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: July 2020

THE DAILY EDGE: 15 JULY 2020

From John Hopkins, last 24 hours:

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Even the Midwest and the Northeast are showing signs of deterioration:

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Fingers crossed Moderna’s Vaccine Moves to Bigger Study New U.S.-funded trial would seek 30,000 subjects and could deliver answer by year-end

(…) The new results, published online by the New England Journal of Medicine, showed that the vaccine induced the desired immune response for all 45 people evaluated—a larger group than in the preliminary data Moderna released in May—and was generally safe and well-tolerated.

“This is really quite good news,” Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said in an interview Tuesday. NIAID co-developed the Moderna vaccine and led the study.

“The gold standard of protection against a viral infection is neutralizing antibodies,” he added. “And the data from the study, small numbers as it may be, are pretty clear that this vaccine is capable of inducing quite good [levels] of neutralizing antibodies.” (…)

The study is scheduled to run through October 2022, but it is likely researchers would have preliminary results well before then.

Moderna said Tuesday it has made enough doses to start the new study and is on track to deliver about 500 million doses a year, and possibly up to one billion a year starting in 2021. (…)

Researchers, however, still don’t know what level of a neutralizing immune response would be needed to guard against either infection or severe disease, and for how long a vaccine could provide such protection.

“This provides some essential first information on how the vaccine is tolerated and how the doses affect immunity, and I think it’s essential information to progress onward,” Dr. Jackson said. (…)

(…) When Winther and his colleagues compared the blood from Covid-19 patients to those battling other diseases in the ICU, they discovered that Covid-19 patients had a disproportionately large amount of Sars-CoV-2-specific IgG. These antibodies “strongly amplify pro-inflammatory response”, they said in a non-peer-reviewed paper posted on preprint platform bioRxiv.org on Monday. (…)

There was once a hope that the blood of recovered patients could be used as a cure to those still fighting the virus. Clinical trials have been launched in some countries to evaluate the effectiveness of plasma therapy. The Dutch study raised a safety alarm.

“It may be wise to omit the [virus-specific] IgGs that are present in severely ill patients,” said Winther and his colleagues.

A Chinese government epidemiologist based in Shanghai said the Dutch paper confirmed “what we suspected for a long time”. Several studies from China have also found the destructive role played by the macrophages in severely ill patients and proposed potential drugs that could suppress the cytokine storm. (…)

PANDENOMICS
Banks Get Ready for Wave of Coronavirus Loan Defaults JPMorgan, Citigroup and Wells Fargo signaled that the worst of the coronavirus recession is yet to come, opting to stow away tens of billions of dollars to prepare for an expected wave of loan losses.

JPMorgan JPM 0.57% Chase & Co., Citigroup Inc. C -3.93% and Wells Fargo WFC -4.57% & Co. said Tuesday they took large hits to their second-quarter profits to collectively stockpile $28 billion to cover losses as consumers and businesses start to default on their loans.

The provisions amount to a sharp increase above what they put away in the first three months of the year, reflecting a shift in their assumptions about the length and severity of the pandemic’s economic toll. JPMorgan, the largest U.S. bank by assets, said it put aside extra to prepare for an unemployment rate that remains at double digits well into next year and a slower recovery in gross domestic product than the bank’s economists assumed three months ago.

“This is not a normal recession,” said James Dimon, JPMorgan’s chief executive. “The recessionary part of this you’re going to see down the road. You will see the effect of this recession. You’re just not going to see it right away because of all the stimulus.”(…)

All told, the three banks have stockpiled $83 billion for credit losses. Hard-hit industries like retail and hotels are already struggling financially, but executives said they now expect the downturn to hit a wide range of businesses.

“May and June will prove to be the easy months in terms of this recovery,” said Jennifer Piepszak, JPMorgan’s CFO. “Now we’re really hitting the moment of truth in the months ahead.” (…)

“Our view of the length and severity of the economic downturn has deteriorated considerably,” said [Wells Fargo] CEO Charles Scharf.

This is as close as you get from a biz survey mid-July. Bankers are right on the front line.

“There’s significantly more reserves against non-investment grade names,” Citigroup CFO Mark Mason said. “Within that non-investment grade bucket, we’ve seen a lot of further downgrades.” (…) “We’re just guessing,” Dimon said. “We are prepared for the worst case. We simply don’t know.” (Bloomberg)

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Delta Trims Flying Amid Pandemic Delta Air Lines trimmed plans for more summer flights as Covid-19 cases increased nationwide and a $5.7 billion loss for the latest quarter underscored the depth of the crisis facing the aviation industry.
Auto Makers Grapple With Worker No-Shows as Covid-19 Cases Surge General Motors and Ford are struggling to keep workers on the job as coronavirus cases increase, forcing the companies to cut shifts, hire new workers and transfer others to fill vacant roles.

(…) Ford and GM plan to continue increasing their U.S. truck production through the summer. From April through June, U.S. truck output was down at both companies by more than 60% compared with last year, according to production schedules from Wards Intelligence. (…)

As of July 14:

Morning Consult U.S. Index of Consumer Sentiment:

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Sobering Economic Data From Europe, Asia Dash Hopes for Swift Recovery Early data suggest the recovery from the economic crisis precipitated by the coronavirus pandemic could take longer than originally hoped, with countries facing a long slog to recover lost jobs and income.

(…) The U.K.’s small May expansion [+1.8%] was much weaker than the 5% rebound on the month that economists polled by The Wall Street Journal had been expecting. Some surveys and indicators such as mobile phone data had pointed to a quicker recovery. (…)

IHS Markit Global Business Outlook

imageBusinesses around the world are reining in hiring and investment intentions as a result of the coronavirus disease 2019 (COVID-19) crisis, according to the latest IHS Markit Global Business Outlook survey. June saw sentiment regarding business activity in the year ahead drop compared to the prior survey, conducted in February, with profits set to be hit and employment and investment predicted to be largely unchanged over the coming year. Expectations around inflation were also historically low.

The June IHS Markit Global Business Outlook Survey – based on responses from a panel of 12,000 companies and conducted three times per year – showed the net balance of global firms predicting output to rise over the coming year minus those predicting a decline at +15% in June, down from +18% in February and among the weakest since the global financial crisis. Data for the latest survey were collected between the 10th and 29th of June.

Confidence around business activity in June generally reflected the stage of the virus outbreak in each country. In China, which saw the worst of COVID-19 back in February, confidence was up markedly in the latest survey. A similar trend was recorded in Italy, albeit registering an improvement less strong than seen in China. (…)

Firms across the world anticipate little change to profitability over the coming year. The expected profits net balance was down to just +1% in June, its lowest in the survey history. Any cost savings look set to be passed on to customers through softer output price inflation amid weak final demand.

As was the case across all of the variables covered by the latest survey, the picture was consistent in both the manufacturing and service sectors. Profitability was predicted to decline across half of the 12 countries for which comparable data are available, with pessimism led by India and Germany.

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U.S. June Consumer Prices Rose Sharply as Reopenings Prompted More Buying Consumer-price index rose 0.6% after falling in each of the previous three months

(…) So-called core prices, which exclude the often-volatile categories of food and energy, increased 1.2% over the year, unchanged from the increase the previous month. (…)

Actually, YoY core CPI was up 1.19% in June, from +1.24% in May. Sequentially, prices declined 0.1% in March, -0.45% in April, -0.06% in May and rose 0.23% in June so that core prices are still 0.4% below their February level. (Table from Haver Analytics)

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Surging Copper Prices Signal Optimism About Global Growth Global investors are piling into bullish wagers on copper prices, sparking the quickest rally in the industrial metal in years and signaling that many money managers remain hopeful about the economic outlook despite rising coronavirus cases in much of the U.S.

(…) Because copper is widely used in the global manufacturing sector and critical to making everything from smartphones to houses, many market watchers use its price as an economic indicator. The metal is closely linked to growth in China in particular. (…)

Commodity prices can also rise because of supply issues. My friend Terry, who knows a thing or two about metals and South America, points out that production at many South-American mines is curtailed because of high Covid-19 cases forcing mines to close or curtail production.

Pointing up Saudi shoppers hit by tripling of VAT rate Riyadh changes social contract for citizens long used to cradle-to-grave benefits

EARNINGS WATCH

We now have 26 reports in including 4 Financials. The beat rate is 73% but the surprise factor is -7.9%. Those 26 companies reported aggregate earnings down 68.2% on revenues down 5.5%. Q2 estimates are being trimmed lower to -44.3% from -43.0% on July 1.

As Fathom Consulting illustrates, there are all kinds of “V”s:

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Trailing EPS now $139.97, on their way to around $120 after Q2 if analysts prove right. The Rule of 20 P/E is now 24.2!

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The forward P/E of the FAANGMs soared from a recent low of 26.1 during the March 20 week to 40.1 during the July 3 week. The forward P/E of the S&P with and without the FAANGMs is 21.5 and 18.8. Here are the current forward P/Es of each of the Magnificent Six: Alphabet (29.9), Amazon (97.7), Apple (25.2), Facebook (26.9), Microsoft (33.2), and Netflix (62.1) (Ed Yardeni)

Apple Wins Major Tax Battle Against EU The bloc’s second-highest court sided with the U.S. company over a $14.8 billion tax bill that EU antitrust officials had said the company owed to Ireland.

PANDEMONIUM

Trump signs Hong Kong act clearing way for China sanctions

Outrage Over China’s Treatment of Hong Kong Galvanizes the West Complaints about China have long piled up in Western capitals, but it took Beijing’s new curbs on Hong Kong’s autonomy to galvanize them around something approaching a common cause.

(…) there are signs the Trump administration is warming to coordinated diplomacy regarding China. This week, U.S. national security adviser Robert O’Brien is touring Europe along with his deputy, China expert Matthew Pottinger. (…)

Canada faces pressure to ban Huawei after UK ruling risks marooning Ottawa

China Provocations Hasten Japan’s Military Revival Beijing’s naval maneuvers reshape security policies across Asia-Pacific region; Japan’s Self-Defense Forces want to be ready to put troops into battle

(…) China’s ascent has reshaped security policies across the Asia-Pacific region. Australia recently detailed $186 billion in high-tech defense spending over the next 10 years and, along with India, it is drawing closer to Japan and the U.S. through military drills and cooperation. South Korea is boosting spending on jet fighters after incidents such as one last year when Seoul accused Russian and Chinese bombers of intruding into its airspace and scrambled fighters in response. On Monday, the U.S. offered support to its allies in the region by formally opposing Chinese claims in the South China Sea. (…)

White House Rescinds Rules on Foreign Students Studying Online The Trump administration has agreed to rescind rules it issued last week governing whether international students can enroll at U.S. universities this fall.

Scientific Journal Pulls Over a Dozen Papers by Chinese Researchers Recent investigation had highlighted apparent reuse of images in articles

More than a dozen scientific papers published by Chinese researchers in internationally peer-reviewed journals are being withdrawn after an investigation this month highlighted the apparent reuse of images across more than 100 academic articles, amid increased concern about scientific integrity raised by the fight against the coronavirus.

Earlier this month, a report by Elisabeth Bik, an image-analysis expert and former researcher at the Stanford School of Medicine, found that six global journals had published 121 scientific papers that appeared to reuse identical sets of images, despite covering different topics over a four-year period. The authors hailed from roughly 50 cities across China. (…)

THE DAILY EDGE: 14 JULY 2020

On Monday, coronavirus cases in the U.S. rose by 64,605 from a day earlier to 3.34 million, according to data collected by Johns Hopkins University and Bloomberg News. The 2% increase was in line with the average daily increase of 1.9% over the past week. Deaths rose to 135,400.

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@KXAN_News 

In NYC: 51,687 tests were performed yesterday. 557 tests came back positive (1.08% of total). Total hospitalizations fell to 792. For the first time in months New York City saw a 24 hour period with no COVID-19 related deaths.

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Meanwhile, Florida’s daily positivity rate for coronavirus on Monday was 19.19%. The latest daily data from the Florida Department of Health shows 12,624 patients out of 65,800 people tested positive for COVID-19.

Yesterday, 8.1% of all 720k tests performed in the U.S were positive.

Pence Tells Governors to Protect Citizens However They Can On Monday, he made clear the situation has become grave.

(…) The person who heard the Monday call said the vice president dropped previous talking points meant to argue that the pandemic’s threat was overstated. (…)

In New York, Cuomo has said a decision on whether schools will reopen for in-person learning will be made by the state early next month. Cuomo, a Democrat, has noted that the federal government has no authority on the matter.

“He was wrong on the economic reopening and he’s wrong on the schools reopening,” Cuomo said Monday of Trump. “We’re not going to use our children as guinea pigs.”

San Diego and Los Angeles, America’s second-largest school district behind New York City, will start the academic year with online classes amid the resurgent coronavirus. The districts together have an enrollment of about 720,000 students. (…)

The WSJ editorial board, in The Case for Reopening Schools, says that “the evidence—scientific, health and economic—argues overwhelmingly for schools to open in the fall.” On Monday, Scott Gottlieb, former FDA commissioner, wrote an op-ed in the WSJ, arguing that

(…) The evidence is varied. Many studies do show children are less susceptible to catching and spreading the virus. Less than 10% of reported infections in Germany, Italy and the U.S. have been in people under 18. It’s possible that because children typically get milder cases of Covid, they are less likely to spread the virus through sneezing and coughing.

Yet some studies have found that children may be as likely as adults to become infected, partly because kids have more close contacts. And virus levels in their respiratory droplets can be just as high as for adults. The evidence is still emerging, and credible studies can be marshaled to support both more and less caution.

Then there is the question of severity. When children are infected, there is wide agreement that they are less likely to get seriously ill compared with adults. But lower risk does not mean no risk.

The number of children hospitalized with serious Covid in the U.S. is small. But the largest study of 2,100 pediatric Covid patients from China found that 5% of children developed severe disease with low blood oxygen; 0.6% became more critically ill with respiratory failure, shock or multiple organ dysfunction. Researchers in the U.S. are also investigating a rare inflammatory syndrome related to infection that can make children seriously ill and damage their hearts. (…)

Axios-Ipsos poll: Parents fear return to school

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From Morning Consult:

Fifty-two percent of U.S. adults agree that the United States has been “worse than most other countries” in handling the coronavirus outbreak, marking the highest point since Morning Consult began tracking in April. Just 30 percent say their country’s response has been better than that of “most other countries,” a new low point. Read more

Thirty-eight percent of registered voters approve of how President Donald Trump has handled the coronavirus outbreak, while 57 percent disapprove. The net approval (approval minus disapproval) of minus 19 is the lowest since Morning Consult began tracking. In recent weeks, Trump’s approval rating has fallen particularly with independent voters. In the latest survey, 29 percent of independent voters approve of the president’s coronavirus response while 62 percent disapprove. Read more

GOP Governors Losing Residents’ Support on COVID-19

(…) There have been clear declines in residents’ ratings of their governor in Republican-led states as a whole. This includes an 11-point decrease, from 54% in early June to 43% most recently, in those agreeing their governor is communicating a clear plan of action for addressing the pandemic. There has also been an eight-point decline, from 61% to 53%, in those agreeing their governor cares about the safety and health of the community. Meanwhile, there has been no meaningful change in the governor ratings of residents in Democratic-led states as a whole. (…)

EU to Resist Further Travel Opening With New Virus Wave a Risk

The European Union will recommend keeping its external borders shut to Americans and most other foreigners for at least two more weeks as fears grow of a second coronavirus wave, according to three officials familiar with the matter.

Member-government envoys in Brussels on Tuesday plan to urge no expansion of a list of 15 countries — Canada, Japan, South Korea and China among them — whose residents were given the green light two weeks ago to visit the EU, the officials said on the condition of anonymity.

U.K.: The current reproduction rate in the U.K. is about 0.7-0.9, which means the epidemic is diminishing overall. (Bloomberg)

U.K. Virus Toll

Did you miss yesterday’s Make America Win Again! ?
PANDENOMICS
U.S. Small-Business Optimism Jumps on Sales Expectations

The group’s index of sentiment increased 6.2 points in June to 100.6, the second straight gain after hitting a seven-year low two months earlier. Even with the advance, the measure remains below the 2020 high of 104.5 reached in February. The NFIB’s gauge of sales expectations surged by a record 37 points to a positive 13. (…)

Eight of 10 subindexes in the small-business optimism index picked up in June, though the measure of sales expectations contributed more than half of overall monthly increase. Job-creation plans improved by eight points, which the NFIB attributed in part to Paycheck Protection Program loans.

Earnings trends, however, continued to weaken, falling to the lowest March 2010.

Full NFIB report here:image

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Axios warns

The Paycheck Protection Program (PPP) has left much to be desired for needy small businesses around the U.S., and the overwhelming majority of recipients are about to exhaust their funding and may start laying off employees.

A new survey from Goldman Sachs provided first to Axios finds 84% of PPP loan recipients will exhaust their funding by the first week of August and only 16% say they’re very confident they will be able to maintain payroll if no further government relief is provided.

  • A recent survey by the right-leaning National Federation of Independent Business found 22% of PPP recipients anticipate having to lay off at least one employee after using their loan.
  • 63% of small business owners say less than 75% of their revenue before the pandemic started has returned.
    • 60% say that less than 75% of their customers from before the pandemic started have returned.

From Barclays Research (via The Daily Shot)

From DeepMacro and GS (via The Daily Shot)

People are concerned about their jobs and household budgets, but a rebound to get them back spending in shops, airports or restaurants will take time, a YouGov survey across 26 countries suggests. More than 30% feel less secure in their job than a month ago and around half of the respondents are still cutting back on non-essential expenditure. Americans would be about three times more likely to save rather than spend an unexpected cash windfall. (Bloomberg)

China’s Imports and Exports Rebound as Coronavirus Fades in World’s Second-Largest Economy Chinese imports from the U.S. rose for the first time since the new coronavirus emerged earlier this year, showcasing Beijing’s post-pandemic purchasing power even as political tension between the world’s two largest economies continues to rise.

China’s appetite for meat and other agricultural goods helped Chinese imports of U.S. goods to jump by 11.3% in June from a year earlier, after a 13.5% drop in May, data from Beijing’s General Administration of Customs showed Tuesday. The Chinese buying helped to narrow Washington’s trade deficit with Beijing from a year earlier, though Chinese exports to the U.S. also improved, rising 1.4% in June from a year earlier after a 1.3% decline in May. (…)

China’s imports from the rest of the world climbed 2.7% in June from a year earlier, Chinese customs officials said Tuesday, reversing a 16.7% slump in May and coming in much stronger than an expected drop of 10%, according to economists polled earlier by The Wall Street Journal.

Exports, meantime, edged up 0.5% in June from a year earlier, versus a 3.3% decline in May, customs data showed. June’s exports were also higher than economists’ median forecast for a 4.3% year-over-year decline. (…)

Deficit Reaches $3 Trillion as Virus Costs Soar As share of GDP, deficit is on pace to be the largest since World War II

As a share of gross domestic product, the 12-month deficit came to 14% last month, compared with 10.1% in February 2010, when the U.S. was still recovering from the last recession. In June alone, the deficit widened to a monthly record of $864 billion, the Treasury Department said Monday—nearly as much as the gap for the entire previous fiscal year, which totaled $984 billion. (…)

For the first nine months of the fiscal year, the budget gap totaled $2.7 trillion, the Treasury said, more than triple the deficit during the same period a year earlier. Receipts fell 13% from October through June compared with a year earlier, and spending rose 49%. (…)

Political support for taming deficits has faded in Washington in recent years, as persistent global demand for U.S. Treasury assets has kept borrowing costs near historic lows. Despite the surge in government borrowing, net interest costs fell 11% in the first nine months of the fiscal year, the Treasury said Monday.

EARNINGS WATCH

Today is the official kickoff, starting with trailing EPS of $140.12 after the first 20 early reports (Mar-May quarter) aggregated a 32.3% decline in YoY earnings on revenues down 3.5%.

JPMorgan sets aside $10.5 billion for loan losses as profit top estimates JPMorgan Chase & Co on Tuesday set aside about $10.5 billion in reserves to cover a wave of potential defaults in the aftermath of the COVID-19 pandemic as the largest U.S. bank reported a smaller-than-expected 51% drop in second-quarter profit.
JPMorgan’s Record Trading Helps Ease the Pandemic’s Toll
Citigroup Profit Falls 73%
Wells Fargo swings to $2.4 billion loss as pandemic bites The bank, among the United States’ biggest mortgage lenders, reported a net loss of $2.4 billion, or 66 cents per share, for the quarter ended June 30, compared with a profit of $6.2 billion, or $1.30 per share, in the year-earlier period. Analysts had expected Wells Fargo to report a loss per share of 20 cents, according to Refinitiv.

“We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter,” Chief Executive Charlie Scarf said in a statement.

I was wondering what these insiders are buying: growth or value?

Insider Transactions Ratio

Then I found that 19 of the top 50 companies with net buying in $value over the past 60 days were in Health Care. Only 2 were in Tech and 4 in Consumer cyclicals, according to data from INK Research. Furthermore, only 2 sectors, Energy and Financials, display larger buy-only transactions than sell-only with Technology the least favored. INK Research commented on July 8:

Our key US Indicator which measures sentiment towards the average stock in America has firmly established a bottoming pattern. That means insider buying has bottomed out, typically a short-term bearish signal as such a pattern often happens near market tops. Moreover, we have seen above-average insider profit-taking in dollar terms. This has taken place right before many firms enter insider trading blackout periods. In plain English, that means insiders are taking money off the table while the going is good. (…) we find little comfort from insider signals as our banking indicator is heading down even as bank stocks fall. That is not typically a good sign.

The [BoA] survey also finds cash levels rose to 4.9% from 4.7%. That caution shows up elsewhere — just 14% say the economic recovery will be “V”-shaped versus 44% expecting a “U,” and 30% a “W” shaped recovery.

PANDEMONIUM

U.K. Bans Huawei From 5G Networks in Security Crackdown

New U.S. Visa Rules Threaten to Deport 369,000 Chinese Students

As schools try to figure out how to start the fall semester amid the coronavirus pandemic, some — including Harvard University and the University of Southern California — are opting for online-only instruction. And that means their foreign students will have to leave or transfer, according to new rules issued Monday by the U.S. Immigrations and Customs Enforcement agency. In order to keep their student visas, foreign nationals have to take in-person classes, according to ICE. (…)

U.S. Shifts Policy, Rejects Most Chinese Maritime Claims in South China Sea The U.S. declared its formal opposition to a swath of Chinese claims in the South China Sea, in an unusually direct challenge to Beijing’s efforts to assert control in the strategic waters.

(…) While Washington has previously said it sees Beijing’s expansive sovereignty claims over most of the South China Sea as unlawful, the U.S. is now officially rejecting specific Chinese claims for the first time, according to diplomats familiar with the matter. (…) “The world will not allow Beijing to treat the South China Sea as its maritime empire,” Mr. Pompeo said. (…)

Beijing’s claims there overlap with those of six governments, including five Southeast Asian countries. The U.S., which doesn’t have claims in these waters, has generally called on rival claimants to resolve their disputes peacefully and in accordance with international law. (…)

China to Impose Sanctions on Lockheed Martin on Taiwan Sale

China said it would impose sanctions on Lockheed Martin Corp. after the U.S. approved a possible $620 million deal for Taiwan to buy parts to refurbish defensive missiles made by the company.

Chinese Foreign Ministry spokesman Zhao Lijian made the announcement at a briefing in Beijing on Tuesday. He called on the U.S. to cut military ties with Taiwan — which China considers part of its territory — to avoid “further harm to bilateral relations.”

“China firmly opposes U.S. arms sales to Taiwan,” Zhao said. “We will impose sanctions on the main contractor of this arms sale, Lockheed Martin.” (…)

DIFFERENT FOLKS, DIFFERENT STROKES

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