Pg 7, Up and Down Wall Street: $2.3 trillion from CARES Act and $5 trillion pumped in by the Fed prevented a worse outcome than -32.9% [annualized] decline for Q2 GDP. The government stimulus in Q2 [total $7.3 trillion] well exceeded normal/typical quarterly GDP of $4.85 trillion. Interestingly, market-cap of stocks also increased by +$7 trillion to 2x GDP, a new record [prior record was 1.87x GDP in 2000/Q1 dot.com bubble]. While personal income grew due to government stimulus, personal spending collapsed, and personal saving increased. Some of the savings went into online gambling and stock speculation – Eastman Kodak [KODK] was the latest hot stock for speculators as it ventured into pharma chemicals using a government loan. FB, AAPL, AMZN, GOOGL had good Q2 reports as their businesses benefitted from Covid-19. Jobs report this week would be good. State and local governments [10% of GDP] continue to struggle. Fitch revised its outlook for US sovereign credit rating to negative but kept AAA rating for now. But there is complacency in DC as the next stimulus is delayed.
Traditional 60-40 is revisited for the ZIRP environment. But rather than increasing %stocks, it is suggested to look into unloved value and financial stocks.
Pg 9, Streetwise: Bitcoin has been very volatile, but it is rising again; some point to falling dollar [-7% since mid-May, a huge quick drop for currency], others to profits from other cryptocurrencies being parked in Bitcoin. Gold has moved up too. Lower dollar helps exporters and multinationals with high foreign sales [MCD, CL]. There isn’t much inflation although inflation expectations [ = nominal Treasury yield – TIPS yield] are up to 1.5%. Euro is benefitting from huge stimulus in the euro-zone; now the EU is doing some borrowing on behalf of the euro-zone states [previously, each euro-zone state had to borrow on its own]. But Ed Yardeni [Yardeni Research] doesn’t see much downside for dollar, a reserve currency; he is optimistic about Covid-19 outcomes and treatment in the US; he is OK with owning some gold but not Bitcoin. US big techs had hearing via videoconferencing, but investors don’t seem to be worried – the lawmakers traded barbs among themselves and also confused FB and TWTR.
Pg 10-11: BOE policy decision on Thursday.
Harley Davidson [HOG] took a huge loss in its restructuring. It will dump 30% of its product lines to focus on best sellers and will slash inventory at dealers by 33%.
Allegiant [ALGT] is a low-cost airline that operates scheduled and charter flights for vacation travel market. Its stock has lost less than the major airlines.
Data this week [bad reports keep coming but some may be better than expected]: ISM manufacturing PMI, residential construction spending on Monday; factory orders on Tuesday; ADP employment report, ISM nonmanufacturing PMI, international trade deficit on Wednesday; weekly initial jobless claims on Thursday; consumer credit, jobs report [+2 million], unemployment rate [10.5%] on Friday.
Bullish Recommendations: Auto dealers [AN (largest national; expanding online used-car operations), GPI (regional; emphasizes parts and service)), KMX (largest for used car shopping; expanding online operations), and unprofitable online newcomers CVNA, VRM; online car buying has convenience but not deals; used car prices are high due to lack of inventories and that helps new car buyers on trade-in; car dealers have lot of leeway with gross profits of $3K/car; combo new-used car dealers are more profitable than stand-alone new or used car dealers; pg 23];
gold [all-time high (prior peak in 2011); bullion ETFs GLD, IAU; gold-mining ETFs GDX, GDXJ; mutual funds (OEFs) FSAGX, INIVX; CEF ASA; major companies (NEM, GOLD) have all-in production cost around $1,000; GS has $2,300 as next target; pg 25].
Bearish Recommendations: See other stories.
Pg 12, 29: FB, AAPL, AMZN, GOOGL had virtual Congressional hearing that investors ignored. They also reported great earnings. AAPL split its stock, will have new iPhones in October and may soon have $2 trillion market-cap. An analyst said that AMZN had shocking levels of growth and profitability. FB wasn’t worried about ad boycott from some large companies as its ad platform caters to thousands of small businesses and its products are used by almost 40% of world’s population. GOOGL posted only better than expected earnings [not blowout like the other 3] and, if you can believe it, that disappointed some.
Pg 13: Cover Story, “SPACs Are All the Rage, but These Private-Equity-Like Vehicles are Complicated. Here’s What You Need to Know”. SPACs are blank-check companies that raise money via IPO first and decide in 2 years what business(es) to buy. Examples are PSTH.U [largest; from Bill Ackman], GSAH.U, TXAC, IPOB, IPOC; post-SPAC examples are NKLA, DKNG, SPCE, VRT. Retail investors should stay away from this complex area; they cannot participate in the lucrative IPOs.
Pg 16: China investment ideas. Forget travel and malls, but e-commerce [BABA, JD, Tencent, EDU], home improvement [HD. Midea], health & wellness [NKE, YUMC, HDALF, Chacha], cosmetics and luxury/premium products [EL, LVMUY, PPRUY] are fine. Government has relaxed restrictions on shopping at domestic duty-free zones. China is the only major global economy that may show growth for 2020 and Chinese stocks are moving up; consumer-discretionary ETF is CHIQ.
Pg 19: Barron’s 4th Annual Ranking of Robo-Advisors. AUM $631 billion . Top-level ERs range from 0 to 0.50%; some have flat $ fees. Top 10 of 40 ranked:
#1-SigFig, #2-TD Ameritrade, #3-Fidelity Go, #4-Vanguard, #5-E*Trade Core, #6-Betterment, #7-Ellevest, #8-Wells Fargo, #9-Wealthsimple, #10-SoFi.
Pg 26: Alex Umansky of global go-anywhere BGAFX looks for companies with unique businesses with sustainable competitive advantage. He expects market volatility to continue. The concentrated fund has 36.1% in top 10 holdings. Covid-19 has accelerated certain disruptive trends and digital revolution is one of them.
Pg 28: Beware hot niche thematic ETFs. There are 129 with $41 billion AUM and many are benefitting from Covid-19. Many are tiny; only 54 have 3-yr record and only 16 have 10-yr record; they are expensive as they use specialized/customized indexes. They are different from sector ETFs. Those with similar names can be quite different. Large ones include ARKK, SKYY, XT, ARKG, KOMP.
Pg 30: With work-from-home [WFH] trend persisting/growing, office REITs have sold off [-23% YTD], Many office buildings will require capex to adjust for social-distancing and make health and safety related modifications. Current office occupancy rates are very low [Philadelphia 5-10%, Austin 10%, DC 20%]. But selected office REITs in non-gateway and non-coastal markets may do relatively better [CUZ, HIW].
Pg 31: Ugly Q2 GDP -32.9% came and now forget about it. Q2 was mostly a lockdown quarter and has no meaning for the other quarters. By the same token, ignore the fantastic rebound in Q3 GDP when that comes. High frequency data are more important – NY Fed has a basket of 10 daily and weekly indicators that shows that rebound from late-April bottom is about 1/3rd of the total decline [mid-March to late-April]. Harvard U has economic tracking for small businesses that shows an alarming business failure rate; it also tracks consumer spending that shows stall/decline. S&P has noted that many companies that received PPP loans are planning layoffs. The Fed has done quite a bit and the Congress has to follow up with more fiscal stimulus. Investors should include assets will low or negative correlations [gold (GLD, IAU, SGOL)], real estate] and selected international stocks.
Pg 32: Brad Safalow, PAA Research. Some stock picks [CWH, OSTK] and pans [PRDO, STRA, TREX, TRUP] but no general/broad insights.
Pg 34: Lorraine Kelly, Institutional Shareholder Services [ISS]. The SEC has now closed off investor dissent by its new regulations on proxy advisors and voting that favor corporations. The new SEC view is that proxy voting advice is solicitation. Proxy advisors may now face lawsuits if the companies disagree with their advice. The SEC process for this rule making was deeply flawed – some comments cited from individual investors were fabricated or motivated by lobbyists.
Extras from Friday – I try to guess on Friday which features will make it in the weekend edition but the following guesses didn’t make it. Almost 75-80% of the weekend edition is now available by 9:00 PM Central on Friday. Barron’s revised website has “Interests” tabs similar to columns topics and that makes it easier to find potential items for the weekend edition. This is also the reason for earlier postings on Saturday – I do wait for my paper delivery [typically between 5:00-6:30 AM Central] to fill in some data.
Bullish Recommendations: Apple [AAPL; it beat estimates; next iPhone in October; buybacks continue; 4-for-1 split on August 31; on the way to $2 trillion market-cap (now $1.78 trillion; $1 trillion was 2 years ago)].
Long awaited Fed’s review of its monetary policies will be unveiled after September FOMC. But it will just codify what the Fed has already been doing. In action, it is seen in the lowered Treasury-VIX MOVE index.
ESG funds had strong inflows in Q2 and H2; H2 inflows were already near those for the entire 2019. 51% of global institutional investors now incorporate ESG into their investment approaches and 29% use impact ESG approach; the numbers are weaker for North America. In surveys, 76% of individual investors, and 60% within retirement plans, favor ESG. The DOL on the other hand is moving the other way; its comment period for restrictive rules ended on 7/30/20. There is an industry push for ESG standardization and audits. There are also several ESG indexes [SP500 ESG EFIV, etc].
An interesting comment from Barron's Market View section. I skipped similar stats in my summary but some may find the data useful.
“Uncharted” Economic Territory
National Bank of Canada
July 30: We now have a fuller picture of this atypical downturn caused by the economic lockdown imposed to fight the Covid-19 pandemic. The recession may have lasted only two quarters, but the drop in activity is unprecedented. Indeed, the record slump in output of 33% annualized in the second quarter was an eight-standard-deviation event, more than three times the size of the previous record, dating back in to the first quarter of 1958 (-10%). Several elements of this morning’s report show that the U.S. economy is in uncharted territory.
The outsized loss during the quarter, compared to other recessions, was mostly due to the collapse of 43.5% in consumption on services, a category that generally holds up in economic downturns. Another unusual development was that despite labor-market woes, household disposable income surged 33% on the back of generous transfer payments from government. With limited possibility to spend, the personal savings rate rose to a record high of 25.7%. The rise in savings of $3.1 trillion during the quarter is twice the drop in consumption spending, meaning that some of this extra savings could support consumption in the months ahead.
—Matthieu Arseneau, Jocelyn Paquet