• GB Davis

Mexican Peso to Weaken another 20% to USD - 5/14/20

Checking-in

Today’s intraday reversal from negative to positive territory for the S&P500 was the largest intraday reversal since December 2018.  At the same time volatility ($VIX) remains elevated though declined to 32.61.  Transports (TRAN) lagged the overall market.  U.S. Banks and Financials were strong on the day and it remains to be seen what is moving this sector around at the moment – there’s clearly no reason to be bullish, and everything comes to a: what has overshot mentality (to some degree).  Also lagging the market, Real Estate ($XLRE), Airlines ($XAL) and Telecom ($XTC).  While Oil was bid, Copper, a great industrial strength tell-tale was very weak and actually declined.  Further, High Yield ($HYG proxy) continues to tell the story that equities conveyed on risk earlier this week: risk-off.  Tomorrow’s monthly options expiration always makes for interesting “pinning” action and the path of least-resistance is down.  The S&P500 Forward Price-to-Earnings Ratio is at its highest since the late ‘90s.

Bill Gates has had is ambitious COVID19 Tracking Program halted by the FDA for the time being.

Brazil, Peru, Saudi Arabia and other countries continue to see increasing COVID cases daily.

As Lock-Downs begin, we are going to see A LOT OF DEATH and the talking heads will try to Blame TRUMP.  Death is inevitable and it will be front and center for the next 30-45 days. CDC utilizing a variety of third party models project deaths to reach approximately 100,000 in four-weeks time, and could reach 130,000 or more by the end of June. This will cause alarm and the news media will sound that alarm. Certainly LA County and CA Governor Newsome will look to use “science” to take advantage of the situation. None of this is Trump’s fault (and I am not registered GOP and did not vote for Trump by the way – I just hate to see the lying for political gain).

Pakistan: Country Sees Spike in COVID-19 Cases as Markets Reopen

What Happened: Pakistan recorded a record amount of COVID-19 cases only days after the country began reopening markets and allowing other commercial activity to resume, Dawn reported May 14. The governments of Sindh and Punjab, the two states with by far the most recorded cases, moved to again shut down large markets in major cities such as Hyderabad, Lahore and Karachi.

Why It Matters: A spike in cases was one of the primary dangers many health officials warned about as countries seek to reopen commercial activity in the wake of the COVID-19 outbreak. It’s difficult, if not impossible, for authorities to ensure that all shops and shoppers are in compliance with safety precautions including social distancing, maintaining proper hygiene and wearing protective equipment, increasing the risk the virus could spread among those ignoring these measures. If cases continue to spike, the Pakistani government may attempt to reinstitute another shutdown. This will likely be met by resistance from both shopkeepers and shoppers, which could trigger protests and clashes between civilians and police, among other disruptions.

THE SAME THING IS HIGHLY LIKE TO HAPPEN IN THE UNITED STATES THIS SUMMER – DO NOT BE SURPRISED AND RESIST THE URGE TO WALAY BLAME ON DONALD TRUMP – IS THE MEDIA WILL DO. Also note that CDC stop posting forecasting models past 4 weeks in its latest update (5/14) – because they know it’s going to be bad.

Mar-a-Lago will begin a partial re-opening for members this weekend.  Capacity at the jacuzzi has been reduced (and not that is not a joke).

One-quarter of restaurants in the U.S. will not re-open according to Open Table.  Nationwide “reservations” are still down 95% from one year ago

Danny Meyer (Union Square Hospitality) expects his NYC establishments to remain closed until a vaccine is available, though is looking to provide takeout through Daily Provision and Marta.

In Washington, restaurants that wish to resume operations for dine-in service are required to keep a log of all customers, their phone/email and the time they visit each respective establishment

In heartbreaking news, the number of mothers with children under 12 indicating that they cannot afford enough food for their children (“food insecurity”) is 7x larger in April than it was in 2018.  It’s very difficult to raise good people when you constantly beat them down in Maslow’s Hierarchy.  One difference between the “recovery” post-GFC: in every post-WWII recession U3, U6 and U6 + persons on SNAP (food stamps) have been tightly correlated (up and down) in this recovery, U3 and U6 showed typical correlations in their decline, while SNAP levels remain elevated.

Mall of America will re-open in June 1 – designer masks are already becoming en vogue.

West Virginia can’t live without tanning salons, which will be re-opening on later this month according to the Governor (“I see white people”)

JPM is estimating a circa 70% decline in global profits in 1H20

Retail Sector Default Rate in the U.S. Leveraged Loan Market hits a record high at 10.34% MTD in May and is expected to head higher yet.  Total loans in default slowly inching up and rest at 2.53%

ING indicating that Unemployment will not recover anywhere near as fast as it has fallen.

The Cass Freight Index fell 22.7% YoY in April to the lowest lvls since Dec ‘08.

JPM now squarely on the no-V Shaped Recovery train that we laid out for you.

NYC Apartment Lease Rates tumbled 71% in April (y-o-y), the steepest declines on records dating to 2009.

Bank of Canada forecasting that mortgages in arrears will be double the amount of those during the GFC.

Sea Ray is closing its facility in Greeneville and 97 employees have been laid off.

Telsa is cutting the prices of its cars for sale in China for the second time in a month: a sign of not great demand.

EBITDAC, EBITDA and COVID is making its way into pro form accounting – and most are not buying the excuse focusing on EBITDA and FCF.

In addition to punting on Airlines, Buffet has punted on U.S. Bank, selling 500,000 shares.

The Central Bank of Mexico, Banxico (Banco de Mexico) cut is benchmark rate 50 bps to 5.50%, its lowest level since 2016. The Mexican Peso is down over 20% YTD versus the U.S. Dollar.  Mexico was reviewed by Fitch Ratings on April 27, 2020, holding a BBB- rating.  Fitch forecasts Real GDP Growth for Mexico decline by 6.6% in 2020 and growth of 2.8% in 2021.  Fitch expects relatively stable consumer prices in the 3.4 to 3.5% neighborhood.  Such decline is greater than that forecast for the United States in 2020, and weaker recovery in 2021.  Ignoring what will or will not materialize – our focus is that correlation of the movements and larger magnitude downwards for Mexico, while lagging the U.S. in growth when growth returns.  Mexico is a beneficiary of large U.S. remittances and the United States does not care about a weak Mexican Peso.  Current levels in the mid-20s could easily see high-20s later this year in our view.  At the same time with considerable weakness in Brazil, the Mexican Peso which is used by cross-border investors as a currency hedge into Latin America and Brazil, will not be needed (i.e. less demand) further placing a strong USD weak MXP play for the balance of 2020.  We expect Mexico to cut another 50 bps to 5.00% in August 2020.

The United States has physically taken siege to the Syrian Commercial Bank (Damascus), state-owned and the largest bank in Syria under US and EU Sanctions since 2011.  Syrian Democratic Forces (SDF) assisted in taking control of the site.  At the same time, in the U.S.’ covert war in the area, military and logistic reinforcements have been sent into two local bases that it is actively manning.  Political motivation for the seizure is to interrupt efforts at international funding, reconstruction, oil, banking, agriculture & recognition of government.

Next Week, the Global WHO Annual Meeting on May 19, with its 194 member states, and its opposition by POTUS will be front and center.


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