(NBF)

A July 23-26 Morning Consult survey found that 95 percent of adults have worn a face mask in the past month in public spaces, up from half of adults in an April 7-9 poll. Read More.

PANDENOMICS

GOP, Democrats Remain at Odds Over $600 Jobless Benefit Democrats and Republicans remained at loggerheads in weekend negotiations on a new coronavirus economic relief package, including aid to replace the federal $600-a-week boost to unemployment benefits that expired Friday.

While politicians debate, Goldman Sachs’ employment tracker suggests that employment has hooked down in July and that the U.S is still missing about 14 million workers (9%) with many others employed but working fewer hours.

Google Mobility tracer confirms the recent slowdown and shows how activity in the U.S. denser areas remain 20-30% below February’s levels (GS chart).

Consumers Shun Credit-Card Debt Rather than rising as expected when unemployment soared amid coronavirus lockdowns, credit-card debt in the U.S. and other advanced economies has dropped

Fewer people are late on their credit-card payments. Consumer demand for new borrowing—through credit cards, personal loans and even pawnshops—is down sharply.

The main reason, according to economists and financial executives, is government stimulus programs launched in the U.S. and other advanced economies that have worked unexpectedly well. The flood of money, along with debt-relief measures such as deferred-mortgage and student-loan payments, has stabilized the finances of many households and even left some in better shape than before the pandemic—at least for now. (…)

“They’re using the injection of government stimulus, quite frankly, to put themselves in a better position.” (…)

In the U.S., total outstanding credit-card debt fell by 11%, or $100 billion, between February and the end of June, according to Equifax. April was the largest monthly drop in revolving credit on record, while May was the second-largest, according to Federal Reserve data. Personal-loan originations were down by a third in mid-May compared with the beginning of March, according to Equifax.

Since February, credit-card debt is down 11% in Canada, 14% in the U.K. and 17% in Australia. In the eurozone, credit-card debt and other forms of revolving credit for households fell 5% between February and June. (…)

Large credit-card issuers such as Capital One Financial Corp. and Synchrony Financial said many of their customers who entered deferment programs in the spring had exited by June. (…)

But credit-card debt has continued to fall even as lockdowns were relaxed in May and June and retail spending rebounded. (…)

The combination of state and federal unemployment benefits has meant that around two-thirds of U.S. workers who were laid off or furloughed are eligible to receive more in unemployment than they were earning on the job, according to a study by economists at the University of Chicago. The U.S. stimulus legislation also allowed people to defer payments on their federally backed mortgages for up to a year and most federal student loans through September. Those measures have given many Americans who were living for years with large credit-card balances extra funds to pay them down. (…)

“It’s a good time to be debt-free,” Ms. McClean said, “because soon I won’t have a career.”

It’s called a higher propensity to save. From The Day After…

Consumers are the key to re-starting world demand. We are in uncharted territory but we can safely say that

• previous employment levels are unlikely to be reached for years as many businesses will shrink/disappear and companies will seek to reduce costs;
• the use of robots will accelerate;
• fear and safe behavior will linger;
• the savings rate will most likely rise as consumers build bigger financial shock absorbers;
• pension angst will increase with ever rising pension deficits.
• Will luxury, ostentatious wealth be out?

U.S. Personal Spending Strengthens as Income Declines in June

Personal consumption expenditures increased 5.6% in June (-4.8% y/y) following an 8.5% May rise, revised from 8.2%. Spending had fallen in 12.9% in April, revised from -12.6%. In constant dollars, total spending rose 5.2% last month (-5.5% y/y). Real durable goods purchases increased 8.8% (11.7% y/y) during June after strengthening 28.1% in May. Spending on motor vehicles improved 7.5% (8.1% y/y) and has risen 7.2% since December. Home furniture & appliance buying jumped 8.0% (9.9% y/y) after surging 22.7% in May, while recreational goods & vehicles outlays increased 6.7% (26.0% y/y) to another record high. Real nondurable goods buying increased 4.1% (2.7% y/y) after improving 7.9% in May.

Real spending on services improved 5.0% (-10.5% y/y) after a 5.6% gain. Spending had collapsed in the prior two months. The increase was led by a 37.6% strengthening in sales of recreation services following a 7.7% rise. Nevertheless, spending here is down 43.1% year-to-date. (…)

Personal income declined 1.1% in June after falling 4.4% in May, revised from -4.2%. A 0.9% shortfall had been expected. The decline reflected a 9.0% falloff (+59.0% y/y) in government transfer payments as economic impact payments slid 93.4% after declining 76.6% in May. Wages & salaries improved 2.2% (-2.4% y/y) after rising 2.6% in May as employment bounced back. (…)

Disposable personal income declined 1.4% (+8.9% y/y) last month after falling 5.1% in May. Adjusted for price inflation, take-home pay decreased 1.8% (+8.1% y/y) after falling 5.2% in May.

Last month’s strength in spending relative to income lowered the personal savings rate to 19.0% from 24.2% in May. The level of personal saving rose 192.6% y/y.

The PCE chain price index increased 0.4% last month (0.8% y/y) after edging 0.1% higher in May. The price index excluding food & energy rose 0.2% (0.9% y/y). Energy prices increased 4.6% (-12.8% y/y) after five months of decline. Food prices rose 0.5% (5.2% y/y), the weakest increase in the last four months.

High Frequency Indicators for the Economy

CalculatedRisk has a bunch of indicators showing the “V” is not quite perfect just yet.

One-Third of New York’s Small Businesses May Be Gone Forever Small-business owners said they have exhausted federal and local assistance and see no end in sight after months of sharp revenue drops. Now, many are closing their shops and restaurants for good.

‘New Normal’ Emerges for Companies in Pandemic Business executives say they are getting a better grip on what a world transformed by the coronavirus looks like, giving them more confidence to lay out new strategies.

(…) [McDonald’s] moved to a limited menu in the quarter, helping to simplify operations. (…) some renters don’t want to live in various dense urban areas right now. (…) Snack maker Mondelez International Inc. is removing a quarter of product types it produces to better focus on its most important brands. (…)

MANUFACTURING PMIs

I provide the links to each country’s PMI pdf, hereby focusing on the most important data: demand/new orders.

U.S. manufacturing operating conditions improve for the first time since February

• Output rose only modestly in July, albeit the first expansion in production since February. Where an increase was reported, firms linked this to the resumption of operations at manufacturers and their clients. Some also noted that demand also began to pick up.
• Reflecting the reopening of many customers, new orders increased for the first time since February in July. The rate of growth was modest, despite signalling a stark contrast to the marked decline seen in April. Although total sales expanded, new export orders fell fractionally as foreign client demand struggled to gain momentum amid the gradual reopening of global economies following the COVID-19 pandemic.
• goods producers signalled a fractional contraction in employment in July, as firms noted redundancies due to subdued new order inflows. That said, the rate of job shedding was the softest in the current five-month sequence of decline as the reduction in backlogs of work eased further from April’s low.
• firms continued to reduce their input buying at the start of the third quarter.

Eurozone manufacturing economy returns to growth in July

• growth was widespread, with all market groups registering PMI readings above 50.0 during July. Consumer goods was the best-performing, registering is strongest expansion for over a year-and-a-half.
• the gain seen for new orders was the first in nearly two years and the strongest since early-2018.
• Latest data pointed to improved demand from both domestic and international markets. New export orders rose for the first time since September 2018, although growth was modest and notably lagged that of overall new work.
• Backlogs of work declined during July for a twenty-third successive month, albeit only slightly, whilst firms again made cuts to their workforce numbers. Latest data marked the fifteenth successive month that employment has fallen, with the degree of job shedding again considerable and historically sharp.
• Manufacturers continued to signal a preference for utilising existing inventories in production during July, with latest data showing the sharpest cut to stocks of purchases for six months. Higher production requirements and ongoing reductions in purchasing activity were the primary factors placing downward pressure on stocks. Latest data showed that the buying of inputs was cut for a twentieth successive month, albeit to a much weaker degree.

China: Operating conditions improve at quickest rate since January 2011

• Companies registered the quickest expansions of output and new orders since January 2011 amid reports of firmer customer demand. New business from overseas meanwhile fell at the slowest rate for six months. Increased production led to the strongest rise in purchasing activity since January 2013. However, firms maintained a cautious approach to hiring, with staff numbers falling modestly despite an increase in backlogs of work. Inflationary pressures picked up, with firms reporting steeper increases in both input prices and output charges.
• many companies citing greater client demand amid a further recovery in market conditions following the COVID-19 outbreak. Moreover, new business expanded at a solid pace that was the steepest since the start of 2011.
• the gauge for new export orders remained in contraction territory for the seventh consecutive month. Although the pace of the contraction slowed, overseas demand remained a drag on overall demand.
• Rising new order intakes placed some pressure on capacity, as highlighted by a further increase in outstanding business. The rate of accumulation quickened since June but was modest overall. Although backlogs increased, companies cut their staffing levels again in July, albeit only slightly.
• Higher operational requirements led manufacturers to increase their buying activity again in July. Furthermore, the rate of expansion was the most marked in seven-and-a-half years. Consequently, stocks of inputs rose for the second month running.

  

Japan: Manufacturing production falls at slowest pace since February

• Goods producers continued to report a severely negative impact on customer demand from the coronavirus disease 2019 (COVID-19) pandemic and worsening global economic conditions.
• New orders fell to the smallest degree since February, helped by a gradual easing of the downturn in export sales across the manufacturing sector. Nonetheless, survey respondents noted that fragile global economic conditions continued to weigh on order books in July.
• Subdued demand conditions resulted in another steep fall in purchasing activity and tighter inventory policies among Japanese goods producers. The latest survey indicated lower stocks of finished goods as well as reduced pre-production inventories.

EARNINGS WATCH

From Refinitiv/IBES:

• Through Jul. 31, 312 companies in the S&P 500 Index have reported earnings for Q2 2020. Of these companies, 82.1% reported earnings above analyst expectations and 16.7% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 21% miss estimates. Over the past four quarters, 71% of companies beat the estimates and 22% missed estimates.
  
• In aggregate, companies are reporting earnings that are 21.7% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 4.3%.
• Of these companies, 67.9% reported revenue above analyst expectations and 32.1% reported revenue below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 59% of companies beat the estimates and 41% missed estimates. In aggregate, companies are reporting revenue that are 1.4% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 0.7%.
• The estimated earnings growth rate for the S&P 500 for 20Q2 is -33.8%. If the energy sector is excluded, the growth rate improves to -27.3%. The estimated revenue growth rate for the S&P 500 for 20Q2 is -10.4%. If the energy sector is excluded, the growth  rate improves to -6.1%.
• The estimated earnings growth rate for the S&P 500 for 20Q3 is -23.1%. If the energy sector is excluded, the growth rate improves to -19.7%.

Factset tells us that

At this point in time, 32 companies in the index have issued EPS guidance for Q3 2020. Of these 32 companies, 7 have  issued negative EPS guidance and 25 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 22% (7 out of 32), which is below the 5-year average of 69%.

The problem with that is that its mainly companies confident enough that are offering guidance. Normally, at this time, more than 80 companies would have guided forward. In fact, “through July 28, 51 S&P 500 companies had confirmed a previous withdrawal of annual EPS guidance for FY 2020 or 2021 during the Q2 earnings season.”

TECHNICALS WATCH

Lowry’s Research notes, once more, that the Demand side of its Supply-Demand analysis has weakened and has become more selective since the June 8 highs. This is seen in all market caps. It also observes that the “desire to sell continues to wane”. While breadth and momentum still look “healthy”, Lowry’s analysis reveals that increasingly weak Energy and Financial stocks are weighing on equity indices and that an “improvement in the Financial and Energy Sectors will likely go a long way toward  bridging the gap, providing a key Demand boost.”

Hmmm…

If analysts are right, Energy and Financials earnings are not about to offer much buying incentive:

Energy P/Sales and P/CF ratios are very low but margins are very depressed…(charts below from Morningstar/CPMS)

…and need sustained higher oil prices that investors can trust. Calling Putin, calling MBS!

Financials don’t look so cheap on a P/E and P/Bk basis. The unfavorable yield curve and declining ROEs are not motivating buyers:

That said, tech stocks are also not in the cheap area, to say the least. P/E and P/S are back to 1999/2000 levels with margins (blue line) expected to decline (blue dot).

Meanwhile,

the Nasdaq 100 is pretty extended vs its still rising 200dma as Ned Davis Research shows…

…and the S&P 500 13/34–Week EMA Trend remains supportive (CMG Wealth)…

..although the 500 is extended vs its rising 200dma as Ed Yardeni illustrates:

I am not a fan of comps like that one below from Kessler Investment Advisors. I am only using it now to show that investors can, on occasions, entirely misread a situation.

HSBC warns loan losses could hit $13-billion as profit plunges 65%

(…) The lender warned its capital reserves could deteriorate, its revenues would come under pressure and it faced heightened geopolitical risk as Europe’s biggest bank set out a gloomier than expected outlook for the second half of the year.

HSBC increased its estimate of the total bad debt charges it could take this year to between $8-billion and $13-billion from $7-billion-$11-billion, reflecting worse-than-expected actual losses in the second quarter and expectations of a steeper decline in the economy. (…)

PANDEMONIUM

U.S. to Act on China Software Beyond TikTok, Pompeo Says

The Trump administration will announce measures shortly against “a broad array” of Chinese-owned software deemed to pose national-security risks, U.S. Secretary of State Michael Pompeo said.

The comments suggest a possible widening of U.S. measures beyond TikTok, the popular music-video app owned by ByteDance Ltd., one of China’s biggest tech companies. President Donald Trump told reporters Friday that he plans to ban TikTok from the U.S., but his decision hasn’t been announced. Pompeo signaled he expects a Trump announcement “shortly.” Chinese newspapers slammed a potential ban on TikTok. (…)

Chinese software companies doing business in the U.S. are feeding data directly to Chinese authorities “whether it’s TikTok or WeChat — there are countless more,” Pompeo, on of the Trump administraton’s China hawks, said on Fox News Channel’s “Sunday Morning Futures.”

Trump “will take action in the coming days with respect to a broad array of national-security risks that are presented by software connected to the Chinese Communist Party,” Pompeo said. (…)

The China Daily wrote in an editorial on Sunday that “although the Oval Office claims to oppose authoritarianism, it has a penchant for arbitrarily demonstrating its own authority.”

And an editorial in the Global Times, one of China’s most combative state-run papers, said that “the U.S. claim that TikTok threatens its own national security is purely hypothetical and unwarranted charge — just like the groundless accusation that Huawei gathers intelligence for the Chinese government.”

Microsoft talks to buy TikTok’s U.S. operations spark ire in China A potential shotgun wedding to Microsoft Corp for TikTok’s U.S. operations provoked an outcry on Chinese social media as well as criticism from a prominent Chinese investor in TikTok owner ByteDance.

Microsoft confirms talks to buy TikTok’s U.S. operations, Trump gives TikTok’s Chinese owner 45 days to reach deal As Microsoft seeks to buy TikTok’s U.S. business before Sept. 15, prominent Chinese investors and social media users resist

Chinese artificial intelligence company files $1.4 billion lawsuit against Apple

Eastman Kodak top executive got Trump deal windfall on an ‘understanding’

Last Monday, Eastman Kodak Co. granted its executive chairman options for 1.75 million shares as the result of what a person familiar with the arrangement described as an “understanding” with its board that had previously neither been listed in his employment contract nor made public.

One day later, the administration of President Donald Trump announced a US$765-million financing deal with Eastman Kodak, and in the days that followed the stock soared, making those additional options now held by executive chairman Jim Continenza worth tens of millions.

The decision to grant Mr. Continenza options was never formalized or made into a binding agreement, which is why it was not disclosed previously, according to the person familiar with the arrangement. The options were granted to shield Mr. Continenza’s overall stake in the company from being diluted by a US$100-million convertible bond deal clinched in May, 2019, to help Eastman Kodak stay afloat, according to the person’s account.

While Kodak’s approach is permissible, it is unusual because executives are paid to grow a company’s long-term value and are not usually given extra compensation personally to cover events that may hurt share prices, several experts said.

Kodak disclosed the stock options award to Mr. Continenza in a filing to the U.S. Securities and Exchange Commission, which was previously reported. But the person familiar with the arrangement told Reuters that the transaction occurred because of the understanding with the board.

That arrangement reported by Reuters for the first time sheds new light on Eastman Kodak’s handling of the unexpected windfall for its top executives.

An Eastman Kodak spokeswoman said that Mr. Continenza had no comment. The spokeswoman said the gains reflected by the rise in the share price are only on paper: Mr. Continenza, she said, “is a strong believer in the future of the company, and has never sold a single share of stock.”

Prior to this week’s financing deal, the company warned investors it was at risk of not continuing as a going concern, but it was boosted by the agreement with the Trump administration on Tuesday to supply drug ingredients.

As a result, Mr. Continenza’s gains at the end of this week amounted to about US$83-million following a roughly 10-fold increase in Eastman Kodak’s stock, compared to the approximately US$53-million in gains he would have seen were it not for the additional options, according to a Reuters analysis of company filings.

Roughly 29 per cent of the options Mr. Continenza received on Monday vested immediately, giving him the right to cash them out as soon as possible.

While most corporate boards and their committees have wide latitude in awarding options, three corporate governance experts interviewed by Reuters said the move to mitigate the impact of dilution on Mr. Continenza’s stake in the company without a prior contractual obligation was unusual.

“The compensation committee’s job is not to protect the CEO from every adverse effect on the stock price,” said Sanjai Bhagat, a finance professor at the University of Colorado. “It’s to get the CEO to think about long-term value.”

A fourth expert, Robin Ferracone, chief executive of compensation consultant Farient Advisors, said the company may have offered the prospect of additional options to executives as they worked toward the convertible bond offering — to avoid them being “disincentivized” to seal a deal that would help the firm but potentially water down their holdings.

The additional options awarded to Mr. Continenza, a former telecommunications executive, were approved by the board’s compensation committee on Monday, the spokeswoman said. Shareholders had voted in May of this year to increase the shares available for executive compensation.

“The issue is the board wanted to make sure the CEO had the same economic alignment as was contemplated when he took the job,” said a person close to the company.

The company’s market capitalization jumped from a little over US$100-million at the start of the week to almost US$1-billion by Friday following the deal.

Eastman Kodak also granted options on Monday to three other executives, worth US$712,000 each, according to regulatory filings. Kodak declined to comment on the reason for these awards.

The company has struggled to reinvent itself from a flagging camera company after emerging from bankruptcy in 2013. Its selection by the U.S. government for the production of key pharmaceutical ingredients surprised many industry analysts who expected such a deal to go to a major generic drug maker.

The government’s U.S. International Development Finance Corporation released a July 28 statement quoting Mr. Continenza as saying: “Kodak will play a critical role in the return of a reliable American pharmaceutical supply chain.”

President Trump, too, hailed the development. “I want to congratulate the people in Kodak,” he said at a press briefing. “They’ve been working very hard.”

But never on vaccines or anything remotely close…