Odds and Ends - 5/30/20
Client Distribution, May 30, 2020 - 10:48 AM EDT
90% of the SP500 is now back above their 50dMAs, which many will see as bullish. Yet at the same time, it is at extremely stretched equity multiples on a historic basis with very successful investors very wary. Further, the bond market continues to tell a different story – and – we will always chose the bond market over the equity market. UST Futures for negative rates have been talked back to mid-2021 from early 2021 – as we indicated would happen – but if the rioting continues, we see negative rates in the futures market being pulled forward again – the Fed will have no other option candidly – and in such case, we like $SHY over $TLT (though the latter is likely to get a bid earlier and potentially longer until UST issuance comes back front and center).
On Friday, the Fed disclosed their new holdings in Corporate Bonds and High Yield via ETFs: $ANGL, $HYG, $HYLB, $IGIB, $IGSB, $JNK, $LQD, $SHYG, $SPIB, $SPSB, $USHY, $USIG, $VCIT, $VCSH, for $1.3 billion in collective purchases. Keeping an indirect bid on for corporates and HY has helped contain credit spreads and allowed issuers to access the market – before – the terrible 2Q20 earnings season arrives – NEVER FORGET – the Fed is your friend (and mine) – Fed bashing will not be tolerated – except by Joe Biden and Democrats that wish to destroy America from within and those that follow along unknowingly carried by the populism of the day, with promises of utopia and no idea how to balance a budget (separately, but related, WEF ranks the U.S. #73 in terms of government waste – the U.S. government needs to and can be optimized without loss of services, just by being less wasteful) – not to digress too far afield – policy needs to be aimed at reducing the multi-generational high in unemployment (U3, U6) – that is the only way that a recovery can begin to occur – yet, capacity utilization now sits at very low levels (low demand) – so, zombie companies can’t be encouraged in the formulation of such policy. At the same time, difficult Pelosi, shouldn’t be pushing Infrastructure bills that aren’t filled with prudence – China’s infrastructure advanced productivity, just as the U.S. Highway system did after WWII – yet, those opportunities in the U.S., today, are fewer and farther between – rebuilding LaGuardia is meaningless in the context of productivity – MagLev roll-out, 5g rollout – the two easiest infrastructure projects available in the U.S. currently.
Today, the South China Morning Post, reports that ahead of the annual controversial dog meat festival in Yulin, dogs have now officially been identified as pets and not livestock by the Chinese Agriculture Ministry.
Japan un-locked: and reports that the Tokyo train stations are coming back to life with commuters.
Trump’s late afternoon press conference regarding China (CHN) was mostly yawned at by the risk markets – but the message is clear, the U.S. will be sending home the Chinese Visa students; delisting some CHN ADRs, already in the process of moving to Hong Kong and other exchanges, and potentially sanctioning individuals. Not to be deterred, CHN has promised to retaliate should the sanctions occur.
The G7 is just around the corner, which had moved virtual, but Trump pushing for in-person, so we shall see if it is abbreviated, delayed, or occurs as planned.
Singapore is out with a fourth stimulus package, estimated at 19% of GDP.
That party at Lake of the Ozarks (MO) last week: positive COVID19 tests starting to emerge.
And onto, our quick view into Risk Sectors:
Dow Jones Transportation Average Index ($TRAN) ends the month at 8969.79, after opening the month of May at 8253.25, increasing 8.7% on the month. We expect a decline in early June and a consolidation in the 8100-8500 level. However, should such not materialize in June, as month end technical indicators have been strong, then a pullback later this summer is certainly not out of the question.
Dow Jones Utility Average Index ($UTIL) seeing some strength into month end, closing at 806.92, after trading down from 837.96 level to the 771.55 range in the month of April, for perspective. With 100% of SP500 Utilities (n=28) having reported 1Q20 earnings, 57% exceeded EPS estimates, 7% matched and 36% missed. However, what troubles us, in particular over the medium-term, is that average sales declined 1.87%, with 75% of this data sector set missing revenue estimates, exceeding any other sector (read that again). Several names came up on our screen on Friday in this sector including: $DUK, $SO, $EXC, $EIX, $DTE, $AEV, $SRE and $WEC – likely to see short-term strength while this sector sees a bid. At the same time, empty buildings (retail, office, lodging) use less regulated priced electricity and such.
As for Consumer Discretionary ($XLF), the proxy used is sort of distorted as the largest and very large holding is Amazon ($AMZN), which (to us), and especially during Lockdowns, is non-discretionary in nature, generalizing. We think of Discretionary as what is purchased at the margin, or not purchased at the margin. We are not seeing a break-down here just yet and we shall see what next week and June brings, as the start of May saw a period of profit taking to begin the month, which is more than likely for June, in our opinion.
Consumer Staples ($XLP) also bid into month end. We see this sector as likely to be short-term range bound, and not to break-out. May saw sector volatility fall. 1Q20 SP500 Consumer Staples (n=30, 88% reporting) have held up pretty well.
The Energy Sector ($XLE) is starting to be faded in here; while 65% of SP500 (n=26) companies missed Revenue estimates. At the same time we have relayed oil in the $25 - $35 / bbl level, and sector analyst starting to see ’20-’21 levels in the $35-$45 range. OPEC is just around the corner in the second week of June.
Financials ($XLF) saw a big push into month’s end and has a gap below to fill. We are not convinced by the price action here. Fitch knocked UK and US Insurers this past week on the prospects of life, property, casualty, business interruption claims, and lower rates of reinvestment on their respective assets. We closed our open positions in the sector ($TRV, $AIG; each at profit) despite low fundamental valuations on trailing figures. We watch this sector for now.
Healthcare ($XLV) closed May at 103.01, while trading in the 104 level in January and February. Further, 80% of SP500 healthcare companies (n=60, 98% reporting) exceeded EPS estimates, with 72% exceeding revenue estimates, on average by 8.53% - making it the best performing fundamental sector in the SP500 in 1Q20. We will be putting $ (long) to work in select Healthcare names in June at some point and are just starting our work on the sector having made some $ last week in $ABC, which we closed out. We are uncertain as of yet, however, and still evaluating if the sector will mostly consolidate, as it did in May, or break-out and see sustained YTD highs.
Industrials ($XLI) have been a bit all over the board and 1Q20 earnings were truly a mixed bag – they have gap to fill below and were faded heading into month’s end. We will watch early June price action here. Sector volatility also on the rise, though lower than April or March.
Materials ($XLB) saw lots of buying into month’s end, while 1Q20 sales started slipping (SP500, n=72), losing 2.57% on average, second only to Energy – so price action here shows, at present, a discrepancy between fundamentals, on the surface, and as aggregated. We will be reviewing Earnings Transcripts more closely for this sector for March trends likely to carry over in Q2. Early May saw a pullback in Materials, and we expect the same for June; however, the sector proxy as cleared its 200mDA, a key technical level. Early June price action in this sector will help us form our overall Market Outlook – as continuation looks portends well for risk assets; and, a reversal likely portends more bearishness, at least to begin the month.
Technology has been very strong ($XLK) and may consolidate in here, that’s our current view. If Tech catches a bid, however, then the entire U.S. domestic market may lift for June on its back. Sub-sectors and individually security selection matter here; and, we will be active in this sector (perhaps each of long, short and neutral) in the month of June.
We’re not even going to go into Real Estate – but recall, two of our favorite sectors, Gaming and Lodging, despite the re-opening will be weak – as they are in EVERY Recession, names on our short ideas list in this sector are getting closer to levels where we will short them.
Communications ($XLC) has somewhat stalled out, but not looking stretched to us.
Airlines ($XAL) confound us with the Robinhood crowd bidding these or something odd. Even in good times, there is very little reason to own an airline in our opinion.
Biotech ($XBI, $BTK) has seen its 200mDA remain relatively stable, and some issuance in the sector here this year. The Options market is starting to place wagers for an October pullback in Biotech to its 200mDA.
We don’t really understand strength in Retailers ($XRT) and just watch. Some key earnings this week for the sector, which looks horrific to us, but acts quite different of recent.
Silver ($SLV) is going to close the gap to Gold and regress towards its long-term average differential in our opinion. We have a couple of silver mining names circled that we are evaluating.
We continue to watch Copper as a tell and hearing news of a global supply glut, that’s fine for now, we’ll wait here.
In FX land, Swissie still on the bid despite market participants trying to talk it down. Early March saw the Swissie bid hard – if that pattern repeats in early June – then we foresee SNB stepping in to potentially weaken the currency, it’s getting closer, but still feels a comfortable level right here.