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.
|
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.
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.
|
July 6, 2020
We've talked about the set up for positive surprises in the June economic data.
The data delivered last week. And we have more this morning. Here's another look at the big "V" recovery in theISM manufacturing index from last week's report.
Today we had a look at the services component of the ISM survey. That, too, was very hot — another "V" shaped recovery.
|
 |
Again, this is reflecting a policy response that was bigger than the damage. That means we should expect the numbers to continue to come in hot.
On that note, as stocks continue to rise, what's the appropriate multiple on a stock market where rates are zero, and where the Fed is a buyer of practically any asset that could become threatening to the economy (which already includes corporate bond ETFs, and would likely include broader stocks, if an unstable stock market became a risk)?
The answer is, the P/E on stocks can go much higher.
Remember, Warren Buffett made this point a few years ago, about stock market valuations in zero interest rate environments: He said when interest rates were 15% [in the early 80s], there was enormous pull on all assets, not just stocks. Investors have a lot of choices at 15% rates. It's very different when rates are zero. He said, in a world where investors knew that interest rates would be zero "forever," stocks would sell at 100 or 200 times earnings because there would be nowhere else to earn a return.
We don't have a "forever" commitment from the Fed (thankfully), but the Fed has vowed to wait until recovery proves to be sustained, before they will start moving rates — i.e. they will let the economy run hot.
At the moment, the P/E on forward earnings (estimates on S&P earnings over the next 12-months) is 21.8. That's on an earnings estimate that has been dialed down dramatically (on what is a pure guess from Wall Street).
As we've discussed in the past, when you have an environment like this, corporate America will always take the opportunity to put all of the bad news and bad scenarios on the table. If there's a write-down opportunity on an underperforming asset, now is the time to take it. It all resets the earnings expectations bar to a very low level, which makes it easy to step over (i.e. to beat).
But even if we assume the big earnings drawdown that Wall Street is projecting, and even if we remove zero rates from the argument, the average P/E on the S&P 500 is still cheap relative to the average P/E of the past 21 years (which is 25.4).
Plus, consider this: The valuation on stocks tends to run well above average, coming out of recession. Coming out of the 2001 recession, the P/E on the S&P 500 was 46.
With that, if we assumed a 20% decline in S&P 500 earnings and put a 30 multiple on it, we would have something around 4,200 in the S&P 500. That’s 32% higher than current levels.
|
