361 Capital Market Commentary | September 28th, 2020

I think I also paid $750 in federal income taxes once. I had a great summer job working on a McKesson warehouse loading dock during 1985. I felt like a rich man on each payday, even with the government withholding. Who would have known that I’d have a tax figure in common with the author of the book “Art of the Deal,” which I read a few years later?

Even before last night’s dumping of a box of tacks by the New York Times onto President Trump’s road to re-election, the Presidential polls were looking like long odds to beat. (The Atlanta Falcons would like you to hold their beer.) Trump needs women voters to change their minds from Biden, but that is looking even more difficult given his weekend Supreme Court pick. And, this new release of tax returns will not help him with any undecided voters paying more than $750 a year. All you need to know is that the hottest political battles right now are for POTUS in the state of Ohio, and the Senate seat in South Carolina. That should sum up where we are in the 2020 races. Many are still concerned that the election count will roll on for days…or weeks after November 3rd, but I don’t see it happening. Time for the markets to move on and look forward.

So, we had a 10% correction in stocks led lower by the Nasdaq, while at the same time the U.S. dollar moved higher. We had a rise in COVID cases in European and U.S. cities. The U.S. economic data looks like it’s no longer accelerating higher across the board. And, we thought that a new stimulus package from Congress was a dead deal. Also, the increased angst about the election returns, and whether or not the POTUS would leave the White House if he lost. Today’s bounce in the markets is trying to put to rest some of the political uncertainty from the last week; ditto for the fall in the U.S. dollar today. I have to think that the U.S. currency will continue to decline as the markets look forward to a Biden presidency and an increase in future fiscal spending. The lower dollar will be good for stock prices, great for commodity prices and challenging for fixed income values. The debate is on Tuesday, monthly Jobs data on Friday, and corporate earnings in two weeks. Much to look forward to, but still be careful where you step.

The U.S. dollar vs. global stocks and the Nasdaq…

I see how the ACWI performs inversely to the Forex, but a bit surprised as to the close relationship with the Nasdaq. So, if the dollar resumes its slide, will the Nasdaq take off again?

Dollar vs Equities

If you are long the economy or own a restaurant, then you are rooting for another round of congressional stimulus…

Spending Bump

Along with stocks, riskier credit spreads have also taken a breather in September…

Energy has been a very difficult sector. Will the Fed come to the rescue and increase their buying of oil and gas company bonds?

BBB Spread

The big will only get bigger…

Starbucks and Dunkin’ will gain as the small mom and pops throw in the towel. Single store, family-owned restaurants lose out to the big chains. Small retail shuts down, while the majors with big online footprints thrive. Sad but true.

“I think one of the things that happen out of COVID is, the winners win bigger. There’s an awful lot of consolidation. The leaders in a sector are pulling away from the also-rans…we’re in a bit of a world where the winners have access to great amounts of cheap capital.”
– Blackstone (BX) Executive Vice-Chairman Tony James


Nike is one of the giants getting much bigger during COVID…

Nike is proving during the pandemic that its big bets in digital are paying off, as consumers are turning to its website and app in record numbers to shop for sneakers and workout apparel.

For the past few years, the company has been pulling away from department stores and other wholesale outlets, instead investing in opening its own smaller neighborhood stores, called “Nike Live,” to serve as pickup hubs for online orders, alongside multilevel flagship locations dubbed “House of Innovation.” It also is testing a new concept that debuted earlier this year in Guangzhou, China, called “Nike Rise,” where visitors can use their Nike app once inside the space to sign up for local soccer matches and running clubs.

Even as most of its stores were reopened, Nike’s digital sales soared 82% during the fiscal first quarter, pushing revenue ahead of analysts’ estimates…

Before the Covid-19 crisis, Nike had set a goal of having its e-commerce sales represent 30% of total revenue by 2023. But it has already exceeded that. It didn’t break out the exact percentage, but said online sales were more than 30% of total sales during the latest quarter.

Now, it’s on track to break 50% in coming years.
“The accelerated consumer shift toward digital is here to stay,” CEO John Donahoe said Tuesday. “Digital is fueling how we create the future of retail.”

“Nike’s digital transformation strategy is not easily replicated,” he added. “Simply put, scale matters, and Nike leads.”


Home sales remain on fire, but housing stocks have begun to ignore the upside numbers…

@calculatedrisk: New Home Sales increased to 1,011,000 Annual Rate in August

New Home Sales and Recessions

Berkshire Railroad is seeing solid improvements…

“We have seen the economy start to pick up relative to rail loadings…We basically say that if we’re handling 200,000 units a week, that indicates we’re a busy railroad. In 2018, we handled over 200,000 units a week, 41 times that year….In the depth of the pandemic, our rail loadings were actually down to about 150,000 units a week. Now, we have seen that continue to come back. And we anticipate this week we’ll handle somewhere in the neighborhood of mid 195,000-196,000 range,”
– BNSF Railway incoming CEO Katie Farmer

A great long read on how we get past COVID…

Quick tests will help until we get a vaccine. Until then, we wear masks and hammer down the local outbreaks.

There’s been recent buzz surrounding rapid Covid-19 antigen tests—cheap tools recently approved by the Food and Drug Administration that can deliver results within minutes. Some experts have questioned their utility, because they aren’t yet as accurate as more common lab-based tests. But Mina thinks that, if they’re produced on a massive scale and authorized for at-home use, rapid tests can help quell the pandemic in surge areas. The idea is that people would use them not as passports to enter crowded spaces and do things they wouldn’t ordinarily do, but as daily checks before they go about their normal business.

“They don’t have to catch everyone, because the messaging would have to be you do exactly what you’re going to do anyway. If the test is negative, you continue everything the same. But if the test is positive, then you definitely don’t go out,” he says. “We actually [can] use it as a tool to create herd effects so that you have enough people who are high transmitters not transmitting.”


The airlines have been quick to jump on the quick testing train…

Global airlines on Tuesday called for pre-departure Covid-19 testing for all international passengers to replace the quarantines they blame for exacerbating the travel slump.

Rapid and affordable antigen tests that can be administered by non-medical staff are expected to become available in “coming weeks” and should be rolled out under globally agreed standards, the head of the International Air Transport Association (IATA) said during an online media briefing.

“We don’t see any alternative solution that would be less challenging or more effective,” IATA Director General Alexandre de Juniac said…

With rapid antigen tests becoming available for as little as $7 each, De Juniac said, airlines will push for their use to be endorsed by International Civil Aviation Organisation (ICAO), the U.N. agency that oversees global aviation rules.

A global agreement is needed to ensure test results on departure are accepted on arrival, he added. “It will also boost passenger confidence that everybody on the aircraft has been tested.”


Airlines make their money on business travelers so they need the tests available at every airport as soon as possible…

First class is a loss leader
Business low teen – 20%+ margins
Economy is breakeven or 1-3% margin


A first look at commercial real estate markdowns is eye opening…

Commercial properties hit by the economic effects of coronavirus could have lost as much as one-quarter of their value or more, laying bare the scale of the damage being wrought across American malls, hotels and other commercial buildings.

Evidence emerging in the commercial mortgage-backed securities (CMBS) market from recent appraisals also raises questions over the value of the collateral backing commercial mortgages throughout the financial system.

Properties that have gotten into trouble are being written down by 27 per cent on average, data from Wells Fargo shows. New appraisals are triggered when a commercial property owner starts to have trouble paying the mortgage, and the loan is handed to a “special servicer” that could eventually seize the property on behalf of CMBS holders…

The number of new appraisals is accelerating. The Wells Fargo analysis covers 116 struggling properties bundled into CMBS that have had new appraisals since April 1 — 68 of them this month.

Of the total, 75 of the mortgages were backed by hotels while 26 were retail properties, whose tenants have been struggling under lockdown-enforced closures and economic weakness.

(Financial Times)

BlackRock lays out their case for higher inflation…

First, higher global production costs are likely: the Covid-19 fallout marks a major negative shock to services activity. A notable share of contact-intense services will cost more to provide due to reduced capacity, from dentists to restaurants. Deglobalization and the remapping of supply chains will be accelerated by the post Covid-19 desire to achieve greater resilience against a range of potential shocks. This means reduced global specialization and higher costs. Less offshoring could mean that domestic workers will have more bargaining power. That is especially true in places where the political pendulum is swinging toward addressing inequality. Technology has played a role in the disinflation of the past few decades. Yet reduced global competition in economies may embolden companies to hike prices when domestic cyclical pressures rise. Selected large companies have more pricing power than ever to pass higher labor costs on to customers – especially if they seek to buffer profit margins from reduced growth prospects of scale and costlier supply chains.



You already know that inflation is moving because the things you need during COVID cost more…

If it feels like the price of everything you buy has been soaring, that’s because it has—even as central bankers everywhere worry about the danger of deflation.

The gap between everyday experience and the yearly inflation rate of 1.3% in August is massive. The price of the stuff we’re buying is rising much faster, while the stuff we’re no longer buying has been falling, but still counts for the figures.

Economists will be relieved that the laws of supply and demand are still working, at a time when so much in the discipline is in doubt. But for investors it hangs a veil over the outlook for perhaps the single most important issue for the markets: whether we’re headed for a future of inflation, deflation or a continuation of the past decade’s lackluster price rises.


Inflation Items

Gold didn’t like the pop in the U.S. dollar. Now what is next for it?


Plenty of green available for Phoenix HVAC repair teams…

@NWSPhoenix: Phoenix has now recorded 129 days of 100+ °F temperatures so far this year, which is tied for second-most number of days. Do you think we’ll beat the all-time record of 143 days?


Finally, the legal demand letter of the week…

@eriqgardner: Bill Murray receives a legal demand from the Doobie Brothers. And it’s everything you’d want it to be…

Doobie Brothers

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