THE DAILY EDGE: 27 MAY 2020: Rule of 20 Strategy Raises Cash

• The FT has gathered and analysed data on excess mortality — the numbers of deaths over and above the historical average — across the globe, and has found that death tolls in some countries are more than 50 per cent higher than usual. In many countries, these excess deaths exceed reported numbers of Covid-19 deaths by large margins.
• Quest Diagnostics Inc. is offering services to large employers geared at getting their employees back to work safely, including testing for the novel coronavirus, analytics to monitor symptoms and hotspots, and services like temperature monitoring, the company announced Wednesday. The Quest program joins similar ones from Laboratory Corp. of America Holdings and health providers like primary-care clinic One Medical, showing how reopening efforts have created a new way for health-care companies to market their services.

Only about half of Americans say they will definitely get vaccinated, poll finds

Only about half of Americans say they definitely would get vaccinated against the novel coronavirus once a vaccine becomes available, according to a poll released Wednesday by the Associated Press-NORC Center for Public Affairs Research.

The poll finds that 49 percent plan to get vaccinated while 31 percent say they are not sure. Twenty percent say they will not get vaccinated.

In the AP-NORC poll, 70 percent of those who do not plan to get vaccinated cite possible side effects among the reasons. Forty-two percent say they fear getting infected with the coronavirus from the vaccine, while 31 percent say they are not concerned about getting seriously ill from the coronavirus.

The Trump administration has pledged to produce a vaccine by the end of the year, a highly ambitious timetable, health experts say.

Only 20 percent of Americans believe that goal will be met, while 61 percent expect a vaccine to become available sometime next year. An additional 17 percent think it will take longer than that. (WaPo)

PANDENOMICS

Reopening of economy stabilizes consumer confidence but concern remains about income

Sentiment about job prospects stabilized in May, but a majority of consumers surveyed still expect job prospects to improve. However, a majority of consumers expect their income prospects to decline rather than improve. The last time we saw such pessimism regarding income was during the Great Recession.

In sum, consumer spending is not likely to propel economic recovery in the months ahead.

• Global GDP Growth Forecasts BofA has revised lower 2020 GDP growth for 28 of 43 countries.

• The rate of U.S. job losses may have slowed in May, according to this chart from the Dallas Federal Reserve:

• Boeing to Start Voluntary Layoffs, Will Shed an Initial 2,500 Workers representing the first phase of broader cuts that will involve roughly 16,000 job losses in total.
• Amtrak Prepares to Cut 20% of Workforce Amtrak employs more than 18,000 people nationwide. It plans to make the job cuts by October. Amtrak projects ridership in 2021 will rebound to just half of what it was before the crisis.

Salaries Get Chopped for Many Americans Who Manage to Keep Jobs

(…) The hard numbers won’t be in for months, but anecdotal evidence is piling up. On earnings calls, big businesses including The Container Store Group and Lyft have cited what they say are temporary salary reductions. Federal Reserve officials also have found plenty of supporting evidence. (…)

Outside of “high-demand sectors such as grocery stores,” there are signs of “general wage softening and salary cuts” all over the economy, according to a Fed business survey in April. A study by Thomvest Ventures, which looked at 22 public and private technology companies, found that non-executive employees had seen pay reduced by an average of 10% to 15%. (…)

America Inc faces a wave of bankruptcies

(…) In April, Goldman Sachs, another investment bank, predicted that over $550bn of investment-grade bonds will fall to junk status by October (adding roughly 40% by current value to the junk-bond market).

Edward Altman of NYU Stern Business School reckons that about 8% of all firms whose debt is rated speculative grade (about 1,900 in all) will default in the next 12 months. This figure could reach 20% over two years. He expects at least 165 large firms, those with more than $100m in liabilities, to go bankrupt by the end of 2020. (…)

So the good news is that many squeezed firms staring at bankruptcy might be saved through restructuring. Mr Derrough, a veteran of financial crises, explains that this involves five steps: stopping the bleeding; evaluating the injuries; performing the necessary surgery; rehabilitating the victim; and returning it to health. The bad news is that America Inc is at the start of phase one. As he puts it, “Most of what we are doing is blood transfusions. We haven’t even gotten to stopping the bleeding.” (The Economist)

• Tesla cuts prices by as much as 6% in North America to boost demand Tesla said it will also cut prices in China by around 4% for the Model X and Model S.
• Used auto dealers in Ontario expect tough year ahead, prices already down Many of the dealers surveyed had already seen significant price declines in April compared with March, including almost a third who said prices declined between 11 and 20 per cent. About 15 per cent saw prices down at least 21 per cent, and another quarter of respondents saw price declines of between six and 10 per cent.
• China’s Chery Auto plans to sell cars in EU, United States
• Google to start reopening offices, targets 30% capacity in September Alphabet Inc’s Google said on Tuesday it would reopen buildings in more cities at roughly 10% of their capacity beginning July 6 and scale it up to 30% in September, if conditions permit.

As Its Economy Slows, China Embraces a Weaker Currency China set a reference rate for the yuan at its weakest point in 12 years, a signal that Beijing sees the benefits of a weaker currency as it grapples with an economic slowdown and rising tensions with Washington.

(…) Last week Premier Li Keqiang said: “We will keep the renminbi exchange rate generally stable at an adaptive, balanced level.” However, economists and analysts said three consecutive weaker fixings suggested little appetite to defend recent yuan levels, amid growing frictions with the U.S. (…)

The euro-area economy is facing a contraction this year in line with the European Central Bank’s more pessimistic forecasts, according to Christine Lagarde. Output in the region is likely to shrink between 8% to 12%, the ECB president said in an online question-and-answer session targeted at European youth. Estimates for a mild scenario are “out of date.” “We’ll have a better sense in a few days as we publish our numbers in early June, but it’s likely we will be in between the medium and severe scenarios,” she said.

EU Will Propose 750 Billion-Euro Fiscal Stimulus Package

Investment in U.S. Shale Projects to Halve in 2020, IEA Says Energy sector’s transition to renewables is also expected to slow

(…) The Paris-based organization expects global investment in oil and gas to decrease by a third and the financing of all energy projects to decline by 20%. (…) U.S. companies spent on average $35.90 to produce a barrel of oil in 2019, says Rystad Energy AS. WTI hasn’t traded above that figure since early March. (…)

• Global energy spending to fall $400bn due to coronavirus crisis IEA says investments in low-carbon technologies falling far short of climate goals

CHANGE IN THE RULE OF 20 STRATEGY

At 3026 on the S&P 500, the Rule of 20 Strategy will raise cash to 30% from 10%. At that level, the Rule of 20 P/E will reach 20.5.

Yesterday, from MarketWatch:

Perhaps what was more interesting was the composition of the rally. Value stocks in particular did well, with the S&P 500 value index (XX:SP500V)  surging 2.5% while the S&P 500 (SPX)  rose 1.2%. The small caps also enjoyed stellar gains, with the Russell 2000 (RUT)  jumping 2.8%.

The S&P 500 is bumping on its 200dma:

But its equal-weight clone is not quite there yet:

Lowry’s Research last Friday evening wrote that “Given the less-than-ideal conditions accompanying the recent rally highs, investors are encouraged to buy selectively while awaiting evidence of a likely more sustainable advance. Key to this confirmation would be fresh rally highs in Lowry’s OCO Adv-Dec Line and a new Lowry intermediate trend buy signal.”

These did not seem to happen yesterday even though Lowry’s Buying Power rose to the dominant position:

Chaikin Analytics’ Dan Russo writes this morning:

As a group, speculators (large and small) remain net short the S&P 500. They were caught massively short at the March 23rd low, but they have not covered. (…) As the index now tests the 40-week moving average (200-day) near 3,013 we have to wonder if a move above that popular measure of long-term trend will induce the a short-covering rally that sends the market to the next stop on the roadmap that we have laid out near 3,110.

Speaking of buying power, Almost Daily Grant’s has this:

Pharmaceutical manufacturer Indivior plc. has enjoyed quite a run this year, with London Stock Exchange listed shares (ticker: INDV) up 58% year-to-date, leaving in the dust the FTSE 100 Index, which is off by 21%.

Yet the enthusiasm of British investors has nothing on that of American ones.  Thanks to a parabolic intraday rally, Indivior’s American Depository Receipts (INVVY on the U.S. pink sheets) traded as high as $40 per share before turning tail, eventually finishing at $11.2, up 17% on the day.  Even with that steep reversal, the ADRs finished the session at a cool 196% premium to the common, after accounting for currency differentials and the five-to-one exchange ratio.

What might be behind that manic price action and still-yawning disparity? Data from RobinTrack.net may provide a clue: According to the website, which tracks individual stock holdings among the millennial-friendly retail trading platform, some 22,600 accounts held shares in INVVR as of mid-afternoon.  Last Monday, when the ADR closed at $2.99, fewer than 1,500 Robinhood users counted themselves as shareholders.

Also, FYI:

Moderna’s top executives sold $29 million in stock after its early vaccine announcement. (LA Times)

PANDEMONIUM

While China has significantly stepped up its purchases of U.S. agriculture products so far this year, including corn, soybeans, wheat and cotton, it is far from the pace necessary to meet targets for purchases overall.

• Thanks in large part to the pandemic shuttering much of its economy for two months, Chinese purchases of U.S. goods are down 23.5% from 2019’s levels and China was $21.2 billion behind schedule for the first three months of the year, according to an analysis earlier this month from Panjiva, which is part of S&P Global Market Intelligence.
  
• The biggest shortfall is in purchases of U.S. energy products, particularly liquefied natural gas, as energy demand has cratered and prices have dropped. (Axios)

Business will be the loser in the US-China fight Both nations are indispensable, so companies face a two-track world

China-US rivalry in ‘high-risk period’, Chinese defence minister says

The strategic confrontation between China and the United States has entered a high-risk period, China’s top defence official said in a rare statement directly naming an adversary.

Speaking during a panel discussion on the sidelines of the National People’s Congress (NPC) on Saturday, Defence Minister Wei Fenghe said that China needed to bolster its fighting spirit, while other military leaders said the country had to catch up with Western nations in its development of core technologies.

“The United States has intensified the suppression and containment of our side since the [coronavirus] outbreak, and the Sino-US strategic confrontation has entered a period of high risk,” Wei, who is also a general in China’s People’s Liberation Army (PLA), said.

“We must strengthen our fighting spirit, be daring to fight and be good at fighting, and use fighting to promote stability.”

Wei’s comments were made available to accredited journalists covering the NPC in Beijing. While it is relatively rare for PLA officers to name specific countries or regions, more have done so this year amid rising tensions between China and the US, and souring ties between Beijing and Taipei. (…)

• Xi tells PLA to step up combat readiness as ministry defends budget rise “It is necessary to step up preparations for armed combat, to flexibly carry out actual combat military training, and to improve our military’s ability to perform military missions.”

Li Ka-Shing Hong Kong Group Loses Israel Deal Amid U.S. Push

The Hong Kong conglomerate founded by billionaire Li Ka-shing lost a bid for a major infrastructure project in Israel, weeks after the U.S. asked its Middle Eastern ally to review potential security threats posed by China-based companies.

An affiliate of CK Hutchison Holdings Ltd., the flagship of the tycoon’s sprawling business empire, lost out on the contract to build and operate Israel’s biggest desalination plant to IDE Technologies, a local company, the Israeli government said. In the past, Hutchison Water International Holdings Pte. had operated a desalination plant in the vicinity of the planned facility in partnership with IDE. (…)

Hutchison lost its Israeli bid at a time of rising frictions between the U.S. and Beijing over trade and the deadly coronavirus that originated in China. Israel has found itself caught in this conflict, under pressure from the U.S. to cool its relations with Beijing, rather than expand them as it had hoped. Just two weeks ago, U.S. Secretary of State Mike Pompeo flew to Israel for discussions with Prime Minister Benjamin Netanyahu on issues including China’s role in the Israeli economy. (…)

“We do not want the Chinese Communist Party to have access to Israeli infrastructure, Israeli communication systems, all of the things that put Israeli citizens at risk and in turn put the capacity for America to work alongside Israel on important projects at risk as well,” Pompeo told Israeli media after his meeting with Netanyahu. (…)