THE DAILY EDGE: 8 JUNE 2020: R20 Strategy Raises Cash

Jobless-Rate Drop, Payroll Gains Signal a Mending Economy. The May U.S. jobless rate fell to 13.3% and employers unexpectedly added 2.5 million jobs, early signs the labor market is mending. The jobless rate fell from 14.7%, which was the highest on records dating from 1948.

Employment remained down by nearly 20 million jobs, or 13%, since February, the month before the pandemic prompted states to shut down huge segments of their economies. By comparison, the U.S. shed about 9 million jobs between December 2007 and February 2010, a period that covered the recession caused by the financial crisis. (…)

Restaurants and bars added 1.4 million workers last month—more than half the overall job gain—as new virus infections eased and many states began lifting shutdown orders. Other industries adding workers included construction, health care and retailers—among the industries that had been quickest to let go of workers in March and April. (…)

While 21 million workers remained unemployed last month, research suggests that more than half of those laid off during the pandemic are earning more than they did at their jobs, thanks in part to stimulus checks and extra $600 a week in unemployment pay approved by Congress.

“People have been cooped up in houses and apartments for weeks and they’re anxious to get back,” Mr. Sohn said. “They have money to spend—disposable income.” (…)

In May, a broader measure of unemployment—including jobless workers, those working part time and those who have given up the job search because they are too discouraged—stood at 21.2% in May. Many other workers have taken pay cuts. Gregory Daco, chief U.S. economist at Oxford Economics, estimates that at least half of the workforce has lost a job, lost hours or took a pay cut. (…)

More than 80% of the people who lost jobs during the pandemic expect the loss to be temporary.

Those permanently separated from their jobs totaled 3 million in May, a low level compared with prior downturns. In October 2009, when unemployment peaked after the financial crisis, there were 8.3 million such workers. (…)

Nearly 90% of Fiat Chrysler Automobiles NV’s hourly factory workforce in North America has returned to work, the company said in a statement. (…)

Forecasting firm Moody’s Analytics projects the unemployment rate will fall to 8.5% by year-end and that the annual job loss will settle at 8 million. (WSJ)

• There are all kinds of reasons to doubt the accuracy of Friday’s jobs report. That doesn’t mean it should be ignored.

(…) The jobs report is subject to revisions, however, and given the difficulties with collecting data in the midst of the Covid-19 crisis, and the sheer scope of the economic disruptions it has caused, those revisions could be enormous. For example, the Labor Department reported that the response rate in the survey it uses to calculate the unemployment rate was just 67%—about 15 percentage points lower than it was before the crisis struck. Unemployment among the people that the Labor Department isn’t reaching is probably higher than it is for the people to whom it can get through. (…)

At the very end of the footnote to its release, the BLS warned:

However, there was also a large number of workers who were classified as employed but absent from work. As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified. BLS and the Census Bureau are investigating why this misclassification error continues to occur and are taking additional steps to address the issue.

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.

  And, as pointed out by David Rosenberg:

Businesses were incentivized to hire back their workers in May in order to meet the requirements under the $660 billion Paycheck Protection Program — as in, having
the loans shift to grants so long as staff levels were maintained.

David also

noticed that there were actually 295k more people who lost their jobs permanently in May, bringing the cumulative tally over the past three months to over one million — we last saw this at the depths
of the 2008/09 Great Recession. And the BLS’s own probability measure of re-employment is only 38%, so we’ll see what sort of
follow-through we get in the months ahead.

Bloomberg:

(…) “High frequency data — including mobility stats and small business openings — have been pointing to a trough in economic activity since mid-April,” Jefferies economists Aneta Markowska and Thomas Simons said in a note to clients. “Jobless claims did not fit with that picture, suggesting there was no positive follow-through to the labor market. We now know that claims were wrong. The May employment report was rock solid, with broad-based gains across many industries.” (…)

But claims cannot be wrong. And they are still rising, even if at a “slower” pace of +2.1M (!) on average in the 3 weeks since May 9, the week of the BLS survey.

Markit’s May PMI surveys cover data collected 12-28 May 2020, so after the BLS survey. From the Services PMI survey:

Reflecting weak demand conditions, service sector firms reduced their staffing numbers at a significant rate in May. The rate of job shedding was faster than any other seen before April, as lower new business inflows led to greater excess capacity. Another monthly slump in total sales also drove a further depletion in outstanding business.

From its Manufacturing PMI survey, same dates:

Despite  efforts to adapt using reduced working hours and furloughing  staff, firms cut their workforce numbers at the second-quickest rate in over 11 years.

Markit also publishes a Sector PMI covering over 1,000 private sector companies:

The latest survey data, collected 12-28 May, pointed to a steep downturn across all areas of the US private sector economy with the exception of healthcare. But all sectors display negative employment diffusion indices, indicating that many more firms are reducing employment than there are increasing it.

Lastly, the BLS report reveals that private service sector hours increased to a record 33.8. I truly wonder how solid that stat can be when most services are shut or operating with most employees working from home.

That said, Canada had a similar surprise as the Globe and Mail writes:

In Canada, the number of employed people rose by 289,600 last month as provinces began to reopen their economies, Statistics Canada said Friday, or strikingly better than a loss of 500,000 that economists had expected. The unemployment rate climbed to a record high of 13.7 per cent as more people rejoined the labour market in search of work.

Indeed, with May’s increases, Canada has recouped just less than 10 per cent of a combined three million jobs lost in March and April, while the U.S. has recovered 11.4 per cent of 22 million positions lost during those months.

Over all, there are still close to five million Canadians who either lost their jobs or the majority of their work hours because of the pandemic.

Markit’s Canada PMI;

(…) employment numbers continued to decrease at much a faster pace than at any time prior to the COVID-19 pandemic. Around 40% of the survey panel reported a decline in staffing levels, while only 9% signalled an increase.

Time will eventually tell but I sense we should be careful with this positive May employment report

The real key to the recovery will come from demand statistics. Fathom Research:

Looking at some of the dramatic falls in consumer debt statistics across the world, the COVID-19 pandemic has all the hallmark of one great, orderly and synchronised global consumer deleveraging.

“Consumers are placing a greater focus on essential spending categories,” Fitch Solutions said in a June 4 report, predicting a fall in Chinese household spending this year and slashing its 2020 growth forecast to just 1.1% from 5.6% before the pandemic.

In the United States, commonplace brands such as chocolate giant Hershey or toothpaste-maker Colgate say consumers have traded down.

French Labor Minister Muriel Penicaud said the economy is running at 80% of normal. Speaking on France Info radio, Penicaud said industry is running at about 60% of normal and that the long-term furlough program being discussed by unions could last for as long as two years.

Citing the risk of cash-hoarding, French Finance Minister Bruno Le Maire has called for direct incentives to boost demand.

“Overall, the (ECB) Governing Council sees the balance of risks … to the downside.”

Opec output curbs spur US shale to ramp up production Operators poised to reactivate wells after cartel’s success in reviving prices

VIRUS UPDATE

• California, Some Other States See Virus Cases Rise Nearly three months since the U.S. declared a national emergency over the new coronavirus, some states are reporting a rise in new cases as they lift restrictions meant to slow the virus’s spread.
• The virus continued its surge through Brazil, which reported more than 1,000 new fatalities, and Mexico, where the death toll at state-owned oil company Petroleos Mexicanos alone exceeds 100.
• Worldwide infections from the coronavirus surpassed the 7 million mark, a little more than a week after reaching 6 million cases. The global pandemic is hitting such milestones faster as hot spots including Brazil and India drive a daily increase of more than 100,000 cases.
• Iran President Hassan Rouhani pleaded with the public to take social distancing more seriously following a record jump in cases. Russia, the country with the third-highest number of diagnoses, reported a 2% daily increase. Infections in India surpassed those of Italy.
• Indonesia reported a record increase in new coronavirus cases, taking its total number of infections to more than 30,000. The country had its largest daily increase as diagnoses spiked by 993 on Saturday. The record number of new cases comes as the nation’s capital Jakarta is set to ease restrictions put in place to counter the spread of the pandemic, with authorities pushing to reopen Southeast Asia’s biggest economy.

It’s Covid Code Red in Latin America With No Signs of Peaking

The number of regional cases just passed 1.1 million. Demographic giants Brazil and Mexico are posting among the fastest growth rates and logging daily death records. Viral illness is also rising in Peru, Colombia, Chile and Bolivia.

“The curve is steepening — the sky is the limit,” Julio Croda, an infectious disease specialist and former Brazil Health Ministry official, said about the trajectory in his home nation. “The current data show no signs of stabilization.” (…)

Latin America, with its 650 million inhabitants, is now a grim laboratory of viral pandemic. (…)

New Evidence Social Distancing Is on the Wane Data show that only a third of the public is now staying at home all day.

Fathom Research:

(…) a V-shaped recovery chiefly requires having learned some key lessons as the risks of a second wave seem to have also risen over the past weeks. In the absence of a vaccine, the experiences of Korea, Taiwan and Japan unequivocally show that the quick and effective implementation of track-and-trace measures is significantly more effective and efficient than economy-wide shutdowns, but rely on a highly effective bureaucratic apparatus. Attitudes to the virus seem increasingly complacent and primarily based on reports that Wuhan has not seen any new meaningful increase in infections. Indeed, new lockdown measures have been reported in Northern China in late May and seemed to have normalised since. Korea has also recently successfully quashed new localised virus hotbeds.

The recent experience from Iran is far more sobering and perhaps more pertinent to much of the western world. It has been reported that, this past weekend, the Iranian government let all state employees back to work, allowed mosques to hold daily services and removed most restrictions on businesses. This was against healthcare advice and without a track-and-trace programme in place. As of Tuesday, the health ministry reported almost the same number of new infections as at the country’s peak in late March. Saudi Arabia could be another country to keep an eye on over the next weeks as it allowed mosques to reopen for daily services. (…)

Equally importantly the recent experiences in Singapore and across Europe have highlighted how differences in the economic fabric of different countries are important determinants of a country’s susceptibility to the virus and the associated economic fallout. A recent report from the World Bank, for example, analyses differences across countries in the proportion of jobs that can be carried out from home. The spread between countries is striking as is the heterogeneity among European countries. It is also interesting to see how both the UK and the US do not feature anywhere near the top countries with a high share of jobs that could be performed from home. Yet, both have been among the more relaxed among developed markets in their efforts to curtail the virus.

• President Donald Trump said he’ll ask Congress for more economic stimulus to boost chances of a recovery from the pandemic, even after the surprise improvement in U.S. unemployment in May.

• Shipping industry warns of trade logjam as crews remain stranded Global economy at risk with 400,000 sailors stuck aboard vessels or in port

THE RULE OF 20 STRATEGY RAISES CASH

At 3200 last Friday, the Rule of 20 P/E reached 21.6 which triggered an increase in cash from 30% to 40%.

TECHNICALS WATCH

Obviously, Mr. Market is not focused on trailing earnings. Actually, not even on forward earnings, at least those prior to 2022.

Lowry’s Research has been remarkably good calling the momentum through its research on Supply/Demand. After Friday’s close, Lowry’s commented that “At present, despite the various unsavory story lines, the trends in the forces of Supply and Demand are healthy and increasingly supportive of the market advance.”

Its analysis concludes that not only have sellers withdrawn, buyers have returned “enthusiastically”. “Despite its simplicity, the story of Supply and Demand, reinforced by robust breadth, tells investors all they need to know. Not only is the market advance healthy but it continues to strengthen as the price indexes climb – opposite of trends in vulnerable rallies.”

Yes Virginia, momentum feeds momentum, until it doesn’t.

I have never given a lot of weight to technical analysis in my asset mix decisions, until I discovered Lowry’s Research a few years ago. Their method, focused on intelligently measured supply and demand trends makes sense.

I have, however, always payed heed to the 200-day m.a. as an important, albeit not critical, indicator of the basic longer term trend. The fact that the S&P 500 Index has crossed above its now rising 200dma troubles the fundamentalist in me. Even more so since the equal-weight SP500 has now done the same.

And now, this chart is threatening to give a bullish signal as well:

And cash can’t even buy popcorn at the movie, even if we could go to the movies.

Still, this market has bounced on hopes is being valued with normalized data in a truly abnormal world fraught with significant uncertainties.

My friend Terry sent me a piece in Business Insider about “risk velocity” which quoted Seema Shah, chief strategist at Principal Global Investors. Excerpts:

• “Markets are once again vulnerable to a negative swing in sentiment – certainly a second wave of infection that results in renewed lockdowns could bring this new bull market to an abrupt end,” she said.
• The past decade’s rise of social media platforms formed “a global echo chamber to major, anxiety-inducing events,” Shah said. This trend accelerated the spread of coronavirus fears around the world and, accordingly, “exacerbated a collapse in both investor and household confidence,” she added. Unfortunately for bullish investors, the opposite is unlikely to take place. Investors and the general public alike will run into a great deal of misinformation as the virus threat abates and economies reopen, making the proliferation of social media a strong headwind against a broad market recovery.
• “Global supply chains mean that the world economy will only be as strong as the weakest link,” Shah wrote, adding global growth and markets “may be the ultimate losers.”
• “Even tech giants aren’t fully immune to the negative impact of COVID-19, and a disappointing earnings result from any one of them risks reversing recent US equity gains,” she wrote.

From Barron’s:

PANDEMONIUM

Trump Threatens New EU, China Tariffs Over Lobster in Maine Trip

President Donald Trump threatened to impose tariffs on cars made in the European Union and on unspecified Chinese products unless the trading partners reduce their duties on U.S. lobster.

“If the European Union doesn’t drop that tariff immediately, we’re going to put a tariff on their cars, which would be equivalent,” Trump said in a roundtable event in Bangor, Maine, with commercial fishermen and the state’s former Republican governor, Paul LePage. “It’ll be the equivalent, plus,” he added. (…)

• Trump to Pull 9,500 Troops From Germany Without Telling Merkel
• Trump’s Order to Pull Troops From Germany Alarms European AlliesU.S. allies in Europe expressed dismay over President Trump’s plan to slash the number of American troops in Germany by more than a quarter, saying it undermined NATO and boosted adversaries such as Russia.
• Huawei Founder Ren Zhengfei Takes Off the Gloves in Fight Against U.S. Internal communications show how Chinese telecom giant pivoted to counter Washington’s charges with lawsuits and reorganization; “the company has entered a state of war.”
• China and India Try to Ease Border Tensions China and India are elevating talks between military leaders to try to calm tensions along their disputed borders in the Himalayan mountains.
• China warned its citizens not to travel to Australia in the latest sign of deteriorating relations. The Chinese Ministry of Culture and Tourism published a statement Friday night saying discrimination and violent behavior against Chinese and Asians are rising due to the pandemic.
• China Suspends Debt Repayments For 77 Developing Countries And Regions
• Brazil President Jair Bolsonaro said the government is considering withdrawing from the World Health Organization.

Danger ahead: US bumps in China’s global belt and road 

• Beijing’s ambitions to link countries and continents through infrastructure have hit a hazard in Romania, with Bucharest abandoning plans for a joint nuclear energy project
  
• American pressure could mean a rethink in strategy for other small allies that do business with Chinese partners, observers say