Beware of the Fangs

361 Capital Market Commentary | June 22nd, 2020

As COVID cases and hospitalizations continue to rise in several warmer-weather, southern states, the market is rotating quickly back toward the mega-cap FAANG stocks. With all of the State reopenings and an increase in economic activity, I would have thought the market would be excited by the broad spending lift. But with hospital beds filling up with COVID patients, and more asymptomatic people being diagnosed with the disease, the markets are again retreating from the less-certain cyclical, value trade and putting more chips on those companies with increased certainty of being in business in 12 months (no matter what the valuation). Like many investors, I am disappointed in the market’s decisions, but I am also respectful of the direction that it is pointing. You can sit in cash and live to play another day, but if you bet wrong on an airline, casino or retail stock in this uncertain environment, you might need to reserve an ICU bed. This is not an easy market―which makes the rise of Robinhood traders buying Hertz Rental Car at $6 per share even more unsettling to professional investors.

As we watch Apple stores re-close in Arizona, Florida and the Carolinas, the Gila River Casinos and Hotels close in Arizona, and many family-owned restaurants across the U.S. re-shutter due to multiple staff illnesses, it’s clear that the re-openings of states and cities will not be easy. If the economic recovery becomes delayed due to ongoing consumer COVID fears, then the Government will need to be prepared to send out more financial aid to workers and state and local governments, or else that big domino called ‘mortgage and rent’ may get pushed over on the owners of all U.S. real estate. The U.S. Government is working on a new deal that might bring big infrastructure spending into the fold. Hopefully projects that can be green get lit ASAP.

Many workers will need to be flexible and change their employment careers. Economic spending by the consumer and businesses will not stop, but it will shift significantly. While grocery stores and Williams Sonoma win from everyone eating more at home, inside restaurant dining will be impacted severely, along with the food service providers that deliver food nightly. Travel to the biggest cities for fun or work will decline significantly, while second and third-tier cities will benefit from local vacation travel, as well as an influx of work-from-homers who want lower costs and a quality of life improvement. And, I know that many do not have a handle on how attractive a 20+ story office tower in the city is for a work-space. With more and more companies moving to allow half, or all, of their employees to work from home, will there ever be more than 1-2 people in an elevator ever again? Everyone that I talk to and read about is thinking about how to shrink their office square footage in the future. I do not know anyone who is looking to increase it.

So maybe the new cases and hospitalizations from some of these big, southern states will reverse. But until then, if the market continues to make new highs as the Fed’s stimulus and buying of credit works its magic, then you know which group of stocks will be leading the charge.

More COVID testing has resulted in more cases of the virus…

Daily Number of New COVID-19 Cases

Unfortunately, it is discovering too many positive virus cases for the number of tests that are being given…

Florida Coronavirus Cases Per Day
(AsymmetryObservations)

We are seeing an age shift lower in the cases being identified, which is a positive…

@DKThomp: The most important COVID story right now is the age shift.
In Texas: Young adults driving the spike.
https://www.texastribune.org/2020/06/16/texas-coronavirus-spike-young-adults/
In Arizona: COVID cases growing 2X faster among ages 20-44 than 65+.
In Florida: Median age of new COVID cases fell from 65 in March to 35 this week —>
Weekly median age

But the number of hospitalizations in some states like Florida are headed in the wrong direction…

@ScottGottliebMD: Florida doesn’t publish data on Covid hospitalizations statewide, but Miami area hospitals do. Miami is one epicenter of Florida’s epidemic. This data shows Covid hospitalizations in the area starting to rise. This reflects total hospital census (net of admissions and discharges)
Miami COVID-19 Hospitalization

It could be much, much worse as in our neighbor to the South is seeing half of all tests come back positive…

Share of daily COVID-19 Tests
(OurWorldInData)

How this all impacts the stocks market…

Virus cases up causes investors to run from travel, leisure and aircraft maker stocks.
7-day rolling # of new cases

So with investors wanting to own equity assets, they have returned to buy the FAANGM stocks…

FAANGM stocks
(WSJ/DailyShot)

Goldman made the strong case last week that U.S. tech stocks should outperform because of their superior earnings…

Technology earnings
(@RobinWigg)

And not just tech, but biotech is also breaking out to new all-time highs…

XBI

Meanwhile, the average stock has done nothing in 23 years…

Value Line Geometric Index
(@the_chart_life)

When everyone sees value, prices tend to move lower. And when everyone sees over value, well then…

Equity over-valuation
(BofA Global Fund Manager Survey)

An expanded program at the Fed last week that tightened credit prices further and sent stock prices higher…

On Monday, the Federal Reserve Bank of New York announced updates to the Secondary Market Corporate Credit Facility (SMCCF) and stated it ‘will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers,’. With this statement, the Fed’s posture has shifted from a ‘lender of last resort’ to more of a regular market participant – similar to that of the ECB and the BoE. Look for corporate credit spreads to tighten further and for compression across the quality spectrum — between Investment grade (IG) and High yield (HY) — and within IG as well.

(Goldman Sachs)

The markets also enjoyed a much better-than-expected retail sales data point…

@ernietedeschi: We’re still about 8% below where aggregate nominal retail spending stood in February. But that gap was 22% in April.

Retail Sales & Food Services

And in Europe, Germany had a set of good ZEW…

@jsblokland: ICYMI! #Germany’s #ZEW index rose to the highest level since March 2006.

GRZEWI

The NY Fed’s Empire State Manufacturing Report also topped economists’ forecasts, showing a surprising rebound…

Empire State Manufacturing Index

And the Philly Fed’s factory activity indicator registered a sharp rebound in June…

Philadelphia Fed Manufacturing Index

The Mortgage Bankers Purchase Index is recovering like a Phoenix…

MBA Purchase Index NSA

This surge in activity makes one wonder where all the homes for sale are going to come from as inventory moves to 20-year lows…

Existing Home Inventory
(@calculatedrisk)

Mortgage rates are a big help to activity besides the exodus from the big cities…

Mortgage Bankers Association

Consumers aren’t the only ones taking advantage of low interest rates…

U.S. Corporates are also able to borrow at rates not seen in decades.

Bloomberg Barclays US Corporate YTW

But not all companies will benefit from the uptick in economic activity…

This survey shows that hotels will be on the losing end of summer travel; RVs will do better. Driving anywhere will beat air travel.

While on vacation this summer
(CivicScience)

Big city hotels will be especially hurt as these datapoints out of NYC illustrate…

The pandemic that hit New York’s hotel industry harder than any other U.S. lodging market is expected to leave thousands of rooms there closed permanently, as the city starts to reopen after months of lockdown.

New York hotels went into the coronavirus crisis suffering from falling occupancy and room rates, mostly because of a glut of new development. Now travel restrictions and a tattered economy brought about by Covid-19, the disease caused by the new virus, have aggravated an already-bad situation.

As many as 25,000 rooms, or 20% of New York’s total, might not reopen, analysts and hotel owners say. That is equivalent to the entire size of hotel markets in Louisville, Ky., or Jacksonville, Fla.

“Covid…was the final nail in the coffin,” for these New York properties, said Lukas Hartwich, an analyst with Green Street Advisors who follows the lodging industry.

(WSJ)

Too Much Room at the Inn

Big city restaurants, like in Boston, will also be negatively affected…

The coronavirus pandemic could wipe out roughly one quarter of the state’s restaurants, according to the Massachusetts Restaurant Association.

The group predicts that about 3,600 of Massachusetts’ 16,000 restaurants will not survive the pandemic, based on reports from the state’s two major food suppliers. Bob Luz, the president and chief executive of the restaurant group, has said this number could climb higher as the pandemic continues to take a toll on the food industry.

“We really won’t know until we actually start reopening,” Luz said in an interview. “Sadly, I believe that number is pretty spot on.”

On Friday, Governor Charlie Baker announced the state’s restaurants can begin offering indoor dining, with certain restrictions, on Monday, June 22. Restaurants have been operating with no indoor dining since March 17, and only some have the ability to offer outdoor service, which was allowed to resume June 8. Before the pandemic, only 20 percent of the state’s restaurants had outdoor dining available, Luz said.

And while revenues have fallen, the bills keep coming — Luz has said that 50 percent of the restaurants he’s surveyed said they did not get a break on their rent.

Luz said the closures will likely impact downtown Boston at a higher rate than other communities around the state because of the high restaurant density and lack of normal customer-traffic drivers, including business travel, colleges, sports, and tourism.

(TheBostonGlobe)

But where you aren’t spending $200 on a Boston seafood dinner, you are spending on a new coat of paint for the house…

CLEVELAND, June 22, 2020 /PRNewswire/ — The Sherwin-Williams Company (NYSE: SHW) today increased its net sales guidance for the second quarter of 2020. The Company now expects second quarter 2020 consolidated net sales to decrease by a mid-single-digit percentage compared to the second quarter of 2019. The Company’s prior guidance, issued April 29, 2020, was for second quarter 2020 consolidated net sales to decrease by a low to mid-teens percentage compared to the second quarter of 2019.

On a segment basis, second quarter net sales in The Americas Group are expected to be down by a high-single-digit percentage compared to the previous guidance of down by a low-double-digit to mid-teens percentage. Net sales in the Consumer Brands Group are expected to be significantly above the high end of the previous guidance of up by a high-single-digit to low-double-digit percentage. Net sales in the Performance Coatings Group are expected to be in line with the previous guidance of down by a high-teens percentage.

(Sherwin-Williams)

Gold prices are on the move higher…

@lisaabramowicz1: Gold prices have climbed to the highest since 2012.

XAU BGN Currency

Goldman Sachs thinks that gold prices could follow the path they did after the Global Financial Crisis…

We see gold prices as following a similar path today as they did in 2008-2013. During the GFC crisis gold had an initial jump as nominal rates fell and QE started in November 2008. It then remained stuck in a range through the first half of 2009 as the policy effect took hold. During these periods there were brief corrections sparked by risk-on mini-rotations out of defensive assets but overall gold price remained directionless for about 6 months. The market finally broke out higher in October 2009 in line with a decline in real rates as inflation rose while policy remained loose. Allocation to gold continued to increase in line with the share of inflation protected assets in investor portfolio’s for 3 years. This is consistent with the observation that a high level of economic uncertainty persists for several years following a recession and that investment demand for gold will likely continue to expand into the recovery stage the business cycle. After policy (and economic) uncertainty receded, gold fell.

(Goldman Sachs)

Gold

Morgan Stanley illustrates the big shift from legacy tech spending toward cloud spending…

Legacy tech spending

And Amazon continues to lead in its domination of online spending…

Surprising that even with Amazon’s size, it can still outpace all other smaller companies with its growth.

Consumer Online Spending

For those tech workers looking to pick up and leave the Bay Area, here is a good list of cities to explore to get more bang for your buck…

The purchasing power of the median software developer salary is higher than Silicon Valley in nearly all of the largest metropolitan areas outside California. This article provides data on the 10 most financially remunerative in comparison to the Silicon Valley.

In top ranked Winston-Salem, NC, the median software developer purchasing power adjusted salary was $121,600, well above the $76,700 in San Jose and the $85,500 in San Francisco. While Winston-Salem is not known as a tech hub, it is less than 90 minutes by car away from the Research Triangle, between Durham and Raleigh.

San Antonio, TX has the second highest salary, at $117,500, just ahead of Seattle. San Antonio is conveniently located where the Texas hill country begins, about 90 minutes from tech hub Austin, where software developers have a median salary about $15,000 less, when adjusted for purchasing power.

(NewGeography)

Software Developer Salaries

The video game industry is now in hyper drive…

Video Game Sales
(Statista)

The Wall Street Journal illustrates how life will change under COVID…

Attending a sporting event in the future will be beyond bizarre. And just how long does it take to ride the elevator to the top of the Willis/Sears Tower now?

Stadiums
(WSJ)

Finally, if I were involved in baseball…

I’d get the players to donate all of their salaries, and the owners to donate all of their TV fees to multiple great charities, and just get on the diamond before their sport gets passed by cornhole.

What is your favorite sport to watch
(Gallup)

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