ETF Edge - Pfizer Vaccine, Election Impact & Ant Financial IPO

Episode Date: November 9, 2020

CNBC's Bob Pisani spoke with Nick Colas, co-founder of DataTrek Research, Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors and Brendan Ahern, CIO of KraneShares. They discussed the monster rally we’re seeing on the back of Pfizer’s vaccine news, election impact and what Ant Financial’s IPO debacle means for the Chinese ETF market. In the 'markets 102' segment, Bob discusses the strength of the rally and how sustainable the momentum is going into year-end. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, you're in the right place. Every week we're bringing you interviews and analysis and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll be talking about this monster rally we're seeing on the back of Pfizer's vaccine news,

plus the election impact, and what Ant Financial's IPO debacle means for the Chinese ETF market. Here's my conversation with Nick Coles, co-founder of Datatrek research, Matt Bartolini, the head of Spider-America's research at State Street Global Advisors, and Brendan Ait Hearn, the CIO of Crane Shares. Matt, you control the Spider-S&P 500, the biggest ETF in the world, $300 billion, just in that ETF. Huge volume today, I see.

It looks like two and a half, three times normal. What do you see from your perch watching these ETFs today? Yeah, well, I think a lot of what's happening is the market is viewing this very much risk-on sentiment. we're seeing investors step into that market and utilizing a tool that they quite frequently use a lot when there's market action. And that's spy. We've seen a lot of volume in spy come in as that risk on sentiment is taking shape. But also when we look at other products within our lineup, we've seen massive volume spikes in areas that are more cyclically oriented, like oil and gas exploration and production, so XOP, or within banks that are also very macro-oriented, what we're seeing in the move in rates, KBE. And what's really interesting, though, is with the volume we've seen on those two ETS,

as well as the price action. Both of them are up double digits today. Prior to today's action, we actually saw a buildup of short interest. So there could be a little bit of short covering in those two segments of oil and gas, banks. We're seeing this also within real estate and other sort of, reopening type of trades that are also tied to some macro variables of higher oil, but also higher rates. Yeah. Nick, this is a big day for value over growth, but it's one of the only days of the year. I mean, it's been a very short run that values had over growth. Is this going to put value ETFs and value in general, the value style investing back? As you've noted, many times we've discussed, values, mostly financials and some health care stocks and a little bit of energy and some industrials.

Is that finally investment style going to come back at this point? It does feel that way because of the sector allocations that you noted. I mean, because technology has such a huge run over the course of the past couple of years, years, the growth style, the S&P 500 growth became 41% tech. 38 points of the 41 was just big tech, and it had basically no financials, 4% and less than 1% energy. And that kind of waiting worked for the past couple of years, but if we're well and truly back into full-blown recovery mode, which I think we are, then you do want to look to the value side of the trade where you do have health care as 21% of S&P value. Financial is 19%.

they should be good beneficiaries. Energy at 4% versus that less than one for growth also feels like a better way to be positioned. So it isn't so much that, quote, value is going to work, but that the sectors that are value sectors, low p.e sectors, they should work. Yeah, and you and I've talked about this, Nick, that in Europe and in Asia, financial stocks aren't even bigger weighting in not only the markets, but in the value play. So if you're suggesting, value is starting to work better, then Europe should have an even bigger move overall in the value area as well as Asia. Am I right? Oh, totally right. I mean, S&P 500 is 10% financials. In the EFA, which is Europe and Japan, it's 15%. In emerging markets, it's 17%. So orders of magnitude, more weighting in financials. And with hopefully higher long-term rates in a steeper yield curve, that sector should work. Those areas should work. I just want to go back, Matt, and talk about the cyclicals, because you referenced earlier, the XLR, which is the real estate, ETF, it's up 8%.

I mean, there's your return to the office trade. That's kind of obvious. We're seeing REITs move rather aggressively today. We're also seeing aerospace with another cyclical group aggressively moved. That's certainly understandable. Boeing's been a mess, not just on the problems with travel, of course, but also on the issues they've had. with their planes. Any thoughts on real estate from here on out? I mean, I don't know anybody. People have said this before that wants more space. I mean, that is a problem. Maybe people will get back close to their old space, but most people are still looking for less space. I'm just wondering, what's the right value? How do you figure out the right value for something like the real estate space right now? Yeah, I think what a lot of happening today is a lot of

these areas are sort of beaten down, right? So aerospace, those, those from those stocks have been, some of the worst performance we look on on a broader year-to-date basis. So the result of the drawdown we saw in March, as well as banks and oil, right? And those are obviously value-oriented plays, and that's why Valley is doing so well today. You know, it's a little bit of a sort of a knee-jerk reaction to some really positive news. Don't get me wrong. I think one of the things is looking to see if this is sustainable, right? So if we do get a vaccine and we obviously still have the Pfizer one on the table,

it still has to go through safety trials, and you never know what's going to happen there, as well as the distribution of it. So I think what is happening is, you know, what we're also seeing from a short covering perspective, if you look at the top decile of highest short interest stocks and the Russell 1000, they're up around 6% today. And the ones that are least shorted are up around 3.5% today. So it's a little bit of just covering some of those beaten down segments. And the sort of brutality of the cyclical trade is still left to be somewhat questioned of how quickly we can get this vaccine and how quickly we can get, you know, back to sort of normal trendline growth.

So when you see real estate moving higher today as well as banks, you know, some of this, is hopes of higher growth, but also some of it's just, you know, covering up some of those beaten down areas that have been, you know, shorter going into this marketplace. Yeah, Nick, same quote. I want to stay on the value theme and go back to banks. And again, you and I have talked about this in the past. I mean, rates are up today, so that interest income should be up. That's good. And yet the other component, I always point out, low growth, the other critical aspects, other than fees for banks, still looks pretty anemic into 2021. Do you see any possibility that that could change. I'm trying to figure out the same problem I have with banks I have

with real estate. What's the right price for them? More appropriately, what's the right multiple that we're willing to put on them? How do you look at the banks, for example? Yes, I mean, I think of the banks in terms of just structural earnings power. How much can they improve over the course the next couple of years? Because this year was obviously a disaster. On the plus side, they are the cheapest group in the S&P by an order of magnitude. It's like 12 times earnings for next year. Next nearest group is like 15 times earnings and financials. So there is basically zero expectation of structurally improving earnings growth. And if you buy off on the idea of cyclical recovery, the financials should begin to take their place as a leadership group.

It's been very problematic so far as you know. But basically, my thought is if it's not now, then when? Because if we really do believe the vaccine plus stimulus is going to give us a better economy in 2021, financials should work. If they don't, something much deeper is wrong with them. Yeah. I just want to go back to the international markets a little bit. And we saw, Matt, last week, the markets really move up internationally. Some of the big international ETFs like GXC and FVZ, that's the European ETF, moved rather aggressively on last week. And they're moving again today on the vaccine news. Can you give us a little, Nick's given his comments on the international aspects. of this. Can you give us your thoughts? Well, I think the market action we saw last week is reacting to some of the polls and ballots that were already been cast and counted as the week went on.

You know, under a Biden-Harris administration, foreign stocks would likely be more beneficial to have in your portfolio than, say, U.S., on a relative basis, just because Biden is more of a globalist. We're likely to see a reprieve of some of the tariffs and, for more formal PACs within some of the nations where they put some levies on. So that would be overall net positive growth for international markets like Europe as well as China. And that's why we saw some really strong action last week. And then carry on today with the vaccine news. I think that's only going to add to the positive sentiment in that region, particularly as Biden gets into the office.

Yeah. I want to bring in Brendan Ahern from crane shares here, an old friend of mine, an old China watcher. Brendan runs the China Internet ETF, KWEB is the symbol there. He also runs the China A shares ETF, which is the China mainland. and the symbol there is KBA. Brendan, thanks for joining us. Before I ask you about China, I want to ask you about the sort of international market question that we had just been discussing here with Matt and Nick.

The markets globally seem to have rallied on some hopes that there would be that Biden is a globalist and there would be fewer tariffs maybe out there. Can you give us your thoughts on that? Do you think there will be less international tension and fewer tariffs? I do. I think that Biden is clearly going to take

more pragmatic approach, less tweets, you know, less temper tantrums, you know, kind of more traditional diplomatic discussions. So I do believe that it is a net positive for non-U.S. equities, and I think the mark. Yeah, the, I guess the problem, the only pushback I would give, and any three of you could answer, is Biden himself is still somewhat hawkish on China, number one. And number two, there will be some pushbacks about just completely removing tariffs in the Congress on that. I mean, is that really a truly done deal? Anybody want to go in on that? Because that's the concern I have. I mean, it seems like there's going to be some pushback. Yeah, my one view, Bob, is that Joe Biden got elected to focus on domestic issues.

And I just think, you know, China was a little bit of a distraction technique for Trump you know, look over there and not in the mirror. And I think Biden will be much more focus on a domestic policy. And I think international policies, if it's tariffs, if it's going out, you know, threatening China. I mean, I think we can kind of call it what it was is simply a distraction technique. And I think Biden was elected to focus on domestic issues. And I think that takes some of the scrutiny, at least dials it down a notch. I think there's also just more of a procedural issue, too. Trade powers are much stronger within the White House. They don't really need congressional approval, as we saw under the Trump administration by, you know, executive order,

placing tariffs on China and countries within Europe. And I think you could see the same, but reverse under a Biden administration where it seeks to be more globalist and use more trade partnerships instead of actual individual tariffs targeted at one specific country. Yeah, I would agree Biden is more of a global. he'll certainly try to get us back into the Paris Climate Accords. But Nick, for example, he seems to be a bit of a hawk on the global supply chain. I mean, I think there seems to be clear efforts or noises to continue to bring certain critical parts of U.S. infrastructure back. For example, medical supplies.

I think we all got caught a little flat-footed about how much China was producing of our medical supplies. So don't you think, Nick, certain trends are going to continue, like, you know, bring certain supply chains home? Yes, you certainly nailed exactly the right one in terms of long-term trends. You know, localization of supply chain definitely an issue. What I'm looking for is to see what happens with all the blacklisting of Chinese companies that we saw under the Trump administration. And if we begin to see an unwind of that, particularly with Huawei, going into 2021,

because what's so important for Chinese equity investors, and Brendan can talk to this as well, is where is technology going in the Chinese stock? market over the next couple of years, because that's really been a key driver of why that market's done well, particularly this year. And can that continue with a easier overall trade policy and IP policy from the U.S. towards China? Yeah. Brendan, you want to respond to that? No, no, I would agree with Nick. Always good to be in agreement with Nick. But yeah, if you look at within KBA, we have a higher weighting to Shenzhen than other definition of Chinese A shares. And Shenzhen's stock exchanges up three times as much as the Shanghai.

So Shanghai, more value sectors, mega-cap, large-cap, Shenzhen, more growth-oriented names, predominantly tech, mid-cap, small-caps. So some element of KBA's outperformance has been driven by having a little bit of a higher weighting to Shenzhen. And to the next point, you know, overnight you had a lot of the tech war-sensitive securities, ZTE, a lot of the 5G names, a lot of the telecom names rallied very strongly on a more pragmatic approach. Yeah. Brenda, while I have you here, I've got to ask you about the and financial IPO. We were all, I mean, it was a sort of second or third tier story last week given the elections, but everyone was absolutely stunned when all of a sudden we were waiting for it and they just decided not to do it.

The key thing here was the Chinese authorities wanted to imply something. somehow, that they needed to get more control over financial. That this was essentially a company that was doing massive amounts of loans in China and essentially then pushing the loans off to the banks themselves, that they actually had no real skin in the game. They were simply facilitators, and I think Chinese authorities were very nervous about that. At least this was the story. I wanted to get Brendan's reaction to that. But the way it played out in the Western media was largely, oh, Jack Ma, I think,

having sense this was happening, came out and said, well, this is crazy. There's too much regulation of ours, and he was responding to the pressure that the regulators were putting on him. So I guess the question here, Nick, and I don't know if you have a thought on this, is it seemed to me what really happened here was Chinese authorities were already sending noises out there to him, that they were going to be subject to more regulation, and Ma was angry about that. And Ma's reaction caused them to bring him in, but it wasn't going to stop the fact that they

were going to try to get more control over them. So it's a very interesting sort of situation. Matt or Nick, you have any thoughts on that? Yeah, I mean, I think you got structurally the right narrative. The one thing I would add is, if you look at the Chinese online payment system, it's dominated by two players, Ant and We Pay. They have like 80% market share in the online payment space. And it's something that has really astounded other central bankers. I mean, Federal Reserve officials like the Red Mester have talked about how odd it is that two companies dominate that. And I think the Chinese government has looked at it and said, yeah, that really is actually a problem. And we do need to work on figuring out how to

structurally make it more sound because it is probably the biggest structural risk of the Chinese banking system. So unfortunately, they came to that realization a bit late for this IPO. I'm sure it'll happen at some point in a year or two. But it is, you know, it was probably the right regulatory thing to do. It just wasn't particularly handled well. Right. I completely agree with that. I cannot believe that the Chinese authorities waited until five days before, before they started. I mean, obviously there were negotiations going on before. See, I think that's what happened. Ma responded to the fact that there were all these negotiations going on, and he expented his frustration in the weekend before the IPO, and then they had to call him in. But they didn't cancel the

IPO because Jack Moss sounded off. They were having problems to the authorities already, and I think you're right, Nick, who could blame them? You've got the biggest lender in China out there that's not really a bank that's facilitating all these loans that doesn't have any loans on its book because it basically, we're just an application center and we ultimately, it's the banks that hold the loan. Well, that's an awful lot of loans to be pushing out from the public, and that's a big issue. I think we've got Brendan back right now. I don't know if you'd heard us before the question, Brendan. I just want to get a quick response from you about number one, do you know when the IPO might actually happen? And number two, could you just give us your quick narrative? of what happened. We've had a brief discussion about it without you, but go ahead. Yeah, I mean, very unlikely to happen with until about at least a minimum of six months. I think, I think, you know, it looks like this thing had the rug pulled from underneath it and to some degree it did at the same time. You had this more regulatory environment coming. The company really portrayed itself as a technology company, got that very high valuation,

but it was going to increasingly fall under being regulated like a bank. And I think the regulator said, you know, all of the revenue profitability is in the IPO perspective, it's backward looking. And under this new regulatory regime, the company is still a great, great company. But certainly the level of profitability is going to come down. And so I think, I think, you know, as much as it's in the disappointment, I think, you know, the regulator is saying to investors, you know, you need more insight into how the regulation is going to affect this company going forward. Right. That seems completely reasonable to me. And Nick and I haven't having this conversation. But I guess what frustrates me is why wait now? I mean, it was five days before the IPO. It seems like Jack Maher responded to all of this pressure from the regulators saying, wait a minute, you're just offshoring. You're just pushing these loans off to the banks. But you really are a lender. And we may regulate you like that. That seems very reasonable to me. They've got to get a hand around this. But why five days before or six days before? This should have been something that came out. a couple of months ago. Don't you think that's reasonable, Brendan? Yeah, yeah. I mean, I think the company really drove to get the IPO up in advance of the new rules being implemented. And so I think the regulator's hand was forced to some degree by how quickly the IPO came together. So the regulatory environment's been coming. It's just more the IPO came faster. I see. Okay, so your point is this is kind of a game of chicken they were playing

that if they could get this thing out before the actual regulations came in, then they're too big to fail. You can't regulate us now because we're so big. Was that the game? It's a game of chicken, right? Yeah, yeah. And you have all this retail money, you know, predominantly individual investor money in the IPO. And, you know, the regulator wasn't going to do something to hurt the company knowing that you'd only be hurting all these mom-and-pop investors. So I think actually the regulator took a pretty pragmatic view.

And for both parties in the long run, it's probably a better outcome. Yeah. So here you see a situation where the regulators actually were very reasonable. I mean, U.S. regulators would probably have the same concerns, Breton, wouldn't they? I mean, the way this played out initially, it sounded like the Chinese Communist Party has come down on this icon of, you know, international freedom and liberty. And while I love Jack Ma, the truth is a lot more subtle than that. Am I characterizing this right?

Oh, I agree 100%. And if this IPO had come on the New York Stock Exchange, for instance, or the NASDAQ, your institutional investors would say, hey, what about this new regulation? You know, your numbers look great. You know, absolutely fantastic, right? You know, 17 billion of revenue, 10 billion of gross. What would the new numbers look like? And I think institutional investors would have called the company's blood.

if it had come here in the United States, and that's why they went local. Right. And your point is, what would the new numbers look like if they were regulated like a bank? Is that how it would be different? Yeah, I mean, your gross margin of 58% is coming down, right? Yeah, that's a good point. For sure. Okay. Thank you, guys. We went a little bit long, but as you see, there's a lot going on here, and there's a lot to discuss, and these are the guys who've got skin in the game. Now it's time to round out the conversation with some thoughtful analysis.

and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Today we'll be measuring the strength of the rally and how sustainable the momentum is going into the end of the year. My producer Kirsten Chang as always joins me now. Bob, it's been an incredibly turbulent week

to say the least and now we've got a record breaking rally on the back of Pfizer's historic vaccine news. As you mentioned on the show, we're clearly seeing the shift out of high growth mega-cap tech companies and stay-at-home names into the more economically sensitive cyclicals and value names. What are the flows telling you, and is this shift for real, you think?

I think the important thing, Kirsten, is that we have seen a shift in some of the technical trends. I love technical analysis because it's basically the study of crowd behavior. It looks at prices and it looks at volume and it says, this is what the crowd is thinking. Now, you can have a long-term debate about whether technical analysis really works long-term and it makes money for people. and that's certainly been a hotly debated topic. For all 30 years, I've been at CNBC. But the fact is that there's been some very interesting change of sentiment in terms of the flows recently. So in the last month or so, when the concerned about COVID were very, very high, generally the volume was highest on the down days.

And on days when the markets rallied, the volume was much lighter. That has now reversed in the last several days, particularly last week. the volume has been very heavy on days when the market's been up. So this tends to tell me that there has been a certain amount of short covering likely in the market that is contributing to the volume and to the rally, but also that there is obviously more optimism around whether it's for the election and certain aspects of the market under Biden might do better or for the vaccine. So, for example, today, the S&P 500 ETF, the SPY, which I follow, every day, which is the biggest ETF out there, $300 billion in market assets under market.

Right now, we're looking at probably more than two to two and a half times the average daily volume. That's a very, very big day. So there's a certain, if you just look at the crowd behavior as it's reflected in technical analysis, there's definitely a change in behavior. more interest in stocks when they are on the upside than when they are on the downside. Obviously, the vaccine news is a huge deal, but is the market looking overbought to you at these levels? What are some of the relative strength indices or RSIs and other momentum indicators of certain ETFs telling you about where we are right now? Well, Kirsten, on a technical level, again, going back to the technicals,

the market is getting overbought. The RSI, the relative strength index on the S&P, is a little over 6.5. right now. Traditionally, when you get towards 70, it's overbought. Other aspects of the market are a little more obviously overbought right now. So, for example, semiconductors are near 70. That's overbought territory. These are short-term indicators, but normally it tells you, these indicators, these short-term indicators tell you that there's only so far the market can keep going up every single day. It just stops normally. And when you start getting over those 70s, which sort of measures the strength of the market over a two-week period, it normally stops.

So we're getting near that. The question is, does it really matter if we're really overbought? So I think the answer is it depends. I think if you look at the sub-sectors, the rally in cyclical value is really debated right now. So for sectors that have been decimated, like airline stocks, recent rally that we've had, I don't think it's an obstacle for them going higher. They have a long way to go. I mean, look, Delta was $60 in February. So now it's 30 and change. It's up today. But there's a long way to go between $30 and $60. Delta is probably going to lose $10 this year. Maybe they'll make money next year. We don't know. That's the problem. We don't know what the earning situation is going to be like. For others, like industrials, I mean, they've had a huge rally that we've seen. And many

are at New High. So you look at Honeywell. Honeywell is $160. last week. Now, it had good earnings and good guidance, but, you know, it opened a 215 or 210 today. I mean, heavens, they're only going to make, I think, $8 next year. That's 25, 26 times forward earnings. That's a very high end for Honeywell of what it historically traded at. So my point is, there's going to be valuation debates now on some of these sectors. Banks down dramatically throughout the year. But again, you know, if you look at some of these stocks at how they rallied recently, you know, it's a long way to go, but J.P. Morgan was trading, you know, about $130 back in February, and, you know, today it's about $120 almost at the open today. Okay, well, that's not the

same as, you know, 130, but it ain't far away. And I think the whole point here is that valuation is going to become an issue down the road. My, the person who had the most influence on me was probably Jack Bogle at Vanguard. And he always used to say stock prices are a combination of three things. It's a dividend yield plus an earnings growth plus the P.E. Multiple growth. How much is the multiple going? So what we are having a hard time with right now is figuring out what the right multiples for these stocks are, particularly for these cyclical stocks. Because who knows what Delta is going to be able to do next year? Who knows what kind of loan growth J.P. Morgan will get? Because We don't know how much the economy is going to come back.

So there's a lot of confusion over the equation for figuring out stock prices right now. Yeah, we know the dividend yield. We can take a stab at the earnings growth, but how certain are we about what the right multiple is for, I don't know, I just mentioned Honeywell, 25 times forward earnings? That's really rich. I can tell you it hasn't traded anywhere near that multiple in the last five years. So people who would normally look out there and say, hmm, this stock is overbought. That's it for today.

I'm Bob Bizani. Thank you for listening. And make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETF Edge, CNBC.