Jackets Required

361 Capital Market Commentary | October 12th, 2020

Summer temps are gone in Colorado and that means it will start to get colder outside at night. I see several 30- to 50-degree nights in the forecast for us, which means you’ll need to dial back on the hairspray if you plan on sitting next to an outdoor heater for that next meal out. I am guessing that long wool skirts and boots will soon be the fashion trend for the ladies. Go out and enjoy the cold as all of our restaurants are counting on us to help them make it through to 2021.

Besides the colder temps arriving in Colorado over the weekend, all registered voters received their ballots in the mail on Saturday. I had to double check the ballot I received when I saw both Phil Collins and Kanye West running for President. Thought maybe MTV or VH1 was messing with my mailbox. But all was good and it was official. Took about two minutes to fill in the bubbles and another three minutes to drive to the drop off box down the street. The rest of the Union should copy our system. I couldn’t imagine standing in line for three hours like they do in some states. My hat is off to everyone that does it.

While voting is important, the financial markets have already chosen the winners and are running with the outcome. The VIX continued to trend lower last week suggesting that the national polls are correct and there will be little uncertainty on November 3rd. Credit spreads continue to fall as stock prices rise—and the stock market even posted back-to-back 80%+ up volume days signifying solid pressure to buy stocks. While summer investors may have been worried about a ‘Blue Wave’ election result hurting the outlook for stock prices, the markets are now content with the expected results on November 3rd. Taxes will rise for corporate incomes, capital gains and the highest earners, but so will the economic growth outlook, combined with a reduced daily threat of political uncertainty. Portfolios will need to be re-analyzed for the changes in taxes, the rise in interest rates and the decline in the dollar which is likely to occur. While some think that stock prices could pause around the election for the change in future tax rates, others think the markets could surge as investors move to bake in a significant January stimulus package. It could go either way, but it does seem clear that the stock market is in a good place right now as volatility falls and confidence builds. If you are looking for rattled nerves and short fingernails, go check out the financial markets for U.S. Treasuries and the dollar. It’s those investors that I would be much more worried about right now.

October means earnings and that is what we will be watching as the big banks start off the season this week. We are expecting lots of comments about the slow recovery during COVID with hopefully a more optimistic outlook into Q4 and 2021. Amazon will be hosting its Prime Days this week and we expect them to blow the doors off every delivery truck in the U.S. over the next week. Apple will also unveil its newest iPhone tomorrow which will be a big deal because it will be a 5G handset. Seeing the stock up 6% today tells me that someone knows it will be a very powerful phone. With three weeks left until the elections, Washington D.C. has lost its importance to the markets. A stimulus package will not happen under this administration as the Senate GOP rejected a bigger deal over the weekend, and now all the focus is on getting the new SCOTUS approved. Plus, many incumbents are in tight races and having to debate and politic to try and save their seats. Maybe some small stimulus aid deals will happen to help certain industries during the lame duck session, but I’d focus on January to see a major stimulus package.

It was a good week for stocks last week across the board…

Weekly Sector Performance

Walter pointed out the significant sign of buying strength last week…

Tweet from @WalterDeemer

The Q3 corporate earnings season begins this week…

Most Anticipated Earnings Releases

Air travel continues to show very small signs of recovery…

@bespokeinvest: US air passenger traffic yesterday was the highest in over six months.

TSA Traveler Throughput

A few more travel/leisure datapoints to consider from last week…

One can see where many operators in the space are about to be forced to make some major decisions about capacity. If an airline or hotel chain decides to significantly cut back, it could take months or years to re-acquire those routes or locations. This is how the cost of travel could rise meaningfully in the future.

“I think the worst, hopefully, please, please never ever go back to where it was in April or March or things like that…I don’t think we’re going to end up with that mass lockdown that was in April. Yes, I’m fairly confident the worst is over. You do see people are traveling, just nowhere near the rate they were traveling last year.” – Booking (BKNG) CEO Glenn Fogel

“We can’t continue to wait. If forced to, of course, we will indeed discontinue service to a lot of markets and we will be much slower to rebound and help the country rebound from this pandemic…”This is bigger than just trying to keep airlines afloat. This is about keeping critical infrastructure afloat for our country to bring it out of this pandemic.”” – American Airlines (AAL) CEO Doug Parker

“The worst is not behind any airline, not only Qatar Airways..There will soon be other bailouts in Europe, there will be other collapses around the world. Because of the second wave, I think it is … even more severe than in the first wave…I think that there will be more reduction in capacity, which in a way is also not good for the traveling public because then it will give a monopolistic situation to certain airlines that exactly wanted this to happen” – Qatar Airways CEO Akbar Al Baker

Airplane Picture

Meanwhile in China…

There are 44 Cirque du Soleil shows in the world right now. Only one is performing currently. You can guess which country it is in.

Some 637 million residents of China traveled inside their country during the recent eight-day Golden Week holiday, spending tens of billions of dollars at a time when officials hope to get consumers to spend more and perk up the economy.

More than 45% of China’s 1.4 billion people traveled during the holiday, which began Oct. 1. They spent 466.6 billion yuan ($69.5 billion), according to data from China’s Ministry of Culture and Tourism.

That’s 21% fewer trips and 30% less spending than last year, but the numbers show consumption is beginning to bounce back following the battering it took earlier in the year from the coronavirus pandemic.


Remote work for employees continues…

J.P. Morgan’s Jamie Dimon says he’s only aiming to return office staffing capacity to 15-25% and doesn’t expect a return to normalcy until the summer of 2021. The New York Times is now planning on a summer 2021 return to the office.

Microsoft is allowing more of its employees to work from home permanently, the company announced Friday. While the vast majority of Microsoft employees are still working from home during the ongoing pandemic, the software maker has unveiled “hybrid workplace” guidance internally to allow for far greater flexibility once US offices eventually reopen. The Verge has received Microsoft’s internal guidance, and it outlines the company’s flexible working plans for the future.

Microsoft will now allow employees to work from home freely for less than 50 percent of their working week, or for managers to approve permanent remote work. Employees who opt for the permanent remote work option will give up their assigned office space, but still have options to use touchdown space available at Microsoft’s offices.

“The COVID-19 pandemic has challenged all of us to think, live, and work in new ways,” says Kathleen Hogan, Microsoft’s chief people officer, in a note to employees. “We will offer as much flexibility as possible to support individual workstyles, while balancing business needs, and ensuring we live our culture.”…

While Microsoft employees will be allowed to move across country for remote work, compensation and benefits will change and vary depending on the company’s own geopay scale. Microsoft will be covering home office expenses for permanent remote workers, but any that decide to move away from Microsoft’s offices will need to cover their own relocation costs. Flexible working hours will also be available without manager approval, and employees can also request part-time work hours through their managers.


But remote work does allow time for more work…

Drawing on original surveys of our own design, we estimate that the pandemic-induced shift to working from home lowers commuting time among Americans by more than 60 million hours per work day. Cumulative time savings over the past seven months exceed 9 billion hours. Our survey data also say that Americans devote about 35% of the time savings to their primary jobs and about 60% to work activities of all sorts, including household chores and child care.


How are Americans allocating the time they save by not commuting?

Looks like a four handle begins to weigh on the outdoor dining decision…

@carlquintanilla: At what temperature does demand for outdoor dining collapse? Goldman says around 45-degrees Fahrenheit.

Outdoor Dining

Theater chains are in trouble. And so is the outlook for the Hollywood blockbuster film…

But for blockbusters, which typically cost between $200m and $300m to produce and market, the economics of distributing online are tough.

Mulan is a good example. The Disney film opened theatrically in countries such as China where cinemas were open and was sold online for $30 elsewhere. Analysts estimate that the movie has made between $90m and $100m through digital sales on Disney+. The film has also brought in $67m from the box office, but Disney only keeps a fraction of that.

With a $200m production budget and additional marketing costs, Disney would fall far short of breaking even. Disney’s chief financial officer, Christine McCarthy, told an investor conference last month that the company was “very pleased” with Mulan’s online video sales, but declined to give specifics.

Even from his own bleak situation, the chief executive of a major cinema company had choice words for the Mulan gamble: a “financial mess”.


Hollywood delays release of big titles

The numbers are becoming too big to overcome with only three weeks left…

2020 US Election Odds

A Democratic sweep probably means a steeper Treasury curve…

Bond Market

Markets might fear a lift in the capital gains tax rate, but it hasn’t hurt the markets the last two times it occurred…

Strategists and prediction markets are increasingly pricing in a “Blue Wave” where Democrat Joe Biden wins the presidency and his party takes control of the Senate, adding to their hold on the House. That might allow for an increase in some tax rates — including capital gains.

If a higher rate become effective Jan. 1, 2022, there would probably be some downward pressure in equity markets in the fourth quarter of 2021, according to JPMorgan strategists led by Nikolaos Panigirtzoglou. But once the new rate was in place, stocks would likely resume their upward trajectory, as they did in the first halves of 1987 and 2013 following increases on some capital gains.

“Longer term, we see little impact from a prospective capital gains tax rate increase on risk taking and investors’ attitude toward equities as an asset class, given the current low yield and high equity risk-premium environment,” the strategists wrote in a note dated Friday.


S&P 500 Index

Could stock prices peak in Q4?

The strategist at Bank of America thinks that stocks could top out during a lame-duck session blow off if the market prices in both a big stimulus and a vaccine.

Hartnett expects the top in asset prices to come between election & inauguration, as fiscal, vaccine, recovery fully priced-in with SPX >3600 & bond yields on the rise. Peak policy will be the key driver of topping process, >$21tn of fiscal & monetary stimulus in 2020 will not be followed by the same again in 2021 (lucky to get >$2-4tn). Q4 equity capitulation will be driven by low & stable credit spreads and bond/FX vol, all incited by a Fed willfully targeting higher asset prices and/or asset bubble to boost wealth/lower unemployment. In Q4, expect the laggards banks, energy, small cap to rally as HYG >$85, 10-year Treasury yield rises to 1%.


A reminder that past ‘Blue Waves’ have been good to the stock market…

Should a Democratic Sweep Scare Markets?

The U.S. is #1 Baby!

Our combined deficits will continue to place long-term downward pressure on the U.S. dollar which will only add to upward inflationary pressures. Good news for U.S. based multi-national exporters. And good for gold and your other commodity holdings. Great news for farmers and ranchers once the foreign trade tariffs are removed.
@VrntPerception: The US twin deficit is now the worst in the world

Worst Twin Deficits

Q&A with Eugene Fama who doesn’t hold back on the current ‘free money’ environment…

Q: But how about the effects of this «free money» on borrowing? Isn’t the record amount of corporate and government debt a real problem?

A: That really bothers me. We haven’t hit it yet, but there has to come a point where people start questioning whether government debt is really riskless. Piling on debt even in good times is a new thing: In the US, we cut taxes and increased the deficit as a consequence, but that happened when the economy was booming. How are we going to pay that back? It has to come out of taxes in the future. As a matter of fact, we didn’t really lower taxes. What we did was we lowered them now and raised them in the future, when we have to pay off that debt. That’s why I worry that investors will become skeptical of whether governments can actually pay off so much debt. Now, we’re piling on like crazy because of the Covid-pandemic. That was unavoidable, but it was avoidable in the past, when we did it in good times. When does the market say «enough»?


Looking around the world, Italy is getting back its manufacturing mojo…

Italy Industrial Production

…and this is helping take their bond yields to new lows…

Italy 30yr Government Bond Yield

In the U.S., home ownership is surging for the under-30 population…

This helps to explain the new pressure on apartment rentals, especially in the big gateway cities.
@VrntPerception: Mortgage rates at all-time lows are helping to push up home ownership rates for young people

US Homeownership Rate

The college entrance exam is dead. Goodbye #2 pencils also?

It was slowly on its way out of the college application process already, but COVID delivered a final silver bullet.

Nikki Kahealani Chun, director of undergraduate admissions for Caltech, said the 2,200-student school in Pasadena has never focused as much on tests as its ultracompetitive reputation would suggest. She said Caltech has pondered the value of the SAT and ACT for years as it seeks to diversify a student body of about 940 undergraduates. Now it has announced a two-year moratorium on using the tests, enabling the school to assess whether the scores are worthwhile or even necessary.

“I know it won’t cripple the process” to remove the tests from deliberations, Chun said. The school scrutinizes high school transcripts, teacher recommendations, essays and student activities. Caltech’s goal, Chun said, is “seeing the scientist/researcher, the quantitative thinker, in the whole of their application.” Raw talent matters more than stellar scores. “Sometimes students don’t even recognize they have it,” she said…

The Ivy League and many other highly selective private colleges and universities suspended testing requirements for classes entering in fall 2021, although they made clear that applicants may still submit scores. Prominent public flagships such as the universities of Maryland and Virginia took the same step. That added momentum to a test-optional movement that had been growing already for several years.



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