Pro Perspectives 7/20/20

July 20, 2020

Despite what has been billed as a terrible earnings season, thus far,
73% of S&P 500 companies have beat on earnings, and 78% have beat on revenues.

Again, these are beating a low expectations bar, but we are seeing the influence of the massive wave of intervention. Keeping consumers and businesses solvent through the shut-down, and attached to jobs coming out of it, has resulted in positive surprises on the earnings front. 

But the question is, will it sustain?  On that note, the biggest news this week will be progress toward another stimulus bill.

Here's what's at stake:  The big federal unemployment subsidy expires on July 31. That's $600 a week for the unemployed that goes away.  Add to that, the federal moratorium on evictions expires on July 25.  This all with unemployment at 11%. 

This is a formula for pain. 

And, unfortunately, it brings us to a collision course of gridlock coming on Capitol Hill. 

The Democrats have already crafted a $3 trillion plan.   The Republicans are now working on a $1 trillion plan.

I suspect we'll get neither. 

The Democrats are fighting to extend the $600 a week federal unemployment subsidy through January.  Based on the number of unemployed that are making more on unemployment than they would working, this could keep more than 60% of the unemployed at home through January.  That clearly handicaps the economy.

To counter this proposal, Republicans have been looking at "back to work bonuses" that would expire right around the election.  That would get them back to work.  And for minimum wage workers, they would make more, adding in the Federal subsidy, than they would have made on unemployment.  

If push came to shove, the Republicans might give way on the unemployment beneift. But, as we've discussed, the catalyst for gridlock on another stimulus bill has everything to do with mail-in voting.

The Democrats have continued to work through strategies to cram mail-in voting into legislation.  That would probably seal the election for them. 

The Republicans would have no choice but to reject it.  With that, I suspect the Democrats will hold the economy hostage for it. We will see.

Pro Perspectives 7/17/20

July 17, 2020

Yesterday, we looked at the COVID story, through a simple and clear lens — the data.  

Contrary to the hysteria in the media, the raw data tells us that the death rate is moving lower, and has been moving in an orderly trend lower since mid-May. 

Add to that, we took two very important observations from two very important voices in this crisis (the CDC and former FDA head Scott Gottlieb — the same authority figures that the media relies on to validate their draconian stories and positions on the trajectory and threat of the virus) and we found that the death rate, if we include the undiagnosed (per their projections), is between 0.4% and 0.2% (near the ten year average flu death rate of 0.137%).

Now, with this backdrop in mind, let's revisit what we have on the liquidity front: 

We have we have $3.3 trillion in fiscal stimulus now working through the economy.  And the Fed has pumped $3 trillion into the system since March.  That’s a total of $6.6 trillion.  And it’s estimated that, with the Fed’s other facilities, the Fed could inject up to another $3 trillion+.

This doesn’t even include the massive amounts of money the banks are creating, with a zero reserve requirement. On that note, if we look back at the Global Financial Crisis response, where the Fed expanded the balance sheet from $870 billion to $4.5 trillion.  The money supply grew from $7.4 trillion to almost $14 trillion.  That’s a double in the money supply.  If the money supply doubled this time, we’d be looking at over $15 trillion of new money circulating in the economy.

Still, despite the better than expected trajectory on the health crisis, and despite the unimaginable amount of new money floating around, the expectations bar for the economic data has continued to be in the gutter.

But the data don't lie.  That's why we have this chart …

We looked at this Citi Economic Surprise Index a couple of weeks ago, which shows us how economic data is reporting relative to expectations.  As you can see, there has been and continues to be a dramatic disconnect in what the expert community thinks should be happening, and what is happening. The economy is bouncing back aggressively.

This view on the economy reminds me of the view on the NY health crisis.  Remember, we followed the chart on daily intubations in NY hospitals, very closely back in April. 

The daily narrative surrounding the crisis was doom and gloom everyday from the media and the NY Governor.  And neither the media nor the Governor would report on the effectiveness or progress of the experimental treatment options that were being utilized in the NY hospitals (maybe the most important information everyone needed to know). 

 
But the daily intubations told the story for them. When the data started turning south (i.e. showing less intubations), and then went negative, it was clear that something was working.  The data don't lie. That was the turning point in the health crisis, overall. 
 

Pro Perspectives 7/16/20

July 16, 2020

I like primary research.  I don't like to rely on journalists to interpret the world for me.   

With more than 24-years of experience in global financial markets, I know very well how the financial media interprets markets, and financial and economic data.  It's often: 1) wrong, 2) interpreted with a bias, or 3) presented with a shocking headline that is misleading, if not unsupported, by the article itself (most importantly, unsupported by the facts).  Many times its all of the above. 

That's why, when the Fed Chair speaks. I listen to the words coming out of his mouth.  I don't rely on a journalist to tell me what he said.  Similarly, when there is economic report, I read the original report and look at the data (and analyze it within the context of historical data, and the bigger picture).  I don't wait to read about it in the Wall Street Journal.  

With the above in mind, we would all be better informed on the virus, if we looked at the data ourselves. 

In that vein, Harvard has compiled a database with time series data on Covid cases and deaths, by day, by country.  This is the only place I've found the raw time-series data on deaths.  You can see it for yourself here.  

This is useful because we can look at deaths as a percent of cases in an historical chart.  And it gives us a very simple big picture view of the virus. 

Let's take a look. 

In the above chart, the x-axis is "days since the first diagnosis of a Covid positive case." You can see that deaths as a percent of cases is 4.15% (the far right of the chart), and has been moving lower since mid-May.  That May peak is right in the heart of "phase 1" reopenings of state economies.  

Now, a few weeks ago, the CDC chief told us that we've likely only diagnosed about 10% of those that have, or have had, the disease in this country. That's based on surveys of blood samples taken around the country.  So the CDC thinks the infection rate (i.e. cases) should be multiplied by a factor of 10.  

If we do that, the death rate comes down to 0.42%.  That's about 3 times the ten year average death rate of the annual flu. You can see that flu death rate in the green line in the chart below (and that's with a vaccine).

Next, the former FDA commissioner, Scott Gottlieb, has said the mutiple could be as much as 20 times higher. Remember, as we discussed back in April, there was an antibody study on 3,000 New Yorkers that showed a 14% infection rate.  In New York City, the number extrapolated from that study was 21%.  Wake Forest has run a large antibody study since April, which now suggests 14% of North Carolina residents have or have had the virus. 

So, Gottlieb's high-end projection would put the U.S. infection rate at about 20% (more than 70 million Americans).  If we use that 20x multiplier on the current infection rate, the percent of deaths-to-cases drops down to 0.21% (chart below). 

That's slightly higher than the flu death rate.
So, the death rate has gone down since mid-May, for a couple of reasons:  1) treatment options are working, and 2) the large majority of people are simply defeating the disease on their own, and more of those types are being revealed with more testing (and those people are testing because they are being forced to test to return to work OR because they simply can, now that testing is, largely, open and free for asymptomatics).  
 
Based on charts two and three, we should expect the rate-of-change in the death-to-cases ratio to decline more quickly as the rate-of-change in testing continues to increase.  

Pro Perspectives 7/15/20

July 15, 2020

Yesterday we talked about the banks, in particular, the record Q2 performance of JP Morgan. If you needed more convincing that the trillions of dollars in stimulus were a gift to the banks, Goldman Sachs should have convinced you today. 

Goldman grew revenues by 41% compared to the same period a year ago (second biggest quarter ever).  And they beat the street’s estimate on earnings by 65%.  That’s one of the best quarters ever, and that’s after they stripped out (set aside) almost a billion dollars in profits for “provisions for litigation and regulatory proceedings.”  This is Goldman’s version of earnings management, nothing different the $26 billion set aside yesterday by Citi, JPM and Wells for “provisions for bad loans.” 

Bottom line, with the Fed absorbing all credit risk, and flooding the country with money, the banks are profit printing machines. 

With that, as we discussed yesterday, this should be a greenlight to buy the bank stocks.  And that’s supported by this very compelling chart …

In this chart, you can see we have a big technical reversal signal (an outside day) in technology stocks (the XLK) on Monday.  And now we have the banks revealing their position of strength in this bazooka-stimulus world.  Perhaps we have a reason to finally see some money rotate out of the high flying tech giants and into financials. 
 

Pro Perspectives 7/14/20

July 14, 2020

JP Morgan and Citi reported this morning before the open.  We talked about the backdrop for these reports yesterday. 

We expected to see big loan loss provisions.  Check.  JP Morgan, Citi and Wells Fargo set aside more than $26 billion in allowance for futures losses on loans. 

And yet we talked about the likelihood of seeing good, and maybe very good performance from the banks on the quarter.  For JP Morgan, the biggest U.S. based global money center bank, it wasn't just good, it was record setting good.  

They reported a record $33 billion in revenue — a 15% growth rate, year-over-year.  That's one of the largest banks in the world growing at 15%! 

Wall Street was looking for EPS of $1.04 (that's down 63% from the same period a year ago).  They reported $1.38.  That's a beat.  Great.  But that doesn't nearly describe the quarter. 

Let's take a look at what really happened. 

As we discussed, it was a given that the banks would take advantage of the environment and take a huge provision for loan losses.  In JPM's case, they set aside over $10 billion from the quarter, to ramp up an already huge loan loss reserve war chest. 

On the one hand, it looks like they're positioning themselves as ultra-conservative on the economic outlook.  On the other hand, if a worst-case scenario were to unfold, having the JPM war chest of $34 billion 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.  If they need to do more, they will.

With that in mind, as we discussed yesterday, because policymakers have protected the balance sheets of consumers and businesses, and because policymakers have pumped trillions of dollars into the economy, and intervened to ward off threats to the financial system, the banks were given glidepath to print profits. 

With that, JPM reported record markets revenue (up 79%) in the quarter.  Investment banking fees were up 54% in the quarter.  Deposits were up 20% in their consumer business and 41% in their commercial business.  Loans were up 13%.  Overall, JP Morgan created $1.2 trillion of credit in the second quarter. 

Bottom line:  We expected the banks to "take cover" from a broad economic crisis, to manufacture lower earnings.  They did.  But if we strip out the loan loss provisions, things look very different.  JPM would have made a record $3.57 in EPS.  That's 27% earnings growth from the same period a year ago. 

It's time to buy the bank stocks. 
 

Pro Perspectives 7/13/20

July 13, 2020

Second quarter earnings kick into gear this week.  We’ll hear from the big four banks in the coming days. 

JP Morgan and Citi will report tomorrow before the open.  We hear from Wells Fargo tomorrow too.  And then Bank of America on Thursday. 

We should expect all of corporate America to take this opportunity, in their Q2 earnings reports, to put all of the bad news they can muster on the table. 

In a widespread economic crisis, this is their chance to write down the value of anything they can justify, take loss provisions on as much as they can, and set the bar as low as they can, so that in the quarters ahead, they can outperform expectations. 

That said, let’s take a look at what the market is expecting from the big banks.

The market is looking for a 63% decline in earnings at JP Morgan, compared to the same period last year.  The consensus view on Citi is an 85% decline (yoy EPS).  At Wells Fargo, their looking for a swing from $1.30 a share in Q2 of 2019, to a loss of 20 cents a share.  And at Bank of America, their looking for a 63% decline.  

Now, we’ll see the kitchen sink of loan loss provisions (i.e. guesses on what losses may materialize in the future) in these reports.  They will put these out there, because they can.  But remember, the Fed, Treasury and Congress have already pumped trillions of dollars into the economy to keep consumers and businesses solvent. That’s a direct backstop (protection) against these “provisional loan losses.”   

Add to that, the Fed has created tremendous revenue opportunities for the banks. They’ve eliminated the reserve requirement for banks — taking the ratio from 10% to zero.  The banks are now incentivized to make an infinite amount of loans.  The Fed has also become a buyer of corporate bonds, reducing risk in the credit markets, which has driven record first half volume in new corporate debt issuance.  That drives investment banking business at the big banks. And the liquidity deluge from the Fed has created a broad stock market boom, which drives trading revenue. 

With all of this said, don’t be surprised if the bank earnings (ignoring loan loss provisions) come in better, and maybe much better, than expected.  We will see.   

Pro Perspectives 7/10/20

July 10, 2020

The NY Fed’s GDP forecasting model is now looking for a contraction of only 15% for Q2.   

This is a dramatically improved outlook from just a little more than a month ago, when it was projecting a down 35% quarter. 

Of course, we’ve been looking at the Atlanta Fed’s model here in my daily Pro Perspectives notes, which has been projecting as dire as -54%— again, as recent as just a month ago. 

That model is now projecting down 35%. 

As I said in my June 4th note, at the trough of these projections, these expectations are set to be beaten.  And they have been. 

Here’s the latest snapshot of the evolution of these models …

So if we assumed an outcome somewhere between these two models, we’re talking about a loss of economic output in the range of $750 billion to $1.8 trillion. 

Now, with this in mind, remember the simple theme we’ve been discussing here for the past few months, as the data began rolling in. 

 
The theme: “The response (by policymakers) is far greater than the damage.“

Remember, we have $3.3 trillion in fiscal stimulus now working through the economy.  And the Fed has pumped $3 trillion into the system since March.  That’s a total of $6.6 trillion.  And it’s estimated that, with the Fed’s other facilities, the Fed could inject up to another $3 trillion+. 

This doesn’t even include the massive amounts of money the banks are creating, with a zero reserve requirement. On that note, if we look back at the Global Financial Crisis response, where the Fed expanded the balance sheet from $870 billion to $4.5 trillion.  The money supply grew from $7.4 trillion to almost $14 trillion.  That’s a double in the money supply.  If the money supply doubled this time, we’d be looking at over $15 trillion of new money circulating in the economy.

 
Let’s do some math:  $15 trillion minus $1.8 trillion equals a lot of excess money.

The response is far greater than the damage.  Again, this means, the nominal price of practically everything is going higher – much higher.  

Pro Perspectives 7/9/20

July 9, 2020

Yesterday we talked about the Chinese government's initiative to promote a "wealth effect" from the Chinese stock market.

There are about 230 Chinese companies listed on the Nasdaq and New York Stock  Exchange. 

Let's take a look how a few of the biggest Chinese stocks, listed and tradable on U.S. exchanges, are performing. 

First we have Alibaba (symbol BABA), China's biggest (and one of the world's biggest) e-commerce platforms and one of the biggest cloud companies…

It has broken out.  This is a $650 billion company that is up 24% since early last week.  

Next, is JD.com (symbol JD).  JD is China's biggest e-retailer, and with its infrastructure, the closest to China's version of Amazon.  
This stock (JD) has gone vertical since late May, which happens to be when the Senate passed a bill to de-list Chinese companies from U.S. exchanges.  Of course that would have to get through the House too, which seems unlikely. 
 
This chart above is Chinese Life Insurance (symbol LFC).  Unlike the two tech giants, this stock is moving off of the bottom.  It's up 36% since early last week. 

Another stock moving off of the bottom is Petro China (symbol PTR).  This is the fourth largest Chinese ADR, by market cap, and is up about 12% from last week.  
Finally, here's Tencent (symbol TCEHY).  This is one of the most powerful companies in China. This stock, too, has broken out in the past seven trading days. 

Pro Perspectives 7/8/20

July 8, 2020

China kicked the week off with reports that the Chinese government wants to see a "wealth effect" from their stock market. 

So, let's take a look at how it's playing out. 

Here's a look at the Shanghai Composite …

You can see Chinese stocks are on the move.  The Shanghai Composite has jumped 14% since Tuesday of last week. 

And as you can see in the chart, if you scan back to the 2014-2015 period, the Chinese stock market can inflate, and can inflate quickly.

If the Chinese government wants it, they will get it.  Japan has, for some time now, been an outright buyer of Japanese stocks.  The Fed is now involved in the U.S. stock market, buying corporate bond ETFs.  China looks like it will follow suit, using stocks as a tool to promote economic recovery. 

With that, how do you play it?  

The top two (by assets) U.S. exchange traded ETFs on Chinese stocks are MCHI and FXI. Both are up over 15% since the middle of last week. 

Pro Perspectives 7/7/20

July 7, 2020

Last Tuesday, with inflation data hitting that was confirming the rise in wages and the rise in input prices, our chart of the day was gold.

We looked at this chart of gold prices, at a new eight-year high, and just a few dollars away from breaking out.  

We had the breakout today. 

Gold has now cleared the way for a run to the 2011 highs of over $1,900.  But it won't stop there.  With trillions of dollars of new global money floating around, gold has all of the ingredients for a double, or more, from here.   

Sticking with the inflation-signaling commodities, here's a look at the chart of copper — which also looks like a technical break is coming in the days ahead …

Factoring into these two charts above, the mal incentives of the Federal unemployment subsidy are now being exposed, as employers are have trouble competing with the government to get employees back to work. 

As we've discussed, once low wage workers were given a glimpse of what the government deems to be a living wage (and it's higher than they were making at work), they demand a higher wage to return to work.  That's what's were seeing. And this will be just one of the many contributors to upward pressure on prices.   

Remember this chart …