Year: 2021

The Delta Variant Is Already Leaving Its Mark on Business The Covid-19 variant is damping consumer demand and raising costs for business after a spring and summer that seemed to promise a rapid recovery. The unanswered question: Is this a stumble or a fall?

In recent weeks, Kellogg Co. said Delta’s spread in Malaysia slowed production of Pringles there. Online travel company Booking Holdings Inc. said overall bookings declined as Delta took root in July. U.S. healthcare companies say elective medical procedures are slowing once again in some places. (…)]

Traffic at grocery stores, gas stations, gyms, restaurants and retail stores fell starting in late July, after surpassing 2019 levels earlier in the summer, according to mobility metrics from data firm SafeGraph. Weekly domestic flights declined last week, for the second time since mid-April. The median number of trips Americans took at least 10 minutes from home also declined in July, data from the Bureau of Transportation Statistics show. Workplace visits leveled off last week after mostly rising for months, according to data from Brivo, which tracks the number of times people use credentials to gain access to commercial buildings. (…)

There are signs that Delta’s economic impact could remain limited. The number of Americans who aren’t working for fear of getting or spreading the coronavirus has continued to decline, to 2.5 million adults in late July and early August from 2.8 million a month earlier and 5.5 million in January, a U.S. Census survey found. New unemployment claims have remained roughly level since May, and robust job growth and falling unemployment in July suggest the labor market remained strong just ahead of the latest pandemic wave. (…)

Spending on hotels has largely held up so far. But trade shows are getting canceled. And the number of diners seated at restaurants tracked by online reservation platform OpenTable was 9% below 2019 levels for the week ended Thursday, after surpassing 2019 levels in late June. (…)

“With the lower death rates, hopefully a resurgence of the virus now would freak people out less, but people shouldn’t kid themselves,” Mr. Goolsbee said. “If the surge in hospitalizations continues and the virus begins to rage out of control again, the recovery will be in danger.”

He added: “It wouldn’t have to collapse like in the spring of 2020. It could just stall out the recovery like what happened in November and December last year.”

The Chase Card Spending Tracker showed some weakness in July but the last 2 weeks through Aug. 9 have firmed up:

Travel and Entertainment spending has weakened however:

Fed Weighs Ending Asset Purchases by Middle of 2022 Reducing bond buying sooner could provide more flexibility to raise interest rates if inflation stays high and unemployment falls rapidly.

Federal Reserve officials are nearing agreement to begin scaling back their easy money policies in about three months if the economic recovery continues, with some pushing to end their asset-purchase program by the middle of next year.

In recent interviews and public statements, several have advocated for this timetable, which would enable them to raise interest rates sooner than currently anticipated if the economy makes rapid progress toward their goals. (…)

The answers are important to financial markets because Fed officials have said they would prefer to conclude the bond-buying program before considering when to raise interest rates from near-zero. At their June 15-16 policy meeting, 13 of 18 Fed officials projected they would raise rates by the end of 2023; seven expected to do so by the end of 2022. (…)

U.S. consumer sentiment plummets in early August to decade low

This is making the rounds:

U.S. consumer sentiment dropped sharply in early August to its lowest level in a decade, in a worrying sign for the economy as Americans gave faltering outlooks on everything from personal finances to inflation and employment, a survey showed on Friday.

The unexpected reading could give Federal Reserve policymakers pause if it translates in the months ahead to a dent in economic activity. The central bank has been getting closer to a decision on when to begin pulling back the extraordinary stimulus it put in place to shield the economy from the COVID-19 pandemic.

The University of Michigan said its preliminary consumer sentiment index fell to 70.2 in the first half of this month from a final reading of 81.2 in July. That was the lowest level since 2011, and there have been only two larger declines in the index over the past 50 years. Those were at the depths of the 2007-2009 recession and during the first wave of shutdowns in April 2020 at the beginning of the pandemic.

The losses were widespread across income, age, and education subgroups and spanned all regions. Economists polled by Reuters had forecast the index would remain unchanged at 81.2. (…)

The survey’s gauge of current economic conditions also declined to a reading of 77.9 from 84.5 in July while its measure of consumer expectations slid to 65.2 from 79.0 in July.

The survey also showed consumers raising their expectations for medium term inflation, another measure the central bank is closely monitoring to ensure that inflation expectations remain anchored.

The survey’s one-year inflation expectation edged lower to 4.6%, down from 4.7%, but its five-year inflation outlook ticked up to 3.0% from 2.8% in July. (…)

I am not a big fan of consumer surveys generally as they are merely coincident indicators. There are two widely followed surveys: the Conference Board’s Consumer Confidence Index samples some 5000 households and is released on the last Tuesday of every month while the U. of Michigan’s Consumer Sentiment Index polls 500 households and is released around the 10th of each month. The general view is that the Consumer Confidence Index reflects the state of the labor market while the U. of M’s Consumer Sentiment Index is influenced by pocketbook issues such as gasoline and food prices.

SentimenTrader charts the spread between the measures (red dot = recent reading):

(…) the table below shows returns in the S&P 500 following all other notable peaks in the past 40+ years. For the most part, stocks held up well…for a while. The biggest issue is that at some point – and it was an inconsistent “at some point” – stocks fell into a bear market following these divergences. They preceded trouble in 1990, 2000, 2008, and 2020. The first two triggered within months; the latter two took a long time to play out. It’s hard to rely on something with such inconsistent timing.

China’s Economic Recovery Is Losing Steam China’s economy slowed more than expected in July as extreme weather and the highly contagious Delta variant of the coronavirus swept across the country.

Monthly indicators of industrial, consumption and investment activity all showed growth retreating more quickly than expected—and decelerating from June’s yearly growth rates—according to data released Monday by China’s National Bureau of Statistics. (…)

The data included two key contributors to the headline gross domestic product figure: industrial production, which rose 6.4% from a year earlier, and fixed-asset investment, up 10.3% during the first seven months of the year from the year-ago period. Both rates of increase fell short of expectations, and marked a slowdown from June’s growth rates. (…)

Retail sales growth slowed to 8.5% in July compared with a year earlier, a pullback from June’s 12.1% increase.

China’s headline jobless rate, the surveyed urban unemployment rate, rose to 5.1% in July, up from 5.0% in June. (…)

After Monday’s data release, ANZ cut its full-year GDP target to 8.3%, from 8.8%, citing the “broad-based slowdown in domestic activities in July, which suggests that the economy is rapidly losing steam.” (…)

From Bloomberg:

EARNINGS WATCH

From Refinitiv/IBES:

Through Aug. 13, 457 companies in the S&P 500 Index have reported earnings for Q2 2021. Of these companies, 86.9% reported earnings above analyst expectations and 10.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 83% of companies beat the estimates and 14% missed estimates.

In aggregate, companies are reporting earnings that are 16.4% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.9% and the average surprise factor over the prior four quarters of 20.1%.

Of these companies, 86.4% reported revenue above analyst expectations and 13.6% reported revenue below analyst expectations. In a typical quarter (since 2002), 61% of companies beat estimates and 39% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 26% missed estimates.

In aggregate, companies are reporting revenues that are 5.3% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.1% and the average surprise factor over the prior four quarters of 3.5%.

The estimated earnings growth rate for the S&P 500 for 21Q2 is 93.8%. If the energy sector is excluded, the growth rate declines to 78.4%. The estimated revenue growth rate for the S&P 500 for 21Q2 is 24.3%. If the energy sector is excluded, the growth rate declines to 20.1%.

The estimated earnings growth rate for the S&P 500 for 21Q3 is 29.4%. If the energy sector is excluded, the growth rate declines to 22.8%. That’s after +80.2% this year

I highlighted the two extreme S&P 500 revenue growth rates in the above table to draw your attention to the revenue side of the earnings picture. As Refinitiv reveals, “companies are reporting revenues that are 5.3% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.1%”. This huge and broad revenue beat largely explains the +16.4% earnings beat given the leverage from the fixed costs component of the P&Ls.

Companies are generally better and more forthcoming at guiding on revenues than earnings so the +5.3% revenue beat last quarter reflects the unusual strength of the U.S. economy as the humongous rescue payments worked their magic. Everybody got surprised.

The risk is that analysts extrapolate the unusual. Their revenue growth estimate for 2022 is 6.3%. Revenues grew 2.7% in the last full pre-pandemic quarter and +1.5% ex-Energy for all of 2020 when inflation averaged 1.7%.

It seems fair to assume a pretty good economy in 2022, aided in no small part by a likely inventory rebuilding cycle, but can we reasonably expect that revenues of Consumer Discretionary companies could jump 19.1% as currently estimated? Recall that CD companies’ revenues grew 7.5% in 2018 and 4.1% in 2019 (1.4% in 2020).

And amid the current earnings euphoria, I just want to point out that the estimated S&P 500 earnings growth rate for 2022 has been reduced rather meaningfully in recent weeks. It was +11.6% on July 1, +10.8% in mid-July and is now +9.0%. Note that CD companies are seen “growing” their earnings 29.4% next year. That’s after +80.2% in 2021!

• Wall Street Is the Most Bullish on Stocks in Almost Two Decades

About 56% of all recommendations on S&P 500 firms are listed as buys, the most since 2002. It’s one more data point that shows the extent of the euphoria sweeping markets after a blockbuster earnings season.

While analysts are historically a bullish bunch, they’re turning even more optimistic in the face of relentless stock-market gains and corporate earnings that topped even the highest expectations. For all the concerns about the delta variant, China’s regulatory crackdown or waning Federal Reserve stimulus, it hasn’t made much of a dent yet on stock prices. (…)

TECHNICALS WATCH

Slow Slog in Stocks Is Now a Steamroller Crushing Every Naysayer

The gains are smaller, befitting a less hysterical year. When the S&P 500 Index has risen in 2021, the daily increase has been half what it was in 2020. But in terms of persistent, day-after-day gains, these seven months in the U.S. stock market have few historical precedents.

Virtually doubling from a bear market bottom in 17 months, fueled by Federal Reserve stimulus, the seemingly never-ending succession of little gains has somehow become the fastest rally since 1932. Up 31% from its previous peak, the benchmark gauge for American equities is already beating the median-increment gain seen in the last 13 bull markets. (…)

Going into August, warnings were everywhere that the traditionally challenging month could bring choppiness. To say none has materialized is an understatement. August is shaping up to be one of the calmest months on record. The S&P 500 has fluctuated at an average 0.5% each day, a level of tranquility that, except for 2017, has rarely happened. CBOE’s volatility index sits at the lowest in six weeks. (…)

The pattern of slow-motion advance continued this week. The S&P 500 scored four straight records to end at 4,468, with daily gains capped below 0.3%. The gauge added 0.7% in the five days for its sixth weekly gain in the past eight. The Nasdaq 100 edged higher by 0.2%, while and the Dow Jones Industrial Average added 0.9%. (…)

With volatility muted and an uptrend persisting, any trading tools that told investors to do anything but buy are failing. When applied to the S&P 500, half of the 22 charts-based indicators tracked by Bloomberg have lost money since the end of March, back-testing data show. All of them are doing worse than a simple buy-and-hold strategy, which is up 12%. (…)

At least four strategists have boosted their year-end price targets for the S&P 500 over the past month, including Goldman Sachs Group Inc.’s David Kostin, whose projection increased by 400 points to 4,700. Short sellers are driven almost into extinction, with an index of their most-favored targets going against them and surging more than 40% this year. (…)

Lowry’s Research’s reminds us that “prices alone can often be misleading” and investors need to carefully watch what’s going on below the surface. Last week’s action showed some improvements among some indicators but market breadth remains weak enough to warrant continued prudence and selectivity.

  

  

• The large cap 13/34–Week EMA Trend Chart remains positive:

• The S&P 500 Index Daily MACD Indicator suggests a coming testing of its rising 50dma (-3.3%). Its rising 200dma, not visited since June 2020, is 11% lower:

Something Is Awry in the Treasury Market This Summer Bond yields have tumbled during the past three months, yet equities are at new highs and corporate bonds are close to the most expensive they’ve ever been. What gives?

(…) Pramod Atluri, a fixed-income portfolio manager at Capital Group, says this is akin to “too much debt and too much money in the system.”

That means low bond yields, as debt holds back the economy and the Fed is unable to raise rates much. It means corporate bonds do fine, because there is so much money chasing safe returns that even fairly risky companies can refinance. And it is great for stocks, as the past decade shows, especially those able to offer reliable growth in a weak economy—broadly, Big Tech. (…)

“It is a conundrum,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “The scale [of the moves in yields] seems at odds with the degree of concerns.” (…)

Again, though, it is deeply strange that stocks should reach new highs both when bond yields were falling (and stocks were driven by Big Tech) and when bond yields were rising (and stocks were led by cyclicals).

And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history. It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold—which usually rises when TIPS yields fall—and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys. (…)

Whatever the reasons and the context, the current S&P 500 real earnings yield on forward EPS is not in “buy-low” territory. BTW, same reading with trailing EPS.

Hacker Returns Stolen Cryptocurrency in Heist Reversal The hacker who plundered more than $600 million of crypto assets from a decentralized finance platform known as Poly Network has now returned almost all of the money.

(…) Poly Network is still waiting for the hacker to provide access, known as the final key, to the wallet containing the returned crypto, the company said.

The incident highlights the risks of trading in crypto markets. Securities and Exchange Commission Chairman Gary Gensler said recently that the area is rife with “fraud, scams and abuse” and in need of investor protections and regulation. (…)

The hacker or hackers said that they were negotiating with the Poly Network team and that they “would like to give them tips on how to secure their networks.”

Some analysts said the stolen assets might have proved harder than expected to liquidate. The transparent nature of blockchain technology, which records every transaction on a public ledger, can make “the process of cashing out and laundering many cryptocurrencies prove difficult for the lesser professional career criminal,” said Jake Moore, a specialist at cybersecurity firm ESET. “However, next time, the attackers may plan an exit strategy involving cryptocurrencies that aren’t so well monitored.”

Poly Network said it offered $500,000 to the hacker, who the company called Mr. White Hat, as a reward. A white hat is a term for an ethical computer hacker. (…)