Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: May 2020

THE DAILY EDGE: 15 MAY 2020

VIRUS UPDATE
  • Spain imposes quarantine and extends restrictions to June 15
  • South Korea’s Centers for Disease Control & Prevention says coronavirus cases linked to a nightclub in Itaewon increased to 153 as of noon Friday. Among them, 90 are club visitors and 63 are their family members and co-workers.
  • Italy will allow citizens to move freely between its 20 regions starting June 3, according to a draft decree seen by Bloomberg, as Prime Minister Giuseppe Conte’s government opens up the country after more than two months of a stringent lockdown. Retail stores and other businesses will reopen on May 18.
  • Spanish antibody study suggests 5% of population affected by coronavirus Preliminary results from a nationwide coronavirus antibody study showed on Wednesday that about 5% of the overall Spanish population had contracted the novel virus – about 10 times more than the tally of diagnosed cases suggests. “There is no herd immunity in Spain.”
  • Texas cases see record spike 2 weeks into reopening. The Houston Chronicle reports that the state recorded 58 deaths yesterday, breaking the record of 50 deaths set late last month.
  • Gilead, the American pharmaceutical firm that created the antiviral remdesivir, licensed its production to five generic manufacturing companies, which will allow the drug to be in 127 countries. The deals are temporarily royalty-free.
  • China has a total of five possible vaccines for the coronavirus already in human trials and more will be approved next month, signaling the Asian nation’s rapid progress in the race for immunization. The five vaccines have been tested on more than 2,000 people in phase II trials which are expected to finish in July, said Zeng Yixin, vice minister of the National Health Commission, at a press briefing on Friday in Beijing. Phase II is the second of three phases of human trials that medications must go through before being approved for general use. No serious side effects have been reported yet among phase II patients, said Zeng, adding that more vaccine candidates will be approved to go into human trials in June.
  • The New York Stock Exchange will reopen its trading floor later this month, two months after the coronavirus pandemic forced its closure. Only a limited number of traders will return to the floor when it reopens May 26, and they will be required to wear masks and abide by social-distancing rules to limit the spread of Covid-19. People coming to work on the floor won’t be allowed to take New York City public transit to get there Thinking smile.
  • A new study by the National Institute of Diabetes and Digestive and Kidney Diseases and the University of Pennsylvania found that ordinary speech can emit small respiratory droplets that linger in the air for at least eight minutes and potentially much longer. These droplets are likely infectious, and help explain why the virus is so infectious in enclosed spaces like cruise ships and airplanes.
  • New study sheds light on how loud talks can spread virus
PANDENOMICS
China’s Cautious Economic Reboot Is a Warning for the World

China has a lesson for the world: An economy is harder to reboot than it is to shut down.

Fresh data for the month of April, covering a period when the government pushed hard to reopen the economy as the coronavirus came under control, show that retail sales continue to fall as consumers shun restaurants and curb spending on other non-essential items. (…)

Retail sales slid 7.5% though, more than the projected 6% drop, as shoppers preferred to avoid crowds and instead move their purchases online. Restaurant and catering receipts slumped by 31.1% from a year earlier, after a 46.8% collapse in March. (…)

Industry improves though retail still contracting

China's CPI moderated while PPI weakened further
PANDEMONIUM
Trump threatens to cut off relations with China New rhetorical blast comes as US increases criticism of Beijing over the coronavirus

The headline above is from the FT. This is from ZeroHedge:

Adding to the anti-China rhetoric this morning, President Trump allegedly mused to Bartiromo hat he “wonders what would happen if the US cut ties with China.”

Adding about his “good friend” President Xi: “Right now, I don’t want to speak to him…We could cut off the whole relationship, if we did, what would happen?” Trump says of China. “You’d save $500 billion”. In addition to once again hinting at cancelling Treasury debt held by China, Trump also said he would prefer “a stronger dollar” – sending the greenback higher, as it marked an unusual u-turn from Trump’s typical insistence that rates are too high and the dollar is too strong.

China Gives Fresh Details of Virus Response, Denies Cover Up

China said it did not know how infectious the new coronavirus was until Jan. 19, pushing back against accusations that it intentionally withheld information about the severity of the outbreak in Wuhan. While officials knew that there were signs of human-to-human transmission earlier, it was hard to ascertain the new virus’s level of contagiousness, according to Zeng Yixin, vice minister of the National Health Commission. There are diseases like HIV that while infectious, are not easily transmitted from person to person, he said.

It was only on Jan. 19 that Chinese scientists concluded that the virus spreads easily among people and China released that information to the world the next day, Zeng said. The comments come as China faces growing blame for a delay in sounding the alarm about the coronavirus, which allowed people to spread it unwittingly for some time. Zeng was responding to an Associated Press report in April that cited confidential documents showing Chinese officials waited six days before President Xi Jinping warned the public of the dangers of the virus outbreak.

Giving a rundown of events since the crisis began, Zeng said that China concluded on Jan. 9 that it was dealing with a novel coronavirus and began developing test kits the next day. On Jan. 12, it informed the World Health Organization about the outbreak.

On Jan. 14, a national meeting of provincial health officials was held. “Many uncertainties remained. We understood there’s more research needed on human-to-human transmission and we couldn’t rule out the chance of a further spread of the virus,” said Zeng. “But we couldn’t reach conclusions to many questions.” (…)

The English publication of a Chinese writer’s account of the early days of the coronavirus outbreak in Wuhan has stoked a fierce debate over what happened in the city where the pandemic began. (…) For many in China, her entries, written in direct yet restrained prose, quickly became the go-to unofficial account of events unfolding in Wuhan, capturing in real time the bungled early response of Wuhan officials and the suffering and despair that followed. On Friday, a collection of Ms Fang’s essays and social media posts will be published in English as an ebook by HarperCollins. The work is expected to be translated into 15 languages. (…)

Virus Revives Worst-Case Scenarios for U.S.-China Relationship
U.S. moves to cut Huawei off from global chip suppliers

(…) The U.S. Commerce Department said it was amending an export rule to “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”

The department added the “announcement cuts off Huawei’s efforts to undermine U.S. export controls.”

The rule change is a blow to Huawei, the world’s no. 2 smartphone maker, as well as to Taiwan’s TSMC (2330.TW), a major producer of chips for Huawei’s HiSilicon unit as well as mobile phone rivals Apple Inc (AAPL.O) and Qualcomm Inc (QCOM.O). (…)

The Trump administration has taken a series of steps aimed at Chinese telecom firms in recent weeks. (…)

China’s Clout Loses Punch as Trading Partners Push Back Over Coronavirus Australia and other countries spar with Beijing over its handling of the pandemic

(…) In recent days, Beijing has threatened tariffs on barley—one of Australia’s top agricultural exports to China—escalating a trade dispute that began in 2018. On Tuesday, Chinese authorities banned four Australian slaughterhouses from importing meat into the country, citing inspection and quarantine violations. A Foreign Ministry spokesman denied the move was meant as economic coercion.

Beijing’s diplomatic and propaganda efforts have grown more aggressive in the wake of the coronavirus pandemic, but so too has the pushback.

About a dozen African countries summoned Chinese ambassadors last month to protest pandemic controls that allegedly discriminated against Africans in China. India recently stepped up scrutiny of Chinese investment, concerned state-backed entities could swoop on local firms weakened by the pandemic.

Japan, which counts China as its biggest trading partner, set aside $2.2 billion of its pandemic support package to help Japanese companies address chokepoints in their supply chains, which could help them diversify in cases where a product is sourced solely in China. (…)

China buys more than a quarter of everything Australia sells to the world. (…) A new poll by Sydney-based policy think tank the Lowy Institute this week found 68% of Australians now feel “less favorable toward China’s system of government” when thinking about China’s handling of the outbreak. (…)

“A lot of the business community has a long record of wanting to ignore Chinese behavior,” said Mr. Shoebridge, a director of defense, strategy and national security at the Australian Strategic Policy Institute, a security think tank. “It is harder to run those arguments with the public because of the pandemic. There is a public expectation that we reduce the leverage that China has over Australia.” (…)

Taiwan Firm to Build Chip Factory in U.S. Taiwan Semiconductor Manufacturing, the world’s largest contract manufacturer of silicon chips, said it would spend $12 billion to build a chip factory in Arizona, as U.S. concerns grow about dependence on Asia for the technology.

(…) Construction will begin next year with production targeted for 2024, the company said in a statement.

TSMC’s new plant would make chips branded as having 5-nanometer transistors, the tiniest, fastest and most power-efficient ones manufactured today. TSMC just started rolling out 5-nanometer chips at a factory in Taiwan in recent months.

TSMC said the plant would make 20,000 wafers a month, making it a relatively small facility for a company that made more than 12 million wafers last year alone. (…) TSMC said the factory would employ more than 1,600 people, the company said. (…)

TSMC had been talking to U.S. officials as well as to Apple Inc., one of its largest customers, about building a chip factory in the U.S. for some time, but the conversations gained momentum recently as concerns mounted about the fragility of the Asian supply chain, according to people familiar with the matter. (…)

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Sector Breakdown of 164 Companies that Discussed Suspending Buybacks and/or Dividends
Tesla’s secret batteries aim to rework the math for electric cars and the grid

Electric car maker Tesla Inc (TSLA.O) plans to introduce a new low-cost, long-life battery in its Model 3 sedan in China later this year or early next that it expects will bring the cost of electric vehicles in line with gasoline models, and allow EV batteries to have second and third lives in the electric power grid. (…)

New, low-cost batteries designed to last for a million miles of use and enable electric Teslas to sell profitably for the same price or less than a gasoline vehicle are just part of Musk’s agenda, people familiar with the plans told Reuters.

With a global fleet of more than 1 million electric vehicles that are capable of connecting to and sharing power with the grid, Tesla’s goal is to achieve the status of a power company, competing with such traditional energy providers as Pacific Gas & Electric (PCG_pa.A) and Tokyo Electric Power (9501.T), those sources said.

The new “million mile” battery at the center of Tesla’s strategy was jointly developed with China’s Contemporary Amperex Technology Ltd (CATL) (300750.SZ) and deploys technology developed by Tesla in collaboration with a team of academic battery experts recruited by Musk, three people familiar with the effort said. (…)

Power Struggle at Russian Newspaper Shows Kremlin’s Widening Influence One of the country’s last independent voices could soon be stifled as President Putin expands political control.

THE DAILY EDGE: 14 MAY 2020

New global cases are not dropping. Of yesterday’s 85k new cases, 21k (25%) were from the USA, 12k (14%) from Brazil and 10k (12%) from Russia. (Bloomberg data and charts)

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PANDENOMICS
Fed Chairman Warns of Slow Rebound

(…) “There is a growing sense that the recovery may come more slowly than we would like…and that may mean that it’s necessary for us to do more,” Mr. Powell said Wednesday during an online speech and question-and-answer session.

He warned that, with revenues depressed for longer, waves of business bankruptcies could follow, risking a much slower pace of improvement in the job market. “Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” Mr. Powell said.

For example, if small businesses that were viable enterprises before the crisis fail, “we would lose more than just that business. We lose something more fundamental,” he said. “And it won’t be able to be replaced quickly.” (…)

He said the central bank wasn’t considering plans to cut its benchmark federal-funds rate below zero after it slashed the rate to near zero in March. (…) “The committee’s view on negative rates really has not changed,” said Mr. Powell. “This is not something that we’re looking at.” (…)

Mr. Powell said it was possible the jobless rate would peak and start to decline in the next few months but signaled concern that it could remain at an elevated level for a long time.

Early data revealed the downturn had hit households least able to bear it. Mr. Powell previewed a Fed survey to be released Thursday showing that among people who were working in February, nearly 40% of those households making less than $40,000 a year had lost a job in March. (…)

The Fed chairman warned of long-lasting damage that could follow. Deep and long recessions leave millions out of work for spells that could erode their skills and leave them in greater debt. Failures of thousands of small businesses would “destroy the life’s work and family legacy of many businesses and community leaders” and erase a main source of job creation when any recovery comes, he said. (…)

Think carefully, like there’s an election in less than 6 months:

Despite Powell’s message earlier in the day that “additional fiscal support could be costly, but worth it,” Mnuchin continues to contend that no immediate action is necessary. He rejected the House Democrats’ proposal to unleash another $3 trillion stimulus package as something Republicans wouldn’t agree to, and that there’s no urgency for additional spending. “Let’s have this money in the economy, let’s take the next 30 days and think carefully,” Mnuchin said. “If we need to spend more money down the road, we’ll come back and do that.”

STIMULUS VS LIFE SAVERS

This Goldman’s chart clearly shows that all the dollars directed toward American consumers have almost exactly offset the dollars not earned because of the pandemic/lockdowns. This is not stimulus money that boosts demand and provides pricing power to merchants and thus might result in demand-pull inflation. The payments are economic life savers to prevent a permanent collapse in demand and a depression (my emphasis).

Congress has provided stimulus payments, expanded unemployment benefits, and aid to businesses, and we expect the next phase to include a further extension of unemployment benefits, another round of stimulus payments, and more aid to state and local governments. This fiscal easing has largely offset the hit to private income, resulting in only the modest net decline in disposable income from pre-virus levels in 2020 (…).

The big question is, as states reopen, will all that money finds its way where it would normally have been, a key assumption for the V-shape recovery? Can we realistically expect to be at 100% sometime after re-opening? No way, unless there is genuine mega stimulus on top of the band-aids.

Problem is, the virus is not going away just yet. So we will need more bridging until we truly get on the other side, hoping unemployment is restored to some “decent” level and the consumer does not save too much and consumes the economy out of this hole. If that is not wishful thinking… at least until the virus goes away…

(…) The JPMorgan Chase Institute studied anonymized spending data from more than 8 million Chase credit card customers for the period from March 1 to April 11.

Credit card users who report household incomes of less than $26,000 reduced spending by 38%, while wealthier cardholders, with incomes of more than $95,000, reduced spending by 46%. The group says the difference largely reflects higher average spending by wealthier households. (…)

  • German luxury car maker BMW said that the recovery of demand in China provided some cause for hope, while Europe and the U.S. are still in decline. “In April, we already delivered nearly 14% more vehicles to customers than in April 2019. We know from our Chinese customers that consumption there will quickly bounce back, thanks to pent-up demand,” BMW Chief Executive Oliver Zipse told shareholders during a virtual annual general meeting on Thursday. BMW sales plunged 88% in China in February, as the country locked down to stop the spread of the coronavirus. But as the economy began opening in March, and auto makers opened their dealerships, customers have begun buying new cars again. “Demand for cars in countries like Spain, Italy and the UK will probably be very slow to recover,” he said. “The same applies to the U.S.”
  • In its monthly oil-market report, the IEA projected global demand to drop by 21.5 million barrels a day this month, while crude-producing nations and companies slash output by 12 million barrels a day.
  • Lloyd’s, a marketplace of insurance syndicates, estimates underwriting losses covered by the global insurance industry will total around $107 billion this year, comparable to claims paid out for catastrophic hurricanes in 2005 and 2017. It also predicts a $96 billion loss in the industry’s investment portfolios, or money set aside to pay future claims. “This is something the likes of which we have never seen before,” Mr. Neal said, referring to the amount of underwriting losses coupled with the fall in investment value.
  • Canadian malls collect just 15 per cent of May rent from tenants This follows April’s figure of around 25 per cent.

Airplane As reported by STR, U.S. industry wide hotel RevPAR decreased 74.4% last week (week ended May 9) from year-ago levels. The prior week had seen an 76.8%.
Over the last 28 days, U.S. RevPAR is down 77.0%. Industrywide RevPAR for the U.S. was down 19.3% in 1Q20 (January and February RevPAR were up 2.2% and 1.7%, respectively). (Raymond James)

Plate This update comes from Black Box Intelligenceâ„¢ (formerly TDn2Kâ„¢) data from over 50,000 restaurant units and $75 billion in annual sales.

  • The number of restaurants reopening their dining rooms has steadily increased in recent days. As of Saturday, May 9, on average almost 30% of the restaurants operated by the companies that participated in our Restaurants Recovery Sales Flash survey opened their dining rooms in some capacity.
  • Dine-in sales still represent a small percentage of the total. During the last week, dine-in sales have represented an average 11% of total limited-service sales and 13% of total sales in full-service restaurants. This remains a dramatic shift for full-service, which tended to see roughly 86% to 88% of their sales coming through dine-in in the last year.
  • Comp sales for the industry were -45% during the week ending May 3, a 2.5 percentage point improvement since last week and the best result since week ending March 15.
    [April was –55%]
  • Despite many companies beginning to bring back employees from furlough, of those people employed by chain restaurants back in January, only 45% of them remain actively employed today on average.
  • Restaurant companies held on to most of their managers. Of those employed back in January, on average 75% of restaurant managers remain actively employed today.

U.S. rail traffic significantly worsened in April but trying to find a bottomU.S. Rail Traffic April 2020

Week 18 carloads are originations through the week of 5/2/2020 Source: Association of American Railroads and Stifel research

CHINA WATCH
Vast Numbers of Unemployed Will Undermine China’s Recovery Millions of Chinese people are being thrown out of work by the collapse in global demand and a slow restart of the domestic economy. A lack of clarity about exactly how many is making it harder to gauge the chances for recovery.

(…) analysts from BNP Paribas SA said the real unemployment rate including non-urban residents could have reached 12% in the first quarter, and as many as 130 million people could have suffered some kind of job disruption. (…)

From Markit’s April PMI surveys:

  • Manufacturing: “Reduced amounts of new work led firms to cut their staff
    numbers again in April. Furthermore, the rate of job shedding
    quickened     from March.”
  • Services: “The sustained drop in total new work led to a further fall in
    employment across the sector. Moreover, the rate of job
    shedding was the quickest recorded since data collection
    began in late-2005.”

George Magnus in today’s FT:

(…) More suddenly than we could have expected, China now has a major unemployment problem. From an economic perspective, we may have arrived at what we could call ‘Peak China’. Put another way, it’s the moment when a major demand shock and balance sheet and other growth-sapping economic factors are colliding. (…)

Meanwhile, the structural headwinds China was facing anyway in the 2020s, arising from over-indebtedness, demographics, low productivity and weak institutions, have just become a whole lot bigger and more intractable. (…)

The Yuan, as stated, is likely to depreciate, perhaps considerably so in the next two to three years. China is still ageing faster than any other nation on Earth and the weaknesses and shortcomings in its social and healthcare insurance systems are being exposed by the current crisis, adding to the need for responses that will place additional downward pressures on growth.  (…)

If, as some analysts think, China’s unemployment rate is now somewhere either side of 20 per cent and graduate employment prospects are the worst ever, there are truly reasons for worry. If SMEs, many of which take on a high proportion of graduates, are going to continue to suffer economically and be sidelined politically, the outlook for entrepreneurship and commerce is not propitious. (…)

At the end of my Red Flags book, I wrote that China faced daunting economic challenges but that we should never ignore what these might imply for the Communist Party’s politics and survival instincts and for its governance system at home and abroad. The pandemic can be seen as another significant red flag pointing to a brittleness in Xi Jinping’s China, which would make it more unpredictable and volatile.

Soaring Prices, Rotting Crops: Coronavirus Triggers Global Food Crisis

(…) Prices for staples such as rice and wheat have jumped in many cities, in part because of panic buying set off by export restrictions imposed by countries eager to ensure sufficient supplies at home. Trade disruptions and lockdowns are making it harder to move produce from farms to markets, processing plants and ports, leaving some food to rot in the fields.

At the same time, more people around the world are running short of money as economies contract and incomes shrivel or disappear. Currency devaluations in developing nations that depend on tourism or depreciating commodities like oil have compounded those problems, making imported food even less affordable.

“In the past, we have always dealt with either a demand-side crisis, or a supply-side crisis. But this is both—a supply and a demand crisis at the same time, and at a global level,” said Arif Husain, chief economist at the UN’s World Food Program. “This makes it unprecedented and uncharted.” (…)

The biggest danger going forward, economists say, is that the pandemic’s dislocations will affect not just existing food stocks but planting and harvesting in coming months. (…)

PANDEMONIUM

Why vaccine ‘nationalism’ could slow coronavirus fight

Sanofi Chief Executive Officer Paul Hudson’s suggestion that the U.S. may get the French drugmaker’s coronavirus vaccine first sparked outrage in France, with one government minister calling the prospect “unacceptable.”

“For us, it would be unacceptable that there be privileged access for this or that country on a pretext that would be a financial pretext,” Junior Economy Minister Agnes Pannier-Runacher said in an interview Thursday on Sud Radio.

The U.S. will likely be first in line should Sanofi succeed in developing a vaccine because the country was the first to fund the French company’s research, Hudson said this week in an interview with Bloomberg News. The U.S., which expanded a vaccine partnership with the company in February, expects “that if we’ve helped you manufacture the doses at risk, we expect to get the doses first,” Hudson said. (…)

More than 140 world leaders and experts signed an open letter released by UNAIDS and Oxfam on Thursday, calling for a “people’s vaccine” as well as treatments that would be available swiftly to all for free. (…)

Supplies of an experimental shot from the University of Oxford will be prioritized for the U.K. before other parts of the world, Pascal Soriot, CEO of AstraZeneca Plc, which will manufacture the vaccine, said last month. (…)

Asked on BFM Business TV if the U.S. would be first in line for a Sanofi vaccine, Olivier Bogillot, the head of Sanofi France, said, “No, I don’t confirm it. It’s evident that if Sanofi discovers a medicine, a vaccine against Covid-19, and if it’s effective, it will be available to all.”

Sanofi has partnered with U.K. rival GlaxoSmithKline Plc on the project supported by the U.S. and says it could make 600 million doses annually. (…)

Wall Street Heavyweights Sound Alarm About Stock Prices

Legendary investors Stan Druckenmiller and David Tepper were the latest to weigh in after a historic market rebound, saying the risk-reward of holding shares is the worst they’ve encountered in years. Druckenmiller on Tuesday called a V-shaped recovery — the idea the economy will quickly snap back as the coronavirus pandemic eases — a “fantasy.” Tepper said Wednesday that next to 1999, equities are overvalued the most he’s ever seen. (…) Managers including Bill Miller, Paul Singer and Paul Tudor Jones have all voiced doubts about markets or the economy. (…)

Tepper, who runs the $13 billion Appaloosa hedge fund, told CNBC on Wednesday that valuations are “nuts” for some individual stocks on the Nasdaq. He also highlighted banks and airlines as difficult areas in which to invest right now. (…)

Trump attacked “so-called ‘rich guys’” in a tweet Wednesday. “You must always remember that some are betting big against it, and make a lot of money if it goes down,” Trump wrote about the stock market. “Then they go positive, get big publicity, and make it going up. They get you both ways.” (…)

RBC’s Calvasina Warns of ‘Significant’ Drawdown in U.S. Stocks

BMW faces dividend showdown as it pursues state subsidies German industry under fire for rewarding investors while seeking government support

TECHNICALS WATCH
  • 13/34–Week EMA Trend (CMG Wealth)

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U.S. Warships Support Malaysia Against China Pressure in South China Sea American officials accuse Beijing of coercing smaller countries out of developing offshore resources and say Navy presence shows U.S. commitment to region