in neutral value strategies. 

Our hypothesis is that over the past year momentum stocks have increasingly got characteristics of high growth and high valuation stocks which means that momentum stocks have become long duration assets. This is because these stocks derive a larger share of their present value from cash flows far into the future. As a direct result these stocks are more sensitive to interest rate changes. Value stocks on the other hand have increasingly become short duration assets with companies deriving most of their present value from near-term cash flows. When US 10-year interest rate rise by 28 basis points then long duration assets will go down relative to short duration assets.

Judging from price action in the European session the sell-off in momentum stocks is over so we would not be surprised to see short-term rebound and outperformance among momentum stocks.

Stocks to watch

With California’s Assembly Bill 5 passed Uber’s shares will be in focus today as the new bill could force Uber (UBER:xnys) and other companies selling contractors on their platforms to classify contractors as employees. As Uber stated in their S-1 filing before going public this was one of the key risks for investors. It could potentially erode the entire price differential between traditional taxi companies and Uber drivers. Is Uber then just a taxi company with a fancy app? Uber shares were up 4% yesterday as the company announced further layoffs to rein in accelerating losses.

Assembly Bill 5 says that people in California can only be a contractor if their work is outside the usual course of the company they work for.

Apple (AAPL:xnas) introduced its iPhone 11 yesterday which now comes in three different versions with cheapest version selling for $699 which a price cut aimed to lure smartphone buyers back into Apple’s realm. The stock market reacted positively to the news, but criticism has surfaced that Apple is falling behind as the new iPhone 11 is not coming with a 5G integration which makes almost impossible for Apple to have growth in China where local smartphone makers such as Huawei is introducing smartphone with 5G integration. Beginning in the second half of 2020 this will be a constraint for Apple.