Tick-Tock

361 Capital Market Commentary | August 3rd, 2020

With 30-million people out of work, and over 1,000 Americans dying each day from COVID, somehow a Chinese-owned website dominated by dance videos has hijacked not only this weekend’s news cycle, but also valuable minutes of operating time in the West Wing. Hopefully, they will deal with it quickly and move on. We have a pandemic to get past and a major economy to save.

As unemployment aid expires this week, Congress is hearing its own tick-tock to reload the aid packages before those on the sideline can’t pay for housing, utilities and food. Now that their backs are up against a grandfather clock (plus their vacation breaks start on Friday), don’t look for any members of Congress to stand in the way of a quick deal. The Dems have the big stacks of chips right now in the polls, so expect an agreement to be cut with the Senate GOP this week as several of them are up for re-election in ninety days.

COVID data points will get better as we wear masks and social distance, but the next 2-3 weeks are going to be rough. While new cases appear to be flattening again, deaths will continue to rise as they are lagging the recent spike in cases by a few weeks. And then as kids go back to school, we are going to have incidents of outbreaks and shutdowns. So, the news flow will be tough during August, but as the testing positivity rate continues to retreat, the outlook for September will improve. Just look at the numbers coming out of Europe right now where Italy, France and Spain are each having daily deaths in the single digits. We will get there at some point, and our reward will be college football (but likely spring ball this season).

Interest rates moved again through all-time lows last week. This has not only pushed investors into the buying of other, riskier asset classes, but it is also pushing corporations to hunt for strategic deals. Just in the last week, we have had $100B+ in M&A hit the tape: Siemens buying Varian, Seven-Eleven buying Marathon’s Retail Gas operations, Nvidia wanting to buy Arm Holdings from Softbank, private equity buyers buying a ticket on the Kansas City Southern, and of course, Microsoft looking to dance for TikTok. Well when your corporate cash yields zero and borrowing rates are a scratch above zero, the executive offices will be doing a lot of looking around.

What a good week of earnings. Apple, Amazon, Facebook, UPS, and many others surprised strongly and stocks reacted. To date, two-thirds of companies have reported with about 60% beating estimates which is higher than usual, but then again, this has been an unusual year. Still a big slate of companies to hear from this week which will provide some added data and news flow away from the COVID aid battle in D.C. Then we will slide into the August staycation slowdown and the start of the school year. What a wild ride this summer has been. Tick-tock.

10-year Treasury yield hits a 234 year all-time low…

10 year US Government Yields
(@RobinWigg)

Cash rates moving to zero is forcing investors out of their money market funds…

Retail Money Funds

Do you want to know why Treasury yields are at all-time lows and stock prices at all-time highs?

$24 trillion in stimulus. It is just that simple. And a significant number of the programs and stimulus announced has not been fully implemented, so while the markets have reacted, the actual dollars, euros and yen have yet to be put to work.

Economic policymakers
(JPMorgan)

The stimulus is working and Europe is rising back…

Reopening of Europe leading to a better-than-expected manufacturing recovery bounce across the continent.

European Manufacturing PMIs
(Goldman Sachs)

In fact, Europe’s recovery lead is causing investors to take notice…

Scott Thiel can’t remember the last time BlackRock Investment Institute had a positive view on European stocks. It’s been that long.
At the end of June, the research arm of the world’s largest asset manager upgraded its view on European equities to overweight, from underweight, recommending that investors buy more of these stocks. “It’s been a very long time,” said Mr. Thiel, the institute’s chief fixed income strategist.

Europe has a bad rep with investors. For years, asset managers and bank strategists have characterized the region by its anemic growth rate and shaky political union, and steered investors away. Now, a crisis has turned into an unlikely investment opportunity as the region appears to have handled the pandemic better than some other parts of the world. In the past few months, European assets have staged a comeback.

The euro rose to its highest level in more than two years against the U.S. dollar this week, and the region’s benchmark index, the Stoxx 600, is set for a second straight month of gains greater than those of the S&P 500 index, in dollar terms, according to data from FactSet.

The most important reason for this upswing, analysts say, is that Europe is recording far fewer new cases of coronavirus. There are still occasional spikes in Europe, and some early signs that the infection rate is starting to level off in the United States. But there are about 65,000 new cases each day in the United States, compared with fewer than 10,000 new cases across the Atlantic.

(NYTimes)

The U.S. is also bouncing as today’s better-than-expected ISM data showed…

Tweet from @C_Barraud

Of course, the Fed would not raise rates anytime soon…

But it looks as if their leash to monitor inflation is getting even longer.

The Federal Reserve is preparing to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation, a practice it has followed for more than three decades.

Instead, Fed officials would take a more relaxed view by allowing for periods in which inflation would run slightly above the central bank’s 2% target, to make up for past episodes in which inflation ran below the target…

The change being contemplated now is a way of essentially telling markets that rates will stay low for a very long time. Markets have likely already picked up on this change, given the continued declines in long-term interest rates.

(WSJ)

Keeping rates lower for longer, and letting the leash run on inflation, has of course worried the U.S. dollar…

US dollar endures worst month in a decade

If the U.S. dollar is going into a long decline, here is your shopping list…

Dollar bear markets

Gold is on that list and Morgan Stanley has some thoughts…

“In today’s extraordinary environment, investors have been turning to gold as a hedge against multiple risks – currency debasement, inflation, uncertainty around the pace of economic recovery, US-China tension – all combining to drive record ETF inflows (+800t), and lifting price to all-time highs (spot $1,965/oz). The key short-term price drivers of real interest rates and the US dollar both remain supportive: 10-year real yields are at an all time low of -1.02% and DXY has fallen 4% over the last month. Last week’s FOMC meeting down-played the potential for further significant stimulus and delivered little in the way of fresh guidance, suggesting gold could be in for a period of consolidation in the absence of a fresh catalyst”

(Morgan Stanley)

Goldman Sachs also has strong thoughts on gold…

@carlquintanilla: GOLDMAN: “.. real concerns around the longevity of the US dollar as a reserve currency have started to emerge.” [Currie]

Gold Views

Investors are responding…

Record 6-week inflow to gold

Of course, low interest rates continue to help housing demand…

‘We’ve never seen such a sharp increase in home buying intent…bidding wars have strung up in places where they were once uncommon because market conditions and customer loads have swung wildly from February to July…Now we’re scrambling to capture demand. Blowing out our financial projections from just a few months ago. We’re running naked through the jungle with a Bowie knife clenched between our teeth, which is the way Redfin was born to be.” – Redfin (RDFN) CEO Glenn Kelman

“…the housing market appears to be relatively healthy and has recovered faster than the rest of the economy…To give you an idea about how remarkable the recovery in home buying has been: it took 10 years for purchase demand to fully recover from the great recession. In this crisis it did so in 10 weeks.” – Freddie Mac’s (FMCC) Senior Vice President-External Relations and Corporate Communications Jeffrey Markowitz

(@TheTranscript_)

Low rates and a lack of supply is sending lumber prices to the moon…

Lumber futures have more than doubled since early April, when roughly 40% of North America’s sawing capacity was curtailed by mill owners. They expected widespread job loss and economic uncertainty would torpedo demand for building products.

Instead, stuck-at-home Americans undertook home-improvement projects en masse. Home builders are rushing to meet soaring demand for houses, stoked by historically low mortgage rates and a flight to the suburbs.

“Our sales folks are spending three, four, five hours a day, dealing with customers that don’t have any inventory,” said Christopher McIver, vice president of sales and marketing at West Fraser Timber Co., North America’s largest lumber producer. “Whether it’s in plywood or whether it’s in lumber, everybody is still very, very short, including the box stores.”

(WSJ)

CME Lumber

Earnings are now confirming the four-month upward move in stock prices…

@EarningsScout: The improvement in underlying $SPY EPS ests has been accurately predicted by the market since 3/23 & debunks the bears commentary that stocks were disconnected with #earnings & fundamentals. The market speculates about the future, not the current, and especially not the past.

S&P 500 EPS growth estimates

Hail Apple!

@hmeisler: Highest volume for AAPL since the March downdraft.

Apple

Amazon’s stock also did well after it’s earnings report, but the Revenue Growth chart is even more impressive…

Amazon.com

Earnings showed many companies benefiting from COVID…

“We set a June quarter record with revenue of $59.7 billion, up 11% from a year ago. Both products and services set June quarter records and grew double-digits and revenue grew in each of our geographic segments, reflecting the broad base of this success.” – Apple (AAPL) CEO Tim Cook

“Demand is still super high. What we’re seeing on – it’s driven by Prime members and Prime member engagement. They’re shopping more often. They have larger basket sizes.” – Amazon (AMZN) CFO Brian Olsavsky

“Q2 GMV growth accelerated to its highest level since before our 2015 IPO, driving Shopify’s cumulative GMV to over $200 billion. Stores selling on Shopify sold 1.5 times what they did in Q4 of last year, the seasonally strongest quarter of the year, and that number of stores is growing all the time” – Shopify (SHOP) COO Harley Finkelstein

“Three months ago, the idea that our PayPal-branded experiences would enjoy TPV growth for an entire quarter at a level consistent with and only previously seen during high-velocity holiday selling days like Black Friday and Cyber Monday was bold and even somewhat inconceivable” – PayPal (PYPL) CFO John Rainey

“And in terms of penetration of e-commerce in our business, we have progressed this last 10 weeks as much as we did in the past –in the previous three of four years” – L’Oréal S.A.(LRLCF) CEO Jean-Paul Agon

“…what we’re seeing is that increasingly businesses of all sizes, but including small businesses have to sign up customers online, people aren’t walking into stores as much, have to find new ways to deliver products, like curbside pickup, like shipping. So, they are increasingly moving online” – Facebook (FB) CFO Sheryl Sandberg

“Due to ongoing COVID-related sheltering in place, retail store closures and changes in U.S. consumer spending fueled by the economic stimulus, we experienced unprecedented demand and record high volume levels” – United Parcel Service (UPS) CEO Carol Tomé

(@TheTranscript_)

Two-thirds of earnings for the S&P 500 are now behind us for the second quarter reporting season, but still many meaningful names to report this week…

Most Anticipated Earnings Releases
(@eWhispers)

COVID daily cases are turning the corner…

@COVID19Tracking: Our update is published. Major caveat to the data: Texas did not report today. The other states reported 49k new cases and 726k new tests. There were 515 deaths reported, about the same level as last Sunday. For perspective, last Sunday TX reported 6k new cases and 153 deaths.

Nationwide COVID-19 Metrics

Unfortunately, deaths will lag cases by 2-3 weeks…

Tweet from @PantheonMacro

Sweden took the rough road to battle COVID, but even their cases and deaths have fallen toward zero…

“That Sweden has come down to these levels is very promising,” state epidemiologist Anders Tegnell told reporters in Stockholm on Tuesday.

The Health Agency of Sweden says that since hitting a peak in late June, the infection rate has fallen sharply. That’s amid an increase in testing over the period. “The curves are going down and the curves for the seriously ill are beginning to approach zero,” Tegnell said…

“With numbers diminishing very quickly in Sweden, we see no point in wearing a face mask in Sweden, not even on public transport,” he said.

(Bloomberg)

Swedish Covid Cases Trend Down
@pwyowell

Time for the U.S line to converge with Europe and Asia…

Daily Change in Confirmed Cases
(@JimPethokoukis)

This will be the most interesting ‘Back to School’ year ever…

New York Magazine
(NewYorkMagazine)

Looks like Major League Baseball should have followed the NBA and NHL into a bubble…

@JimmyVaccaro

COVID has collapsed the movie theater-to-video window for the studios…

Not great for the theaters in the very long term, but at least they will have a better shot at staying in business in the near term.

The ceasefire between AMC and Universal is surprising because for a long time, exhibitors have argued that shortening the window will cannibalize their business. They believe it will encourage consumers to avoid theaters, no matter how compelling a new release may be, in favor of waiting a few weeks to stream it in their homes. But AMC has bargained that this was a risk it had to take and it will be compensated for its willingness to take the plunge, according to insiders. The theater chain could earn as much as 10% of the revenue from any film that Universal puts on premium video on-demand. In return, Universal has the option to make any film it distributes available for rent three weeks after it debuts in AMC’s theaters. The studio has to charge a minimum of $19.99 for the rental, which lasts 48 hours.

In the short run, however, Universal’s competitors are proceeding with caution. AMC has reached out to the other major studios to offer them slightly different terms from what Universal has agreed to, but has yet to find any takers. Universal is believed to be getting more generous terms because it made the deal first. Under its proposal to other studios, AMC would receive 20% of gross revenue from the rentals. It would also have to pay 2% less for each film it distributes from a particular studio. That means that if the theater chain and a studio split the box office returns, AMC’s take would be 52%, netting it millions of dollars on top titles. In return for being able to release their films on-demand earlier, studios would have to contribute an additional $2 million annually for marketing.

(Variety)

COVID pushing Zillow to allow its employees to work from home indefinitely…

Zillow Group introduced a new policy on Wednesday allowing about 90% of its employees the option of working from home, at least some of the time, indefinitely. It significantly extends a move the company made at the end of April in response to the coronavirus pandemic.

The new plan was spelled out in a blog post from Dan Spaulding, the Seattle-based real estate company’s chief people officer, in which he said the company always planned to be “responsive to changing conditions.” Three months ago, Zillow was one of the first companies to announce an extended WFH option, enabling approximately 5,400 employees to go remote through the end of 2020.

“This is a drastic change from where we started the year,” Spaulding wrote. “We have historically discouraged employees from working from home, preferring face time and in-office collaboration versus virtual exchanges.

“Our old preferences have been debunked during the pandemic,” he added.

(GeekWire)

Easy to see in the chart below how renters are moving from the high-cost cities to lower-cost cities during COVID…

Of the top 100 rental markets in the nation, here is the listing of the top gainers and decliners for a one-bedroom apartment year over year. Of course, the equity residential stock price decline is also reflective as they own some of the top tier properties in gateway cities.

Rental Market

(WolfStreet)

But here in Colorado, our vacation mountain towns are also benefiting from an exodus of city dwellers…

“There were a number of people who relocated here full-time after 9/11, saying that it was simply too uncomfortable for them to be in the city,” said O’Donnell who has been with Beck for 24 years. “The difference now is that we have proven you can work from home. That was not the case in 2001, right? Now you can hold your job and work remotely and live in the safety of the mountains.”

Heading into this summer, resort communities embraced part-time residents as the economic foil to declining tourism. “The summer of the second-home owner” they called it, sculpting specific campaigns to entice non-resident property owners to come for prolonged stays and help float economies wilting without a steady flow of tourists. Now it’s become the year of the second-home owner…

The migration also is filling resort-town schools. Across the high country, school districts and private schools are seeing unprecedented enrollment and interest as a wave of newcomers settle in mountain valleys.

David Baugh, the superintendent at Aspen School District, said 30 to 35 new students typically enroll each year. This summer, enrollment has soared at the preschool, elementary, middle and high school, and the district is expecting 150 new students.

“They are all ages, but that is about an extra graduating class in a really good year,” Baugh said. “We are of course happy to welcome these folks and I can say anecdotally there are quite a few cars with Texas, New York, California and Arizona tags in town. We have asked all newcomers to self-quarantine for 14 days before entering school.”

(ColoradoSun)

Not a good sign for the outlook for air travel…

A director of United Airlines Holdings Inc. liquidated all of his directly owned shares in the company as the carrier struggles with a devastating decline in travel because of the Covid-19 pandemic.

United is considering furloughs for as many as one-third of its nearly 12,000 pilots, an executive warned on July 30.

On July 28, Edward Shapiro sold more than 157,000 shares for $5.25 million, four days after selling 25,000 shares, according to filings with the U.S. Securities & Exchange Commission. United’s shares have plummeted 64% this year.

(Bloomberg)

Ninety days left until the election polls close…

Recent polling continuing to show that battleground states like Georgia and North Carolina are tilting toward Biden.
Real Clear Politics
(RealClearPolitics)

We may not have a full slate of sports right now, but here are a couple of all-star advertisements that dropped over the weekend from Barilla and Nike…

The Rooftop Match
(YouTube)

Green Bay Packers
(YouTube)

And finally, we hope you can join us for a virtual 5k next month to benefit the Travis Manion Foundation…

The last couple of years, 361 Capital has hosted the Denver 9/11 Heroes Run benefiting the Travis Manion Foundation. The 9/11 Heroes Run provides a way to honor our fallen heroes—and with current public health concerns—this year’s event is going virtual. With that, we are hoping even more of you can join us from all across the country. By signing up as a virtual runner, walker or rucker you will still receive a shirt, as in past races, along with a multi-functional face mask/neck gaiter, all while honoring our heroes.

Please help us support this cause by registering here now. You can use promo code DION15 until 8/22 for a 15% discount on your race registration.

To learn more about the Travis Manion Foundation, their mission and the 9/11 Heroes Run purpose you can visit their website at 9/11 Heroes Run.

Catch up on past Weekly Research Briefings >