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CORONAVIRUS 

• GLOBAL COVID CASES CONTINUE TO SKYROCKET, ESP IN THE AMERICAS

• FOLKS ARE BEGINNING TO RE-SOUND THE ALARM BELLS

• https://www.statnews.com/2020/06/25/covid-19-brain-complications/

• https://twitter.com/ScottGottliebMD/status/1276584179988340737?s=20

• https://twitter.com/BillHanage/status/1275985247277113346?s=20

• https://twitter.com/ashishkjha/status/1275988101047955456?s=20

• https://twitter.com/paulkrugman/status/1276914569034825729

FALSE NARRATIVES 

• “THE NEW CASES ARE ALL YOUNG PEOPLE”

• Young people still can face serious health risks, require medical capacity, and can spread this just as easily as anyone else. 

• San Antonio was reportedly short of medical supplies on Friday and Houston is nearing capacity.

• Obviously if regions are skyrocketing in cases consumers in those areas will retrench.  

• “DEATH RATE NOT INCREASING” 

• US data has shown that hospitalizations lag cases and deaths lag hospitalizations.

• 46% of the deaths from the diamond princess cruise ship occurred in the third month after the cruise ship set off, long after everyone had disembarked. 

• “WE WON’T SHUT DOWN AGAIN SO IT DOESN’T MATTER”

• This has obviously gotten dashed in recent days, but it is worth remembering that Sweden never did lockdowns and their economy got obliterated. 

• US whitepaper corroborates the Sweden case study and what we saw and are seeing in US economic data leading up to the March lockdown and today- 

“We find that COVID-19 induced high-income households to self-isolate and sharply reduce spending in sectors that require physical interaction. This spending shock in turn led to losses in business revenue and layoffs of low-income workers at firms that cater to high income consumers, ultimately reducing their own consumption levels. Because the root cause of the shock appears to be self-isolation driven by health concerns, there is limited capacity to restore economic activity without addressing the virus itself. In particular, we find that state-ordered reopenings of economies have only modest impacts on economic activity; stimulus checks increase spending particularly among low-income households, but very little of the additional spending flows to the businesses most affected by the COVID shock; and loans to small businesses have little impact on employment rates.” https://opportunityinsights.org/wp-content/uploads/2020/05/tracker_paper.pdf

• The country is re-shutting as I type

• CA GOVERNOR ORDERS BARS TO CLOSE IN LA, FRESNO, IMPERIAL, KERN, KING AND SAN JOAQUIN COUNTY - LAT

• “On Friday, Florida imposed new restrictions on bars, and Texas Gov. Greg Abbott closed down bars across the state as Houston issued a stay-at-home order.”

https://www.wsj.com/articles/coronavirus-latest-news-06-27-2020-11593250928?mod=hp_lead_pos1

• Europe shutting out the entire United States

https://www.nytimes.com/2020/06/26/world/europe/europe-us-travel-ban.html?action=click&block=more_in_recirc&impression_id=909665267&index=0&pgtype=Article&region=footer

• Governors of NY, NJ and Connecticut ordered travelers from eight other U.S. states to be quarantined for two weeks on arrival.  The 14-day quarantine applies to visitors from Alabama, Arkansas, Arizona, Florida, North Carolina, South Carolina, Texas and Utah, as well as tri-state residents returning from those areas. 

• Opentable bookings are now declining again for impacted states. 

• Auto leads are already declining again in Texas and other impacted states

• Truck sales, heavily exposed to Texas and the south, were down hsd% mtd through 1H June

• In the US, google searches for “unemployment” and “covid” are now increasing again in tandem. 

MARKET STRUCTURE

• Retail is now very long the market, which increases risk of a crash

• Brokers have noted this has recently been an extremely headline driven market- I suspect due to retail. 

• I suspect retail traders pushed institutional money into the market. 

• I now think with bad headlines coming, retail will start selling (if they were not the culprits last week) and will force institutional money back out again.  

• Option buying has surged, driving an increase in gamma. Dealers have to buy as stocks go up and sell as stocks go down, acting as a magnifier on market moves. 

• The overnight S&P500 index futures market is extremely illiquid, creating the risk of ‘liquidity holes’ with large price moves higher and lower on stop-loss runs. 

EQUITY SUPPLY & DEMAND 

• IRS just expanded eligibility criteria for early distributions from IRA or employee sponsored retirement plans without penalty.  

https://investornews.vanguard/what-the-cares-act-means-for-you/

• Universities are going to have to start liquidating endowments to fund operating losses from no football and no international students.

TECHNICALS

• It is now going to be very difficult for investors to look through upcoming 2Q prints, given we now have an uncertain outlook at best, but most likely a backwardated market given cases are now rising rapidly and states are re-entering lockdowns.  

• As a friend noted, “The long bet now really is let's hope people can stay clam even as economic data is horrible. When bad data comes out, some people will sell. That creates price mo the other way. And then everyone piles in. In order to be bullish you really have to believe markets will shrug off bad economic data for at least the next 6-18 months.  That is a lifetime in the markets.”

• S&P500 closed at low-of-day and low-of-week on Friday, signaling potential further selling pressure ahead. 

• SPY broke 20-day VWAP  

• SPY island reversal formation indicates likely short capitulation/gap higher followed by strong selling/price rejection and gap lower. 

• Breadth has collapsed

US EQUITY MKT VALUATION RICH ON STREET ESTS THAT ASSUME GROWTH IN 2021 VS 2019

• CPI INDICATES DOWNSIDE TO S&P MULTIPLE

OUTLOOK FOR FUNDAMENTALS IS POOR

• Biden now leads Trump by a wide margin. In December 2019, Biden pledged to roll back Trump’s signature tax cut legislation, which massively boosted corporate profits.

https://ig.ft.com/us-election-2020/

• As previously detailed, fundamentals are slowing again alongside the rise in COVID cases

• Global corporate tax rates are going to rise on the back of record government spending  

• USD strength will pressure US corporate earnings

• the technology sector could be hit the hardest due to high margins/decrementals and intl revenue exposure. This poses a headwind to the markets as this sector also garners a) the largest market cap and b) the largest multiplier of earnings to market cap, with multiple correlated to rev/earnings growth.

• Supplemental $600-per-week unemployment checks expire July 31.

• PPP workers will be laid off

• “I think a lot of the job gains from ppp loans will be reversed. It is artificial hiring. My business is pretty resilient but there are a few people I have on the payroll just for ppp. Letting them go in July. If your revenue is down after ppp loan period in July, I have to think these jobs are lost again.” -healthcare staffing CEO 

• Global new orders continued to decline m/m in June, as did employment, as indicated by Markit’s June flash PMIs 

• 2020 capex is currently budgeted -20%/-13% y/y for manufacturing/non-manufacturing sectors as of mid-May, as per the institute for supply management. Gross domestic private investment was 18% of US GDP in 2019.  

• Consumer sentiment is strongly linked to COVID. As per Richard Curtin, head of Michigan Consumer Sentiment survey:

• “The Sentiment Index rose by just 0.5 Index-points among Southern residents in June, and by only 3.3 Index-points among Western residents.”  

• “The resurgence of the virus will be accompanied by weaker consumer demand among residents of the Southern and Western regions and may even temper the reactions of consumers in the Northeast.” 

• A wave of companies are halting ad spend on social media, I suspect due to slowing demand.  

• US air travel remains BADLY depressed, and Europe is potentially banning all US travelers. 

• Mass evictions are coming; Potential nationwide eviction-and-foreclosure resistance movement

• Courts are about to get flooded by eviction hearings. Thirty percent of Americans missed their June housing payment.

• Supplemental $600-per-week unemployment checks expire July 31.

• ’I think we will enter into a severe renter crisis and very quickly,’ Columbia Law professor Emily Benfer, a housing expert who tracks eviction policies, told The New York Times May 30. Without government action, she warned, ‘we will have an avalanche of evictions across the country.’”

FUNDAMENTALS HAVE CONTINUED TO DETERIORATE

• GLOBAL PMI DATA INDICATES FUNDAMENTALS HAVE GOTTEN WORSE, NOT BETTER, SINCE MARCH

• THIS HAS BEEN BADLY MISUNDERSTOOD BY ECONOMISTS AND INVESTORS 

• Investors do not understand how to read a purchasing manager index (PMI)

• Global PMIs have continued to show month-over-month declines – sub 50 prints - while investors look at PMI charts (that look like a ‘v’) and cheer ‘beats’ vs expected #s.

• IF WE WERE IN FACT SEEING A V-SHAPED RECOVERY WE SHOULD BE SEEING 60-65 PRINTS ON THE PMIs. WE ARE CURRENTLY WITNESSING AN L-SHAPED RECOVERY, IE NO RECOVERY. 

https://ftalphaville.ft.com/2020/06/23/1592906906000/PMIs--perpetually-misleading-indicators--/

• FUNDAMENTALS HAVE BEEN OVERSTATED 

• RAPID RECOVERY IN US STOCK MARKET HAS PROVIDED A TAILWIND TO CONSUMER. LACK OF FURTHER INCREASE, OR WORSE, A DECLINE, WOULD PROVE DEVASTATING TO US CONSUMER SENTIMENT, SPENDING AND CORPORATE FUNDAMENTALS. 

• Alan Greenspan has said that every 10% move in the S&P equates to 1% +/- impact to US GDP.

• DESPITE THIS BOOST, CONSUMER SENTIMENT HAS STILL GOTTEN SMASHED AND REMAINS WIDELY DISCONNECTED FROM THE EQUITY MARKETS

• “The disconnect between financial markets and the real economy can be illustrated by the recent decoupling between the soaring U.S. equity markets and plunging consumer confidence (two indicators that have historically trended together), raising questions about the rally’s sustainability if not for the boost provided by central banks.

• This divergence raises the specter of another correction in risk asset prices should investors’ attitude change, posing a threat to the recovery. So-called bear equity market rallies have occurred in the past during periods of significant economic pressures, only to unwind swiftly.” -IMF, 6/22/2020

• POOR DATA HAS NOT BEEN FULLY CAPTURED/REFLECTED IN GOV STATS

• “Conducting the surveys that economic data releases are made of in a world where businesses are shuttered by coronavirus containment policies is not easy.  Sample sizes have been reduced, and site visits are not being conducted to find out why. If a national statistical office calls a company and no one answers the phone, the establishment is excluded from the data.”

• “This is a problem that we think is leading to an underestimation of the actual decline in economic activity.  If a business with 100 employees fails during a lockdown, no one answers the phone when the national statistical office calls to collect employment data.  So the loss of 100 jobs is not recorded.  

• Consider the May retail sales report for Australia:  If ABS calls a retail outlet to ask about activity in May and the store is closed—if no one answers the phone—then the establishment is excluded from that month’s survey result.  However, the right answer should be that this outlet is reporting zero sales.  The survey result will overstate actual sales because the sample under-represents outlets that have failed.”

https://www.hifreqecon.com/coronavirus-a-statisticians-nightmare/

• TRADE WAR ‘VIRUS’ IS ACCELERATING GLOBALLY – FULL EFFECTS HAVE YET TO BE SEEN

• Ed Yardeni believes, as do I, that the Great Depression was caused by global trade wars. From Ed Yardeni in his book, "Predicting the Markets" -

"This outbreak of protectionist sentiments reminded me of a similar outbreak during the late 1920s and early 1930s... the 1920s was a period of globalization, with peace, progress, and prosperity, yet by the early 1930s, the world fell into a depression that was followed by World War II near the end of the decade. My research led me to conclude that the great depression was caused by the Smoot-Hawley Tariff Act of June 1930... The tariff triggered a deflationary spiral that had a deadly domino effect. Other countries immediately retaliated by imposing tariffs too. The collapse of world trade pushed commodity prices over a cliff. Exporters and farmers defaulted on their loans, triggering a wave of banking crises. The resulting credit crunch caused industrial production and farm output to plunge and unemployment to soar. In my narrative, the depression caused the stock market crash, not the other way around as is the popular belief...” 

“Historian John Steele Gordon observed that US exports in 1929 were $5.25 billion, whereas by 1933, exports were only $1.68 billion...” 

“As countries successively raised tariffs, world trade fell by two-thirds from 1929 to 1934.... The producer price index (PPI) for industrial commodity prices plummeted 24% from June 1930 until it bottomed during April 1933."

• DATA 

• New export orders in global PMIs continue to get OBLITERATED.

• India (#7) vs China (#2)

• ”Days after a border clash with China this month in which 20 Indian soldiers were killed, New Delhi told firms to find ways to cut imports from China.”

• “The government is now consulting with companies on tightening curbs on 1,173 non-essential products, a trade body official said on condition of anonymity. They include toys, plastics, steel items, electronics and specific auto components - which feed vehicle manufacturing.”

• “This is on top of plans to raise trade barriers and import duties on around 300 products from China and elsewhere, as part of Prime Minister Narendra Modi’s self-reliance campaign.”

https://www.reuters.com/article/us-india-china-business/indias-auto-and-pharma-sectors-not-ready-to-wean-off-china-idUSKBN23W2LM

• US (#1) vs Europe (#2 in aggregate)

• US (#1) vs Canada (#10)

• https://www.reuters.com/article/us-usa-trade-canada-tariffs/u-s-set-to-announce-aluminum-tariffs-on-canada-by-end-of-week-bloomberg-idUSKBN23U0DW

• US vs Mexico

• US (#1) vs China (#2)

• China is not meeting their commitments on ag purchases and this deal looks increasingly at risk.

• Japan (#3) vs South Korea 

• China VS Australia 

• https://thenewdaily.com.au/news/national/2020/06/19/china-australia-hacking/

• Europe vs UK (#6)

• SOLVENCY ISSUES ACCELERATING

• In the past week, Blackstone missed an interest payment on $247mm hotel loan, and auto supplier Sona BLW Gmbh, a Blackstone investment files for bankruptcy

https://www.ft.com/content/1e1ce57d-aecc-44c7-8145-76071d13990b

• Forty-three U.S. issuers of leveraged loans sought relief on the terms of their debt in May, higher than the previous record of 25 in March 2009.

• “If the unemployment rate stays at the current rate for an extended period, bankruptcy filings will likely be two to three times higher than the peak in 2010, which was at 1.5 million.” – Epiq, 5/7/2020

https://www.epiqglobal.com/en-us/about/news/restructuring-bankruptcy/bankruptcy-filings-in-april-down-39-percent

• “Commercial Chapter 11 filings were up 48% in May as compared to May 2019 with a total of 724 new petitions, and up 30% over April with 165 new petitions. There was a slight increase month over month in U.S. bankruptcy filings. Across all U.S. bankruptcy code chapters, the total number of new bankruptcy filings in May 2020 was 39,943. This represents a 3.9% increase from April, which had 38,440 new filings.” - Epic, 6/3/2020

https://www.epiqglobal.com/en-us/about/news/restructuring-bankruptcy/chapter-11-us-bankruptcy-filings-up-48-in-may

• Moody’s analysis indicates tightening of bank credit is going to drive increased defaults, which is going to drive a decline in equity prices. 

Tighter Supply of Bank Credit to Businesses Widens Spreads and Warns of More Defaults 

• The willingness of banks to supply credit to businesses deteriorated considerably at the start of 2020’s second quarter. According to a Federal Reserve survey of bank loan officers, the net percent of responding banks tightening standards on commercial and industrial loans jumped up from the 0.0 percentage points of 2020’s first quarter to the 41.5 points of the second quarter. During the Great Recession, the net percent of banks tightening business loan standards peaked at fourth-quarter 2008’s record high of 83.6 points. 

• The simple unweighted average of the net percent of banks tightening C&I loan standards and the net percent widening C&I loan spreads shows a high correlation with a composite high-yield bond spread. This indicator of the tightness of the supply of bank credit to businesses jumped up from first-quarter 2020’s -10.4 points to the second-quarter’s +41.2 points. The tightness of the bank supply of business credit previously climbed to 41.2 points during 2008’s first half, 2000’s second half, and 1990’s third quarter. Like the current situation, each of the three previous episodes either overlapped a recession or was just prior to recession’s arrival. Moreover, each of the three previous episodes was followed by a substantially wider high-yield bond and a higher speculative-grade default rate.

• The index of the tightness of the bank supply of business credit also serves as a very meaningful leading indicator of the U.S. high-yield default rate. For example, the default rate generates very high correlations of 0.90 and 0.89 with the tightness of the bank supply of business credit from three and four quarters earlier. The median high-yield default rate was 10.5% a year after the tightness of the supply of business credit previously reached second-quarter 2020’s 41.2 points.

• When the default rate was soaring from a December 2007 low of 1.0% to a November 2009 peak of 14.7%, the month-long average of the market value of U.S. common stock had plunged by as much as 42.1% from its year earlier average in March 2009. 

https://www.moodysanalytics.com/-/media/article/2020/weekly-market-outlook-troubling-default-outlook-warns-against-complacency.pdf

• Cash is fleeing China

https://asia.nikkei.com/Business/Markets/Currencies/China-watches-big-cash-transactions-to-stem-capital-flight

Catalyst

Continued virus spread, realization this will not be a v-shaped recovery, earnings declines.