Month: September 2020

The Jobs of August

The economy added 1.4 million jobs in the month while the unemployment rate declined 1.8 percentage points to 8.4%. Temporary Census hires filled 238,000 of those jobs. But the economy has nonetheless added 10.5 million private jobs in four months, about half as many as were lost in the recession caused by government-ordered lockdowns. The recovery after the 2008-2009 recession took three years to make this much progress, and the jobless rate was still 8.1% in August 2012.

Labor force participation increased 0.3 percentage points to 61.7%, up 1.5 points from its April low. This is still 1.7 percentage points below its February peak, but the increase means that hundreds of thousands of Americans are continuing to return to the workforce. By contrast, labor force participation declined in the five years after the 2009 recession. Our contributor Donald Luskin notes that the number of Americans receiving Social Security disability payments is 9.8 million, one million fewer than in August 2012. (…)

All of this means the economy is growing again as the lockdowns ebb and despite the lack of another spending blowout from Washington, D.C. The downturn was a recession, not the depression that many feared in March. The Atlanta Federal Reserve’s GDPNow formula is predicting third-quarter growth of nearly 30% year-over-year.

Consumer spending may slow without more federal checks, but perhaps not as much as feared with a recovering job market and average hourly earnings up 4.65% from August last year. They’re up 4.9% for production workers. People have pent up savings—the savings rate was 17.8% in July—and the wealth effect from rising home and stock prices despite the selloff in tech stocks this week will also help. Home prices are up 12% year-over-year, and the Dow Jones Industrial Average has risen 51% from its March trough. (…) (WSJ editorial board)

Aggregate weekly payrolls of private employees (employment x hours x hourly wages) are slowly recovering but are more swooshing than veeing, unlike retail sales which gained from pent-up demand and government payments, both temporary.

Retailers have added back 1.7 million of the 2.4 million jobs lost in March and April, accounting for 16.3% of all jobs recovered since the April low while retailing typically represent 10% of all jobs. Entering the most critical period of the year for retailers, the swooshing trends in payrolls and labor income are worrisome.

BLS data show that the number of jobs reported as permanently lost swelled another 534k in August, totalling 2.13 million since February which is 18% of unrecovered jobs so far. Another way to look at it is that while the economy has recovered 10.5 million jobs, it has also permanently lost 2.1 million jobs, almost 10% of all jobs lost in March and April, and counting.

Fed’s Powell Says Economy Likely Will Need More Government Spending, Low Interest Rates Federal Reserve Chairman Jerome Powell said Friday’s report showing 1.4 million Americans found or resumed work in August was good news, but the economy likely will require more government spending and low interest rates for years.

(…) “We do think it will get harder from here,” said Mr. Powell. Employment in service sectors, especially those that tend to support entry-level and lower-paid workers, “may be some of the harder jobs to find because there are some parts of the economy that will take longer to recover,” he said. (…)

“I think we’re not really going to know the pace … of the recovery with any clarity for a couple more months,” he said, according to a transcript released by NRP. (…)

Summer is over, still swooshing:

(Bespoke)

Job Market in Canada Extends Recovery With Strong Full-Time Gain

Canada’s economy added 245,800 jobs in August, a fourth-straight month of gains that has recouped almost two thirds of employment losses from the pandemic.

The hiring lowered the jobless rate to 10.2%, from 10.9% in July, and brings the number of jobs recovered since the height of the pandemic to 1.9 million. Canada lost 3 million jobs in March and April. (…)

The latest numbers capture the reopening of Toronto, Canada’s biggest city and one of the last to ease restrictions due to high Covid-19 counts. Ontario posted 142,000 new jobs last month. (…)

Population adjusted, Canada added the equivalent of 2.5 million jobs in August!

U.S. Coronavirus Cases Fall Below 25,000 Outbreaks on some college campuses have forced students to return to online learning

(…) But public-health officials worry that sending students back to their hometowns, often without testing them before departure, could lead to new outbreaks around the country. (…) “Just because a kid is asymptomatic doesn’t mean it’s safe to send that kid home. They could be exposed and incubating. They could be in fact a ticking time bomb.” (…)

Colleges and universities have found at least 51,000 coronavirus cases already, according to a NYT campus tracker. “The Times has counted more than 45,000 additional cases at colleges since late July, and more than 24,000 additional cases since late August. (…) While The Times’s survey is believed to be the most comprehensive account available, it is also a near-certain undercount.”

• “Mom, dad, I’m back!”:  Pew: Record 52% of young adults in U.S. are living with their parents

Mommy, is this a second wave?

Some of the recent big risers are plateauing but India and Argentina keep rising:

Asymptomatic children who contract COVID-19 may ‘shed’ coronavirus for weeks

A new study published in JAMA Pediatrics suggests that children can spread SARS-CoV-2, the virus that causes COVID-19, even if they never develop symptoms or even long after symptoms have cleared. It found a significant variation in how long children continued to “shed” the virus through their respiratory tract and, therefore, could potentially remain infectious.

While the virus was detectable for an average of about 2.5 weeks in the entire group, a significant portion of the children —about a fifth of the asymptomatic patients and about half of the symptomatic ones — were still shedding virus at three weeks, meaning they were releasing it into the environment. The researchers also found that the duration of COVID-19 symptoms also varied widely, from three days to nearly three weeks.

A recent systematic review estimated that 16% of children with a SARS-CoV-2 infection are asymptomatic, but evidence suggests that as many as 45% of pediatric infections are asymptomatic, according to the U. S. Centers for Disease Control and Prevention. (…)

The risk, as Israel discovered, is providing an environment where children unwittingly spread the virus to each other, which can lead to community transmission. That’s particularly worrying for those who have underlying conditions, and the elderly, who are more vulnerable to the most severe effects of the virus. Community transmission also makes contact tracing more difficult. (…)

Vaccine CEOs issue safety pledge amid Trump’s quest for pre-election approval The joint statement by nine chief executives represents an extraordinary effort to bolster public faith in a coronavirus vaccine.

“We believe this pledge will help ensure public confidence in the rigorous scientific and regulatory process by which covid-19 vaccines are evaluated and may ultimately be approved,” the executives wrote in their joint statement.

The statement included a vow that the companies would “only submit for approval or emergency use authorization after demonstrating safety and efficacy through a Phase 3 clinical study that is designed and conducted to meet requirements of expert regulatory authorities such as FDA.”

They also vowed to “always make the safety and well-being of vaccinated individuals our top priority.” (…)

Vaccine manufacturers want to bolster public faith in the safety and efficacy of a vaccine to counter perceptions that the Food and Drug Administration will cave to political pressure, said Amesh Adalja, senior scholar at the Johns Hopkins University Center for Health Security.

“It just reflects the fact that we have seen political meddling from the start in this pandemic response,” Adalja said. (…)

Americans are told that the private sector will protect them against the public institutions and politicians, those that are supposed to protect them against potential private sector abuses. Pathetic!

Politico reported last week:

Trump said in a press briefing Friday that there would be a vaccine “before the end of the year and maybe even before Nov. 1. I think we can probably have it sometime in October.”

The president’s remarks came a day after the head of the government’s vaccine accelerator, Moncef Slaoui, said that the government was “very unlikely” to greenlight a vaccine by early November, because data from late-stage clinical trials of leading vaccine candidates would not be ready by then.

“There is a very, very low chance that the trials that are running as we speak could read before the end of October,” said Slaoui, who heads the government’s Operation Warp Speed, told NPR. (…)

The federal government’s top infectious disease expert, Anthony Fauci, also cautioned this week that result could take longer.

“If you look at the projection of the enrollment and the kinds of things you’ll need to get a decision about whether the vaccine is safe and effective, most of us project that that’s going to be by November and December, by the end of this year,” Fauci, director of the National Institute of Allergy and Infectious Disease, said on CNN. “It is conceivable that you could have it by October, though I don’t think that that’s likely.”

But Trump remained adamant yesterday;

(…) “We’ve done an incredible job, and in speed like nobody’s ever seen before,” said Trump during a kitchen-sink press conference from the North Portico of the White House, referring to a vaccine. “This could have taken two or three years. And instead it’s going to be done in a very short period of time. Could even have it during the month of October.

“The vaccine will be very safe and very effective and it will be delivered very soon,” he continued. “You could have a very big surprise coming up.” (…)

Trump went on to say that Biden and Harris are spreading “fake rhetoric” that “undermines science” and holds back “this incredible vaccine.” (…)

That last line is truly incredible. You can’t make this stuff up!

Lastly,

(…) As for Covid-19 itself, Dr. [Scott] Atlas [Trump coronavirus advisor] is upbeat. “We’re doing a lot better with this,” he says. “The length of stays in hospitals are a third of what they were in the peak” in the spring. “I think most of the damage, honestly, has been done.” He’s optimistic about a vaccine—“there’s a lot of incredible speed in its development”—and anticipates “roughly a hundred million doses are going to be available toward the end of the year.” We are, he thinks, “on the road to getting rid of this threat.” He rejects confident predictions of a “second wave”: “That’s just conjecture. Not every virus has a second wave.” And he says: “The talk of anybody saying we’d better do another societal lockdown is completely anti-data.” (WSJ)

EQUITIES

SoftBank’s Bet on Tech Giants Fueled Summer Stock Rally The Japanese conglomerate placed billions in options bets on fast-rising tech stocks. Investors say that turbocharged the tech sector.

Investors watching the vertigo-inducing rise—and this week’s fall—of technology stocks are buzzing about a single trade, a giant but shadowy bet on Silicon Valley big enough to pull the market up with it.

The investor behind that trade, according to people familiar with the matter, is Japan’s SoftBank 9984 -3.21% Group Corp., which bought options tied to around $50 billion worth of individual tech stocks. Investors and analysts, aware of the activity but in the dark as to who is behind it, say it has turbocharged the tech sector, whose sheer size drives broader market moves. (…)

Regulatory filings show SoftBank bought nearly $4 billion of shares in tech giants such as Amazon.com Inc., Microsoft Corp. and Netflix Inc. this spring, plus a stake in Tesla. Not included in those disclosures is the massive options trade, which is built to pay off if the stock market rises to a certain level and then lock in gains, the people said.

SoftBank bought a roughly equal amount of call options tied to the underlying shares it bought, as well as on other names, according to people familiar with the matter. It also sold call options at far higher prices. This allows SoftBank to profit from a near-term run-up in stocks and then reap those profits by unloading its position to willing counterparties.

Investors pay a small premium to buy options, giving them exposure to a much larger notional amount of shares. In SoftBank’s case, the roughly $4 billion in options generated an exposure of around $50 billion, according to the people familiar with the matter. (…)

SoftBank is best known for its $100 billion Vision Fund, which invests in startups including Uber Technologies Inc. and TikTok owner Bytedance. But in July its founder and CEO, Masayoshi Son, announced a new unit to invest in public markets, similar to a hedge fund in its scope and tactics. (…)

The whale is out of the bag. SentimenTrader had revealed the highly unusual call options trading starting in mid-May (vertical line). Then came the 50% eruption in NDX volume in the first 2 weeks of June pushing the NDX up 5% in 8 trading days.

The subsequent investor frenzy brought the NDX more than 30% above its 200dma, a 20-year high:

Wait, wait…there’s more scary stuff:

ZeroHedge today reports that

(…) for all intents and purposes, SoftBank is now out of most – if not all – of its public equity positions and “Nasdaq Whale” bets which were, as we reported last week, the primary catalyst for the market’s tremendous rally. (…)

But Softbank was not alone betting on the one-way market:

• The Options-Enhanced Stock Market Money Machine Is Going Global

Back in January, a bunch of chat-room denizens got it in their heads that they could rev up returns in a stock portfolio by corralling options dealers to their side. It’s starting to seem like they were on to something.

While not new and a long way from risk-free, the strategy celebrated in the Reddit forum r/wallstreetbets is at least fairly simple. Spend some money on bullish calls on shares you own in hopes of forcing the sellers to purchase the same stock as a hedge. An ensuing feedback loop drives everything higher, or so the theory goes.

Now, by happenstance or design, something like this appears to be happening on a grand scale in U.S. technology shares, dialing up a blistering rally — and possibly worsening last week’s decline. Armies of mom-and-pop traders have piled into options with gusto. More recently SoftBank Group, the Japanese conglomerate, bought large positions in contracts tied to megacap tech shares. (…)

“This entire summer has been about the public being right, early and often, and institutions piling in after,” said Julian Emanuel, chief equity and derivatives strategist at BTIG, who sees the options bets stoking market volatility. “The public is trapped long and institutions are trapped long and the snowball that was pushed very quickly up the hill and got big is now at risk of becoming an avalanche.” (…)

A bigger influence is retail investors — a constituency that goes far beyond the Reddit crowd — who have shelled out $40 billion in call premiums in a month, data from the Options Clearing Corp. compiled by Sundial Capital’s Jason Goepfert show. The total dwarfs SoftBank’s reported outlay. (…)

“What we’ve thought all throughout August as volatility and stocks rose in tandem is that the public buying of short-dated calls throughout the summer led to institutional buying,” he said. “Which in turn led to dealers having to hedge their short gamma (the calls they had sold the public and other large players), creating more stock to buy the higher the stocks ran. Classic momentum/short gamma snowball effect, which the public exacerbated, blissfully unaware.”

SentimenTrader offers this chart showing “an average of the 8 other times the Nasdaq hit a 3-year peak that wasn’t surpassed for at least the next year.

That average is v-toppy, meaning there wasn’t a lot of back-and-forth activity surrounding the peak. The Nasdaq soared higher, then…did not. The individual signals show that when the Nasdaq peaked, it PEAKED, underlined and with all-caps. There wasn’t much dickering around. (…)

Interestingly, it is in mid-May that Lowry’s Research’s Buying Power Index exploded 35% to peak in mid-June and lose almost all of it since. Strangely (!), Lowry’s Selling Pressure Index stalled in mid-June, as investors froze, scared to feed the raging bull anymore, in FOMO fashion.

Is it a coincidence that the NDX crashed the very same day that the Softbank name was first linked to the highly unusual activity in options? Could it be that nervous equity holders finally got the cue that this last crazy leg could be because of a single size buyer, therefore unsustainable? Downside volume swelled to 2.7x upside volume on Sep. 3. During the previous 4 sessions, downside volume averaged 0.7x upside volume.

After Friday’s close, the NDX still stands 24% above its 200dma while the S&P 500 is 10.8% above its own 200dma, down from 15.9% on the morning of Sep. 3 but still uncomfortably high:

So, while Lowry’s analysis and narrative tells us that “there is a long-list of evidence encompassing breadth, new highs and momentum that remains positive for the intermediate-term”, I continue to heavily weigh the worrisome short-term trends in its Buying Power/Selling Pressure data: rising markets are stronger when demand is strong and vulnerable when mainly supported by weak supply. With no help from valuation, equities are very sensitive to any sell trigger. Maybe we just got one from Japan.

ST’s NDX v-chart above is rather scary. Is that it? Are we finally there?

Lowry’s notes that NASDAQ Selling Pressure has been rising since July 6, unlike the NYSE. NASDAQ’s big 5 stocks, which account for 47% of the index, have masked the recent erosion in breadth. While Lowry’s sees no technical similarities with the bubble peak of 2000, it sees many signs for a pullback.

At least, both the NYSE and the NASDAQ Buying Power remain dominant vs Selling Pressure. We shall see if knowledge of the whale changes investor attitude. No doubt that Softbank’s heavy buying fed the Robinhooders and other momentum investors since April. Now realizing that demand was actually pretty narrow and unsustainable, many could simply head for the sidelines, further reducing Buying Power, perhaps taking it below Selling Pressure, itself potentially rising with the same revelation. After all, investing in Masayoshi Son’s footsteps has not been a tranquil, stressless and always financially fulfilling voyage, has it?

Also from SentimenTrader:

(…) Through August, there hasn’t been such a wide chasm between the best and worst sectors in nearly 90 years. The only years in that span when the difference neared or exceeded 50% were 1987 and 2000. That doesn’t seem like a great sign. This is thanks to the money pouring into the big tech stocks while neglecting left-for-dead sectors like energy. (…)

Every time there is a split like this, investors make extrapolations about structural changes in the market that explain the difference between the two sectors. Currently, it’s that big tech stocks are going to keep benefitting from the post-pandemic world while a focus on renewable energy with a possible change in administrations is going to doom the energy sector. Maybe.

More likely is that by the time these themes have been played out to the degree they have in 2020, future returns have already been sacrificed even if the theories play out. Maybe tech will continue to gain on energy in the months ahead, but historically it would be highly unusual for them to continue to outperform by a meaningful degree over a 1-2 year time frame.

Not to advocate buying Energy (I generally avoid investing in commodity-sensitive sectors), but I note that the S&P Energy median stock sells below book value (0.92) and that its P/CF at 2.6x trailing CF is the lowest in 25 years by some margin while the median CF margin, at 18%, is near its high of the last 5 years.

On the other hand, such wide chasm in sector returns has often meant a market peak and a change in regime…

At today’s pre-opening of 3375:

FYI:

(Financial Times)

(Source: Vincent Deluard, StoneX via EvergreenGavekal)

Shares of Tesla tumbled 7% in extended trade on Friday after the electric car maker was excluded from a group of companies being added to the S&P 500, among them Etsy, whose stock market value is less than a 20th of Tesla’s.

«The Market is Vulnerable» Blackstone’s market maven Byron Wien sees a significant correction risk. He warns of rising speculation in the stock market, the vulnerable state of the U.S. economy and possible turmoil in the course of the presidential election. He also shares his views on where he spots opportunities for patient investors.

U.S.-China Chip-War Collateral Damage Will Range Far and Wide New Trump administration rules look likely to choke off equipment sales to China’s leading chip maker—and hit chip-making equipment makers where it hurts

U.S. agencies are discussing whether to add Semiconductor Manufacturing International Corp. SMICY -0.72% into the Commerce Department’s “entity list,” which would restrict the supply of U.S. technology to the Chinese chip maker. (…)

The potential restrictions will make it almost impossible for SMIC to catch up with leading rivals  like Taiwan Semiconductor Manufacturing Co. and Korea’s Samsung Electronics. SMIC only has 5% market share in the global foundry business, which entails making chips for other semiconductor companies that don’t have their own plants, according to Credit Suisse. To narrow the technology gap, SMIC had planned $6.7 billion of capital expenditures this year, more than triple the amount in 2019, after raising $7.7 billion on Shanghai’s technology-heavy STAR market in July. But such a cash splurge could be in doubt now. Goldman Sachs estimates that SMIC’s revenue could be halved by 2024 if the company is unable to expand capacity in both advanced and older nodes. SMIC may also have trouble getting maintenance and spare parts from its U.S. suppliers, says brokerage house Bernstein.

That could mean reduced orders for semiconductor equipment makers: But an even bigger worry is that the Trump administration could target other Chinese chip makers too. Demand from China is expected to be a growth spot for equipment makers in the next few years. (…) Jefferies has estimated China could account for around a quarter of global semiconductor equipment procurement this year. Chip makers outside of China may fill part of that demand but are unlikely to fully offset the impact.

In the short term, other Chinese chip makers may also rush to increase inventories of semiconductor equipment in fear of potential sanctions, helping dull the pain. But in the longer run, those sanctions could hurt manufacturers of chipmaking tools everywhere—including those in the U.S., Japan and the Netherlands—if it becomes impossible for most Chinese semiconductor firms to construct complete production lines at all. California-based Lam Research, for example, made a third of its revenue last quarter from China. (…)

Trump Vows to Sharply Scale Back U.S.-China Economic Ties

President Donald Trump said he intends to curb the U.S. economic relationship with China, contrasting himself with Joe Biden by threatening to punish any American companies that create jobs overseas and to forbid those that do business in China from winning federal contracts.

“We’ll manufacture our critical manufacturing supplies in the United States, we’ll create ‘made in America’ tax credits and bring our jobs back to the United States and we’ll impose tariffs on companies that desert America to create jobs in China and other countries,” Trump said at a White House news conference on Monday where he complained at length about his Democratic re-election opponent.

“If they can’t do it here, then let them pay a big tax to build it someplace else and send it into our country,” he said of U.S. corporations. “We’ll prohibit federal contracts from companies that outsource to China and we’ll hold China accountable for allowing the virus to spread around the world.” (…)

“We’re going to end our reliance on China because we can’t rely on China and I don’t want them building a military like they’re building right now and they’re using our money to build it.” (…)

• US and Taiwan to work on reshaping supply chains away from China
• US border agents turn up the heat on Chinese students

Companies Brace for Profit Hit From Euro Rally The euro’s sharp rally this year is seen as a vote of confidence by investors on the prospects for Europe’s economic recovery. But companies and their shareholders are bracing for pain.

(…) When the euro is strong, it makes exports such as machinery, cars and chemicals from the eurozone more expensive for foreign buyers. It also erodes the value of overseas sales for companies in the 19 member states, and can chip away at profit just as they emerge from the Covid-19 economic crunch. (…)

For every 10% that the euro strengthens against the dollar, eurozone corporates stand to lose about 3% in profits, he estimated. For S&P 500 companies, a 10% appreciation in the dollar costs companies up to 2%. (…)

AND THE U.S. ELECTIONS…

From Axios:

This is the era of misinformation and mistrust, so it’s easy to war game scenarios where the election provokes civil unrest and dispute. So here are the facts you need to know — and share:

1. Don’t expect a conclusive outcome on election night. Be patient. And go into the night knowing it might take a week to count every vote.
2. History shows mail-in voting is safe. A Brookings analysis found minuscule numbers of fraud cases, going back many years, in the five Western states that vote almost entirely by mail. Go deeper.
3. Be extra cautious of your sources of news, especially on social platforms. Don’t share news unless you’re 100% confident in its accuracy and legitimacy. 
4. Click here to understand how you can vote in your state. 
5. Vote.

Axios built an interactive tool to show you when and where to apply for an absentee ballot, the deadline for postmarking it, and how soon early voting starts.

• Why it matters: Voting in a pandemic takes more attention and effort, since your ballot will only count if you understand your state’s rules and deadlines, Axios’ voting expert Stef Kight and visual journalist Naema Ahmed report.

Click into the tool.

The prospect of court fights over COVID-related voting changes, an absentee ballot avalanche, and foreign interference have prompted a nationwide lawyer-hiring binge, Axios’ political reporter Hans Nichols and voting expert Stef Kight write.

• Why it matters: Election-related lawsuits have been on the rise for the past two decades, but the coronavirus has supercharged them. Both national parties are hiring preemptively so they’ll be ready for challenges and recounts.