Work from Hammock

361 Capital Market Commentary | August 10th, 2020

It’s the second week of August, so hopefully you have an office chair set up for the month that resembles this one. In a normal year, this would be one of the quietest weeks in the markets. But with 20-30M people out of work and concerned about this month’s rent, all eyes remain on Washington D.C.

The good news is that we will get a $1.5-$2.0 trillion COVID aid deal this week before Congress goes on break. Because if we don’t, then analysts’ estimates for earnings, and strategists’ estimates for U.S. economic growth, will be sledgehammered for the rest of the month. This will be immediately reflected in lower stock prices and wider credit spreads which will end up costing the U.S. much more to fix in the short term. Rents and mortgage payments not being made in August and September will ripple quickly through the real estate property markets and the mortgage-backed security pools that own the affected assets. This could reach out to infect the banking system which would be damaging to all future lenders and borrowers. So, to prevent the dominoes from falling, Congress will come to a resolution this week. Plus, they also want to get their hammock time.

Not much else going on this week besides Joe Biden’s VP pick (Harris or Rice expected) and a decision on spring college football. Enjoy the beach and go paddle boarding, or catch a wave for me.

We will be taking next week off from the Weekly Research Briefing, so look for a new edition on August 24.

U.S. real estate landlords are walking a tightrope without a renewed aid package…

Renters across America are wading into unknown territory. With the lapse of the federal moratorium on evictions that expired July 31 and the end of the $600 per week boost to unemployment benefits, a recent survey reveals the breadth of financial uncertainty now plaguing Americans. An estimated 27% of adults in the U.S. missed their rent or mortgage payment for July, according to a nationwide survey conducted by the U.S. Census Bureau weekly over the last three months. Among renters alone, just over one-third (34%) said during the waning days of July that they had little to no confidence that they could make their August rent payment, a stark measure of the ongoing economic devastation for households stretched to the brink by coronavirus pandemic.

The survey registers the deepest uncertainty across the South, where in some states, more than one-third of renters and homeowners said they missed their last rent or mortgage payment and would struggle to meet their obligations for August. In Texas, for example, 39% of renters said they weren’t certain they could pay their rent (or they were sure that they couldn’t). In Oklahoma, doubt has crept up to 43%.


Housing Uncertainty

Last week had some good news for the recovery…

The highlight of the week was the employment report. The U.S. economy added 1.8 million jobs in July, a surprisingly strong number given still high initial unemployment claims, weak ADP report earlier in the week (a gain of only 167k private sector jobs), and Census Pulse data that suggested a downturn in the jobs market. The combination is somewhat puzzling. I suspect the establishment report is still being push and pulled by the dynamics of the sudden shutdown and the initial reopening and has yet to reveal where the labor market stands after those dynamics have played out. The other data I think is signaling that we are close to seeing that process conclude and will soon settle into a slow grow trajectory.
US Nonfarm Payrolls

Manufacturers in the U.S. were also surveying very positively…

ISM Manufacturing PMI

Ditto for U.S. Services sectors…

ISM Services PMI

Services New Orders actually surveyed at their highest level in 15 years…

ISM Services PMI: New Orders

Goldman feeling good about a vaccine this year and positive about the global recovery…

“We remain more optimistic than most other private and official forecasters about the global economic recovery”
(Goldman Sachs)

Our Global Growth Forecasts

Hyatt Hotels even said last week that China has recovered…

“With respect to China, the progression has been really great to see very encouraging. We’ve seen a steady progression of occupancies in the market over the course of the last several months. And to the point where if you look at the different regions within China and the performance there, we’ve seen very strong performance in East China, South China and West China to the point where by the end of July, they were at occupancy levels equivalent to where we were in 2019, which is quite remarkable” – Hyatt Hotels Corporation (H) CEO Mark Hoplamazian

Chinese manufacturing data confirms their recovery…

Caixin/Markit China Manufacturing PMI

As does the bounce in China’s short-term swap rates…

Chinese rates have been pulling ahead of the US

Even with White House vs. TikTok, the Chinese stock market looks ready to take off…

@RyanDetrick: China Shanghai Composite has coiled for years. Is this finally the start of something bigger?


The virus still spreads in the world…

But as we have seen in other geographies, COVID remains much less damaging today than it was back in March and April.

Spain's Catalonia cluster

The U.S. infection rates and number of new cases continue to decline…

Next goal will be to get the daily fatality rate down from 1000+ and towards double digits before the cold weather begins.

7-day rolling # of new cases
(Goldman Sachs/JHU CSSE)

A great Q&A with Bill Gates in the new Wired…

At this point, are you optimistic?
Yes. You have to admit there’s been trillions of dollars of economic damage done and a lot of debts, but the innovation pipeline on scaling up diagnostics, on new therapeutics, on vaccines is actually quite impressive. And that makes me feel like, for the rich world, we should largely be able to end this thing by the end of 2021, and for the world at large by the end of 2022. That is only because of the scale of the innovation that’s taking place. Now whenever we get this done, we will have lost many years in malaria and polio and HIV and the indebtedness of countries of all sizes and instability. It’ll take you years beyond that before you’d even get back to where you were at the start of 2020. It’s not World War I or World War II, but it is in that order of magnitude as a negative shock to the system.Let’s talk vaccines, which your foundation is investing in. Is there anything that’s shaping up relatively quickly that could be safe and effective?
Before the epidemic came, we saw huge potential in the RNA vaccines—Moderna, Pfizer/BioNTech, and CureVac. Right now, because of the way you manufacture them, and the difficulty of scaling up, they are more likely—if they are helpful—to help in the rich countries. They won’t be the low-cost, scalable solution for the world at large. There you’d look more at AstraZeneca or Johnson & Johnson. This disease, from both the animal data and the phase 1 data, seems to be very vaccine preventable. There are questions still. It will take us awhile to figure out the duration [of protection], and the efficacy in elderly, although we think that’s going to be quite good. Are there any side effects, which you really have to get out in those large phase 3 groups and even after that through lots of monitoring to see if there are any autoimmune diseases or conditions that the vaccine could interact with in a deleterious fashion.But people aren’t getting their tests back quickly enough.
Well, that’s just stupidity. The majority of all US tests are completely garbage, wasted. If you don’t care how late the date is and you reimburse at the same level, of course they’re going to take every customer. Because they are making ridiculous money, and it’s mostly rich people that are getting access to that. You have to have the reimbursement system pay a little bit extra for 24 hours, pay the normal fee for 48 hours, and pay nothing [if it isn’t done by then]. And they will fix it overnight.


The virus impact on Hollywood…

Not only have box office receipts fallen to zero, but so has new TV and movie production. It will be a most interesting second half viewing slate with the studios assembling whatever they can find off of the cutting room floor. Good thing that they are cancelling the awards season early.

Domestic Box Office
(Goldman Sachs)

The virus impact on your dentist…

Do not skip your dental appointment. The team in your office is geared up in a near hazmat suit. You need your teeth cleaned and they need your business. So, book an appointment during this slow month in the markets.

Patient Volumes
(Goldman Sachs/ADA)

The virus impact on the housing market remains a big positive…

A sluggish U.S. housing market is staging a recovery amid the pandemic, shaking off high unemployment and a rising number of infections as buyers with pent-up demand seize on record-low mortgage rates. Sales of previously owned homes rose 20.7% in June over the prior month to a seasonally adjusted annual rate of 4.72 million, according to data from the National Association of Realtors released Wednesday, the biggest monthly increase on record going back to 1968. The surge in existing-home sales follows other recent bullish indicators such as rising new-home sales, robust home-builder activity and a flood of mortgage applications.

Driving sales are apartment renters seeking more space, young families moving to the suburbs, and wealthy city dwellers looking for second homes, brokers and economists say. At the same time, the supply of houses for sale remains low, with the pandemic making potential sellers cautious about letting people tour their homes.

“The housing market is hot, red hot,” said Lawrence Yun, chief economist for NAR, an industry trade group. “As we are coming out of the lockdown, we see this backlog of buyers…trying to take advantage of the record-low mortgage rates.”


Homeownership Boom

Many companies will be working from home through next summer…

But how many will be like Facebook and give their employees a $1,000 home office needs allowance?


Zillow CEO, Rich Barton, on the factors affecting today’s home purchase market…


Another homebuyer survey showing the current housing drivers…

Buyers are gravitating away from dense, expensive cities to single-family homes in affordable suburbs. According to Redfin, condominium prices were down 1.4% in June from a year earlier while single-family homes were up 2.6%. Sales growth has been strongest in the least-dense areas, especially around major cities, according to mortgage and home-sales data analyzed by Edward Pinto and Tobias Peter of the American Enterprise Institute. Asked how the pandemic affected their homebuying plans, 21% of buyers recently surveyed by Redfin said they want space to work from home, 21% said more outdoor or recreational space, and 7% said a place for children to learn from home. Savvy sellers are catching on: Along with granite countertops and master bathrooms, listings now mention attractive backdrops for Zoom calls.


What Homebuyers Want

Mortgage rates to a new all-time low…

Mortgage Rates

Sounds about right…

Tweet from @morganhousel

Credit spreads continue to get tighter…

Even heard on Friday where some Johnson & Johnson debt traded at a negative interest rate. We have seen this in Europe, but a new event for the U.S. corporate bond market.

The Moody’s BAA yield has collapsed. As the COVID-19 panic was at its worst, there was a temporary spike in the highest risk category of Investment Grade Debt. The Fed intervention into the Corporate Credit arena has brought the average yield on BAA-rated credit to a level we never thought possible. The Fed has hardly bought any paper, but their backstop has flooded money into the higher risk category of credit.
(Canaccord Genuity)

Moody's BAA hit a record low

Corporate debt yields going lower only makes corporate dividend yields even more attractive to investors…

@TheOneDave: U.S. corporate bonds historically have provided much more yield than stocks. Not any more.

Lost Advantage

BofA thinks that investors are still underweight gold…

@ISABELNET_SA: Gold How much gold should an investor have in his investment portfolio? BofA suggests an optimized allocation to gold of approx. 4.5%

Investors are still underweight gold

Interesting comment from someone who spends every day in the world of precious metal investing…

“In my 10 years as Chief Executive Officer of Sprott, I have never witnessed a more favorable macro outlook for precious metal investments. In our view, the central banks have painted themselves into a corner, leaving no option other than artificially low interest rates, debt monetization and, ultimately, currency debasement. Together, all of these factors have contributed to an extremely favorable macro outlook for precious metal investments. While we wish the circumstances were different, we are pleased that our clients and shareholders are now being rewarded for their foresight in allocating a portion of their wealth to precious metals investments.”
Peter Grosskopf, Chief Executive Officer, Sprott Inc.(Sprott)

Maybe the most extreme data graphics you will ever see in your lifetime…

“We’re now hitting the part of earnings season that will see some of the ugliest YOY declines.” – @HumOnTheMarkets

This Week's Ugly Revenue Declines

Another new record made by Apple Inc last week…

Largest S&P 500 % Weight

Apple’s largest shareholder decided it’s best investment in the Q2 was in its own stock…

Shares of Berkshire Hathaway Inc. were left out of the stock market rally in the second quarter. Warren Buffett clearly thought the disconnect wasn’t warranted. The famed investor spent a record $5.1 billion buying back Berkshire’s own stock in the second quarter, more than double the amount he’d ever purchased before. That came as he unloaded almost $13 billion of other companies’ shares, including airline stocks and some financials, in what was Buffett’s biggest selling quarter in more than a decade…

“Our operating business groups are preparing for reduced cash flows from reduced revenues and economic activity as a result of Covid-19,” Berkshire said Saturday in a regulatory filing. “We currently believe our liquidity and capital strength, which is extremely strong, to be more than adequate.”


Boosting Buybacks

Berkshire Hathaway doesn’t pay dividends but…

It’s stock repurchase rate is running over 3% annually for the last five years thus shrinking the shares outstanding by 16%.

Berkshire Hathaway

Maybe a whipsaw no more….

With the recent interest in the railroad, air freight and heavy equipment stocks, maybe Industrials can show some leadership as the global economy begins to recover.

Industrials XLI

What if you could make more advertising earnings by NOT using cookies on your website?

“When do people want to buy a Snickers?” said van Bentheim, recalling a conversation he had with someone who worked at an ad agency. “It’s not because someone is in a specific age or in a specific region or has a high income; it’s because they are hungry and they are looking at food at that moment.” On the whole, the new tracking-free ad server was performing so well that NPO decided to abandon cookies entirely beginning in 2020. As of January, visitors aren’t even asked to opt in or out; the site simply doesn’t track anyone. The results have been striking. In January and February of this year, NPO says, its digital ad revenue was up 62 percent and 79 percent, respectively, compared to last year. Even after the coronavirus pandemic jolted the global economy and caused brands to drastically scale back advertising—and forcing many publications to implement pay cuts and layoffs—NPO’s revenue is still double-digit percentage points higher than last year.

The main explanation is simple: because the network is no longer relying on microtargeted programmatic ad tech, it now keeps what advertisers spend rather than giving a huge cut to a bunch of middlemen. A report by the Incorporated Society of British Advertisers found that fully half the money spent by advertisers was getting sucked up by various ad tech companies before it got to the publishers running the ads. Even Google publicly states that when an advertiser and publisher both use Google’s platforms to buy and sell programmatic ads, Google takes more than 30 percent of the money. That’s before factoring in other players in the hyper-complicated digital advertising world, as well as the ever-present problem of fraudulent sites sucking up money in exchange for fake clicks.


Cookie Jar

The GOP will need perfect weather on November 3rd…

Republicans on every ballot now have a major problem and the party now knows it. If their voters wait to vote in person and the weather, a COVID outbreak, or the appearance of a landslide victory affect turnout, then all down-ballot Republicans could lose votes.

President Trump’s unfounded attacks on mail balloting are discouraging his own supporters from embracing the practice, according to polls and Republican leaders across the country, prompting growing alarm that one of the central strategies of his campaign is threatening GOP prospects in November…A Monmouth University poll of registered voters in Georgia taken late last month found that 60 percent of Democrats are at least somewhat likely to vote by mail this fall, compared with 28 percent of Republicans.

Glen Bolger, a pollster with the Republican firm Public Opinion Strategies, said that in one swing state he declined to identify, only 15 percent of voters planning to cast ballots by mail were Trump supporters. “Republicans are skeptical about voting by mail, and that’s a problem up and down the ballot,” he said.

Similarly, an analysis of current absentee ballot requests in North Carolina shows that Democrats have vastly outpaced Republicans, even though roughly the same numbers of Republicans and Democrats voted by mail four years ago.


The Current States of Mail-in-Voting

Not even an Oxford comma can help the U.K. save this statement…

@TheBrometheus: I’m horrified, yet curious.


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