So Close

361 Capital Market Commentary | June 29th, 2020

Miami beaches, Texas taverns and the LA bar scene all shuttered for the long holiday weekend. We almost made it to a wider opening for the Fourth of July. But science doesn’t sleep and it never takes holidays. We knew that the reopenings could lead to COVID spikes and business disruptions, and this one sure did at a terrible time. Is there a silver lining in this new surge of case growth? Yes. This new round of cases has not led to as many fatalities as the March wave. This is due to the fact that the average age of the newly infected has fallen rapidly, as those over 50 yrs. of age seemed to have taken extra precautions to avoid the virus in the last two months. Unfortunately, about one third of the cases ending up in a hospital bed are still under 50 yrs. of age, but at least we have the improved knowledge and capabilities to help them better recover. Hopefully, a new increase in awareness of social distancing and mask wearing will stop this new spread of the virus and allow the infected U.S. geographies to reopen again. New York City had to learn this the hard way; now it’s Dallas, Miami and Phoenix’s turn. So, don your mask, keep a safe distance and always dine outside. Labor Day social activities are only two months away and hopefully your beach can reopen by then.

The markets remain on edge. While the Treasury and Congressional stimulus and aid have helped to prop up the credit markets, and thus all other asset values, market psychology can be best defined as fragile. The market is now holding its breath on every COVID case and hospitalization release by stemming from the new outbreak states’ of Florida, Texas, Arizona and California. New city spikes are having a direct effect on expanded business openings and could soon affect August school scheduling. And with small business aid and expanded unemployment assistance ending this month, what will Congress do to renew the programs? Without more help, expect to see many more small businesses closing for good. Banks and investors who own pools of assets dependent on others paying their rent, leases and mortgages will be watching Washington D.C. closely.

This is no time to take extreme risks with the equity and credit markets. Best to sit back and have cash ready at hand to be able to play that next hand if COVID or Congress takes a wrong turn. Sometimes it is easier to wait for the next big data point, and pay a higher price, than buy early with more risk and uncertainty. Now is one of those times.

With the holiday weekend, the market volumes will thin and prices will go on cruise control at some point this week. We will be taking next week off from the Weekly Research Briefing. Our next issue will be on Monday, July 13. Also, I will be hosting a webcast with a Mid-Year Review of market events on July 22. Register Now. Hope you can join and thanks for reading.

Have a safe and enjoyable 4th of July weekend.

This new COVID transmission data series is very helpful in pointing out those states with future problems. Be safe Nevada…

Rt COVID-19: These are up-to-date values for Rt, a key measure of how fast the virus is growing. It’s the average number of people who become infected by an infectious person. If Rt is above 1.0, the virus will spread quickly. When Rt is below 1.0, the virus will stop spreading. Learn More.


Transmission Data Series

The second wave infections are not translating into the same number of fatalities…

But, it has now scared consumers and businesses into retreating from going out or opening their offices.

Virus Spread Accelerated

“Right now we are seeing rising infection rates, but … it’s very apparent to me that the world is accepting higher diseases, higher infection rates … and markets are still pretty stable..I think the market is probably a little ahead of itself at this time, because I still believe we are witnessing real tragedies in the small and medium businesses. What’s remarkable is there are more human beings being affected by the disease today than on March 21 when markets were 40% lower” – BlackRock (BLK) CEO Larry Fink


BUY the fear, SELL the comfort?

Buy the NY lockdown

“I’m much more optimistic about the progress with therapeutics and vaccines. Until then, we’re going to be an 80% economy, an economy shifting toward an e-economy.” – Bain Capital Co-chair Stephen Pagliuca


So many small businesses today are being kept alive by government assistance. What will happen in 1-2 months?

Roughly 140,000 Yelp-listed businesses that had closed since March 1 remained closed on June 15. A large minority of that set, 41%, has shut for good, according to Yelp.

The figures have improved by about 20% compared with April data, when 175,000 businesses were closed. But the large share of persistent closures, which were spread nationwide, showed the pandemic’s stubborn hindrance to life as normal even as all 50 states have taken steps to reopen.

Among business categories, retail stores had the highest number of total closures: more than 27,000. Restaurants, meanwhile, had an especially high share of permanent closures, with 53% of closed restaurants saying they won’t reopen, according to Yelp.


Number of businesses on Yelp

We didn’t mean to follow the Swedish ‘herd immunity’ model, but we ended up at the same point…

@EricTopol: One country intended to contain cases, the other didn’t

New confirmed cases of COVID-19

As a result, we will get to join Sweden in being banned from the EU for travel and tourism…

This will hit the global airline industry very hard given that the North Atlantic premium passengers likely represent all of the profits of those that fly back and forth across the pond.

A delay in opening up travel between the U.S. and the European Union would stunt a rebound in trans-Atlantic flights that are the industry’s biggest profit generators.

Carriers like British Airways and Delta Air Lines Inc. ply skies between North America and Europe that far and away comprise the biggest market for premium long-haul travel. Almost 40% more business- and first-class seats were sold on North Atlantic flights than the nearest contender last year, according to figures from OAG Aviation Worldwide.


Premium Position

U.S. airline stocks have pulled back this month with the new rise in COVID cases…


Multi-generational family gatherings this year will prove difficult unless high virus transmission rates are hammered down soon…

“By the time we get to the end of this year probably close to half the population will have coronavirus and that’s if we just stay at our current rate.” Dr. Scott Gottlieb on CNBC

U.S. consumers are moving toward thinking that COVID will last into 2021…

Record-High Think COVID-19

Many employees are not returning to the office in 2020…

@ZH_Crown: Work from home not just a phase per MS

Not Just a Passing Phase

WFH is great news for the Microsoft Teams product which we are all becoming very familiar with…

@TSOH_Investing: “We believe that MSFT’s vast installed base of 258 million commercial Office 365 subscribers has been a key driver for Teams’ more rapid acceleration vs. Slack during the pandemic, as Teams is included in each of its Office 365 bundles…”

Slack and Teams

I’ll place my chip between ‘After 12 months from now’ and ‘Never’…

Thirty-eight percent of survey respondents indicated that it will be more than a year before their company will have employees in the office at the same levels experienced prior to the coronavirus-induced shutdowns. Some 31 percent say it will be between six and 12 months before those levels are reached. About 15 percent say those levels will be reached within six months, while 16 percent say they will never have that many employees in the office again.


Workers at the Office

Major hotel owners are now skipping mortgage and loan payments on their weaker properties…

Blackstone has skipped a payment on a $274m hotel loan, joining the ranks of leading real estate investors that have fallen behind on debt during the coronavirus crisis.

The debt is secured on four hotels in Chicago, Philadelphia, Boston and San Francisco, which the US private equity group acquired in 2016 from Club Quarters, a membership-based hotel network that continues to operate the properties.

Blackstone made contact with the loan administrator in April to request “various modifications and forebearances”, according to a report distributed to credit market investors, which added that the properties were closed, and the loan was delinquent.


A tough outlook for Architecture Billings which isn’t recovering like other economic data series…

Architecture Billings Index

“The banking system has been a source of strength during this crisis and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.” – US Federal Reserve Vice-Chair Randal K. Quarles


A tougher outlook for bank stocks…

While the Fed stood behind banks last week, they did ask them to start retaining more capital. Because of the rise in COVID-related economic uncertainty, it is probably wise to wait now for the COVID-spiked states to cool down so we can be certain that U.S. businesses will be able to reopen. If the new closures drag on and Congress does not extend more financial aid, there will be increases in delinquencies and loan losses. So, patience will be required if you own these names.


As Europe outperforms the U.S. in managing COVID cases…

Europe vs. US

Several investment firms are now recommending European stock allocations over U.S. ones…

@jsblokland: Goldman Sachs expects the Eurozone economy and Eurozone assets to outperform as the #Covid19 outbreak is more contained, #reopening is happening faster and labor markets are better protected.

Time for Outperformance

Tough to argue with Biotech stocks anywhere in the world right now…

@StrategasRP: This is a great chart… a technical favorite.

Nasdaq Biotech Index

As expected, bond yields have broken down with this recent uptick in COVID…

@hmeisler: Yield on Ten Year broke the uptrend line.


The market is telling you that inflationary pressures are building…

The flood of liquidity in the markets is causing greater investor demand for inflation protection. This is being seen in rising TIPS prices leading to lower and lower yields.

10yr TIPS Yield

And of course, rising inflation is great for your gold positions…


Another chart showing why you own gold…

@ISABELNET_SA: Gold Chart suggesting that the growth of central bank balance sheets should drive gold prices higher

Gold Chart

Finally, no more elevator rides with others means…

@lyazel: The end of the #elevatorpitch?

Elevator Pitch

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