• GB Davis

15-16% Unemployment is Not Good - (5/6/20)

  • If Warren Buffet doesn't see ANY reasons to buy U.S. equities at these all-time Multiple of Earnings Highs - should you think more like Buffet or less like Buffet?

  • COVID19 deaths in the U.S. are on track to eclipse 200,000 in mid-July.

  • As businesses begin to re-open, while this is encouraging in some respects, there will still be major economic strife.

  • Tomorrow we will get a historic cumulative unemployment figure for the weekly data and on Friday, Non-farm payrolls - we see 15-16% for U3, the officially reported number.  We see 19-20% for U6, the broader unemployment figure which includes short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.

  • Bankruptcies of all varieties will accelerate in 2020 - and the Banking sector has been selling off over the past few days; Transportation looking weak too.

  • Some Funds have halted redemptions.

  • There are some positive and negative aspects of the Fed's actions (net positive).  One negative aspect is that by providing liquidity, it doesn't force people to sell OVER INFLATED UNICORNS - that ones that ACTUALLY need to deflate to meet redemptions and REAL liquidity needs.  $SHOPs CAN valuation is the perfect example of dot.com excess. If someone walked up to you and said, you can have one present: either the Royal Bank of Canada or Shopify - what would you pick? -- and which would a Millennial pick?  and which would a Boomer pick?  and which would a Bitcoin trader pick? 

  • 1Q earnings, but a mere two weeks or so of real COVID impact - 2Q will be horrendous.

  • We're continuing to watch what is and is not bouncing in CHN - as we indicated in March - that there would be a lasting psychological effect - people (generalizing) are scared to work, dine, travel, fly, etc. etc. (as shown in polling).

AT THE END OF THE DAY, THE INTRINSIC VALUE OF A BEANIE BABY OR A DUTCH TULIP IS VERY PERSONAL - and cannot be commoditized to excess forever.  We think U.S. equity valuations will be shaved by 20%+ by the fall - in another draw-down scenario - and we are not alone in that thinking.

  • On March 22, 2020, in "Week Ahead," we commented in part, that there would be a "[c]hanged Psychology after [covid19 passes in our 3-wave baseline], just as with post 08/09 global economic weakness." (i.e. not business back to normal).  Thereafter, we Noted:

  • On April 7, 2020, in "Only Bulls Rush In," we indicated, in part, that, " There will be a Lasting Impact of this mess too - China, which three weeks ago lifted its internal travel restrictions, is still seeing car demand (auto sales) down by over 40%."

  • On April 24, 2020, in "On Friday's we Pause and Reflect," we commented (via Fitch), in part, that, Industrial Resumption Stagnates at High Level; Retail Ramps Up High-frequency data on electricity consumption and logistics reveal a fast recovery in China’s industrial activity, although still some distance from 2019 levels. The consumer sector is rapidly returning to normal levels, although the pace of each sub-sector varies. Offline retail and leisure industries are likely to recover at a slower pace, as intra-city traffic data remain subdued. Recovery in Industrial Activity Stagnates: The resumption of industrial activity flattened in April, probably due to lower overseas demand and some supply disruption. The combined daily coal consumption by China’s six key power utilities averaged at 87% of 2019 levels from 1 to 24 April, while internet giant, Baidu, Inc. (A/Stable), estimates that 20% of the working population had not returned to work as of 7 April, based on big-data analysis on its platforms. Steel tyre production rates recovered to around 60% of capacity as of mid-April, up from 40% in early March, versus 72% in the same period last year. The blast furnace operating rate had also recovered to 68% of capacity as of 24 April, up from 64% in early-March, to be on par with April 2019. Large Corporates Recover Faster: Large corporates have recovered faster than SMEs according to logistics data from a leading trucking platform, G7. Full-vehicle trucking volume is already on par with November 2019, a high season for Chinese retail, while less-than-truck-load transport used by smaller corporates has recovered to 90%-95%. This is in line with the Chinese government’s estimate that 99% of large enterprises and 84% of SMEs had resumed operation as of mid-April."

  • On April 26, 2020, in "Week Ahead," we commented, in part, " Where are we Looking for Greenshots? We are monitoring foremost China and what is and is not rebounding there and how fast. -->  https://www.scmp.com/week-asia/opinion/article/3081465/coronavirus-think-worst-over-chinas-economy-not-so-fast  -- U.S. survey data, also shows a lasting psychological impact (and not just for the U3 folk) but in regard to social distancing from COVID on the U.S. Consumer."

  • On April 29, 2020, in "Winners and Losers - Sector Analysis - Where to Start," we indicated, in part, " Apparel is experiencing a similarly worrying slowdown, with consumption 40-50% lower in China compared to pre-pandemic levels."

  • On April 30, 2020, in "Month End Mark-ups will Expire Eventually," we indicated, in part, via Nordea, " [v]oluntary social distancing is also unlikely to stop. So far data out of China also indicate that things will not go back to normal just because lockdowns are ended. Broad activity measures are still 20 to 40% below normal levels."

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