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.
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 …
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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.
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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.
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