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.    

Pro Perspectives 9/28/20

September 28, 2020

The debate is tomorrow night. 

This will be one of the most interesting broadcasts in the history of television.

About 84 million people tuned into the first Clinton/Trump debate back in 2016.  That broke a record for presidential debates.  I suspect tomorrow night will blow that number away.  Muhammad Ali fights used to draw over a billion viewers.  Given the global consequences of this election, this debate might match those types of numbers.   

For the past month, the polls have shown a clear advantage to Biden.  And as we discussed on Friday, a Biden win would likely mean a ramp up of government guidelines on virus mitigation, which would include more restrictions on business capacity – more economic damage, with a strategy focused on the vaccine timeline.

The Biden scenario seems to be what markets have started pricing in since early August, which includes an increased risk of a deflationary bust.  With that, we've had lower stocks, lower commodities prices, lower gold (reversing some of the inflation trade).     

But the expectations bar will likely reset after tomorrow night. 

And today, with global markets broadly higher, we're seeing the pendulum swing back a bit toward Trump.

Now, with all of this said, with gold down about 10% from the highs of August, maybe the easiest bet here is on gold — not as an inflation hedge, but as a safe-haven, in the scenario of a contested election. 

Pro Perspectives 9/25/20

September 25, 2020

The first debate is Tuesday. And it appears at this point that both candidates will be in the same location, and on the same stage.  If that is indeed the case, we can probably throw out all of the polling to this point.  The debate will be the reset button. 

The markets have gone fairly range bound for the past two weeks heading into this event, so Tuesday will set the tone. 

If the biggest overhang for markets and the economy, right now, is the government policy on the virus, then we have two distinctly different strategies to evaluate.

Trump will clearly push to get the economy operating at full capacity, with the political obstacle of an election removed.  That would be good for a continued economic recovery, and good for stocks.  And we would be on path to see the inflationary impact of a policy response that has been far bigger than the economic damage (i.e. trillions of excess dollars floating around).

Biden, if we listen to the broader party line on the virus, would likely ramp up government guidelines on virus mitigation, which would include more restrictions on business capacity – more economic damage.  The strategy would be focused around the vaccine timeline.  Adding more economic damage increases the risk of a deflationary bust.  To counter that risk, he would need an aligned Congress to get a monster stimulus package passed.  That scenario requires a lot of pieces to fall into place.

Pro Perspectives 9/24/20

September 24, 2020

We’ve heard a lot this week from Jay Powell (Fed Chair) and Steve Mnuchin (Treasury Secretary) as they’ve addressed House and Senate committees on the coronavirus relief efforts.

Today the Senate Banking Committee had their shot.

The markets liked some of the headlines.  Does this mean the door might be open for a big, second fiscal stimulus deal now?  I doubt it.

Let’s talk about the takeaways …

First, as we know, these events are always used by politicians as an opportunity to grandstand for personal political gain.  They get face time on national TV, and they use it.  And in the current environment, they are sure to use it in attempt to further the narrative of the party.

This week was all about communicating to the American people that they want to get money to you, but the other side is obstructing.

That’s not a recipe for getting a deal done.  Moreover, history shows us that these massive packages only tend to get done when a crisis is at peak severity and both sides are scared.

With that said, with the funds for the extended federal unemployment subsidy set to run out, in some states, this week, we could be in for a very difficult October.

The democrats want a big “comprehensive” package.  The word comprehensive means they want relief money for state and local governments, and they want money to invest in their vision of the future.

The Republicans want a targeted package.  They want to address unemployment and small businesses, without bailing out what they deem to be mismanaged states.

Today, with both sides of the Senate committee belaboring over the need for more aid, Mnuchin offered up an easy and quick stop gap.

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.  He called on Congress to reallocate and reauthorize use of these funds, and send checks to the hardest hit small businesses.  Of course, that would further erode the negotiating positions within Congress.  So, that won’t happen.

But Trump may be able to reallocate those funds by, once again, using Executive Order.

Remember, while Congress has exclusive control of the purse, once it has appropriated funds, “the President and executive branch enjoy considerable discretion as to how those funds are spent” (paper on Presidential Spending Discretion and Congressional Controls, here).  Another executive order to get money in the hands of the unemployed and struggling small businesses would bridge the country to the election finish line, and leave big stimulus bullets to fire for the winner.

Pro Perspectives 9/23/20

September 23, 2020

We've been watching a big technical level in Apple the past couple of days as a proxy on global risk appetite. 

With a broad risk-off day in markets, let's take another look …

Apple finishes the day testing this big line again.  Remember this line represents the recovery from the pandemic-induced lows.  

Let's take a look at some other key charts to see if price might be telling us something …

First, here's a look at Copper.  

Copper is an industrial metals that tends to be an early signal on a turning point in the economy, and a good inflation hedge. With that, copper put in a bottom on March 19th, just two trading days before the Fed's announced it would backstop the corporate bond market.  It has since climbed 50%.  But we get a break of this big trendline today (similar to the line being tested in Apple). 

Is copper predicting a slowdown in the economic recovery?  Maybe. 

That would align with what's happening in gold. Gold is now down 10% from early August.
As we discussed earlier this month, as we approach a very high stakes election, we have a vacuum to be filled with uncertainty and speculation.  And we're beginning to see that play out in markets through some "de-risking" and some profit taking on inflation bets. 

As for uncertainty, there is plenty.  Adding to the mix, Trump said today that he expects the election "will end up at the Supreme Court" (i.e. a contested election).  And we also have an uptick in virus concerns. The UK stepped up "slow the spread" guidelines yesterday.   Israel has become the first developed country to go into a second lockdown.  And the head of the CDC said today that less than 10% of the U.S. has been infected by the virus.  

 

Pro Perspectives 9/22/20

September 22, 2020

Yesterday we looked at this chart below on Apple, as a proxy on the direction of broader stocks and on global risk appetite.

As you can see, Apple was testing a big trendline yesterday, which comes in from the pandemic-induced lows.

Here's how the chart looks today …

This line did indeed hold (at least, so far).  In fact, big tech (Apple, FB, MSFT, AMZN, GOOG) each outperformed the S&P 500 on the day. 

Is this money plowing back into the dominant monopolies that have crushed it in the stay-at-home economy?  Maybe.  The UK put its foot on the economic brakes this morning, by tightening up some lockdown restrictions.  And with cases rising here, this combination only emboldens the "stay-at-home" bets, which means buy big tech.   

Also, something a tech and global investor should find to be encouraging:  With all of the rhetoric out of Trump in recent years about regulating big tech, he had an easy one in the crosshairs to prove he meant business — TikTok.  But instead of banning it, as was threatened, he agreed to a bizarre deal. 

The takeaway here might be that two powerful American-based/born global companies (Oracle and Walmart) ended up playing mediator between Trump and China.  This could be a foreshadowing of how the U.S. and China could get to a place of co-existance again, in a Trump second term.  It may take powerful American companies, with big businesses in China, to broker a deal.