I’m loving this work-from-home gig! I have a comfy office, my gourmet-cook Mister’s lunches rival his to-die-for dinners, I’ve got my best good-friend dog Anthony as my constant companion and if my PA weren’t so wounded, I’d boast of all the money I’m saving being homebound. No office gossip is working wonders on my character and productivity! I know I’m not alone. Clearly, many are chomping at the bit to get back to normal. A lot of eyes are on Georgia. One of the last states to shut down, it will start to reopen today, making it the first among many states with plans to lift shelter-from-home orders in the weeks ahead. Bank of America sees The Peach State as an important bellwether, both from an economic perspective and tactical point of view. If all goes well, it expects to see a sharp rebound in value/cyclical stocks, such as financials and industrials. If it goes poorly, it anticipates further increases in the VIX and additional market declines. A big element of uncertainty is the pace at which the consumer will re-engage, particularly with the "social-distance taboo" facing restaurants, travel and entertainment. Fundstrat estimates shuttering these businesses accounted for $240 billion of the country’s $8 trillion in annual consumer expenditures. While less than many may imagine, demand is unlikely to return to pre-crisis levels until a vaccine is widely available. Deutsche Bank sees the economy gradually returning, recovering just 40% of lost output and jobs by year-end.
The unprecedented stimulus flooding the markets is breathtaking! While European Union leaders continue to debate just how big they want to go, global stimulus under Cornerstone’s tally already has surpassed 20% of global GDP, with the U.S. up to nearly 40% of its GDP after this week’s passage of “Phase 3.5” stimulus bill. The Fed’s balance sheet has blown past $6.5 trillion—up $2.3 trillion in just six weeks—and is expected to reach $10 trillion. Money supply growth is surging. All of this has lifted credit markets and stocks, with equities holding on to gains and trading in a range. While so much stimulus has spurred some inflation fears, the better worry is the opposite. With the economy already in recession, unemployment soaring, demand collapsing and oil prices plunging, price pressures will be minimal at best in the near term. Even with a commitment to low rates for longer, real borrowing costs could actually surge if prices fall, complicating recovery efforts. Money supply velocity, currently at record lows, will tell the tale. Despite the daily deluge of negativity, the S&P 500 is down less than 14% year-to-date and barely negative year-over-year (y/y). This improvement owes much to the fact that sectors with the largest market capitalizations have outperformed so far this year, as they have for much of this secular bull. About 300 S&P companies have a weighting in the Index of less than a tenth of 1%. Five companies, on the other hand, account for nearly 20% of market cap—Microsoft, Apple, Amazon, Alphabet and Facebook. A simple average of the latest 12-month period P/E of these five stocks is 41.4x!
Oil’s turmoil doused a lot of “happy talk” about equities and recovery this week. Record oversupply is as much about the unwillingness of producers to be the first to significantly slow the spigot as it is about crisis-related demand destruction. JP Morgan sees the depth and duration of this slump hitting petro-linked assets in the currency, commodity and emerging-market (EM) credit markets far harder than the equity market, where energy accounts for less than 3% of the S&P of market cap. This helps explain why, for all the headlines around crude, the cross-asset impacts of oil briefly trading at a negative price were largely contained, with global equities down about 3%, U.S. and euro credit spreads marginally wider and various volatility gauges up trivially. Still, given short positions in large oil exchange-traded funds, JP Morgan fears a repeat of this week’s dynamics in a month, when the June contract expires. And it’s the spillover effects on the rest of the commodities/currency/EM complex that’s a concern. Agricultural markets are nearing 13-year lows, some EM sovereign spreads have widened toward cycle highs and numerous commodity currencies are close to cycle and in some cases all-time lows. Notably, copper prices, long a barometer of broad activity, have plunged. The equity rally has been driven by the belief the economy will soon re-open and this virus quarantine will become a distant memory. But if this is the case, Ned Davis Research wonders, why are 2022 oil futures priced at $37.10 per barrel? It sees the decline in commodities and rise in gold prices as being consistent with past bear markets and thinks it’s too early to be confident about the recovery. Quarantine is no problemo for this virtual girl. I will have to apply makeup for next week’s Skype meeting, that’s OK. Now how to work my new Prada shoes into the camera shot?
- Under-promising and over-delivering still-bad earnings With almost a third of S&P market cap in, earnings are missing estimates in aggregate by -3% but, ex-Financials, are surpassing expectations 6.6%, with 72% of companies exceeding their lowered projections. Q1 expectations are for revenues, earnings and earnings-per-share growth of 0.0%, -16%, and -15.2%, respectively. Ex-Financials, growth rates are -0.3%, -10.3% and -10.1%.
- A sign of things to come? While many questioned the legitimacy of China’s recovery, a broad array of private and public sector data appear to confirm it, including April’s second straight monthly increase in confidence among small and midsized businesses.
- Another sign the low is in While this year’s waterfall decline was the largest on record (dating to 1929), the rally was stronger than any of the 13 previous post-waterfall bounces. Ned Davis says this does not eliminate chances of a retest, but it notes big retracement rallies—the post-March 23 move is the third-biggest, trailing only 1940 and 1970 rallies—tend to be followed by milder retests.
- Q2 off to ugly start April services and manufacturing PMIs hit a record low and fell to an 11-year low, respectively. On the jobless front, new claims reached 26.5 million for the past five weeks, easily wiping out all gains since the Great Recession. And Redbook weekly same-store U.S. sales crumbled, with department stores down 40% y/y to a record low and discounters slowing dramatically as hoarding has come off the boil. So far this month, some mall owners and retail landlords reportedly have collected as little as 15% of what they’re owed.
- It’s ugly all over March’s unprecedented declines in European PMIs were followed by almost equally sharp contractions in April, with the monthly eurozone composite PMI hitting a second consecutive all-time low. The services component, which had held up better than manufacturing over the past year, saw a particularly dramatic fall as travel, tourism and hospitality-related sectors were clobbered. And Germany’s services and manufacturing PMIs plunged the most on record, while its Ifo gauge of business confidence hit a new record low.
- First small businesses, now states? Renaissance Macro estimates that states, suffering from huge declines in tax revenues on widespread lockdowns in activity, will need at least $300 billion to plug this year’s fiscal gap. The White House is signaling it favors the aid even as Senate Majority Leader McConnell says it’s time to hold off and suggested states instead could seek bankruptcy, an option that legally is a non-starter.
Zombie apocalypse? Given today’s context, Yardeni says an October 2019 Global Financial Stability Report entitled “Lower for Longer” instead should have been “Is a Zombie Apocalypse Coming?” Its conclusion: “In a material economic slowdown scenario, half as severe as the global financial crisis, corporate debt-at-risk (debt owed by firms that cannot cover their interest expenses with their earnings) could rise to $19 trillion—or nearly 40% of total corporate debt in major economies.”
One man’s castle is another man’s home Oil’s plunge coincided with the completion of the most expensive home in the world owned by Mohammed bin Salman, the Crown Prince of Saudi Arabia. In 2015, he paid almost $300 million for the 50,000-acre Chateau Louis XIV near Versailles, France. While modeled on a 17th-century French castle, the current chateau actually was built by Emad Khashoggi, nephew of the late billionaire arms dealer Adnan Khashoggi, who bulldozed a 19th-century castle to make way for the new chateau in 2009.
Not a good look, Madam Speaker Speaking of Marie Antoinette’s old stomping grounds, House Speaker Nancy Pelosi is featured in a recent video at her waterfront gated home in San Francisco showing off her super-expensive Sub-zero stainless steel freezer full of ice cream, saying, “I don’t know what I would have done if ice cream were not invented. I just wonder.” Strategas says she might as well have said, “Let them eat ice cream.”