The Market’s Energy Gets “SAP-Ped”

What a difference a weekend can make. Last week was a fairly unexciting one for the major US indices. It appeared that indices were consolidating ahead of the election, though with a slightly lower bias, as traders considered upcoming earnings and largely ignored rising Covid-19 rates and diminishing hopes for fiscal stimulus. Markets were drifting lower in Asia before the German tech giant SAP (symbol SAP) released its earnings. Even markets that are adept at ignoring inconvenient bad news could not ignore the message sent by the European tech bellwether.

SAP cut its full-year revenue forecast, painting a dire picture for corporate demand for enterprise software and cloud storage. This has significant implications for its major competitors in the cloud and enterprise space. While it is possible that SAP is primarily suffering from increased competitive pressure, the stocks of competitors like Salesforce (CRM), Oracle (ORCL), Microsoft (MSFT), and Workday (WDAY) all fell in response to SAP’s news. Of that group, only MSFT is expected to report this week, so we will have little immediate clarity into the German company’s assertions about corporate demand. And as if to thumb their nose at the whole theme, another cloud computing giant is higher. Amazon (AMZN) is up on a renewal of the stay at home trend stemming from increasing Covid-19 rates. Investors appear to be focusing on its domination of the low-margin retail business rather than increased pressure on its high-margin cloud business.

Until this morning, it appeared that US Investors were still hopeful for another round of fiscal stimulus, despite the lack of progress and the stated lack of cooperation by Senate leadership. Markets seem to be hopeful that a “Blue Wave” election, where Biden wins and Democrats take the Senate, will lead to a larger stimulus package, so perhaps that accounted for the seeming lack of concern. In the meantime, it is possible that the Federal Reserve is preparing for a lack of immediate stimulus because the Federal Reserve balance sheet has grown nearly 14% annualized over the past 12 weeks. I wrote about that here on Friday: click here to read the article

The VIX index is sharply higher today, which is not surprising after a 2% decline in the S&P500 Index (SPX). While the market may say it is rooting for a “Blue Wave”, the VIX futures market appears to be hedging the possibility that such a development will not be market-friendly in the short-term. Bearing in mind that VIX is the market’s best estimate of 30-day volatility, it is revealing to see that until this morning the peak for VIX futures was in November, after the election. (See graph below)  

Until a few weeks ago, the VIX futures curve had its peak in October. When the peak moved from October to November that was originally attributed to fears about post-election chaos. That may be true, but December VIX futures were also above spot VIX. I think this reflects fears that a Biden landslide will have investors concerned about a capital gains tax hike in 2021. In that circumstance, investors would be incentivized to sell some of their winners before year-end. The problem is that investors can’t necessarily position for this trade in advance, since they won’t want to sell for tax reasons without knowing who wins the election. 

Source: Bloomberg

Last week we noted that the market has not been kind to major companies after they released earnings. I noted that options traders displayed unusual optimism for Netflix (NFLX), Tesla (TSLA), and Intel (INTC) ahead of their releases. It is not surprising that NFLX and INTC were hit hard after reporting and TSLA was greeted with a relative yawn after a beat and upgrades since it is hard to beat extraordinarily elevated expectations. SAP is merely the latest reminder of that trend. This week we will see about 45% of NDX and 22% of SPX release earnings, with the bulk of that number coming on Thursday when Apple (AAPL), AMZN, Facebook (FB), and Alphabet (GOOG/GOOGL) all report nearly simultaneously. We will soon see if the post-earning swoons from INTC and SAP are harbingers of a change in sentiment, or if their woes are specific to their own circumstances. Stay tuned.