Back to School

361 Capital Market Commentary | August 17th, 2020

A short note as I am off to college today to help my oldest move back in after her hurried exit from the Empire state in March. Lots of post-COVID firsts for me today as we head to New York. First flight, first hotel, first car rental and the first time that I am more than 10 miles away from home. I am looking forward to traveling again.

So, prepare for another week of very low market volumes as others help their kids get ready for the start of school and wind up their summers. Of course, this year’s benefit for many will be that the second home will become the WFH/SFH primary residence. Go broadband!

Congress left town without a new COVID aid package, so now we have to wait to see if, and when, they will agree on a new one. The longer they take, the more expensive the package will become. Goldman Sachs slid their estimate up from $1.5 trillion toward $2 trillion over the weekend. And with each passing day, the outlook for consumer spending, rent/mortgage collections and small business sustainability dims. The strategists and debt/equity analysts are watching the news from the beach and mountains while beginning to pencil how much they will need to cut future GDP and corporate earnings estimates. The posted cuts will begin as we get closer to September and everyone returns to Work Zoom.

As financial outlooks for consumers and businesses dim, expect corporate bond issuance to remain bright. Not only is the U.S. Government borrowing at record amounts, but all industries and credit qualities are issuing all the paper they can while the markets are open. The size, combined with some isolated inflationary pops, are beginning to weigh on the prices of longer bonds which have corrected 5% in the last two weeks. We will need to keep an eye on this.

The new volatility in the bond market and the increasingly hazy outlook for the U.S. economy has got my attention. While I do think that Congress will get a new COVID aid deal agreed on and passed, the timing of it is now a big question mark. If they don’t get a deal done during September, then there is the possibility that they could run this into a U.S. Government shutdown in October. I don’t think any incumbent wants this to happen, but the snail speed of Congress in acting will definitely hit consumers and small businesses.

Given that many of our stock prices have run up and through our 2020 target prices, I think it’s a prudent move to take some chips off the table where you have flexibility. For example, if you rode that large UPS position from the $100 level to a supersized $160 price today, you might think about cutting it back to give yourself some room if the market hits a bump. We can still like the company and its 2.5% dividend yield, but with the stock fully valued in the short term, we won’t have much room to add to it if it falls back to a 3-4% dividend yield like when we bought it. You probably have many positions like this in your portfolio that you should take a close look at if you have tax flexibility.

Some other interesting items worth watching during this slow news tape:
• China opens Macau to tourists
• Carnival to start some cruise ship sailings in September
• The China trade talks were postponed
• The DNC will have its virtual convention this week
• The week also brings retail earnings coming from the giants: Walmart, Target, Home Depot, Lowe’s
• Berkshire’s quarterly filling shows that they cut back on their banking/financial exposures, while adding one new position in a gold miner—interesting given Warren and Charlie’s past comments about gold and miners.
• Barry Diller’s InterActive Corp bought 12% of MGM to get access to their online gambling exposures

So, have a great week and maybe I’ll see you in an airport or hotel lobby.

Worth noting as more rents are likely to be missed for September…

One-third of U.S. apartment units are in Class C space.

Rent Collections Decline


With all of the financial uncertainty, consumer sentiment remains weak with few expectations that it will get better in the future…

UMichigan Consumer Sentiment Index

Main Street is about to get stressed as they don’t have the access to the capital that Wall Street is now providing to the biggest firms…

@TaviCosta: Powell better step up…
Credit lines for small firms are getting drastically more expensive.
A massive divergence from junk bond yields.
Credit conditions are still tightening under the hood.

Cost of Credit Lines

Big companies have no problem tapping the corporate bond markets today…

Ball Corp. sold $1.3 billion of junk bonds at record-low yields amid a rally triggered by the Federal Reserve’s historic support for the market and heavy inflows into funds that buy the risky debt.

The aluminum packaging company priced the 10-year notes at a 2.875% yield, according to a person with knowledge of the matter. That’s the lowest-ever for a U.S. junk bond with a maturity of five years or longer, according to data compiled by Bloomberg.

The debt deal comes amid a surge in issuance from high-yield borrowers seeking to cut interest expense on existing debt as yields approach unprecedented lows of 4.95%. They closed Friday at 5.31%.

Companies are capitalizing on a credit rally that keeps on giving, initially sparked by the Fed’s foray into the market in March and since supported by months of heavy inflows. Investment-grade firms are reaping the benefits too, with yields at an all-time low of 1.82%.


Yields Plummet

A much different story if you are a Main Street small business looking to your bank for help…

@ISABELNET_SA: Bank Loans According to BofA, banks won’t lend, as nearly three-quarters of loan officers reported tighter bank lending standards in the second quarter

Banks won't lend

The U.S. COVID case numbers continue to head in the right direction…

Absolute numbers are still massive, but at least the greater awareness and preventative measures have flattened the recent curve.

Change in new COVID-19 cases


Testing up, cases down and hospitalizations falling…

Nationwide COVID-19 Metrics

The saliva test gets FDA approval…

This should be a huge event. Now you will be spitting in to a cup before you enter a building, get on a plane, or go to a football game. No more long swabs or needles.

Today, the U.S. Food and Drug Administration issued an emergency use authorization (EUA) to Yale School of Public Health for its SalivaDirect COVID-19 diagnostic test, which uses a new method of processing saliva samples when testing for COVID-19 infection.

SalivaDirect does not require any special type of swab or collection device; a saliva sample can be collected in any sterile container. This test is also unique because it does not require a separate nucleic acid extraction step. This is significant because the extraction kits used for this step in other tests have been prone to shortages in the past. Being able to perform a test without these kits enhances the capacity for increased testing, while reducing the strain on available resources. Additionally, the SalivaDirect methodology has been validated and authorized for use with different combinations of commonly used reagents and instruments, meaning the test could be used broadly in most high-complexity labs.


Coronavirus Update

Just incredible how well New Yorkers shut down COVID…

Health experts in New York City thought that coronavirus cases would be rising again by now. Their models predicted it. They were wrong.

New York State has managed not only to control its outbreak since the devastation of the early spring, but also to contain it for far longer than even top officials expected.

Now, as other places struggle to beat back a resurgence and cases climb in former success-story states like California and Rhode Island, New York’s leaders are consumed by the likelihood that, any day now, their numbers will begin rising.

The current levels of infection are so remarkable that they have surprised state and city officials: Around 1 percent of the roughly 30,000 tests each day in the city are positive for the virus. In Los Angeles, it’s 7 percent, while it’s 13 percent in Miami-Dade County and around 15 percent in Houston.


Park in NYC

Also, Russia released their vaccine into the world last week…

Tweet from @IvanTheK

Equities continue their upward march, while the bond and gold markets pause…

@allstarcharts: After all-time high monthly closes in July for the S&P500, Gold and US Treasury Bonds, we’ve seen some change in that dynamic so far in August

A much more cyclical stock theme to August…

The Market's New Vibe


Likely hitting bonds: longer-term, market-based inflation expectations continue to grind higher…

USD 5yr Inflation Swap
(The Daily Shot)

Gold prices made it through a big resistance level. Now can they stay there?


Someone in Omaha thinks gold prices will remain healthy…

@ivan_brussels: Berkshire Hathaway portfolio changes Q2 2020 Source: Dataroma

Berkshire Hathaway Portfolio Changes

In other commodity prices, the grains and meats have been on the move recently…

Invesco DB Agriculture Fund

And, as world trade recovers and airline capacity falls, the container prices to ship goods is seeing five-year highs…

The cost of moving goods by ship has climbed 12% in 2020 to the highest in 5 1/2 years, according to the Drewry World Container Index.

“Ocean-liner rates have benefited from the industry being more disciplined with idle capacity, coupled with support from general rate increases and peak-season surcharges,” said Lee Klaskow, a senior analyst with Bloomberg Intelligence. At the same time, “Asian exports are showing signs of improvement due to U.S. restocking activity.”

Limited passenger flights, which handle about half of the world’s airborne cargo, have created a significant reduction in available belly capacity, which has helped drive rates higher despite a decline in demand of about 19%.


Choppy Waters

China’s domestic air travel is nearly fully recovered…

China domestic vs. international air travel
(Goldman Sachs)

And Chinese mall traffic is at about 85% of pre-COVID levels

“China is a pretty good example as a post-COVID example. By late March, nine weeks after the country shutdown, 90% of the malls reopened and traffic has recovered to about 85% of the pre-COVID levels. That is very similar to the numbers we’re seeing in the U.S. Our town centers are a vital part of their communities.”
– The Macerich Company (MAC) CEO Tom O’Hern


The newly updated Fortune 500 list of the 500 largest companies by revenue has more companies from China and Hong Kong than the U.S…

China versus America

Great cover art…

The Economist


Not just China, but Germany is also surging back…

Bloomberg Markets: @markets: Investors unexpectedly raise their expectations for Germany’s recovery, adding to signs that Europe’s largest economy may bounce back more quickly from coronavirus restrictions than its neighbors

Rebound Hopes

And the surge is lifting the stock market…

@Schuldensuehner: Party like it’s 1999: #Germany’s Dax jumps above 13k after ZEW Econ Expectations Index (as measured by investor sentiment) surprise on the upside. BUT what causes what? Is the Dax driving the ZEW Expectations of investors or are the ZEW expectations of investors driving the Dax?


Employees want to work from anywhere and not be strapped to a corporate office…

Around 40% of Facebook’s employees were interested in permanent remote work, CEO Mark Zuckerberg said in May, citing an internal survey. Three quarters of those employees said they might move to another place. Facebook declined to say how many employees have formally requested to relocate.

A survey of 371 Bay Area tech workers, conducted in mid-May by the recruitment marketplace Hired, found that 42% would move to a less expensive city if their employer asked them to work remotely full-time. Another survey at the end of July by Blind, a platform for workers to discuss their jobs anonymously, found that 15% of more than 3,300 Bay Area professionals who responded had left the region since the pandemic began—though it was unclear how many considered their moves to be temporary. Of those remaining, 59% said they would consider relocating if their companies allow it.

While it’s too soon to measure the total net outflow of tech workers from the Bay Area, it’s already affecting real-estate prices. Rents have started falling for the first time in years. The median rent for a one-bedroom apartment in San Francisco in the month of July dropped by 11% compared with the same month a year prior, according to rental-listings platform Zumper, which analyzed nearly 11,000 listings in the city and several surrounding areas. In Cupertino, home to Apple Inc., and Mountain View, home to Google, the median rent for one-bedroom apartments fell by more than 15%.


Even REI is selling its brand-new HQ that it hasn’t even moved into…

Recreational Equipment Inc. is looking to sell its custom-made new headquarters and allow employees to work from home or other offices, the latest sign that the pandemic is driving companies to ditch central offices to raise cash.

The retailer, known as REI, was poised to open the new Seattle-area headquarters this summer after creating a unique building that reflected the company’s outdoorsy image and could serve as a way to recruit new employees. The property features outdoor staircases and bridges, a courtyard of native plants, and skylights to let in sunshine and air.

But the cooperative said on Wednesday it was trying to find a buyer for the property before ever moving in. Instead of a single headquarters, REI will open a number of smaller offices and allow employees to work remotely, the company said. Employees have been working from home since March.

REI’s about-face on a building that was two years in the making offers the latest example of how the coronavirus pandemic is changing daily work habits and upending the office sector.



I know where they are moving to…

Homebuying records are snapping like dry tree branches all across Colorado this summer, not just in metro Denver, as a mismatch between supply and demand pushes sales prices higher and drains the inventory of homes available for sale.

The Colorado Association of Realtors reports that buyers purchased a monthly record of 10,771 single-family homes in July across the state, a 15.7% gain from June and a 21% gain from July 2019. About 6,500 of those sales came in the seven-county Denver metro area, which was up 20.4% over the year in July sales.

Sellers listed a respectable 11,417 new single-family properties statewide. But it wasn’t enough to sate buyers, who put 11,420 homes under contract. That represents a 37.5% increase from July 2019, and is the third month running where buyers in Colorado have put more than 10,000 single-family homes under contract in a given month.

Statewide, the median price of a single-family home sold rose 8.6% from a year earlier to a record $443,925, while the median sold price in the seven-county Denver metro area rose almost 9% to $489,500.


You know where they are leaving…

Tweet from @fed_speak

James Altucher thinks it will last… ‘NYC IS DEAD FOREVER’

I love NYC. When I first moved to NYC it was a dream come true. Every corner was like a theater production happening right in front of me. So much personality, so many stories.

Every subculture I loved was in NYC. I could play chess all day and night. I could go to comedy clubs. I could start any type of business. I could meet people. I had family, friends, opportunities. No matter what happened to me, NYC was a net I could fall back on and bounce back up.

Now it’s completely dead. “But NYC always always bounces back.” No. Not this time. “But NYC is the center of the financial universe. Opportunities will flourish here again.” Not this time.

“NYC has experienced worse”. No it hasn’t.

A Facebook group formed a few weeks ago that was for people who were planning a move and wanted others to talk to and ask advice from. Within two or three days it had about 10,000 members.

Every day I see more and more posts, “I’ve been in NYC forever but I guess this time I have to say goodbye.” Every single day I see those posts. I’ve been screenshotting them for my scrapbook.


Barry Diller has always been an A+ for quotes…

“Disney will remain relevant into the future,” said Barry Diller, who once headed Paramount and Fox and is now chief executive of the digital media company IAC. “All of the rest of them are caddies on a golf course they’ll never play.”


Catch up on past Weekly Research Briefings >