BANKS

Fresh Surge in U.S. Covid-19 Cases Is Feared as Death Toll Nears 200,000 The U.S. reported 39,844 new coronavirus cases Sunday and was closing in on 200,000 deaths, amid fears that the country was heading for a new wave of infections.

(…) The daily increase was smaller than the 41,037 a day earlier. But the seven-day average for Saturday was 39,978, higher than the two-week average of 37,143. When the seven-day average is higher than the two-week average, which has been the case in the U.S. since Tuesday, it suggests cases are increasing.

Twelve states reported at least 1,000 new confirmed cases on Saturday, led by California with 3,822 and Texas with 3,377.

“I think we have at least one more cycle with this virus heading into the fall and winter,” Dr. Scott Gottlieb, a former Food and Drug Administration commissioner, said on “Face the Nation” on Sunday. “If you look at what’s happening around the country right now, there’s an unmistakable spike in new infections.“ He cited about 30 states where the rate of transfer is above one, which indicates “an expanding epidemic.” (…)

• Indonesia’s capital is adding thousands of beds to house Covid-19 patients as its health system struggles with record increases in virus cases. The system is “already overwhelmed,” said Jossep William, coordinator of volunteer department at the pandemic task force.
• Czech Health Minister Adam Vojtech quit on Monday, saying he wants to let the government apply a different strategy in tackling the pandemic. After being among Europe’s least affected nations during the spring outbreak thanks to early, strict quarantine measures, the Czech Republic is now one of the hardest-hit on the continent.
• India added almost 87,000 cases to its virus tally Monday, pushing the total to nearly 5.5 million cases in the nation that already has the world’s second largest coronavirus outbreak. Deaths rose by 1,130 to cross 87,800, according to the India’s health ministry.
• Germany’s tally of new cases ticked back above 2,000 on Friday for the first time since the end of April and there were just over 1,000 additional infections in the 24 hours through Monday morning.
• France’s daily coronavirus cases rose by 10,569 on Sunday, after surging to more than 13,000 twice in the highest daily increases since the national lockdown ended in May on Saturday. Still, the seven-day average, which smooths out reporting spikes, rose above 10,000 for the first time, indicating a significantly higher pace of infections than a week ago.
• Britain is at a “critical point” in the coronavirus pandemic and data on cases are heading in the “wrong direction,” Chief Medical Officer Chris Whitty is expected to warn on Monday, as concern mounts that a second lockdown may be needed. Expectations are running high that local restrictions elsewhere in the U.K. could be extended to London. Mayor Sadiq Khan will recommend tightened rules for the capital on Monday, LBC radio reported.
• South Korea added 70 more coronavirus cases in 24 hours compared with 82 a day earlier, according to data from Korea Disease Control and Prevention Agency. The number of confirmed cases remained below 100 for a second day, the first time since mid-August. Meanwhile China reported 12 new cases for September 20, all of which were imported.
• New virus cases in Victoria fell to 14 on Sunday, the state’s health department said on Twitter. That’s the lowest in more than three months. The 14-day rolling average declined to 36.2 in metropolitan Melbourne, comfortably below the 50 level the local administration has set as the benchmark for a slight easing of restrictions on Sept. 28.

STALL SPEED

From John Mauldin’s Thoughts From the Frontline:

“(…) The economy is just barely at stall speed, coasting along on the previously generated momentum but unable to accelerate. It can only stay in the air so much longer, and our pilots are pointing fingers at each other instead of restarting the engines.

Philippa Dunne and Doug Henwood calculated this week the stopgap benefit payments, cash for which is coming from FEMA disaster relief funds, are almost exhausted (my emphasis):

FEMA is reporting that it’s spent $30 billion of the $44 billion allocated by the executive order, though all that spending has not showed up in the Daily Treasury Statement yet. In any case, the program will run out of money in a week or two. In fact, a number of states have already run through their allowances. The program will be history before the month is over. And that $44 billion is a bit more than half what the CARES Act program spent in its peak month, June—$80.4 billion. With nearly 28 million people drawing traditional and expanded pandemic benefits, a lot of people are suffering sharp cuts in income now and Congress doesn’t seem to be motivated to address the problem.

(…) I hope everyone understands we are on the edge of a cliff. Moves that would normally be harmless could spell disaster. We need leaders to represent all their constituents, not just those who voted for them. This necessarily means compromise. Yes, I’m using that word a lot. It’s not profane. It is a way to get things done. And right now, compromise may be the only way to keep this plane in the air. (…)”

• STALL SPEED? DEPENDS WHERE YOU LOOK

Some recent corporate quotes from The Transcript:

• “I’ll start by saying that things look better than we thought they would. The data looks pretty good relative to what we would have thought at second quarter earnings. But, importantly, we still haven’t seen the typical recessionary indicators that you would expect to see at this point.” (…) “And so, while things do look a little bit better than we thought they would, we’re still dealing with an enormous amount of uncertainty looking ahead…Obviously, we have an election. We have a potential second wave. We have tapering of stimulus, as you said. There’re still lots of things to be worried about.” – JPMorgan Chase (JPM) CFO Jen Piepszak
• “I think for the whole industry, it’s probably a little too soon to say that things are better than previously forecast. They’re probably not worse than previously forecast.” – Wells Fargo (WFC) CFO John Shrewsberry
• “…we are encouraged about the recovery we are seeing in most of our markets…Our full-sized and SUV plants are running all out and our other facilities are operating in line with market demand. We are selling every full-sized truck and SUV we can produce as demand remains strong and our inventories remain lean.” (…) “In China, the industry continues its recovery and our JVs have been seen improved sales since the deepest impact of the virus in February. Our retail sales were up over 10% year-over-year in each of the past two months.”  – General Motors (GM) CEO Mary Barra
• “China is in many ways up and running in a very, very normal way. We look at our businesses there. People are walking around without mask. People are back in the office. So we are really seeing that part of the world kind of coming back up to normal. Even in parts of Europe, particularly around Denmark and places like that, we have seen life return to the new normal.” – Herman Miller (MLHR) CEO Andi Owen
• “…our second lead growth market, which is our business in China, you can see that our business there is approaching full sales recovery. We’ve posted flat comps in August, up from minus 10% in July.” – Starbucks (SBUX) CFO Pat Grismer

Canadian Retail Sales Slow After Surpassing Pandemic Losses

Sales grew 0.6% in July, versus 23% in June and 21% in May, Statistics Canada said Friday in Ottawa. Excluding vehicles, receipts unexpectedly dropped 0.4%, versus a forecast gain of 0.5%. Core retail sales, or those excluding vehicles and gasoline, dropped 1.2%. Preliminary estimates from the agency show receipts climbed 1.1% in August, suggesting the weaker trend will continue. (…) In July, retail sales were up 2.7% compared with year earlier levels.

EQUITIES

A Healthy Correction That Finally Merits the Label If there is ever such a thing, the retracement of U.S. mega-cap tech stocks fits the description.

(…) Herd mentality is in the news, as well as herd immunity. Whatever its role in combating the pandemic, it has long played an important part in the world of investing. Professional investors are paid not to make the most money possible with the least risk, but to accumulate the most assets — which generally means doing a bit better than their peers. That makes big contrarian bets very dangerous to their careers, and creates an incentive to hug their benchmark. It’s often best expressed in terms of herd psychology; in a herd of antelope, it is safest to be in the middle, as it is those at the front or the back who are most likely to be attacked by lions. (…)

The herd psychology isn’t just visible at the level of individual stocks. If we look at funds’ sectoral holdings, the same pattern appears. The sectors in which funds were overweight at the beginning of the year are now even more overweight, and vice versa. There has been very little rotating from successful sectors, or profit-taking thus far: (…) (John Authers)

Well, the some in the herd may feel less healthy today:

TECHNICALS WATCH

Last week saw a small uptick in Lowry’s Buying Power Index and a small easing in its Selling Pressure measure but the basic trends are unchanged: BP keeps waning while SP failed to rise, reflecting only selective selling. In fact, the recent relatively better behavior of Consumer/Cyclicals, Materials and Industrials suggests “that Technology corrected while money moved into other areas instead of being withdrawn from the market altogether.”

Lowry’s analysis remains “biased to the upside” but prefers to “wait for the return of enthusiastic demand” before giving an all-clear signal.

Not happening this morning…

The other indicator I closely follow is the 13/34–Week EMA Trend from CMG Wealth. Still positive:

The S&P 500 traversed below its still rising 50dma and remains 6.3% above its 200dma (3099).

Reflective of the sector shifts, its equal-weight clone closed at its 50dma, 4.8% above its declining 200dma

Small caps remain weak, well below their pre-pandemic highs, and sitting or near their declining 200dma.

BUYING THE DIP?

Only 46% of NYSE Stocks Are > Their 200-Day MAs
(Major Lows Occur w/ This Indicator Below 20%).

Source: Wolfe Research (via Barry Ritholtz)

At today’s pre-op (3260), the R20 P/E is 24.2.

At the 200dma level: 23.0. At 5-10% “undershoot” like in 2010, 20112015, 2016 and 2018: 22.0-21.0.

A 20.0 R20 P/E is at 2650. And trailing EPS are not about to get better any time soon, dragging the Rule of 20 Fair Value (yellow line above) even lower in Q4.

European Banks Consider Mergers for Survival Banks in Europe are facing a prolonged era of low interest rates, a gloomy economic outlook and souring loans that are expected to rise.

(…) Many of the conversations are happening internally and have yet to translate into deal talks or takeover offers. And most discussions at this stage are around domestic rather than cross-border deals, which offer less cost synergies and would require deeper government involvement to push through to completion. (…) Now, the feeling that something needs to be done and done soon has never been so strong, according to bank executives and outside advisers. (…)

Curious about U.S. bank ROEs? Currently running at 8.3% down from the 11.0-11.5% range pre-pandemic. Price to book values are back below 1.0.

U.S. banks have not grown their EPS in 25 years!!

Their 4.0% collective dividend yield may look attractive to some but Canadian banks are yielding 4.9%, also selling near book (1.1) but with a better ROE of 11.1%, down from 14% in 2018 and 13.4% pre-pandemic.

Canadian banks profit performance has been much, much better with very solid dividends (the 2013 dip in the dividend line must be a software glitch; National Bank is the only Canadian bank to have cut its dividend, in 1983 and 1993). (Charts using Morningstar/CPMS software)

U.S. bankers quotes:

• “…we’re not seeing anything that you would typically expect to see at this point in a recession…on the wholesale side, given the amount of liquidity that’s out there…we may see some losses there later this year, but more likely really see that start to emerge in the first half of 2021. On the consumer side…I think it’s easy to see that, that could be the back half of 2021 before we really start to see those losses realized in a material way.” – JPMorgan Chase (JPM) CFO Jen Piepszak
• “…the actual loss taking or charge off activity is getting pushed out on the consumer side. And these deferral programs are certainly a big part of it. And then all of the liquidity in the system and other forms of state and federal government support are having the effect of either making things better or at least pushing losses for the future. So we’re not anticipating those losses being worse sitting here in the third quarter, but it’s hard to know whether they’re going to be better or just further out in the future.” – Wells Fargo (WFC)

And now this:

Banks Moved $2 Trillion Amid Laundering Orders, ICIJ Says

PANDEMONIUM

  ByteDance adamant it will retain majority ownership of TikTok in US Chinese company contradicts assertions of Donald Trump, Oracle and Walmart

• The TikTok deal’s for-show provisions and flimsy foundations

The new deal to rescue TikTok from a threatened U.S. ban — full of provisions aimed at creating the temporary appearance of a presidential win — looks like a sort of Potemkin village agreement. Potemkin villages were fake-storefront towns stood up to impress a visiting czar and dignitaries. When the visitors left, the stage set got struck. Similarly, many elements of this plan look hastily erected and easily abandoned once the spotlight moves on. (…)

• Oracle’s TikTok Deal Pours Trump Toxin Into Capitalism: Rewarding your friends in business is the hallmark of countries like Russia, not America (Bloomberg)

In the communist party’s Global Times:

Chinese regulators may block Nvidia’s $40b Arm buyout: analysts

(…) Arm, which was acquired by SoftBank in 2016, is seen as an independent entity that gives equal treatment to all licensees, with its major customers including Apple, Samsung, Qualcomm and Huawei.

“As part of Nvidia, Arm will continue to operate its open-licensing model while maintaining the global customer neutrality that has been foundational to its success,” the US firm said in a statement.

However, the “neutrality” is in serious doubt as Arm will become part of a US firm, which means the Trump administration could contain China’s growing chipset industry from the design side, following its crackdown on Huawei, Ma Jihua, a veteran telecom industry analyst, told the Global Times on Monday.

“The acquisition will affect the development path of China’s chipset industry as most of its products are based on Arm architecture,” said Ma.

Huawei’s Kunpeng, Kirin and Ascend chips are all based on Arm architecture. “If the US prohibits Arm from cooperating with Huawei, the design of Huawei chips will be temporarily suspended,” said Huang Haifeng, an independent semiconductor industry observer.

But the deal is likely to prompt close scrutiny by antitrust authorities around the world, including those in the US, UK, EU and China, and whether the deal goes through hinges on the regulators’ reviews.

Xiang Ligang, director-general of the Beijing-based Information Consumption Alliance, told the Global Times on Monday that the Chinese government is likely to play a role in reviewing the case and the chance of its approval is low.

“Regardless of whether the US government stands behind the purchase, its impact on China’s semiconductor industry is not something we want to see in the future,” said Xiang. (…)

China’s Rejection of Taiwan Buffer Zone Raises Risk of Clash

China is ratcheting up the risk of military confrontation in the Taiwan Strait, as Beijing seeks to deter Taipei from continuing to deepen ties with the U.S. and other like-minded democracies.

People’s Liberation Army aircraft repeatedly breached the median line between Taiwan and the Chinese mainland last week, in the latest of a series of military exercises in the area. The Chinese pilots signaled a willingness to continue the practice, telling Taiwanese personnel who attempted to warn them away that “there is no median line,” the Taipei-based China Times newspaper reported Friday, citing unnamed military officials.

The report was widely circulated by Chinese state media, with the PLA’s Eastern Theater Command responding to one post by urging citizens to “discard any illusions and prepare to fight.” The PLA Air Force separately released a video Saturday showing H-6 bombers making a simulated strike on a runway that looked similar to one at Anderson Air Force Base on Guam, a key staging area for any U.S. support for Taiwan.

“The risks of war are rising considerably, and redrawing the map over the median line in the Taiwan Strait is a very obvious step by Beijing to not only raise the pressure, but also justify use of force,” said Malcolm Davis, a former defense adviser to the government and now a senior analyst at the Australian Strategic Policy Institute in Canberra. “These aggressive probes are perhaps designed to provoke the Taiwanese air force to ‘shoot first’ and then Beijing has all the justification it needs.” (…)

The incursions across the median line, which the U.S. established in 1954 to prevent a conflict, signal Chinese President Xi Jinping’s displeasure with Trump administration overtures to Taiwan, including the visit last week by U.S. Undersecretary of State Keith Krach. Nineteen Chinese warplanes, including fighter jets and bombers, crossed the center line Saturday, according to Taiwan’s defense ministry. (…)

Chinese Foreign Ministry spokesman Wang Wenbin told a regular news briefing Monday that there “is no so-called median line.” (…)

U.S. Image Plummets Internationally as Most Say Country Has Handled Coronavirus Badly