The Need to be Flexible

361 Capital Market Commentary | July 20th, 2020

Investing in the financial markets under the impact of COVID has required excess flexibility in being able to navigate both the economic impacts as well as psychological shifts thrown at our portfolios this year. February and March required full defensive actions to protect risk assets. Then as the government turned on all the fire hoses of liquidity to protect the economy and markets, a portfolio heavily weighted towards credit and equity risk benefited. May followed with a market focusing its attention on cyclical stocks as COVID numbers flattened and hope for an end to the virus rose. This was followed by a return to ‘work from home’ tech stocks and the mega-cap FAANGs as investors again feared a second surge in COVID. Had you navigated all of those moves perfectly, you are likely enjoying 50%+ returns this year.

While perfect nimbleness was rare for investors in the first half of the year, hopefully you were able to add some extra value to your portfolios through the volatility. As we look into the second half of the year, there are still many unanswered questions about the timeline for COVID and its effect on the economy. There are also ongoing questions about long lasting industry and sector impacts from the virus that will create longer lasting winners and losers. The need for added flexibility in managing a portfolio will continue into the second half as the markets pick out their winners and losers across all asset classes. And, maybe even more important will be an investor’s ability to recognize and take advantage of the many valuation differences between companies and sectors as we move past COVID. Right now, the market remains fearful of COVID impacts toward economically sensitive companies, but that won’t always be the case. Will the next 100% move be in your favorite FAANG stock or in a bank, an airline or in an auto manufacturer?

S&P 500 Since December 2019

As we discussed last week, I think that the U.S. markets will continue to move past the virus. Yes, the recent data out of some of the sunbelt states looks uncertain, but the same data also gets people to wear masks and social distance. Big business took a major step forward last week by mandating masks among the largest retailers and restaurant companies. This was a major move that will push the Federal and State Governments closer toward a loose mandate. And as masks go on, we know that COVID cases fall 7-10 days later. So, we will get through this. Maybe not in time to get 100% of kids back to school, or to have fall college football. But maybe for spring football which could be kind of fun for a change.

There is a lot going on in the world of vaccines right now. With so much activity, there has got to be a vax cocktail that will be available before year end. Recovery therapies and drugs continue to improve, as evidenced by the lack of hospitalization data ending in increased fatalities. Testing remains an issue in the U.S. still, but hopefully our throughput will increase from the current 7-10 day timeline down to something closer to a same, or next day, so that we could improve tracing of cases. The technology is there, but we just need to increase the rollout of the new equipment and consumables.

Whoever said summers are slow? Earnings. Volatile economic numbers. A new Government aid package. Big sector moves in the markets. There are details on some of it below. I will also be hosting a 2020 Mid-Year Review webcast of market events this Wednesday. I will be discussing a few possible market scenarios for the 2nd half of the year. Send in a question and we will try and address it. Register Now. I hope you can join me and thanks for reading.

So much good vaccination news dropping over the last week…

Good news out of Moderna’s vax as their 45-person trial was very successful and safe. Now begins a 30,000-person trial that will run into October. But if early results are good, expect that the company will begin to ramp production immediately. The University of Oxford/AstraZeneca and J&J/Beth Israel are close behind. Pfizer/BioNTech also posted good data and they will begin a larger trial this month. If you want to deep dive into the vaccines being developed and trialed, the New York Times built a good website to track them.

Coronavirus Vaccine Tracker

The front running Vax?

On Monday, the early trial data released in ‘The Lancet’ showed the Oxford/AstraZeneca vaccine generated “robust immune responses” and was safe and tolerable by all 1,077 patients in the study. Now onto a significantly larger trial across multiple geographies.

At the end of April, crunching a process that normally takes about five years into less than four months, Gilbert and her colleagues at Oxford’s Jenner Institute started a human trial on 1,100 people. When Gilbert testified before a parliamentary committee in early July, one member compared her effort to going into a shed and coming out with a jet engine. Gilbert’s team has leapfrogged other vaccine contenders to the point where it will likely finish vaccinating subjects in its big 10,000-person efficacy trial before other candidates even start testing on that scale, Kate Bingham, chair of the U.K. government’s Vaccine Taskforce, told the parliamentary committee in early July. “She’s well ahead of the world,” Bingham said. “It’s the most advanced vaccine anywhere.”

Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases (NIAID), has sounded a note of caution about Oxford’s front-runner status. “You’ve got to be careful if you’re temporarily leading the way vs. having a vaccine that’s actually going to work,” he told the BBC recently. Most vaccines in development fail to get licensed. Unlike drugs to treat diseases, vaccines are given to healthy people to prevent illness, which means regulators set a high bar for approval and usually want to see years’ worth of safety data. In the Covid-19 pandemic, it’s not yet clear what regulators will accept as proof of a successful and safe vaccine. The U.S. Food and Drug Administration has said a vaccine would need to be 50% more effective than a placebo to be approved and would need to show more evidence than blood tests indicating an immune response. Regulators in other countries haven’t spelled out what would be acceptable.

Gilbert has voiced remarkable confidence in her chances, saying the Oxford vaccine has an 80% probability of being effective in stopping people who are exposed to the novel coronavirus from developing Covid-19. She has said she could know by September. Asked by MPs in early July whether the world would have to struggle through the winter without a vaccine, Gilbert said, “I hope we can improve on those timelines and come to your rescue.”


Buy-N-Large is not the villain in this real-life Wall-E follow up…

Major retailers and restaurants pushed the U.S. Government out of the way last week as they moved to mandatory masks for all customers in their stores. And, as soon as Walmart, Kroger and Starbucks announced the policy, most other big businesses followed. No need for a Federal or State mandate now, but expect the politicians to jump in line behind the major corporations.

Walmart Inc. and Kroger Co. will require customers to wear face coverings inside all their U.S. stores, joining a growing chorus of big businesses and state leaders deciding that masks are needed to battle the surge in coronavirus cases and calling for a national policy.

The retail giants, which operate more than 8,000 stores across the country, said they were adopting their own mask requirements to protect their staff and customers. Walmart said a lack of federal rules had left it with a patchwork of local regulations. “We know this is a simple step everyone can take for their safety and the safety of others,” it said.


We already have proof that mask wearing is growing in the hardest hit sunbelt states. This is great news that will flatten those state and city curves…

Despite some initial reluctance, a growing number of state and local authorities have imposed mask mandates over the last month. We estimate that the share of the US population subject to a mask mandate has risen from 40% to over 70% over the last month, as shown on the left of Exhibit 1. In the Sun Belt, the share of the population who report wearing a mask in public has risen as the outbreak has grown, as shown on the right of Exhibit 1.

(Goldman Sachs)

Masks are increasingly mandatory

By the way, did Florida just peak?

@IanShepherdson: Florida cases look to have peaked; Arizona coming down, though slowly. Definite progress compared to just a couple weeks ago. Chart updated for today’s numbers.

Did Florida Peak

While we fight COVID, Congress is about to send some more financial aid into the system…

And we all know that the markets like more liquidity than less

Don't fight the printing press

As the markets wait for more liquidity, fund managers seem to have a near consensus on what is the most crowded trade…

Most crowded trade

The data would show that at least among hedge fund managers, they are correct…

Tech/TMT-Related Net Exposures

So, what caused the big volatility event last week in the Nasdaq 100?

Just too many passengers on one side of the ship? At some point, we will get past COVID and portfolio managers will look to diversify away from their expensively safe ‘work from home’ technology stocks. My guess is that last week we saw some increased movement from this strategy as several companies vaccine data was being released, and more Americans were wearing masks. But Monday’s 4% intraday reversal was big and it made me take notice.

Nasdaq 100 Index

Bloomberg also noticed…

The stay-at-home trade just got kicked to the curb.

At least for a week, anyway. Down 5.5%, the Fang bloc — Facebook Inc., Inc., Netflix Inc. and Google’s parent Alphabet Inc. — suffered its worst drop since March. As hopes for an economic rebound bubbled back up, money darted to cyclical stocks, a once-ignored corner of the market. As a result, the tech-heavy Nasdaq 100 trailed the S&P 500 by the most since 2009.

Strange as it sounds, it’s been that — speculation the economy will shake off the Covid crisis — that has most often threatened tech’s preeminence in 2020. Positive data on a potential vaccine raised those odds in investor minds, making stocks optimized for a lockdown seem less precious. While the Nasdaq eked out a gain Friday, it came after Netflix reminded bulls that as fast as tech earnings have expanded, they are not limitless.


Walter also has his antennae up…

Tweet from @WalterDeemer

Could mega-cap U.S. stocks be in a bubble?

Over the past six years prices have increased five-fold, while earnings have only doubled…

Mega-Cap US Stocks

But while the Nasdaq fell, semis held in…

Remember that semis are not just tied to the fate of the technology industry. Open up anything with a cord or a motor in your house and notice the motherboard. Semis are a GDP+ play.

Semiconductor Index

If the market is looking to spread out its valuation in the future, there is a big difference between the largest and smallest market caps…

S&P 500 Median Results

So, another test for the mega cap/growth/tech bull trend…


Some value PM humor…

Tweet from @AlbertBridgeCap

Over the longer term, value looks very out of whack…

S&P 500 Value vs Growth

Transports testing their upper bound…

Will Dow Theory take hold? The railroad stocks are beginning to ignore the ugly freight volume trends. Truckers act better. Who knows about the airlines?

Dow Jones Transportation Average

There was a lot to digest in the J.P. Morgan earnings that is far-reaching across the economy. It is worth looking at Jamie Dimon’s many comments:

• “Debit and credit sales volume while overall still down has consistently trended upward since the trough in the second week of April to down just 4% year-on-year in the last two weeks of June….April saw the lowest level of loan and lease origination since the financial crisis, but activity rebounded sharply in May and June, and in fact, June ended up the best month for auto originations in our history. And in Home Lending, retail purchase applications after reaching a low in April recovered to well about pre-COVID levels in June, due to a strong and broad market recovery”
• “We’re also very clear that you’re going to have a much murkier economic environment going forward than you had in May and June and that — you have to be prepared. You’re going to have a lot of ins and outs. People get scared about COVID. They’re going to get scared about the economy, small businesses, the companies, bankruptcies, emerging markets. So, it is just going to be murky, which is why, if you look at the base case, adverse and extreme adverse case, they’re all possible”
• “This is not a normal recession… in the normal recession, unemployment goes up, delinquencies go up, charges go up, home prices go down. None of that’s true here. Incomes go down, savings go down. Savings are up, incomes are up, home prices are up. So, you will see the effect of this recession. You’re not going to see it right away because of all the stimulus and the fact, 60% or 70% of the unemployed are making more money than they were making when they were working. So, it’s just very peculiar times.”


JPMorgan’s loan loss reserve addition looks pretty good for the Q2…

While they did lift it by $9b, they did so while assuming much worse economic trends than the Fed is using for their 2021 outlook. So, this is a good, big datapoint if you are long the stock or debt of J.P. Morgan.

Allowance for credit losses

As it relates to the U.S. economy, JPMorgan stepped up in lending to car and home purchases…

Mortgage and auto applications
(JP Morgan Q2 Earnings)

JPMorgan’s appetite for lending is no doubt helping the U.S. housing market…

@Econoday: The housing market index jumped to 72 in July, up an unexpected 14 points and back to pre-virus levels.

Housing Market Index

And, we are seeing single family home permits moving toward eight-year highs…

US 1-Unit Building Permits

The demand for new home builds, plus all the newly outdoor restaurant structures is sending lumber prices through the roof…


But as you know, all small restaurants and retail will not make it through COVID…

Restaurants and Retail

The recent spike in COVID datapoints has put a pause in the TSA upward trajectory…

Let’s see if the new mask wearing and social distancing will get people flying again.

Airport Traffic

The CEO of Marriott on how the travel industry recovers…

Travelers who resist wearing masks are risking the recovery of the hospitality industry.
With some guests continuing to resist the mask-wearing imperative, whether because they feel concerns about COVID-19 are overblown, or they’re standing on their feelings of independence, or they dislike the aesthetics of a mask on their face in a leisure environment, the problem, says Sorenson, is that in the very same hotel, “we know from the feedback received that there are many [mask-wearing] guests who feel jeopardized by the conduct of their fellow guests and will not travel again until they believe their stay will be safer.”

When travel comes back it may come back roaring, due to pent-up emotional demand.
“So many life events have been postponed: weddings, vacations, anniversaries,” says Sorenson, who made history as the first CEO of the company to not have “Marriott” for a surname. “There are no virtual replacements for these. When it’s safe, I’m confident people will begin to travel again, and I am optimistic that when travel does return, it will come back stronger than ever.”

… but a full recovery isn’t in the cards for this year, and possibly not even for the next.
“It may be that we are looking beyond 2021 for a full recovery,” says Sorenson. What’s coming back first are the domestic travelers who are haltingly returning to leisure travel, particularly at drive-to destinations: “guests who join us via the nostalgic road trip.” This will be followed by domestic air travel, then international air travel, and, finally, by group travel.


The recent surge in COVID has also dampened the Consumer Sentiment surveys…

Again, let’s see what a few weeks of mask wearing will do to the future numbers.

US: Consumer Sentiment

Thanks to the government aid, U.S. retail sales have bounced right back, even quicker than after the 2008 Financial Crisis…

Of course, under the surface of these numbers are some major shifts toward online and grocery and away from brick and mortar.

US Headline Retail Sales

Got Gold?

Bullish factors building in the gold market are set to see prices take out the record set in 2011, according to Citigroup Inc.

The metal is benefiting from loose monetary policy, low real yields, record inflows into exchange-traded funds and increased asset allocation, the bank’s analysts including Ed Morse wrote in a report. Gold is expected to climb to an all-time high in the next six-to-nine months, and there’s a 30% probability it’ll top $2,000 an ounce in the next three-to-five months…

Citigroup is among a long line of market watchers in predicting bullion will either test or top its long-standing record as the resurgence of coronavirus cases in several parts of the world point to a prolonged and uneven global economic recovery. Spot gold has surged 19% this year to the highest since 2011 as the pandemic drove investors to havens, while easier monetary policy and other measures to shore up economies also supported demand.


All-Time High?

Got Oil?

A big deal in the oil patch this weekend as Chevron buys assets in the Permian and DJ Basin. So if Chevron is buying at these levels…

Chevron Corp. has agreed to a deal to buy Noble Energy Inc. for about $5 billion, in what would be the largest oil-patch tie-up since the coronavirus pandemic delivered a shock to the industry.

The all-stock takeover values Noble at $10.38 a share or 0.1191 Chevron share. Chevron said Monday that would represent a roughly 7.6% premium over Noble’s Friday closing price of $9.65 and nearly 12% based on a 10-day average. Including Noble’s hefty debt load, the deal would be valued at roughly $13 billion.

Noble, based in Houston, is an independent oil-and-gas producer with U.S. and international operations. Buying the company would expand Chevron’s presence in the DJ Basin of Colorado and Permian Basin, which spans West Texas and New Mexico. It would also give San Ramon, Calif.-based Chevron, which has a market value of $163 billion, assets in the eastern Mediterranean and West Africa and yield potential annual cost savings of $300 million, according to Chevron.


1/4 of the S&P 500 will report this week…

Most Anticipated Earnings Releases

The U.S. dollar remains weak as most other countries are outperforming us in fighting COVID…

But the good news is that a weaker US$ is often good for stock prices. In 2017 when the U.S. dollar broke down from these levels, the S&P 500 put on a +20% move.

US Dollar Index

The New Zealand ski resorts and sports stadiums are open for business…

Of course, you have to be a Kiwi to participate. Good for NZ and all their success in smashing COVID. Couldn’t happen to a nicer country.

BusinessNZ Manufacturing PMI

France’s opening has also been successful…

Clémentine Sebert buzzed through an Ikea furniture store during her lunch break, filling her cart with decorative cushions, a new nightstand, lamps and a small rug. After being cooped up for two months during France’s coronavirus quarantine, she was back to work at the firm where she is a legal counselor — and ready to spend.

“I’m not so worried about the future,” said Ms. Sebert, who returned to her office last month after France’s lockdown was lifted, and was settling into a new rental apartment.

Because of a government program to support businesses during the crisis, Ms. Sebert kept her job and most of her pay while on furlough — a big help in paying for the new purchases. “If I had been unemployed, I wouldn’t be spending as much,” she said.

Consumers in Europe are going on a shopping spree as their economies reopen, offering hope that a fragile recovery from a deep pandemic-induced recession may be taking hold.


Thank you French Government!

France Retail Sales

Italy 1, United States 0…

The Italians stayed at home, wore masks and socially distanced. It paid off as the country crushed the virus. Our Government bet that we would follow the same curve. We didn’t come close and are now redoubling our efforts to send this game into extra time.

Italy vs US

The virus continues to be an issue of rising importance for voters…

With the Red Team failing to make more progress against the virus, voters will look to give the Blue Team the controls in November.

Trust More to Handle

The big national polls are now registering double-digit gains for the Blue Team…

Even the swing state polls are nearly all showing a Biden victory. Even Texas is only a +2 for the incumbent in a very Trump-friendly poll.

Latest Election Polls

The betting markets are now at all-time wide spreads…

Predict It

If there is a Blue Wave in November, should the markets be concerned?

@RyanDetrick: Growing consensus of a Democratic sweep in November. Historically, stocks have done quite well under this scenario. There are many worries out there, but this shouldn’t be one of them.

Democratic Sweep

Expect Congress to move on the next package of aid this week…

23 million — The number of renters in the U.S. who said they had little or no confidence in their ability to make their next rent payment, according to a survey from the U.S. Census Bureau conducted earlier this month. A federal eviction moratorium covering about a third of renters is set to expire on July 25.


Tweet from @nichcarlson

Members of Congress have an important two weeks ahead…

As COVID aid to Americans runs out in July, Congress will need to build another package to help keep people in their jobs and housing. This will get done, but it will be highly politically charged going right into the election.

President Donald Trump and his Republican allies in Congress are facing their last chance to keep the economic rout sparked by the resurgent coronavirus from deepening before the November election.

Amid a steady stream of bad economic news, Senate Majority Leader Mitch McConnell this week is set to unveil a roughly $1 trillion GOP plan, fashioned with the administration, for a new round of virus relief for individuals and businesses.

That will be the Republicans’ opening bid as they begin negotiations with Democrats, who’ve already put out an expansive $3.5 trillion proposal. Beside the amount, both sides remain far apart on many of the particulars, including McConnell’s determination to include liability limits for businesses, schools and other organizations…

As the economy falters, so does a pillar of the re-election strategy for the president and his Republicans allies who’ve staked their fates to his.

Although both parties have stakes in coming up with a relief plan, the biggest political burden is on Trump. He has repeatedly promised the economy would come “roaring back” in the third quarter, right before the election. It’s a prediction that’s looking less and less certain.


A great virus follow up Q&A with Larry Brilliant in Wired…

You say we’ve made progress. How much better are my odds of survival than they were three months ago?
Number one, you’re better off because you’re three months closer to a treatment or a prevention. Number two, the treatments are getting better, so the outcomes in hospitals are getting better. We already have convalescent plasma [with antibodies from recovered Covid-19 patients] that’s doing an amazing job. And number three, depending on where you live, by flattening the curve, it is far less likely that you would have died in a corridor in a hospital because there was no room in an ICU, or there was no oxygen to give you. But I think now almost 100 percent of all the ICU beds in Phoenix are full.

OK, we know to wear a mask. But should we still be swabbing everything with Clorox?
The virus does not exist very long in fomites. I mean you’re talking about a very small percentage of cases that are caused by the pencil, the toilet seat—asterisks on toilet seats, because if you don’t have a cover on the toilet seat, and somebody who’s got Covid takes a poop, you create an aerosol so that can spread. But if you look at the things that we worried about, like the Amazon box that comes to the door, the fact that the virus can do that doesn’t mean it does do that. I don’t scrub my groceries at all. If an Amazon box comes, I open it right away. I’m mostly worried about face-to-face transmission by somebody you have had a conversation with, or you’re stuck in an elevator with, or you’re seated next to somebody at a rock show or at a bar. I don’t go do any of those things. I don’t go to lectures, I don’t go out.

Speaking of ending the curse, how do we get out of this mess?
We can still get to that inverted V, but we have to do three different things. First, we have to develop a way to deal with the clusters—nursing homes, refugee settlements, immigrant workers, homeless encampments. We should look to Japan, which had similar problems, and they created a team which called the Cluster Busters. In an act of humility, we should be inviting the Japanese epidemiologists to come and teach us their techniques for being Cluster Busters.
The second thing that we should be doing is basic epidemiology 101. We should be finding every active case. You find someone who has symptoms of the disease, and a human being talks to them and identifies all the people they’ve been in contact with, looking backwards to try to find where the disease came from, what was their source of the disease. Those who test positive, you either treat them or you quarantine them for 14 days. Those who test negative, you isolate them for 14 days. You do whatever the hell you need to do, because you’ve got to stop the virus from walking into a bar. It’s not a joke. You’ve got to stop the virus from walking into a super-spreader event.

What’s the third thing?
A sensible, nationwide requirement for those places where there are clearly going to be super-spreader events to stay closed: bars, indoor restaurants, churches, megachurches, the kinds of places that we know will spread the disease. Those places can’t be reopened.


Don’t expect seeing a big concert happen until 2022…

“There is no insurance against Covid currently offered… and even normal insurance policies are pretty scarce and hard to come by,” said Geiger. “The insurers are sitting on the sideline because there’s infinite liability. … ‘Hey I got Covid,’ this and that – how do you prove it, etc.? I think the biggest companies can maybe self-insure, and they can start. Everybody else has to wait till the insurance industry feels good. So that’s one of many, many roadblocks in the way of restarting this vibrant economy that got shut down. So there’s probably 20 (reasons)… Insurance is a biggie. And I don’t know when that comes back, either.”

(Marc Geiger, former head of music at WME, and one of the founders of Lollapalooza)

How the virus will impact the individual auto market…

During the height of the pandemic in April, Americans sheltering at home drove 64% fewer miles, an unprecedented decline in travel. Those new habits will die hard, with KPMG predicting as much as a 10% permanent reduction of the almost 3 trillion miles typically traveled every year and vehicle ownership declining to slightly less than two cars per household.

“People buy a car to get to and from work and because shopping is a very important part of their lives,” Gary Silberg, head of KPMG’s global automotive practice, said in an interview. “If two of the primary missions that the American public buys a car for are going to reduce in demand, we know that’s going to have an adverse impact on auto sales. It’s just like gravity.”

The change in habits could result in roughly 1 million less sales of new cars and trucks annually, Silberg said. Americans have purchased more than 17 million cars, sport-utility vehicles and light trucks annually for the last five years. The National Automobile Dealers Association expects U.S. auto sales to plunge as low as 13 million this year. As the industry works its way out of the hole created by the shutdown, the potential loss of 1 million sales a year will loom large.

“People will fight very seriously for a million vehicles, especially if sales drop,” Silberg said.

With fewer miles driven and fewer cars on the road, that also means dealers and mechanics will have less money coming in from repairs and other after-market services aimed at keeping cars running.


This coin shortage will only accelerate the end of physical money…

The trouble began weeks ago, when the coronavirus pandemic delivered a bizarre double blow to the U.S. supply of quarters, dimes, nickels and even pennies. Social distancing and other safety measures slowed production of coins at the U.S. Mint. But also fewer coins made their way from customers to banks, coin-sorting kiosks and stores’ cash registers as people holed up at home.

“The flow of coins through the economy … kind of stopped,” Federal Reserve Chair Jerome Powell told lawmakers in June.

That month, the Fed began rationing coins. Soon after, business groups — representing grocers, convenience stores, retailers, gas station operators and others — wrote to Powell and Treasury Secretary Steven Mnuchin that the situation was an emergency.

“We were alarmed to hear that the system for distributing coins throughout the country is at the breaking point,” they wrote on June 23, offering a series of suggestions for how to fix it. A week later, the Fed announced it would convene a U.S. Coin Task Force to address the matter.


The convenience of flight… With the luxury of a resort hotel…

This one is for when all the RV parks are full. The Heli-Home was a crazy idea, but Winnebago did sell eight of them. Dad, why does my pillow smell like jet fuel?

Popular Mechanics


Finally, the reward for crushing COVID is live sports with fans…

Taiwan had one new active COVID case over the weekend. Fifteen in total for the country right now. Its population is larger than Florida.

Now let’s do this so that we can see the Fighting Ducks crush the Buckeyes in a Spring football game.

Tweet from @BaseballBrit

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