Mnuchin Says Stimulus Talks Remain Stalled Treasury secretary suggests Pelosi may be open to resuming talks when House convenes to take up Postal Service bill

(…) Democrats have said they are willing to move to $2 trillion on the next coronavirus bill, down from the $3.5 trillion of a bill the House passed in May. The administration has set its goal for the size of the next bill at $1 trillion but has indicated willingness to go higher. (…)

But Reuters reports that

Some Democrats and Republicans have a “real desire” to reach agreement on a smaller coronavirus relief bill that could be worth around $500 billion, a senior Trump administration official said late on Tuesday. The official said the agreement could include funding for the U.S. Postal Service, additional funding for loans to small- and medium-sized businesses to keep workers on their payrolls and potentially added money for schools. (…)

• Several States Commit to Extra Federal Jobless Benefit of $300 a Week The Labor Department estimates states will take three weeks on average to deliver the enhanced unemployment payments offered by the federal government under an executive order from President Trump.

(…) To meet the new federal guidelines for distributing the extra $300 benefit, state unemployment agencies must determine whether a person lost work due to the pandemic. Some but not all unemployment-insurance recipients have already provided such information to state labor departments.

States must also determine whether an unemployment claimant meets Mr. Trump’s requirement that only recipients of at least $100 in regular weekly unemployment benefits receive the $300 federal benefit. (…)

Based on the current number of unemployment-benefit recipients, federal funding allocated for the enhanced jobless benefits could run out within a month and a half if all states participated, according to a senior Labor Department official.

That time line would put the benefits on pace to expire sooner than the December termination set in Mr. Trump’s order.

From ZeroHedge:

(…) according to an update from FEMA, only 7 states, Colorado, Missouri, Utah, Arizona, Iowa, Louisiana and New Mexico, have signed up with FEMA so far to access the additional $300 weekly stimulus for those receiving unemployment benefits under Trump’s Aug 8 Executive Order. Using initial claims data, this accounts for only 6% of Americans receiving unemployment insurance, which means that more than 90% are currently ineligible for the emergency stimulus. (…)

Meanwhile, in another major setback for Trump’s attempt to single-handedly carry the economy through to the Nov 3 finish line without Congress, a coalition of big-name business groups warned that many employers won’t participate in President Trump’s payroll tax deferral plan.

Calling it “unworkable,” they said in a letter Tuesday to Treasury Secretary Steven Mnuchin that it risks saddling their workers with large postponed tax bills they could have trouble paying back. According to the coalition, someone earning $35,000 would see their biweekly pay go up by $83 this year, the groups wrote, but would owe $751 next year. People earning $75,000 would see a $178-per-paycheck bump now, but would face a $1,609 tax bill next year. (…)

“Therefore, many of our members will likely decline to implement deferral.” (…)

The risk charted:

New U.S. Covid-19 Cases Jump The U.S. reported more than 44,000 new coronavirus cases Tuesday, up sharply from the previous day’s 35,112 but lower than recent peaks

(…) The University of Notre Dame moved in-person classes online for at least two weeks after seeing an increase in coronavirus cases. The South Bend, Ind., college reported an additional 80 positive cases of the coronavirus of 418 tested Monday, the highest number of cases the school has reported and tests completed by the school in a single day by far. (…)

Michigan State University President Samuel Stanley Jr. said the school would have all fall semester classes online, citing safety concerns for students and staff. That comes a day after University of North Carolina at Chapel Hill said it was moving undergraduate classes online starting Wednesday, after a series of Covid-19 outbreaks on and around campus since starting classes last week.

Schools in several states, including Indiana, Louisiana, Oklahoma, Tennessee and Georgia, closed to in-person learning this month after students and staffers tested positive for Covid-19, the illness caused by the new coronavirus, sending thousands into quarantine and remote learning. Several superintendents working to reopen schools also have tested positive, and at least one has died. (…)

Separately, New York Gov. Andrew Cuomo’s office said it was adding Alaska and Delaware to the state’s travel-advisory list, which now includes 34 states and Puerto Rico. Travelers from those states must quarantine for 14 days when visiting New York. (…)

South Korea reported 297 cases, its largest single-day increase since March 8, when the country reported 367 infections. The recent rise in cases is largely linked to big churches. South Korea’s prime minister said it is still too early to adopt the most stringent level of restrictions, as it would bring a “shock to the daily life of citizens.”

The 7-day averages remain on a good trend, however.

• The number of new confirmed coronavirus cases continues to decline in the vast majority of states. But the level of new cases remains very high in several states. States representing over 80% of the population have new cases over 50 per million per day. In states representing 40% of the population new cases are still over 200 per million per day. Although the nationwide downward trajectory is encouraging, state government officials may wait until case levels decline further before moving forward with additional reopening policies. (GS)
• The US has continued to experience fewer cases, with the weekly moving average down some 25% over the past month. New cases in Arizona, Florida and Texas have dropped by much more than that. Indeed, daily new confirmed cases in Spain have been higher over the past week than across the Atlantic once adjusted for differences in population. (Fathom Consulting)

  

• One in five workers at Brazil’s meat plants have been infected with coronavirus, according to union estimates. That would make the country home to one of the world’s worst workplace outbreaks. The estimate comes from Nelson Morelli, the president of national workers union Contac-CUT who spoke Tuesday on a webinar. The figure would mean about 100,000 infected workers in the country’s meatpacking industry, which employs half a million people. It’s not an official count and is based on surveys of the group’s local members, but an outbreak even close to that figure would be one of the biggest globally for a single industry. (Bloomberg)

U.S. Housing Starts Surge Unexpectedly in July; Building Permits Strengthen

Improved activity in the housing sector continues to lead the economy out of recession. Housing starts strengthened 22.6% during July (23.4% y/y) to 1.496 million (SAAR) from 1.220 million during June, revised from 1.186 million. Despite these gains, total starts remain 7.5% below their January peak of 1.617 million. The Action Economics Forecast Survey expected 1.230 million starts in July.

Starts of single-family homes rose 8.2% last month (7.4% y/y) to 940,000 after surging 19.4% in June to 869,000, revised from 831,000. Multi-family starts strengthened 58.4% (65.0% y/y) to 556,000 in July from 351,000 in June, revised from 355,000.

Building permits improved 18.8% in July (9.4% y/y) to 1.495 million from 1.258 million during June, revised from 1.241 million. Permits to build single-family homes increased 17.0% (15.5% y/y) to 983,000 after improving 12.6% in June. Permits to build multi-family homes increased 22.5% (-0.6% y/y) to the highest level since January.

  

Fundamentally Speaking: Earnings Don’t Support Bullish Thesis

Lance Roberts yesterday posted a good analysis. Some excerpts:

(…) Below is the evolution of estimates from Standard & Poors from the beginning of this year.

Let me point out some critical points:

1. In January and February, investors were bidding up stocks to all-time highs based on REPORTED earnings of $171/share by the end of 2021.
2. Today investors are paying the same price for 2021 earnings that are $20/share lower.
3. While earnings revisions did tick HIGHER at the beginning of August, estimates through the end of 2020 hit a new low just 2-weeks later.

The message here is simple.

• In January of 2020, investors were told to buy stocks because valuations were cheap based on 2021 estimates.
• In August of 2020, investors are being told the same, but they are paying more for less.

(…) The reality is that while markets are sitting at all-time highs (as they were in February), both 2020 and 2021 estimates are lower.

(…) During the last TWO years, reported earnings for the S&P 500 have plunged. While analysts are currently hoping for a “V-shaped” economic recovery to provide for the “hockey stick” recovery, risks are high such will not occur.

As noted, investors are currently “paying up” for 2021 earnings, which are $27 lower than 2020 earnings in April 2019. (…)

Eventually, investors might need to factor this in: estimated S&P 500 Earnings Impact Based on Biden’s Proposals.

(BofA US Equity & Quant Strategy)

Goldman Sachs’ estimates suggest a 11.8% hit overall:

Based on know trailing EPS at today’s 3390 pre-opening:

Conventional P/E charts:

PANDEMONIUM

Trump Cancels China Talks, Raising Questions About Trade Deal

(…) “I canceled talks with China,” Trump said Tuesday in Yuma, Arizona. “I don’t want to talk to China right now.” (…) Addressing whether the U.S. would pull out of the phase-one deal, Trump said: “We’ll see what happens.” Terminating the deal would require a written notification and take effect 60 days later, unless both parties agree on a different date. (…)

“What China did to the world was unthinkable,” Trump said Tuesday.

U.S. puts stranglehold on chip sales to Huawei

The U.S. announced new rules that would completely cut off the supply of computer chips to Huawei Technologies Co. Ltd., in what some say could be a killing blow to the Chinese company.

Under the rules published Monday by the Department of Commerce, companies worldwide will need a license to sell the Chinese company products in which U.S. technology is used in the production process, including any components.

“This amendment further restricts Huawei from obtaining foreign-made chips developed or produced from U.S. software or technology to the same degree as comparable U.S. chips,” the department said. The latest rules build on previous regulations announced in May that targeted products specifically designed by Huawei. But the new rules also target third-party chips, which the company was expected to rely on after its stockpile of custom-built chips ran out.

Geopolitical Futures adds:

The United States is going for the jugular against Huawei. The U.S. Commerce Department announced on Monday new restrictions on exports to the Chinese telecom giant that aim to starve the company of commercially available microchips and to block sales by any firm, anywhere in the world, of any microchips containing U.S. intellectual property or manufactured using machinery with U.S. IP. Given U.S. dominance in the semiconductor sector, this covers just about the entirety of Huawei’s supply of foreign chips. Chinese chipmakers are not believed to be anywhere close to capable of allowing Huawei to stave off a crisis once its chip reserves are exhausted (likely within the next year or so). Naturally, assuming the United States can force heavyweights like Taiwan Semiconductor Manufacturing Co. and Samsung to comply with the order, this would likely force Huawei to dramatically scale back its ambitions in both 5G infrastructure and sales of smartphones, at least in the short term. (…)

The United States is scrambling to address rapidly evolving technological challenges through pivotal policy decisions based on best guesses and worst fears about how the world might look more than a decade from now. So it’s taking advantage of one of its few clear sources of leverage – its semiconductor dominance – and letting the chips fall where they may.

U.S. Warns Colleges to Divest China Stocks on Delisting Risk

(…) “Boards of U.S. university endowments would be prudent to divest from People’s Republic of China firms’ stocks in the likely outcome that enhanced listing standards lead to a wholesale de-listing of PRC firms from U.S. exchanges by the end of next year,” Keith Krach, undersecretary for economic growth, energy and the environment, wrote in the letter addressed to the board of directors of American universities and colleges, and viewed by Bloomberg.

“Holding these stocks also runs the high risks associated with PRC companies having to restate financials,” he said.

The warning to endowments opens a new front in the Trump administration’s multipronged campaign against China’s government, businesses and individuals. The college and university funds represent billions of investment in Chinese companies, according to a 2019 investigation by Bloomberg, driven by the prospect of better returns. (…)

The State Department letter also warns universities of China’s growing influence on campuses and said the U.S. is accelerating investigations of what it called “illicit PRC funding of research, intellectual property theft and the recruitment of talent.”

• COVID-19 has become the third-worst cause of death in the US, according to the CDC. The pandemic has now surpassed accidents, injuries, lung disease, diabetes, Alzheimer’s and many other causes of deaths – even drug overdoses, which are surging again due to the outbreak. (ZeroHedge)

The chart shows that the U.S., Brazil and India are the big problem areas:

New U.S. Cases Slip to Lowest Since Late June Monday’s 35,112 new cases were the fewest since June 24, and followed a Sunday count that was the lowest since June 29

Hopefully, what happened in Asia and Europe and Canada is now happening in the USA as Americans and their “leaders” are seemingly getting more serious about it. Next 3 charts from NBF:

The hot states in the U.S.. Last 7 days vs last 28 days: 6 rising vs 14 declining:

Huge problem in Miami!

Most US voters fear reopening of schools, FT poll shows FT-Peterson survey reveals rising pessimism over pandemic and economic rebound

NY Fed Business Leaders Survey

After steadying last month, activity in the region’s service sector declined significantly, according to firms responding to the Federal Reserve Bank of New York’s August 2020 Business Leaders Survey. The survey’s headline business activity index fell fifteen points to -17.1 The business climate index was little changed at -74.1, indicating that the vast majority of firms still viewed the business climate as worse than normal. Employment levels continued to decline, though at a slower pace than in recent months, and wages edged slightly higher. Input price increases picked up, while selling prices continued to decline slightly. Capital spending fell for a fifth consecutive month.

The index for future business activity turned negative, falling ten points to -2.8, and the future business climate index fell to -20.4, indicating that firms expected conditions to be worse over the next six months. Employment levels are expected to hold steady at current levels, and small increases in wages are anticipated. Capital spending is expected to continue to decline. (…)

Respondents were also asked about their July revenues relative to a year earlier. The median business indicated a 20 percent decline, in both the service sector and manufacturing surveys, while the average declines were 30 percent and 25 percent, respectively. (…)

Finally, businesses were asked how long they could continue without becoming insolvent if current revenue levels were to persist and if there were no further support from government programs. Roughly one-third of firms in both surveys said they would eventually become insolvent if current revenue levels were to persist and there was no further government support. Of those indicating that they would become insolvent, about half said they could last at least another six months in both surveys, and the average expected time frame for this was about ten months.

U.S. Home Builder Sentiment Unexpectedly Surges to Record High in August

“However, the V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April. Such cost increases could dampen momentum in the housing market this fall, despite historically low interest rates.”

Lumber Update – August 2020

Another month forward in 2020 and another month of turbulent but booming sales in the lumber market. Building material supply centers have remained busy throughout the pandemic, and even though the general consensus was that sales would taper off after stay-at-home orders were lifted. It had an opposite effect as stimulus money, a growing confidence that the economy would rebound, and cancelled vacation plans propelled homeowners to continue to invest in their homes. All of the activity gave one heck of a boost to spending and put a mammoth dent on supply.

Virtually every sector of the building materials supply chain (but most especially with pressure treated and decking) suffered with outages, extended lead times, and anguish over disappointed and frustrated customers who couldn’t get material fast enough. Few anticipated such a robust and swift rebound.

The supply-end of the equation was punished by that fact as they had reeled back their inventories and commonly laid off employees in anticipation of a downturn in business. Trying to catch up proved a difficult, if not impossible, challenge because companies were forced to operate short-handed as many workers were reluctant to return from layoffs either due to Covid-19 concerns or because of childcare and family care issues.

BTW, the U.S. slapped a 20% duty on Canadian lumber…

Canada Home Sales Continue Surge, Rising 26% to Record in July

Meanwhile, commercial properties have lost 10% in value:

Green Street’s Commercial Property Price Index is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted. Features that differentiate this index are its timeliness, its emphasis on high-quality properties, and its ability to capture changes in the aggregate value of the commercial property sector.

EARNINGS WATCH

We now have 457 reports in, an 81% beat rate and a +17.6% surprise factor. Q2 earnings are now seen down 33.6% vs -43.0% on July 1. Q3 estimates: -22.8% vs -25.0%. Q4e: -13.7% vs -13.2%.

Trailing EPS are now $143.75. 2020e: $129.37. 2021e: $165.73.

Trump Pledges Tax Credits, Tariffs to Redirect Jobs From China

President Donald Trump said he’ll punish American companies that move jobs abroad and reward firms with tax breaks for shifting work from China to the U.S., proposals aimed at hastening the decoupling of the world’s largest economies.

“We will create tax credits for companies that bring jobs from China back to America, and we’ll impose tariffs on companies that leave America to produce jobs overseas,” he said in a speech Monday in Minnesota. (…)

India, Taiwan and Japan have also offered fiscal incentives to entice companies to shift production out of China, or at least increase investment at home. (…)

Chinese scientists to carry out joint Covid-19 vaccine trials with Russians

Biden Tax Agenda Hinges on Democratic Control of Senate the Democratic presidential candidate plans to raise taxes by about $4 trillion.

(…) In the aggregate, Mr. Biden’s proposed $4 trillion tax increase would begin reversing decades of tax cuts. About three-quarters of the burden would fall on the top 1% of households. (./..)

Easier-to-adopt policies include raising the corporate tax rate from 21%, reversing the 2017 tax cuts on individual income above $400,000 and increasing estate taxes. The more a tax increase falls on corporations or the very rich, the more Democrats embrace it. Those changes could raise more than $1.5 trillion.

But some of Mr. Biden’s tax increases on specific industries could be tougher to get through Congress. Those include imposing a financial-transactions tax and repealing a provision that allows real-estate investors to avoid capital-gains taxes by quickly reinvesting proceeds of a transaction. And some lawmakers may want to wait until the recovery is on surer footing before imposing tax increases that could slow it down.

Democrats’ policy ambitions will be tempered by the party’s reliance on the upper middle class for votes and donations. That’s already evident in broad Democratic support for repealing the $10,000 cap on the state and local deduction, a move that benefits Democratic voters but disproportionately helps the top 1% of households—the same people that Democrats say should pay more. (…)

Sen. Ron Wyden of Oregon, who would likely run the tax-writing Senate Finance Committee if Democrats win, has been developing a proposal the Biden campaign hasn’t embraced yet—annual taxes on unrealized capital gains. And he doesn’t necessarily view tax increases as incompatible with economic recovery.

“You start by saying the wealthy would pay their fair share,” Mr. Wyden said in an interview. “My view is: You’re going to need revenue out of the gate.”

Double the Facts

I have been reading the WSJ for, what, 45 years. Surely a must read in economics/finance. This morning, I noticed a Journal’s caption at the bottom of my screen, giving me a bronze medal because I visited WSJ twice this week – “nice streak” it says, claiming that gives me “double the facts”.

The same day, the WSJ published and prominently highlighted a commentary by Andy Puzder, “former CEO of CKE Restaurants and author of “The Capitalist Comeback: The Trump Boom and the Left’s Plot to Stop It.””, titled Biden’s Assault on ‘Shareholder Capitalism’. The first paragraph:

Is Joe Biden a moderate or a radical? He says businesses “have a responsibility to their workers, their community, to their country”—a truism. But he has also called for “an end to the era of shareholder capitalism.” He says it’s “untrue and a farce” that a company’s primary responsibility is to generate returns for shareholders.

Here’s what Joe Biden actually said per The Hill:

“It’s time that corporate American pays their fair share of taxes,” Biden said.

“The days of Amazon paying nothing in federal income tax are over. Let’s make sure workers have power and a voice. It’s way past time to put an end to the era of shareholder capitalism – the idea that the only responsibility a corporation has is to its shareholders. That’s simply not true and it’s an absolute farce. They have a responsibility to their workers, to their country. That isn’t a new or radical notion.”

I am not getting into a left/right debate here. Only pointing out the “Double the Facts” farce. Biden actually said that that it is not true “that the only responsibility a corporation has is to its shareholders”, a rather subtle distinction from Puzder’s apparent quote “He says it’s “untrue and a farce” that a company’s primary responsibility is to generate returns for shareholders.”.

As Daniel Patrick Moynihan once said, “Everyone is entitled to his own opinion, but not his own facts.”