Three Peaks

361 Capital Market Commentary | October 19th, 2020

We made it through the first two COVID peaks and now it’s time for a third ascent. This one could be trickier as the country needs to battle both colder weather and communities tiring of safety and social distancing measures. We are already seeing cases climb rapidly in cities and states where safety protocols and mask mandates are not in place. This new spike will likely put a damper on year-end holiday travel, gatherings, and could affect retail sales. Without any help from Washington, I’d expect more financial stresses and bankruptcies to hit the travel, leisure, entertainment and retail industries. If you know a pilot, stage actor, or bartender, please try and make sure they have support and a backup plan in the event their industries are out of business, or oversupplied for the next few years.

The week’s rise in COVID cases and hospitalizations is adding a further elbow to the gut of Washington D.C. because this week will be their last chance to get something done to help those out of work before the holidays. If nothing is done this week, then there’s a small chance that something could get approved in the lame duck session. But even then, the final timing of assistance may not hit until late December or January. And, if they wait for a new White House, that financial help may not drop until February or March. We are all unsure of how this Mnuchin/Pelosi dance will end. It seemed like the music stopped many times over the past several weeks, but now the President is pressuring for a much bigger aid package than even Pelosi is offering. If Sec. Mnuchin and Speaker Pelosi can come to an agreement this week, then this could force several GOP Senators to go along with the big package to save their upcoming Senate seats. If the incumbents don’t vote for President Trump’s deal, then the GOP-controlled Senate is certain to flip to the Dems in two weeks. Bottom line: This is one of the craziest hands of poker I have ever seen played.

In the short term, the stock market remains fixed on the Mnuchin/Pelosi dance like a cat on a laser pointer. But for longer-term timeframes, the equity market is placing its bets to benefit from a new administration. This, of course, means placing stacks of chips on those companies that will rise from a lift in spending, especially infrastructure spending. Just look at the price chart of Caterpillar below. There is no bigger cap bell weather for large infrastructure spending. When the large cap, billion-dollar portfolio managers at the biggest fund companies and hedge funds want to dial up their infrastructure exposure, they buy millions and millions of shares of Caterpillar first, and then later spend time digging into all others. It is no surprise that as Vice President Biden has increased his lead in the polls through the summer and into the fall, that CAT has outperformed the market. There are plenty of other industrial and material names that have performed well like Caterpillar. This is the market placing bets on the winners of the $2-3 trillion in infrastructure spending that is headed to the U.S. economy in 2021 and beyond.

Caterpillar, Inc

As mentioned, COVID cases grew meaningfully this week…

Daily reported Covid-19 cases

And not surprising, case counts are growing fastest in the communities with fewer safety measures for COVID in place…

Average new daily Covid-19 cases
(WSJ)

Increasingly worrisome is the rise in hospitalizations…

As long as regional hospitals do not become overwhelmed, the current fatality rate should be kept in check.

National Covid-19 Hospitalizations
(biancoresearch)

Besides COVID and politics, last week 3rd quarter earnings season started in full with the banks dropping some very important credit outlook comments…

While bank stock investors were not rewarded for their companies’ performance last week, most important over everything should have been the more positive highlights about credit quality. Banks did not see the need to increase their reserves further in Q3 and felt they were adequately reserved. And, it did not appear that their customer health deteriorated in total. If we can get past COVID and get more financial help from Congress, then the banks would appear to be over reserved which could someday benefit their earnings.

“Credit performance across almost all loan products was stronger than we would have anticipated a quarter ago.” – Wells Fargo (WFC) CEO Charlie Scharf

“What you’ve seen with us and also the other banks this morning, I mean, provisions are a bit lower than they had been the early part of the year…You’re right, our losses have been very low.” – First Republic Bank (FRC) CEO Jim Herbert

“Overall, the balance of nonperforming loans remains at a modest 48 basis points to loans.” – Bank of America (BAC) CEO Brian Moynihan

“Charge-offs across our portfolios remained relatively low and, in fact, we’re down slightly year on year and quarter on quarter.”
“While we could see an uptick in charge-offs over the next few quarters, given payment relief and government stimulus already provided we don’t expect any meaningful increases in charge-offs until the second half of 2021.” – JPMorgan Chase (JPM) CFO Jennifer Piepszak

“Despite the somewhat lumpy increase in NPAs and charge-offs during the quarter, we’re seeing broad signs of progress in commercial credit quality as the economy recovers”
“We believe charge-offs should be stable in Q4 and barring a deterioration in economic outlook, we should start to see reserve releases beginning in the fourth quarter…I think we’re probably nearing the peak charge-offs, but they’ll stay elevated for a while before they move back down I think in the second half of the year.” – Citizens Financial Group (CFG) CFO John Woods

“…if you look at consumer as well, we’ve had really, really healthy trends even surprising to the point of being surprising but very solid in terms of delinquency.” – Citizens Financial Group (CFG) CEO Bruce Van Saun

(@TheTranscript_)

This week and next will be peak earnings season for the S&P 500…

Most Anticipated earnings Releases
(@eWhispers)

J.P. Morgan laid out their forward-looking economic forecasts, which appear conservative…

JP Morgan
(J.P. Morgan)

All-time high confidence in the outlook for homebuilders…

@calculatedrisk: NAHB: Builder Confidence Increased to 85 in October, Record High

NAHB Housing Market Index

No slowdown in trading volumes leaving China’s main port…

Shanghai Containerized Freight Index
(@SoberLook)

Don’t have to look past your next restaurant receipt to find a rise in prices…

Food Away from Home
(@SoberLook)

That is a 30-year bottom in the Japanese stock market…

Japanese Nikkei
(@allstarcharts)

If we are planning a year-end trip, it is likely to be by car rather than by plane…

A new AAA survey finds that three out of 10 Americans are planning a vacation before the end of the year, and 80 percent of those will go by car. Not surprisingly, the top destinations are those known for outdoor recreation and socially distanced activities as travelers hit the road during the coronavirus pandemic…

The AAA survey finds that 23 percent plan to fly to a domestic destination, and eight percent plan to fly to an international destination.

Two-thirds (67%) of U.S. adults planning a vacation before the end of the year report some degree of uncertainty they will actually be able to take their vacation. As a result, some are opting for spur-of-the-moment travel decisions as they take coronavirus implications into account. One in five who are planning a trip before the end of this year expect to book within one week of traveling.

(TheNewsGuard)

Speaking of driving, you might want to spend some time on the auto after-market retailer stocks…

Since bottoming in 2015, the peak repair cohort dynamics continue to improve at an increasing rate with the number of cars entering the peak repair cohort age of 6 (vs. the number turning 13) improving sequentially every year with 2021>2020>2019>2018. This suggests the peak repair cohort is expanding at an increasing rate (and 2022 looks even better than 2021).
(JPMorgan)

Vehicles Entering 6-12 Year Age Cohort

Texas and Oklahoma hope that Goldman is correct in their outlook…

ISABELNET_SA: Price of Oil – Goldman remains bullish on oil prices, forecasting $65 oil in 2021 & expecting a recovery in global oil demand

Oil

Climate change is now directly affecting coastal real estate values in Florida…

With single-family homes selling for an average of $3.6 million, Bal Harbour epitomizes high-end Florida waterfront property. But around 2013, something started to change: The annual number of homes sales began to drop — tumbling by half by 2018 — a sign that fewer people wanted to buy.

Prices eventually followed, falling 7.6 percent from 2016 to 2020, according to data from Zillow, the real estate data company.

All across Florida’s low-lying areas, it’s a similar story, according to research published Monday. The authors argue that not only is climate change eroding one of the most vibrant real estate markets in the country, it has quietly been doing so for nearly a decade…

The paper released Monday by the National Bureau of Economic Research takes a different approach; it focuses not on price declines, but instead tries to detect an earlier signal of trouble, a decline in the number of houses changing hands.

Falling sales have been a reliable predictor of price drops in previous housing crashes. A drop in home values follow a common pattern. First, prospective buyers become reluctant to pay the price that sellers are asking. But sellers, not wanting to take a loss, often hold out for months or even years, before grudgingly starting to accept lower bids.

Dr. Keys, along with his co-author Philip Mulder, a doctoral student at Wharton, wondered if the same pattern could predict a climate-induced housing crash.

(NYTimes)

Florida

Viewership of sports programming in 2020 looks ugly…

Will this have a permanent impact on the price of sports TV advertising, or is it just a COVID thing? I’m actually surprised that more people are not watching sports. Fewer group gatherings to watch “the Big Game” and binge watching ‘Tiger King’ must bear much of the blame.

Sports Viewership Trend
(@paulsen_smw)

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