- 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…
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 20th 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)
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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.” (…)