Pro Perspectives 10/12/20

October 12, 2020

Stocks open the week up big.  Last week, it was many of the relative underperformers of recent years, that were the winners on the week:  small caps, infrastructure stocks, utilities.

Today it was a return of the seemingly indiscriminate flood of money into big tech.  Google was up 3.6%.  Amazon was up 4.8%. Facebook, up over 4%. Apple was up 6%. Twitter was up 5%.      

Is it stimulus? 

Despite a lot of jawboning over the weekend, a deal on stimulus doesn't seem any more likely. 

Is it China? 

Maybe.  The Chinese central bank removed a reserve requirement for financial institutions on foreign currency liabilities over the weekend.  This tends to be a move to weaken the yuan.  And that tends to move money out of China.  Money from China used to flow into our Treasury market, now there seems to be very healthly flows into a new store of value: U.S. big tech monopolies.

Is it earnings? 

Probably.  Third quarter earnings kick into gear this week.  We'll hear from Citi and JP Morgan tomorrow. 

As we know, Wall Street and corporate America will always take the opportunity to dial down expectations when possible.  They've been given the mother of excuses through the first two quarters of the year.  And they have taken advantage, setting the bar very, very low (if they have even provided guidance).  In the earnings game, expectations are set to be beaten.  And with an economy that has bounced back on the order of 35% annualized growth for Q3, we may see some broad and big earnings beats in the coming weeks. 

As of Friday afternoon, twenty-two S&P 500 companies had already reported, and twenty have beaten estimates.  So 91% of the companies have beat on earnings thus far.  And the average earnings beat is 25% above estimates. 

So, with a market looking for a 17% year-over-year earnings decline for S&P 500 companies in the third quarter, it appears to be set up for some positive surprises.

Stocks seem to be anticipating this, as we are sniffing toward the record highs in the S&P 500 today.   

Pro Perspectives 10/9/20

October 9, 2020

As we end the week, we continue to hear the talk of more stimulus.  And it continues to look like it won't happen.

Why?  Because there is little political gain for the democrats to accept a deal that doesn't advance/fund the agenda they look to pursue in a Biden presidency. 

Still, as we discussed yesterday, the economic rebound has been incredibly aggressive, on pace for 35% annualized growth for Q3.  The question is, will the bridge that has been created with the help of the PPP program and stimulus checks fall short?  If the economy doesn't fully open very soon OR if we don't get another relief package very soon, it's only a matter of time before the bridge runs out and the suffering is amplified.

My view:  If we get a democrat sweep, expect a massive package to come, to kickstart the Biden $2 trillion climate response plan.  If we get a republican sweep (much lower probability), expect a trillion dollar plus infrastructure package. 

A split Congress, in the case of either president, would mean no more money, unless we get an extended pandemic timeline.  In that case, history shows us that you get action from a split Congress only when they get scared.  

With the above said, the odds makers now have a "blue wave" priced at a better than 60% probability.  Given that it would clear a path for a big government spending package (even bigger deficit spending), the markets have started adjusting for that outcome.  For the week, that has resulted in higher stocks, higher interest rates, higher commodity prices, and a weaker dollar. 

Pro Perspectives 10/8/20

October 8, 2020

Third quarter earnings kick off next week with the banks.

JP Morgan and Citi will report on Tuesday.  Bank of America and Wells Fargo will report on Wednesday. 

These earnings should be very good.  Remember, the Fed is absorbing all credit risk.  And the Fed, Treasury and Congress have flooded the country with money.  This all makes the banks, profit printing machines. 

With that, even in a 31% economic contraction (in the second quarter), the banks put of big numbers (in some cases record numbers), while trying to manage those numbers down, by setting aside huge "provisions for loan losses."    

As we discussed after the Q2 reports, in this crisis environment, if a worst-case scenario were to unfold, even the war chest of capital these big banks have set aside wouldn't come close to absorbing the losses.  That's why the Fed, Treasury and Congress had to, and did, go all-in — and did so quickly — to neutralize the economic apocalypse scenario.  And there is no pulling back.  So, if they need to do more, they will.

What does that mean?  It means the tens of billions of dollars that each of the big banks have earmarked as loan loss provisions, will ultimately be used at the discretion of the banks to juice earnings in the future, where they see fit.

So, with that in mind, they have operated through the third quarter with a glide path to profits, and won't have the excuse to build bigger loss reserves in this coming report.   And they were operating in an economy that has done this over the third quarter … 

As you can see above, the latest Atlanta Fed GDP model is forecasting a 35% annualized growth in the third quarter – a huge bounce back.  If the fourth quarter grows at all, the economy should be at record output by early next year. 

Pro Perspectives 10/7/20

October 7, 2020

Stocks took a hit yesterday afternoon after Trump instructed his team to walk from negotiations on a big stimulus package.

Today, the losses in markets were fully recovered on this …

Just like that, Trump has put the ball back in the court of the democrats. 
 
It seems unimaginable that Pelosi and company would comply with this suggestion/demand.  They lose all leverage to get what they want out of a stimulus package (what they want is not in this tweet). 

Now Trump gets to tell the American people, he's ready to sign, to get money in your hands, to keep your business afloat, but the democrats refuse.  

And this could bring about the Executive Order option we've discussed.  

Remember, less than two weeks ago, in his testimony to the Senate Banking Committee, Mnuchin said there was there is $200 billion of unspent money from Cares Act 1.0, and $130 billion of unspent money from the Payroll Protection Program.  That's $330 billion. 

 
The airline and additional PPP money in his tweet totals $160 billion.  That leaves $170 billion in the kitty for stimulus checks.  In the last round, the government sent 160 million payments.  On a flat $1,200, for those that qualify, that would amount to $192 million.

As for markets, with the level of turmoil, most would expect to see the “flight to safety trade” working — with the dollar, treasuries and gold serving as a hiding place.  None are working. 

 
Rather, what seems to be at work in markets, is the positioning for a Biden Climate Change Plan.  The big loser in that, is the fossil fuel industry.  Biden has vowed to end fossil fuels. 
 

On the other hand, the big winner, on the week and month, has been utilities.  His plan targets net zero carbon dioxide by 2035, and a $2 trillion outlay. This would be a big payoff on the renewal energy investments that many U.S. utility companies have already made. 

Pro Perspectives 10/6/20

October 6, 2020

We've talked a lot about the ongoing fiscal stimulus negotiations, dating back to early August.  My view has always been, it's not going to happen.

Today we get this …    

Let's talk about how we got here …

First, the economy only contracted by 31% in Q2, and is only about to do 30%+ growth in Q3, because Powell (the Fed) was quick to respond with the bazooka of monetary stimulus back in March, and Mnuchin/Trump (Treasury Secretary/the White House) and the Senate were quick to coordinate an unthinkable $2 trillion fiscal stimulus package, that included cash handouts to consumers and businesses.

 
They locked down on March 16, and had a bill passed in the republican-led Senate on March 25.  All involved were only able to respond so quickly, and so aggressively, because of the lessons learned from their intimate involvement in the global financial crisis (just 12 years earlier).  
 
Lamenting an opportunity missed, the democrat-led house came around in JUNE with a package of their own, to respond to a problem that was already being addressed with the initial $2 trillion package, much of which had still yet to be spent.  

With that, the democrat package has always been about cramming in climate change initiatives, state and local government bailouts and voting reform.  And with that, there has never been a chance the republicans would give that ground.  So no deal. 

But, as we've discussed, there remains a path to getting money into people's hands. There is $200 billion of unspent money from Cares Act 1.0. And there is $130 billion of unspent money from the Payroll Protection Program.  Trump may reallocate those funds, once again, by Executive Order.  This would bridge the country to a full reopening of the economy (in the case of Trump re-election).  In the case of a Biden win, and democratic sweep, we would be sure to see the full democrat stimulus package deployed.  

What about a Trump win and a continuation of the split Congress?  I suspect we may see a war-time stimulus package, as he turns the focus toward "confronting our problems" (i.e. China). 

Pro Perspectives 10/5/20

October 5, 2020

What a weekend.  With the President's health outlook in question, the markets were set to unravel when the futures market opened Sunday night. 

And then Trump released a video, looking much better, and went for a drive to say hello to supporters outside of Walter Reed.  And the talks of being discharged started as well.  With that, Dow futures opened UP 130 points last night, and today stocks finished up close to 2%.  

Now, we are 29 days away from the election.  With the most protected man in the world now infected with COVID, and on the path to recovery, we have a lot of new pieces to the election puzzle.  COVID has for almost nine months been largely veiled in mystery.  Now it has been played out in front of the American people (and people around the world).  Not only has everyone seen the path of the illness and the therapeutics, but the country has also been struck with the reality that the virus is not just a health and economic threat, it's a threat to national sovereignty.  

So, the big question no one (yet) is asking:  With a virus from China now having threatened to take out the American President, will the election narrative change to, dealing with the Chinese Communist Party (CCP)?  

China was barely mentioned in the first debates.  And zero times, in the context of retribution or retaliation.  This may now quickly bubble up into the one and only issue in the election.  If that were the case, the advantage would clearly swing to Trump. 
 

    

Pro Perspectives 10/2/20

October 2, 2020

The media is in a frenzy over the President's positive COVID status.

They continue to overemphasize the "cases" data point.  And they conflate it as a high probability of death.

Let's review the facts …

Remember, we are eight months in since the first U.S. case was recorded.  And the death-to-diagnosed case rate is now at 2.8%.  But the CDC told us back in June that at least 10 times as many people have it or have had it (undiagnosed).  That slashes the death rate dramatically.  If we applied that factor to the current case count, the death rate falls to 0.28%.   

Moreover, antibody tests from a July published study in JAMA suggest the denominator in the ratio could be as much as 24 times higher (that would be nearly half the country has had the virus). 

More:  The CDC just published serology tests from late April that suggests, at that time, there were at least 11 times more cases in South Florida than were diagnosed, 12 times more in New York City, 6 times more in Connecticut, 16 times more in Louisiana, 10 times more in Minnesota, 24 times more in Missouri, 9 times more in San Francisco, 11 times more in Utah, and 11 times more in Washington state. 

This all suggests that death-to-real infection rate is within the range of the annual flu. 

 

Still, as the media persistently bangs the drum of "cases, cases, cases" day after day, it becomes the standard for the public perception on the virus. 

Let's talk about what happened with markets, with the news of the day. 

Interestingly, for the stock market, this was a day where the winners of the year were losers on the day, and the losers on the year, were winners on the day.

The Nasdaq was down 2.2%.  Small cap value stocks were up over 1%.

The sectors that have been hammered this year, were UP today too.  Below is the daily change for major sector ETFs.  Crude oil and natural gas were hammered (again) today.  Yet, the energy ETF was up big.  Financials were up.  Industrials were up.  Materials were up. 

    

What does this behavior in markets mean?
 

The democrats passed a revised version of their June stimulus plan last night (now at $2.2 trillion).  With plenty of money in that number for infrastructure, it appears that markets are betting that Trump's negotiators (Mnuchin and Meadows) and the republican-led Senate might cave under the additional pressure of Trump's situation. 

So far, it hasn't happened. 
 

Pro Perspectives 10/1/20

October 1, 2020

Stocks were broadly higher today. Crude oil and copper were crushed. 

Let's talk about crude. 

And it has to do with Trump (surprise!). 

There are three major forces at work against Trump. 

1) China  

China has spent the better part of the past thirty years executing on a plan to become the biggest, most powerful economy in the world.  They did so, in large part, by undercutting the world on price, which enabled them to build an export monopoly.  And they accomplished this by manipulating their currency — keeping it cheap.  The world allowed it. They liked cheap stuff, on the front end, but it came at with a big price on the backend.  

 
So, China was just years away from overtaking the United States as the world's biggest economy.  And then Trump became President, and threatened to reverse three+ decades of a perfectly executed plan by China.  To what extreme would they go to, to remove Trump? 

2) D.C. Politicians.   

Trump has blown up the game in Washington.  After four years in D.C., he remains an outsider.  And he's an equal opportunity career destoyer.  Democrat or republican, if you're against him, he will destroy you.  To what extreme would the career D.C. politicians go to, to remove Trump? 

3) Climate Change Activists

As we've discussed here in my daily notes, climate change activists believe that climate change is an existential threat to the world.  And the financial backing is nearly unlimited.  A group called Climate Action 100+ has the most powerful investors in the world (representing $32 trillion in assets under management).  And they have been dictating how major energy companies are deploying capital on new projects – forcing the pivot to climate responsible initiatives.  Major global government entities/cooperatives are also largely behind the activist movement, feeding the effort with cash and subsidies.   

They are all in, and near the finish line.  Standing in the way has been Trump.  They view Trump as a climate change denier, and therefore have explicitly said he (Trump) is an existential threat to the world.  To what extreme would the climate actioners go to, to remove Trump? 

The answer to all three questions, seems to be ‘whatever it takes.’

On the latter (climate actioners), it is a war against fossil fuels.  And they intend to take the industry to zero.

With this in mind, we've talked in recent months about the moonshot in Tesla. It seems clear that global capital has indiscriminately plowed into Tesla (likely by the entities mentioned above), as if this company represents the contra–oil industry. 

If that’s the case, if Trump is re-elected, Tesla might be the greatest short of all time.  This is quite a chart…    

Pro Perspectives 9/30/20

September 30, 2020

The debate was ugly last night, as expected.

If anything, it seems to be broadly agreed that Biden stepped over a low bar of expectations, and with that, gets some incremental gains from the election.

However, if we look back at the history of the past sixty years of debates/elections, there is no correlation between debate winners and election outcomes. As for the first debates, the winner of the first debate lost five of the past six elections. 

The democrats continue to push the narrative that the health crisis is still raging, and that the economy is in depression.  Trump didn't do a lot to dispute that, despite the clear data on hand. 

Below is a look at the CDC's chart of COVID hospitalizations.  
  

  

Remember "flatten the curve?"  The lockdown was all about preventing a run on hospital capacity. The country has since been open to increasing degrees since April (that's five months), and according to the data in the CDC's chart above, we currently have a whopping five COVID patients per hospital in the U.S., in the 50 and over age group.  And a percentage of those are hospitalized with COVID not because of COVID. 

Meanwhile, the positive surprises continue to roll in for the economy, in an environment where the size of the response has been far greater than the size of the economic damage.  You can see Citi's surprise index has sustained at sky high levels (relative to history). 
 

Adding to this, the report on Chicago PMI this morning showed a spike to a nearly two-year high – the huge snapback in business activity continues.

With the above on the economy and the health crisis, the election curiously still seems to hang on the topics of how to solve the virus and the economy. Trump continues to entertain the debate. 

Pro Perspectives 9/29/20

September 29, 2020

With the big debate tonight, let's take a look at the topics they will attempt to address, amongst the mudslinging. 

Here is my guess as to how it goes:

Topic #1: Trump and Biden track records.  

Trump:  I've delivered on my promises.  Biden: You inherited our economy. 

Topic #2:  The Supreme Court

Trump: I'm just following the Constitution.  Biden: You’re a hypocrite.

Topic #3:  Covid-19

Trump: I shut down the country, sent a ship to NYC, got emergency use authorization for treatments, brought private and public together to develop a vaccine in record time.  Biden: 200,000 have died. 

Topic #4:  The economy

Trump:  We had the best economy ever.  And it will be better than ever next year.  We got money into the hands of people, kept companies alive, and the economy is in a V-shaped recovery.  Biden: You presided over the worst economic contraction in American history. 

Topic #5:  Race and Violence in our cities

Trump:  You stoked this.  Biden: You encouraged this. 

Topic #6:  The integrity of the election

Trump:  The democrats are rigging it with mail-in ballot fraud.  Biden:  Trump has tried to rig the election by cutting postal service resources. 

That’s how I see it.  I suspect, Trump will be far more verbose.  I suspect Biden will not.  Everything else (before, in between, and following) will be what moves the needle (the attacks, and the retorts). 

Now, let's take a look back at the Trump/Clinton debates for clues on what markets did surrounding these debates, and into the election.    

Back in 2016, stocks finished up the day after each of the first two debates.  And in the day after the last debate, stocks were flat.
 

As we know, the polls didn't reflect the reality throughout.  As I look through them, Clinton was considered the unanimous winner in all of the polls, in each of the debates.  And of course, you can see the big swing in the stock futures on election night, as the market digested a big surprise.