Markets Remain Unsettled; Sanders And Trump Wins Don't Help - Bezek's Daily Briefing

by: Ian Bezek


The markets were flat before falling again on Tuesday evening.

How big of a risk is the presidential election to the US equity markets?

SolarCity crumbles on earnings.

The markets were essentially flat on Tuesday. The major indices all closed ever so slightly in the red, but bulls can claim a moral victory to some degree, since the markets recovered from steep morning losses.

However, as of this writing (11 pm on Tuesday night), futures are again well into the red. (For those who would complain about the political section of the Briefing today, please note that S&P 500 futures (NYSEARCA:SPY) sold off almost 1% once Sanders and Trump were declared the winners on Tuesday evening.) Wednesday is likely to bring more volatility for the US equity markets.

I could write at length about the market's moves Tuesday, but it really was a back and forth that didn't resolve a whole lot. The key levels we discussed yesterday remain the same going into tomorrow.

The longer we stay down here, the more likely bears are to push the market to new lows, so on that front, they get points for Tuesday. On the other hand, bulls got a moral victory for rallying the market way up off the lows and closing the day flat. Still, though, you can't take a moral victory to the bank. Bulls need to get the market back over 1,900 fairly soon if they want this to be just another correction in the ongoing bull market rather than the first wave of a new bear.

But no, today's Briefing will step aside from talking market bottoms. As much as this isn't a political column, we must consider the investing implications of Tuesday's New Hampshire primary. And also, what's going on with SolarCity (NASDAQ:SCTY) and the Musk empire in general?

The Establishment Gets Trumped

First up, let's talk New Hampshire. After a volatile political environment leading up to the Iowa vote, many investors were expecting more uncertainty.

However, the Iowa vote appeared to calm things down. While Cruz - an outsider - won, the story of that night was Trump's poor showing and Rubio coming in strongly. Most folks assumed Rubio was the favorite after Iowa; his odds of winning the Republican nomination rose above 50% on the betting sites.

Rubio is as "establishment" as you can get. If he wins the Republican nomination, investors can expect status quo to continue. Similarly, Hillary Clinton did well enough in Iowa to seemingly stem the Bernie Sanders threat.

However, New Hampshire's results seemed to have flipped the script. The counts aren't final yet, but as of this writing, Trump got about 35% of the vote in New Hampshire, doubling up on 2nd place candidate John Kasich's vote count. More importantly, Trump's clearest rivals, Ted Cruz and Marco Rubio, finished well back in the vote.

The media was quick to say after Iowa that Trump was a flash-in-the-pan occurrence, and that polling overstated Trump's true popularity. However, that narrative has now been disproved. Trump was only polling in the high 20s in New Hampshire, and yet he got 35% of the vote. He's now shown that he can appeal to enough of the Republican base to be a credible candidate to win the nomination.

For investors, is that something to be fearful of? I'm going to say, tentatively, that a Trump presidency isn't something to be that frightened of. At least at this time, Trump is campaigning on an anti-Wall Street and particularly anti-bank platform.

However, he has shifted his positions frequently over the years. I suspect he may be campaigning in the manner that he is because he sees how well Sanders' populist anti-Wall Street rhetoric is going. But at the end of the day, Trump owns billions of dollars of American real estate. His self-interest, if nothing else, would keep him from doing anything that would harm the American economy too greatly.

I predicted back in November that Trump would win not only the Republican nomination, but the presidency. And yes, all signs continue to point that way. After New Hampshire's results, I view him as having a roughly 75% probability of winning the presidency in November. If you're an investor, it's time to start making your Trump contingency plans. (Reminder, I live in Mexico. I don't support Trump. I personally may face negative consequences of an anti-Mexican candidate winning the presidency.)

Assuming Trump wins, it seems likely that he would take actions that may hurt the healthcare industry and American money center banks in particular. Be careful in these sectors. For a pro-Trump trade, consider manufacturing firms that would benefit from an anti-globalization kick. If big tariffs against China and Mexico become a reality, US-based manufacturing firms would be big winners.

On the Democratic side, Sanders won New Hampshire by a wide margin. For investors, this is a disaster. (Again, this isn't a political column, I personally find Hillary to be a deplorable character. But as an investor, I can't bear the thought of socialism.)

If Sanders were elected, it'd be a catastrophe for American capitalism. There's no sugercoating it. This man says straight out that Wall Street is full of crooks and terrible people and he's going to change things. I get that Wall Street acted very badly in 2008, and some change is in order. But socialism isn't necessarily the answer.

The good news is that Sanders hasn't proven that he can win the nomination, let alone the presidency. He does very poorly with minorities and older folks. His campaign is tailor-made to perform strongly in wealthy Caucasian states such as New Hampshire, but upcoming votes in South Carolina and Nevada are likely to expose the narrowness of his base.

If you're considering selling stocks because Sanders did well, I'd reconsider. He isn't going to win the nomination. And if he does miraculously pull it out, Trump would crush him in a landslide. Still, I remain convinced that Hillary will win the Democratic nomination. She is on the warpath against biotech companies, but she's otherwise not going to be a threat to most investors' portfolios.

If you're considering selling stocks because Trump might win, what then? Again, I don't think he would be a disaster for the broader economy or stock market. If you're heavily long healthcare or money center banks, consider lightening up. Those sectors would likely be exposed to a Trump win. And for an opportunistic play, you might look into some manufacturing firms that could benefit from the anti-trade tariff-hiking environment that seems likely.

Finally, remember that Congress can (and will) veto much of what a potential President Sanders or Trump would do. American voters have caught a populist anti-status quo mood. That is indeed a threat to traditional large-cap multinational firms. But Congress is controlled by corporate lobbyists and will likely blunt any anti-corporate actions that either of these outsider men would try to enact.

What's That Smell?

For investors in one of the country's most dynamic innovators, there's been a strong foul scent lately. That's right, things have gone acrid in Musk-land. Consider Tesla (NASDAQ:TSLA):

TSLA Chart

TSLA data by YCharts

And of the two, Tesla's is the good chart. SolarCity is the real disaster.

SCTY Chart

SCTY data by YCharts

Yes, that chart is accurate. For long-term holders, you've lost 70 percent (!) of your money since December. The stock has gone from $60 to the $18s in less than a quarter. Importantly, that $18 quote came in the after-hours session; the stock closed in the $26s on the day before earnings came out.

And let's be honest. Earnings weren't that bad. Yes, things were a bit soft on installed capacity for the quarter. But they beat on both revenues and earnings for the quarter. And full-year guidance wasn't that bad. In a better market environment, there's no way on earth the market would take this stock down from $26 to $18 on this mixed earnings report.

No, the market has turned militantly negative. Just look at LinkedIn (NYSE:LNKD) the other day. Its earnings weren't that bad, all things considered. And yet, the market traded it as though the company's website were a Zika virus transmitter.

Back to SolarCity, I've always ignored this company. As an investing rule, I ignore companies with illogical business models. SolarCity makes no logical sense. Residential solar isn't a price-competitive source of power. It only exists because of perverse government incentives.

As the recent power grid discussions have shown, SolarCity is on the verge of being wiped out if it has to compete on a fair playing field with traditional sources of electricity. So, I'd never go long this company for an investment. Neither would I short it, since so many people are already short. The possibility of short squeezes is high, and this sort of fad concept stock has already been widely picked over by hedge funds. There's little I can add by looking at it myself.

To me, the usefulness of SolarCity is in looking at market sentiment. If a company like this reports mediocre earnings and trades up, it says something good for the overall market mood. If it publishes a similarly lukewarm earnings report and trades down by a jaw-dropping 35%, it indicates that the market currently has no risk tolerance whatsoever.

If you own high-quality stocks, the upcoming stock market bounce will be good to you. If you own low-quality stocks, you need to liquidate some of your worse positions. Low-quality firms are now decisively out of favor. If there is a last gasp move higher in the market - as I have speculated - it will be high-quality companies, not lottery ticket stocks, making the last new highs.

As for Tesla, has anyone proven that electric cars work in an economic sense in an environment where gas costs $1.50/gallon? I suspect that its shares will get Solar-Citied down to the double digits sooner or later.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.