***EARNINGS WATCH

• U.S. Coronavirus Infections Hit New Single-Day Record. New coronavirus cases in the U.S. rose above 50,000, a single-day record, as some states and businesses reversed course on reopenings and hospitals were hit by a surge of patients.
• In Texas, 6,533 Covid-19 patients were in hospitals, according to the state’s Department of Health. For most of April and May that number hovered between 1,100 and 1,800. It broke the 2,000 mark on June 8.
• Arizona, another hot spot, recorded its highest percentage of occupied ICU beds, at 89%. On Wednesday the state reported nearly 5,000 new cases, for a total of 79,228. More than 10% of its daily tests were positive.
• In California, where hospitalizations are up more than 40% from two weeks ago, Gov. Gavin Newsom announced new restrictions, including the mandatory closure of bars, indoor restaurants, movie theaters, zoos and museums in 19 counties where 70% of the state’s population lives. (…)
• At least 80 students living in a dozen fraternity houses at the University of Washington campus tested positive, with hundreds of results pending, the Seattle Times reported. Three fraternity residents had symptoms of COVID-19, and public health officials noticed a spike in cases from the area among people ages 18 to 20, said university spokeswoman Michelle Ma, according to the newspaper.
• Nationwide, 7% of tests administered are coming back positive, a new high reached even as testing capacity has improved (though parts of Texas and Florida are reportedly still struggling with long lines and poor response times).
• Over half of the US has now reversed or placed reopening on hold. Some states that have paused or reversed reopening — such as Colorado and Michigan — are performing better than several others that have announced no changes or suspensions to their plans. Some other states like these could begin to react with targeted measures to mitigate virus spread before new case counts soar and hospital capacity diminishes. Another example is New York, where the governor today suspended the reopening of indoor dining, which was scheduled to begin this week. The spread of the virus is worsening in almost every state. Nationally, prevalence of symptoms, daily new cases, and the positive test rate are still increasing.

Assessment of U.S. COVID-19 Situation Increasingly Bleak

• India, struggling to contain the virus’s spread, reported 19,148 new cases, pushing up the tally of total infections to 604,641, data from the Health Ministry showed. (…)
• In Tokyo, new cases topped 100 for the first time since May 2. The new infections were mainly in people in their 20s and 30s and many were linked to nighttime entertainment districts, according to the Tokyo government. (…)
• Australia’s total number of cases topped 8,000, after Victoria state, which this week placed some areas under lockdown, reported 77 new infections over the past 24 hours—nearly all of the 86 new cases reported nationally. The lockdowns in 10 areas of Melbourne affect more than 300,000 people.
• Experts Worry Latest Covid-19 Surge Will Shift From Healthier to At-Risk People

Coronavirus autopsies: A story of 38 brains, 87 lungs and 42 hearts What we’ve learned from the dead that could help the living

(…) Among the most important findings, consistent across several studies, is confirmation the virus appears to attack the lungs the most ferociously. They also found the pathogen in parts of the brain, kidneys, liver, gastrointestinal tract and spleen and in the endothelial cells that line blood vessels, as some had previously suspected. Researchers also found widespread clotting in many organs. (…)

Another unexpected finding, pathologists said, is that oxygen deprivation of the brain and the formation of blood clots may start early in the disease process. That could have major implications for how people with covid-19 are treated at home, even if they never need to be hospitalized. (…)

When the brain does not get enough oxygen, individual neurons die, and that death is permanent. To a certain extent, people’s brains can compensate, but at some point, the damage is so extensive that different functions start to degrade. (…) the findings underscore the importance of getting people on supplementary oxygen quickly to prevent irreversible damage. (…)

“The big lingering question is what happens to people who survive covid,” he said. “Is there a lingering effect on the brain?” (…)

PANDENOMICS

A Recovery That Started Out Like a V Is Changing Shape After recovering rapidly from mid-April through mid-June the economy has shown signs of sputtering in the past two weeks, just as the coronavirus has resurged in parts of the U.S

The flattening may reflect a pullback by consumers in states where cases of Covid-19 have shot up, the exhaustion of pent-up demand driven by stimulus checks, or simply a pause after the first wave of low-risk workplaces were allowed to reopen.

Regardless of the reason, multiple data sources show that after an initial V-shaped plunge and partial rebound, activity has since flat-lined, resembling the reverse image of the square-root symbol (√). (…)

“There’s a clear decoupling in activity between these hot-spot states in the Sunbelt and the Northeast where activity continues to improve. Texas, Arizona and Florida have not just leveled off but are outright contracting. [For them,] what began like a V is morphing into a W.” (…)

Fed’s Bullard says risk of financial crisis remains St Louis president warns of wave of bankruptcies without public health measures

U.S. Construction Falters

The value of construction put-in-place unexpectedly fell 2.1% in May (+0.3% year-on-year). The Action Economics Forecast Survey anticipated a 1.0% gain. Spending in April and March were revised down to -3.5% and -0.3% respectively from -2.9% and unchanged. Since the February peak in economic activity construction spending has fallen 5.9%, which looks closer to previous recessions than many other economic statistics.

In the revised first quarter GDP report released last week private construction spending (nonresidential + residential) added 0.72 percentage point to GDP growth. Today’s data points to a slight downward revision to Q1 and a meaningful decline in Q2. (…)

The crushing blow awaiting government workers (Axios)

The coronavirus pandemic blew a hole in state and local government budgets. A slew of states cut spending and jobs — with more planned layoffs announced this week as states try to balance budgets. Even more could be coming as states face more pressure from spiking caseloads and people hunkering back down.

In Maryland, layoffs, furloughs and pay cuts could come as soon as next month, Gov. Larry Hogan said on Wednesday. In New York City, 22,000 government jobs are at risk, Mayor Bill de Blasio said last week.
Missouri‘s state budget director also warned this week of looming job cuts for public sector workers in the state.

Already, nearly two decades worth of public sector jobs have been erased in three months as of May — easily bypassing declines seen during the financial crisis, per Pew Research.

Expenses are soaring. Revenues are plunging. Municipalities are seeing less money flow in from sales tax as residents shelter-in-place. In some states, tax deadlines were pushed back at the onset of the coronavirus crisis, and income tax collection is taking a hit as people lose work.
(…)

Moody’s said last week state and local governments may need as much as $500 billion over two years in federal aid to stay afloat. (That’s actually less than the $875 billion set aside for municipalities in the coronavirus relief bill passed by the House in May.)

The Federal Reserve offered cash-strapped state and local governments a rescue float to help manage cash flow pressures. But only one — out of over 250 eligible states, cities and counties — has taken it so far: Illinois. Hawaii officials last week authorized the state’s governor to borrow up to $2.1 billion from the Fed’s facility — but that doesn’t mean they’ll for sure do it.

The slow uptake of the Fed facility is by design. The credit markets seized up at the onset of the coronavirus panic. But the “municipal bond market is much improved from March and certainly operating more efficiently” since the Fed announced it would take action, says Rachel Perlman, who heads up municipal sales at Boenning & Scattergood, an asset management firm. It’s cheaper for municipalities to borrow elsewhere. The interest rates set by the Fed’s facility are “higher than in more traditional public or private markets for borrowings,” analysts at rating agency Fitch wrote last month. (…)

“Ten municipal borrowers defaulted for the first time in May and another 10 in June, the highest for those months since 2012, when borrowers were still absorbing hits from the 2008 financial crisis.” (…)

“More layoffs are coming, as pandemic-related revenue crashes leave many cities and states billions of dollars in the red,” Mark Muro, a policy director at the Brookings Institution, wrote this week.

Home Buyers Overwhelm U.S. Housing Supply Activity is springing back faster in major metro areas, where the median asking price in June was nearly 6% higher than a year ago

U.S. housing supply is falling short of demand, as droves of buyers returned to home shopping last month, according to a report Wednesday from realtor.com.

“Our June data reinforced that buyers are out in force and serious about finding a home,” said Danielle Hale, the listing portal’s chief economist.

But there isn’t enough to choose from. Sellers appear to be less eager to put their homes on the market with so much prevailing uncertainty. Total inventory was 27% lower in June than a year ago, according to the realtor.com report—compounding what was already a shortage of available homes for sale before the pandemic. (…)

In my neck of the woods, some 30 miles away from the city, all houses that were for sale for a while got sold since May at apparently good prices.

Apple Inc., which had been reopening many of its 270 stores in the U.S., said it would temporarily close dozens as the pandemic worsened in certain regions. As of Wednesday, Apple said it had closed 16 locations, with 30 more to close by Thursday.

McDonald’s Halts Reopening Plans as U.S. Coronavirus Cases Grow McDonald’s is pausing the reopening of dine-in service in the U.S. as coronavirus cases continue to spread across states.

Pizza Hut and Wendy’s Franchisee NPC Files for Bankruptcy The nation’s largest Pizza Hut and Wendy’s franchisee, filed for bankruptcy and will put its burger restaurants up for sale after failing to reach a deal with Pizza Hut parent Yum Brands.

Consulting firm Accenture is cutting as many as 900 jobs, or 8% of its U.K. workforce, amid a sharp slump in demand for its advisory work.

American Airlines sees long-haul international capacity down 25% in 2021

S&P now forecasts slower Canadian recovery than expected

Saudis Threaten New Oil-Price War With OPEC Brethren Saudi Arabia has threatened to ignite an oil-price war unless fellow OPEC members make up for their failure to abide by the cartel’s recent production cuts.

EARNINGS WATCH

The Q2 season is underway. Refinitiv reports that 81% of the first 16 reporters (quarter ended in May) beat estimates thanks to 4 of 5 Consumer Staples companies surprising by 5.7% and 2 of 2 Industrials surprising by 40.2%. These more than offset that 5 Consumer Discretionary companies missed by 102.7%.

That said, the 16 reporters had aggregate earnings down 18.5% on revenues down 2.2%. Recall that this is for the March to May quarter.

The blended growth rate for Q2 is -43.0%.

FYI:

PANDEMONIUM

U.S. Warns CEOs Over Supply Chains Tied to Rights Violations in China The administration said companies face legal risks for involvement with entities in China blamed for human-rights abuses, including the mass detention of Uighur Muslims.

The U.S. warned companies that have suppliers or customers in China of legal and reputational risks linked to human-rights violations there, part of the Trump administration’s broader effort to limit business ties with the country.

Companies face peril for involvement with entities blamed for human-rights abuses, including forced labor or the mass detention of Uighur Muslims in China’s Xinjiang region, according to a 19-page memo released Wednesday from the Commerce, Treasury, Homeland Security, and State departments.

The memo repeatedly cited technology companies whose products can be used for the surveillance of Uighurs. (…)

A spokesman for the Chinese embassy in Washington urged the U.S. to “respect facts, drop biases, stop wrongful words and deeds that harm others and themselves and stop meddling in China’s domestic affairs with Xinjiang as a cover.” Beijing says that its efforts in northwest China are meant to counter extremist tendencies among Turkic Muslims.

The Trump administration notice doesn’t have legal force and won’t add new rules for businesses. Still, the coordinated warning from four U.S. agencies is a signal that the Trump administration will enforce the laws on the books in ways that could make many companies think twice about doing business in China. (…)

“THINGS GOTTA BREATHE”

https://mail.google.com/mail/u/0?ui=2&ik=607017aa4f&attid=0.1&permmsgid=msg-f:1671035705293475442&th=1730b61ed5030e72&view=att&disp=safe  (Tks Jean)

And yesterday in a Fox Business Network interview, Trump said: “I’m all for masks, I think masks are good.”…”I don’t know if you need mandatory”…

• Brazil reported a record number of daily deaths from Covid-19 as the pandemic continued to spread in Latin America’s largest nation. It had 1,349 new fatalities on Wednesday, bringing the total to 32,548. Brazil also recorded 28,633 new cases, pushing the total to 584,016, behind only the U.S. The nation of 210 million people has become an epicenter of the virus, and health experts say the peak of the outbreak is still to come.
• Mexico also registered a record daily rise of 1,092 deaths as President Andres Manuel Lopez Obrador resumed traveling across the country. Total deaths reached 11,729, according to data released by the Health Ministry on Wednesday night. The country now has the seventh-deadliest outbreak worldwide.
• Swedish citizens’ confidence in the government’s handling of the pandemic fell to less than half the population, as the scientist behind the strategy acknowledged having made mistakes. A poll showed an 18 percentage point slump in support for the authorities’ response, including the controversial decision to leave much of society open even as swaths of the world shut down.

This chart from Goldman Sachs shows that positive test rates are trending down nationwide,including in the most open states:

https://www.google.com/covid19/mobility/ Accessed: June 3, 2020. Source: The COVID Tracking Project, Google LLC “Google COVID-19 Community Mobility Reports”, Goldman Sachs Global Investment Research

• Wuhan declared free of virus after blanket testing of 10 million
• Researchers at Scripps Research Translational Institute reviewed studies of 16 different populations infected with the new coronavirus and examined how many showed no signs of illness. They concluded that asymptomatic people may account for 40% to 45% of infections. They also found that those individuals can transmit the virus to others for an extended period, perhaps longer than 14 days.

PANDENOMICS

Axios: ISM’s stronger-than-expected reading of U.S. services sector data grabbed headlines, but IHS Markit’s index told a different story.

We have learned over the years to put more weight on Markit surveys. Speaking of services:

Next Wave of U.S. Job Cuts Targets Millions of Higher-Paid Workers

Close to 6 million jobs are potentially on the line, according to Bloomberg Economics. That includes higher-paid supervisors in sectors where frontline workers were hit first, such as restaurants and hotels. It also includes the knock on-effects to connected industries such as professional services, finance and real estate. (…)

For the analysis, Shulyatyeva and colleagues looked at job losses by sector in March and April—with affected industries dominated by blue-collar, hospitality and production workers—and determined how those layoffs would move to supervisory positions, since management cuts tend to lag the frontline workers. (…)

The Bloomberg Economics analysis underscores how financial pain is extending beyond the retail, travel, leisure and restaurant industries immediately impacted by the shutdowns. (…)

More than one-third of households making $100,000 per year have lost some employment income since mid-March, according to a Census Bureau weekly survey. And more than 25% expect to lose income in the next four weeks. Even among this higher-paid group, 7% are only slightly confident or not at all about making next month’s rent, while 5% of homeowners are just as concerned about making their mortgage payment. (…)

Axios adds that the expectation for white-collar job losses tracks with surveys of top executives from accounting firm PwC which found 31% of CFOs thought layoffs would occur in the next month, double the percentage who expected to lay off employees at the end of March.

As a case in point, Bloomberg today reveals that “Evercore told its incoming investment banking analysts that it would offer them $25,000 if they delayed their start date by a year, or $15,000 for deferring until January, a person familiar said. While Evercore committed to avoiding job cuts during the outbreak, it said it will reduce about 6% of its workforce after it conducted an operations review earlier this year. 

• Consumer spending measures rose by 0.3pp to 88.3% of the pre-virus level over the last week, up from an April bottom of 73%. Of the highly-impacted consumer services industries, the retail sector has recovered the most, with foot traffic now back to 74% of the pre-virus level, while the entertainment industry remains the most depressed, now only back to 51% of the pre-virus level. (GS)
• The GS Exports Tracker indicates that manufacturing exports (ex-aircraft) worsened further in April but began to stabilize in May. Over the last 4 weeks, our tracker declined 9% year-on-year to 86% of the pre-virus level. (GS)
• Business bankruptcy measures continued to increase, as the Survey of Credit Managers’ bankruptcy measure surged to a post-GFC high. (GS)
• With Stadiums Closed, Municipalities Struggle With Billions in Debt Two decades of using borrowed money to pay for new stadiums is coming back to haunt many cities across the country. The Covid-19 pandemic has turned sports venues into a strain on budgets when cities are already hemorrhaging revenue from shutdowns.
• Amid Coronavirus Shutdowns, Landlords Often Determine Fate of Small Businesses On Brooklyn’s Fifth Avenue, business owners are frantically seeking rent cuts so they can ride out the pandemic. But some landlords are also under financial pressure.
• U.S. Jobless Claims Understate Reality With Gaps in Federal Data The weekly report has yet to reflect at least half a million filings for a federal pandemic program.
• The ECB just added to the Eurozone policy fireworks of recent days, increasing the size of its pandemic emergency purchase programme (PEPP) by 600bn euro to a total of 1350bn euro. The purchases will last at least until the end of June 2021. Also, the ECB will reinvest the proceeds from the PEPP purchases until at least 2022. After the announcement of the European Recovery Plan and last night’s powerful German fiscal stimulus package, the ECB has added to real stimulus fireworks. Today’s decision should dent any future speculation about whether or not the ECB is willing to play its role of lender of last resort for the Eurozone. It is. (ING)
• Beijing to Give $1.7 Billion in Vouchers to Boost Shopping

Beijing has joined dozens of other Chinese cities and will issue consumption vouchers to citizens, in an effort to encourage spending after retail sales collapsed following the coronavirus outbreak. (…) At least 50 cities across China have distributed vouchers amounting to more than 6 billion yuan via e-payment systems, according to data compiled by Bloomberg, including Wuhan, Hangzhou, Nanjing and Shenzhen.

Bank of Canada pares back some emergency supports, offers slightly more upbeat tone

(…) “Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery,” it said. “While the outlook for the second half of 2020 and beyond remains heavily clouded, the Bank expects the economy to resume growth in the third quarter.” (…)

The central bank said that the “severe” impact of the crisis on the global economy “appears to have peaked, although uncertainty about how the recovery will unfold remains high.”

(…) the bank forecast that the second quarter “will likely show a further decline of 10 to 20 per cent, as continued shutdowns and sharply lower investment in the energy sector will take a further toll.”

While that is a deep contraction, it is nevertheless more upbeat than the April MPR outlook, which warned that second-quarter GDP could be “15 to 30 per cent lower” than it was in the 2019 fourth quarter.

(…) the bank hinted it may be considering refocusing its asset purchases on influencing interest rates in order to stimulate the economy, rather than the current stated goal of facilitating smooth-functioning markets. (…)

EARNINGS WATCH

We now have 490 Q1 reports in and the blended growth rate for earnings is -12.6% on a -1.4% decline in revenues. Q2 estimates: -43.0%. Q3: -25.1%. Q4: -13.3% which would take 2020 earnings down 23.1% to $125.23.

Current consensus for 2021 is $163.67, down a little from $164.48 in mid-May.

Supply Chains, Safety Protocols Hobble U.S. Factories Manufacturers are reopening, but delayed orders, less efficient plants and new procedures weigh on output

Interesting article laying out challenges facing manufacturers. A few excerpts:

• ( …) he expects some suppliers to go out of business this year because they won’t be viable at lower production rates anticipated across the auto industry. “Any one failure is going to impact everybody,” Mr. Pin said. “We’re all co-dependent on each other.”
• As production accelerates, Littlestown is stockpiling more aluminum ingots than usual because deliveries have been less reliable. “I used to play inventories a lot closer than I am right now,” he said.
• O-I Glass Inc., the biggest domestic producer of glass bottles, said it is using more expensive raw materials to make glass because of a shortage of recycled glass.
• overhead costs have climbed. (…) distribution center is less efficient now because operations have been reconfigured to separate employees. “The container takes twice as long to unload,”

SENTIMENT WATCH

Hedge funds brace for second stock market plunge Managers say asset prices have become too detached from bleak fundamentals

But, but, maybe we can justify current high valuations. From Bloomberg:

Throwing CAPE over S&P 500 is seen justifying valuation

But, but, you took out 100 years of data to prove your point! The red line is the last 30 years average, heavily influenced by the dot.com era…

Shiller PE Ratio

The big debate on equity valuation is the “E” component. The Rule of 20 uses trailing EPS to avoid forecasting. We know earnings are about to crater, starting in about 5 weeks. We can attempt to normalize earnings (THE DAY AFTER…) but even this exercise necessitates many fragile assumptions.

Dividends and dividend yields could offer another avenue. Based on today’s pre-opening of 3100, the S&P 500 dividend yield is 1.92%. The last 3 lows in dividend yield averaged 1.75% which, on the current dividend rate of $59.70 would mean 3400 on the SP 500, +9.6% from today.

Taking into account the YtD dividend cuts from 56 companies, S&P 500 dividends are currently $57.28 annualized, bringing the dividend yield to 1.85%. This rate would limit the upside to 3275 at 1.75% (+5.6%).

Goldman Sachs, using long-dated S&P 500 dividend swaps and futures:

Market prices suggest S&P 500 DPS will equal $47.44 in 2023, 16% below our top-down estimate and 19% below 2019 levels. While liquidity is thin further out the curve, prices imply that dividends will not recover to 2019 levels during the coming decade. The only precedent for a decline of this magnitude and longevity since the start of the 20^th century is the Great Depression. DPS fell by 33% from peak-to-trough and took 18 years to recover to its prior high between 1931 and 1949. In contrast, after the Global Financial Crisis dividends took just 15 quarters to recover their prior high. We expect S&P 500 dividends will decline by 25% this year but recover to their 2019 peak by 2024, and be more than 40% greater than 2019 levels by the end of the decade.

Were dividends to decline 25% this year (-25.9% in 2008-09), they would end the year at $43 annualized. At 1.75%, that would be 2450 on the S&P 500 (-21%). The dividend yield was as low as 1.56% in 2004 when dividends were recovering. That would be 2750 (-11.3%).

If you care, the other side of the equation is for dividend yields to return above 2% which would require 2150 or less (-30%).

Goldman’s analysis adds that the 3-year forward implied S&P 500 dividend yield currently equals 1.5%, nearly the lowest level since at least 2006.

TECHNICALS WATCH

• 13/34–Week EMA Trend

The process measures the intermediate-term trend in the S&P 500 Index.  A bullish trend is identified when the blue 13-week smoothed moving average (“MA”) trend line rises above the 34-week smoothed MA trend line.  A bearish trend is signaled when the blue line drops below the red line.  You can see that this trend process has done a pretty good job at identifying the major cyclical (short-term) bull and bear market trends (note small red and blue arrows). (CMG Wealth)

• Volume Demand vs. Volume Supply (Ned Davis Research)

  

• Lowry’s Research:

PANDEMONIUM

China Cancels Some U.S. Farm Shipments, Maritime Executives Say

Chinese state-controlled companies have canceled some shipments from U.S. farm exporters, according to maritime officials, as tensions between Washington and Beijing rise over China’s handling of pro-democracy protests in Hong Kong and the coronavirus pandemic.

“A handful of shipments of livestock feed, corn, pork, cotton and some meat imports are pushed back,” said a senior Chinese shipping executive involved in China farm imports who asked not to be identified and who has been briefed on Beijing’s move.

“Private Chinese exporters are not part of this, but it could escalate, depending on how the relationship between the U.S. and China goes forward,” this executive said. (…)

A second Chinese shipping executive said China state importers have canceled between 15,000 and 20,000 metric tons of U.S. pork shipments, about 10 days’ worth of orders. Beijing is also holding back some U.S. shipments of corn and cotton, he said, and further actions would depend on Washington’s response to China’s tightening grip on Hong Kong. (…)

China Revives London Stock-Listing Program

The U.K. Is On a Collision Course With China

Prime Minister Boris Johnson’s government has criticized Beijing’s planned imposition of a security law on the former British territory of Hong Kong, and is taking steps to exclude Huawei from its fifth-generation mobile networks by lining up potential replacements.

The upshot is that China has become an overriding foreign policy priority of the Johnson government just as it attempts to reach a deal with the European Union on future relations. It’s a challenge that risks leaving the U.K. out in front on its own, having left the shelter of the bloc of some 450 million people on Jan. 31 to pursue its Brexit ambitions. (…)

“Hong Kong affairs brook no external interference,” China’s Ambassador to the U.K. Liu Xiaoming said on Twitter, warning U.K. politicians to “stop interfering in China’s internal affairs.”

Jeremy Hunt, a Conservative lawmaker and former foreign minister, opened a new front on Thursday with an op-ed in the Times of London warning that Taiwan, the separately ruled island that China regards as part of its territory, “should worry us more.”

“In its willingness to abandon Hong Kong’s ‘one country, two systems’, China may also be signalling that it has given up hope of a peaceful reunification with Taiwan in favour of a military solution,” Hunt wrote. “Were that to be the case the implications for western democracies would be extraordinarily dangerous.” (…)