Final Week to Choose

361 Capital Market Commentary | October 26th, 2020

With some states now showing that over 60% of voters have submitted their ballots early, all indications are that voter turnout will be massive this election. There are very few undecided voters left, and the final Presidential debate did little to sway the polls. So, barring some major event in the next week, the Oval Office may have a new occupant in 2021. More interesting right now to the financial markets will be the outcome of the control of the Senate. If high voter turnout, and a willingness to vote party line down ballot holds, then the Senate should also flip. We do not know if this will be the catalyst to a next stimulus package during the lame duck session, or if it will need to wait until a January vote. We will just have to wait another week for more visibility on a further aid package.

As I write this note, the market is down 900 Dow points, and seems to be quite concerned about the rising COVID cases and hospitalizations across the flyover states. Looking at the markets today I see a pandemic playbook replay of how stocks traded in March. ‘Work from home’ and ‘stay at home’ stocks manage to gain, while travel/leisure and economically cyclical stocks get drilled for -5 to -10%. We are bound to have days like this during the winter months when COVID will steal all the headlines, but investors need to remind themselves that our healthcare system has a much better idea on how to treat those in trouble. And, local communities also know how to ‘hammer and dance’ their way to a reduction in COVID cases. Now if only someone could keep the White House Chief of Staff away from a TV camera.

This will be an incredibly busy week of earnings. I think on Thursday alone over 20% of the S&P 500 will be reporting. Expect some significant single stock volatility. Also, the M&A markets have been very busy. Today we had activity in seven deals across multiple industries with over $25 billion in acquired value. And just in the last week, there have been five deals in the energy space alone as buyers want to get married before oil prices move higher. The credit markets remain stable even though they took a ruler to the hand today. With the VIX above 30 today and credit spreads still tight, which market will be right about the outlook for the economy? The answer might very well lie with who controls Congress next week.

Have a great Halloween carving your jack-o-lantern this week. Send me a picture of it and we will put up the best one in the WRB next week.

Monday’s top Russell 1000 losers…

Feels like I am looking at a table from March 2020.

Russell 1000 Losers

And Monday’s top Russell 1000 gainers…

Deja vu! I see COVID testing, work/buy from home and grocery stores.

Russell 1000 Gainers

Most of the Fed has called for further stimulus from Congress. But Lael’s voice might become more important in January…

@Neil_Irwin: Lael Brainard, Fed governor and potential Biden Treasury Secretary or Fed chair, sees a need for more aggressive, sustained fiscal policy and is worried about the inequality-widening effects of the pandemic.

Tweet from @Neil_Irwin

“Call me after the election…”

An interesting chart from Goldman Sachs showing that equity flows typically pause into an election. It makes sense that investors would want to know which type of U.S. Government they are buying into.

Equity flows

Did Black Monday scare that many investors away from October?

Now someone explain to me why the week of Halloween is one of the best weeks of the year. Wonder if it will repeat this year after today’s COVID scare.

S&P 500 Halloween Trade Performance Since 1994
(AlmanacTrader)

The credit markets remain calm while equity VIX is thinking about setting its hair on fire. Who will be right?

@ISABELNET_SA: Volatility IG credit spreads could suggest that VIX should be at 20

Decoupling between two measures of corporate uncertainty

Dr. Copper is signaling that world demand is fine…

Cooper demand

U.S. Treasury yields are following copper prices higher…

But they are likely much more focused on the future supply of Treasury securities being sold into a ’46’ administration, plus the economic stimulus that will occur from a $2-3 trillion dollar aid and infrastructure package.

U.S. 10-Year Treasuries

As rates have risen, investors are looking for future equity sector winners and losers…

@RenMacLLC: Equity industry groups have sensitivity to interest rates. Here they are given a rise in 10-year rates. No surprise banks have high sensitivity, but that’s a recent (10yr) not long-term phenomena.

SP1500 Industry Group

Some of these stocks were the best performers today…

Tweet from @carlquintanilla
Covid Shorts

Thinking of having the relatives and neighbors over for Thanksgiving?

Costco now has all of your turkey, potato and COVID needs met.

Costco
(Costco)

Not a GOP-friendly map with eight days until the election…

Risk Levels by Congressional District
(GlobalEpidemics)

The chart that has me scratching my head…

I see that cases and hospitalizations are rising, but I am more focused on what is happening with fatalities. We have learned a lot about the virus and we have better therapies, drugs and knowledge to treat the patients. But why are so many younger patients in the U.S. dying? Are we that unhealthy? Or, is there some weird population skew to the data that we need more information about?

Average age of Covid-19 death across countries
(@ritholtz)

“Tech workers are never going back to an office”…

At least part of the spike in Los Angeles, Palm Springs, and Austin might be attributed to tech workers divorcing themselves from the astronomical San Francisco housing market. Ironically, the industry that created the technology that allows us to shop for homes on our phones and work from our kitchen tables is the one least likely to return to the so-called normal of massive tech campuses and huge office spaces. “The tech workers are never going back to the office,” one tech executive told me this week. “Twitter, Facebook, and all the start-ups here are realizing that they don’t need to be in the same place all the time. They can be just as productive, if not more, working from home.” The theory among people I’ve spoken with in Silicon Valley is that tech workers trapped in their houses will start to develop new, better technologies to facilitate the process. Google Maps and Gmail, for example, were built as side projects at Google because the engineers saw a need for these tools. Now that tech employees are working remotely, they are finding new problems in the work-from-home lifestyle and creating new solutions to allow them to be more productive. Which means that these products could eventually make their way into our hands, and could justify us never going back to the office. In which case, the diaspora that has taken place from cities like San Francisco and New York to Los Angeles, Austin, and Miami will only continue. Many tech employees and executives I’ve spoken with have said they’ve left San Francisco and Palo Alto for homes in Sonoma and more remote locales…

A related driving factor behind the real estate crush is that employees who now work from home are realizing the limits of their spaces. As one broker pointed out, “many people purchased their last apartment or house thinking they wouldn’t be there much; you’d eat out every night at a restaurant, go to the gym in the morning, bars on weekends, go on vacations several times a year, and now you can do none of that. So you just sit at your dining room table and think, I hate this place, I need a backyard and an office and a bigger kitchen.” Couple that with the fact that people are changing the way they spend money on dining, their wardrobes, and travel, and you have a group much more willing to invest in their homes.

(VanityFair)

One new factor to consider when buying a home that sits next to trees…

Home insurers in California are increasingly refusing to renew certain policies after years of devastating wildfires. Non-renewals climbed 31% throughout the state last year, with ZIP codes that had a “moderate to very high fire risk” seeing a 61% uptick, according to a presentation Monday by the California Department of Insurance. The regulator is hosting a hearing to discuss the state of the homeowners’ market.

Years of wildfire damage have upended the home-insurance market in certain areas of the state, causing insurers to seek to raise prices or refuse to insure certain properties. That’s caused more residents to turn to the FAIR Plan, a backstop for fire risk, with those policies climbing 36% statewide last year and more than doubling in higher-risk areas, according to the presentation.

(Bloomberg)

I strongly endorse taking advantage of these low rates…

Up to you to figure out your annual potential appreciation based on where you buy. Hopefully we can all make 15%/yr., but even if it is 5%, we will still be looking great.

Tweet from @IanShepherdson

And residential home ownership in a good market looks much better than owning office space in any market right now…

More than 3.5% of all the rentable office space in the Denver-Boulder-Aurora metro area was available for sublease at the end of September, according to the latest market report from real estate services firm CBRE.
That’s more than 4.3 million square feet of technically “occupied” but actually available real estate. At the end of March, before the coronavirus pandemic fully sunk its teeth into Colorado, 2.5 million square feet of office space that was available for sublease in the metro, according to CBRE.In a COVID-19-shaped economy, the big jump isn’t necessarily surprising. CBRE found that office-using businesses — a segment of the economy that includes government, financial and business services and the information industries — employed 4,100 fewer people in August than they did at the same time in 2019.Fold in the pivot to a work-from-home business model that many companies have chosen if not been forced to embrace, and you have a recipe for a 20% office space availability rate across Denver area, CBRE’s data shows. That’s a number above and beyond the 15% “total vacancy” rate CBRE tracked for the market, already the highest rate for that category in Denver since 2012.(DenverPost)

Comments from last week’s earnings confirm that the outlook for CRE is difficult, while pool boys will have it made…

“We’re still as a portfolio right around the city average of probably 15% to 20% back to work – back to office work. And that’s out of a 1.5 million office workers. So that means 80%, 85% of the people that work in office buildings are still home and that’s frustrating” – SL Green Realty (SLG) CEO Marc Holliday

“I can tell you the latest number I’ve heard is up to 100,000 new pools, and that they’re coming off of 75,000 last year…I mean I was speaking to dealers in the seasonal markets in the last few weeks and their backlogs are huge, and they’re hoping to get as many of those pools as they can in the ground before the snow flies.” – Pool (POOL) CEO Peter Arvan

(@TheTranscript_)

This is it. Peak earnings week…

Also, $GOOGL is on Thursday, not Monday.

Most Anticipated Earnings Releases
(@eWhispers)

It is a La Nina year. So, it could be tough for fires and farmers in 2021…

“La Niña is basically the cooling of the surface water in the central and/or eastern Equatorial Pacific and the warming of surface water in the western Equatorial Pacific,” AccuWeather Long-Range Expert Paul Pastelok said. “This causes changes in the surface and upper wind patterns that drive air masses across the globe.”During a La Niña pattern, the ocean and atmosphere work together to generate certain weather patterns around the world, he added. However, not all La Niñas are created equal, and thus, there can be variations in weather patterns that develop.

NOAA announced that La Niña was officially underway back in August and issued a La Niña advisory as it will continue to influence the weather pattern in the coming months.

“La Niña is likely to continue through the Northern Hemisphere winter 2020-21 (~85% chance) and into spring 2021 (~60% chance during February-April),” meteorologists at NOAA’s Climate Prediction Center said earlier this month.

This winter will be the first Northern Hemisphere winter to be influenced by a La Niña since the 2017-2018 season.

(Accuweather)

Typical La Nina

Looking like a decent relative ROI for the Tampa Bay Rays even if they lose the World Series…

The big guy vs. the little guy

(@axios)

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