• GB Davis

Way Points - 9/5/20

Will people get rich shorting $TSLA, $APPL, $DOCU, #MoMo names just like in the dot.com era? Or will these unicorns prevail at ridiculous non-sensical valuations? GRAB yo popcorn.

This week, broad based weakness – and – our view, as relayed previously is that we would see a period of “risk-off” between summer, Jhole, Sep FOMC – until each of the Fed and the ECB bring fiscal bazookas – AND – US Congress announces a stimulus package of sufficient size to keep the economic pistons firing.

Our Sector Dashboard – and note the decline in Sector Relative Strength Indices (RSI (14d)). Diversification – always key. [omitted]

MACRO

The Federal Reserve Bank of New York (the “NYFed”) Nowcast of U.S. GDP for each of the current quarter (3Q20) and next quarter (4Q20) increased for the week ending September 4, 2020 from the week ending August 28, 2020. 3Q20e US GDP is forecast to be 15.58%, from the prior estimate of 15.27%. 4Q20e US GDP is forecast to be 7.27% from 7.12%

Positive surprises were driven, in large part, by the latest civilian unemployment report on Friday, which saw the Unemployment Rate (U3) print 8.4% versus consensus expectations of 9.8%, and declining from the prior report’s rate of 10.2%. Average hourly earnings continued to accelerate, with a year-over-year rate of increase of 4.7%

The Federal Reserve (the “Fed”) has been on the tape since last week’s virtual Jackson Hole indicating that rates will stay low for long; anchoring the front end of the UST yield curve (for now, should domestic economic conditions worsen materially, for example from either or both of a COVID Wave II in the ‘20/’21 PIC (pneumonia, influenza, covid) season; or, lack of sufficient stimulus from Congress and the U.S. Treasury (with the Fed waiting to monetize, mind you) – then, the prospect of yield curve flattening, inversion, or negative front-end fed futures (probably the last sign we will see of the aforementioned) will emerge – at which point, Yield Curve Control (YCC) broached in the last Fed FOMC Meeting Minutes released, will come front-and-center again and likely be utilized at that point in time (and not before, as long as there is reasonable YC flatness, relatively low risk volatility, relatively contained corporate credit spreads, modest economic improvements and even some term structure to the YC)).

On the inflation front, our preferred measure of inflation, the Dallas Fed Personal Consumption Expenditures (PCE) monthly index has dramatically increased in the past two months. As reported at the end of August, the July 2020 1-mo PCE was 3.9%, PCE ex Food & Energy (FE) was 4.3% and the trimmed mean PCE was 2.0%. On a longer time-frame, 6-mo and 12-mo PCEs were 0.4% / 1.0% (PCE); 0.9% / 1.3% (PCE ex F&E); 1.3% / 1.8% (Trimmed PCE). As the Fed, for now abandoned, their 2.0% inflation target – they are going to let the economy run hot erroring on the side of loose monetary policy – inflation had been averaging approximately 1.6% for the better part of a decade.

We, ourselves, queue on the Economic Cycle Research Institute’s (ECRIs) indices, including the U.S. Weekly Leading Index (WLIW) with data dating back to January 1967. This week on September 4, 2020, for the week ending August 28, 2020, ECRI’s U.S. Weekly Leading Index printed positive growth for the first time in 25 weeks and indicated a level of domestic economic activity on par with the first two weeks of March 2020. ECRI’s U.S. Coincident Monthly Index (USCI), at present, on last print of August 19, for the month of July 2020, is still negative, but with the negative prints decelerating for each of the past three months, and likely to do so, again, when the August numbers are released in mid-September. ECRI’s U.S. Lagging Economic Index (USLgl) has been accelerating and for its last print of August 21, for the month of July was horrific – yet, this can be expected. The market, generally, will pick up the forward data, while the news will focus largely on the lagging data.

OTHER

Fitch expects “used vehicle supply expected in the latter half of 2020 will put downward pressure on residual value (RV) performance in auto lease asset-backed securities (ABS) transactions, but ratings are expected to remain Stable. Wholesale activity has picked up notably with auctions coming back online following lockdown closures, the lifting of moratoriums on repossessions, and the market now operating at pre-coronavirus levels. Furthermore, captives and other auto lenders discouraged lease returns in April and May, pushing out those returns to the second half of the year. Low new vehicle inventory from the spring/summer production pull-back is currently buoying used values. In early August, new inventories were very low at around 2.3 million units, close to levels seen just after the recession in 2011. However, the projected annual decline in US GDP of negative 5.6% for 2020 and continued high unemployment are expected to outweigh the positive effects of the temporary reduction in new vehicle inventory and the affordability of used cars relative to new vehicles. New auto sales were down 23% yoy for the first six months of 2020, despite generous incentives. Fitch's forecast for 2020 sales is 13.5 million units, down 20% when compared with 2019. Used vehicle values of off-lease vehicles will be a key focus for auto lease ABS” (9/3/20)

International Investment Managers Closer to Cracking Chinese Market. “BlackRock's full licence for its onshore Chinese investment management company represents a milestone in the growing competition between international asset managers in the country, Fitch Ratings says. The announcement by the China Securities Regulatory Commission on 28 August 2020 that it had granted the licence follows closely behind JPMorgan's acquisition of China International Fund Management (CIFM), which has been reported in various media reports. International investment managers have been active in China for some time, although their access to the Chinese market has been limited to joint ventures or private fund management licences. BlackRock's licence approval and JPMorgan's reported completion of its acquisition of CIFM enable both managers to enter the Chinese investment management market in full. This differentiates them from other international managers - such as Fidelity and Neuberger Berman - which are still in the licence approval process. Recent press reports indicate that Vanguard is planning a move of staff to Shanghai from Hong Kong, providing further indication of the importance that international investment managers attach to China, despite ongoing tensions between the US and China.”


“Succeeding in China will be challenging for international investment managers in light of the differences in practices - notably in terms of distribution - between China and other markets. Fund distribution in China typically involves distribution platforms and/or other intermediaries, which can conflict with international managers more accustomed to direct distribution to end-investors. A major driver of the growth of money market funds in China, the largest fund type by a significant margin, has been electronic distribution via mobile apps such as WeChat. Comparable distribution methods do not exist in international markets.”


“International managers will also face stiff competition from domestic investment managers, which often benefit from greater brand recognition, and broader institutional understanding of markets and cultural dynamics. They are also likely to be more attuned to political and regulatory insights. Conversely, international investment managers may be able to offer a wider array of investment products than purely domestic managers due to their global presence, thus attracting investors. Those international managers with stronger risk-management processes or deeper investment expertise may also be at an advantage compared with purely domestic managers. Investment expertise will be particularly important - those managers who consistently outperform, be they international or domestic - will be more likely to attract and retain assets.”


“With CIFM, JPMorgan acquired an active investment manager operating at a moderate scale in China, with mutual fund assets under management (AUM) of CNY133 billion (USD19 billion) at end-June 2020 ranking it as the 36th-largest mutual fund manager in China. The acquisition cost of CNY7 billion (USD1 billion) for the remaining 49% of CIFM that JPMorgan did not already own, according to a report in the Financial Times, represents nearly 11% of AUM. By contrast, BlackRock's steps thus far suggest more of an organic approach to expanding its presence in the Chinese market. Whether the 'build' or 'buy' approach will ultimately prove more successful will depend on many factors, although the scale, diversity, brand recognition and performance records of the two institutions should support both approaches.”


Fitch believes market liberalisation and structural underlying factors will drive the growth of China's mutual fund sector. China's open-end mutual fund assets were CNY15 trillion as of end-June 2020, ranking it the fifth-largest mutual fund domicile worldwide. Growth in China - 70% over the three years to end-1Q20 - outstripped global mutual fund growth of 12% over the same period” (9/3/20)


We (me) are allocating 15%+ to CHN companies; and are currently long the TESLSA of China, $LI, which recently IPO’d; $YY, with amazing quarterly growth; and $CHU (telecom) as core positions.

WEEK AHEAD

On Thursday, September 10, 2020, the ECB meets and will announce an update to its Interest Rate policies. With core inflation in the EU subpar, market participants will be closely watching any indication of increasing monetization by the ECB. Without a firm resolve, Nordea indicates that the ECB likely needs to increase monetization by EUR700b via the PEPP and could do so as early as their September meeting. Further, with the recent strength of the Euro vis-à-vis the USD, briefly breaching 1.20, a key technical level, and believed by market participants to be a pain threshold for European policy makers and central bankers, the prospect of indicating looser monetary policy to the markets would serve multi-purposes here.

Also next week, WED: U.S. Mortgage Applications, Bank of Canada with Interest Rate policy. TH: French Industrial Production, U.S. Jobless claims, U.S. PPI. FRI: Great Britain Industrial and Manufacturing Production and U.S. CPI.

WHAT ELSE ARE WE WATCHING

Vaccine news (e.g. $PFE, $MRNA, $AZN)

Brexit – yes, coming back front-and-center

COVID resurgence (e.g. France, Jakarta)

U.S. Trade Deficit (now highest since ’08)

Rioting / #BLM and anti-establishment backlash

Valuation levels – including but not limited to Technology

Market Technicals (e.g. S&P500 “Bullish %”, a break-down on 9/4 below its 26d moving average; S&P500 up volume vs. down volume)


#NotInvestmentAdvice obviously



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