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Frequent Contributor

From Barron’s, June 22, 2020 (Part 1)

 

 

[Italics-bold within the brackets are my additions/elaborations] [New M* Discussions doesn’t allow any colors for cut-and-paste from WORD]

 

Pg M1, Trader: An up week. Investors are becoming comfortable with Powell-put. New/big techs are new safe stocks. That rotation into cyclicals lasted only until the pullback on June 11. There are oodles of cash on sidelines and investors are willing to buy dips. The Fed balance sheet has expanded rapidly from $4 trillion to $7 trillion and now includes corporate bond ETFs and corporate bonds. With Fed backstop, any bond pullback should be shallow. For stock and bond rally to continue, happy talk from the Fed and good news on economy and Covid-19 should keep coming. But late in the week, there was news on growing Covid-19 cases in places that reopened, and the Fed VP Quarles said that bank dividends may be impacted by stress tests.

Biotechs should continue to benefit from Covid-19 related drug R&D. ETF IBB rebounded strongly from March 23 to May 11 and then stalled; it may be ready to move up again. Equally weighted XBI may do better than IBB.

 

The CME FedWatch tool is based on current fed fund futures quotes around the FOMC meetings and the assumption of gradual fed fund rate changes.

ZIRP [0-0.25% fed fund rate] through March 2021 FOMC meeting.

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html ]

 

For the week [index changes only], DJIA +1.04%, SP500 +1.86%, Nasdaq Comp +3.73%, Russell 2000 +2.23%. DJ Transports -0.05%; DJ Utilities -2.82%. [tech XLK +2.85%]. US$ index (spot) +0.35%, oil/WTI futures +9.63%, gold futures +0.80%.

YTD [index changes only], DJIA -9.35%, SP500 -4.12%, Nasdaq Comp +10.85%. [tech XLK +11.53%]

 

Pg M4, Europe: Belgian cinema chain Kinepolis [KIN.be] is attractive. It has presence in Europe [55 sites], Canada [46 sites] and the US [10 sites]; total 1,079 screens. Most of the sites are company owned, so it has flexibility.

 

Pg M4, Emerging Markets: Argentina bond restructuring would be the 10th in 200 years. The debt binge stopped abruptly when the former President Macri lost and the new Fernandez government demanded 50-62% haircuts; creditors are holding out for 42% haircut. Warrants tied to exports and/or commodity prices may be sweeteners that may close the gap. Bonds have rallied from 20c to 40c with hopes for 55c in settlement. Reforms are not forthcoming, and Covid-19 made the financial situation worse.

 

Pg M6, Commodities: Transportation demand for fuels [jet fuel, diesel, gasoline] will recover slowly as economy reopens. Gasoline demand would be the first to rebound due to combo use by consumers and transportation.

 

Pg M5, Options: RV sales are up [they are popular with younger and older crowds] and WGO is hot [+300% since mid-March]. It reports on June 24, but results will be distorted by Newmar acquisition. Bull call spread is recommended.

 

[SP500 VIX 35.12, SKEW 125.38] [10-Yr TYVIX N/A] [Yahoo Finance data]

 

Pg M23, M28: A great week in Europe [Sweden +5.10%, Norway -0.59%] and a good week in Asia [New Zealand +3.52%, Philippines –2.77%]. The equity CEF index [data to Thursday] underperformed the DJIA and its discount was -8.5% [wide fluctuations between -4% to -16% over the last few weeks].

Treasury rates 3-mo yield 0.15%, 2-yr 0.19%, 5-yr 0.33%, 10-yr 0.70%, 30-yr 1.47% [Treasury data*]. Dollar was up, DXY 97.67, +0.60% [M31]. Gold [Handy & Harman spot, Thursday] was flat at $1,735, UNCH; the gold-miners rose [M34]. [^XAU was at 116.75, +1.98% for the week]

*Treasury Yield-Curve https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=y...

Top FDIC insured savings deposit rates*: Money-market accounts 1.29%; 3-mo Jumbo CD 0.50%, 1-yr CDs 1.13%; 5-yr CDs 1.50% [M29].

*For local rates https://www.depositaccounts.com/banks/rates-map/

 

Pg 20: Cover Story, “The High Cost of Income Inequality”. Covid-19 and related economic downturn has brought forth issues of income and wealth disparity. The downturn and recovery are affecting groups and industries differently. The social discontent may lead to political and regulatory actions that would affect companies. The extraordinary monetary and fiscal policies have provided support for the markets but those wouldn’t be effective without real and broad-based recovery. The middle class in the US is shrinking [only about 50% of population] vs the other developed countries. There is worry that recovery may be like K instead of V, U, W; in a K recovery, some industries will recover quickly while others may see long and slow declines before rebounding. While wealthy save, much of the consumption comes from middle- and lower- income classes. Prepare portfolios for higher taxes, lower yields and eventual future inflation.

Pg 23: Much of the headline economic data [household net worth, home ownership] are averages or aggregates that don’t indicate income and wealth inequality. Monetary and fiscal tools are blunt policy tools and not selective or targeted. For example, low rates may not stimulate if consumers are already highly indebted and have hard time qualifying for credit. Many small businesses couldn’t access PPP loans because banks preferred those with existing banking relationships, and many couldn’t tap into other government lending facilities due to their high minimum.

 

Pg 7, Up and Down Wall Street: As societal issues and speculation collided, trading in some unlikely stocks surged. Micro-caps companies run by, or serving, African Americans surged [media UONE, LA bank BYFC, NY bank CARV] saw large and unusual moves. These could be distortions from app-based day-traders who latch on to stock names/tickers trending on social-media. A recent example was bankrupt HTZ that finally pulled its weird stock offering after the SEC belatedly indicated concerns. A 20-year old committed suicide after incurring gigantic losses from options trading. There is crazy and irrational speculation in the market.

The Fed has become a bubble machine. Its backstop [first promises, then follow through actions] for corporate bonds has led to stock and bond rallies. More than $1 trillion in corporate bonds have been issued since the bond market freeze in late-March. This also helps mega-issuers of bonds [T, AAPL, MSFT, VZ, CMCSA, etc]. Unintended consequences include lower bond yields [hurting insurance companies, pension funds]; scarcity of certain types of bonds; lower bond volatility [sort of a yield-curve control]; potential future inflation [2022?]. TIPS seem cheap insurance for potential inflation.

 

Pg 9, Streetwise: There was some positive Covid-19 drug news. UK researchers found that strong, long-acting steroid dexamethasone is effective for severely ill Covid-19 patients. Also effective are GILD-remdesivir and plasma therapy. These can provide some relief to Covid-19 patients. There are several other drugs and vaccines under development. On the other hand, the FDA revoked emergency use for malaria drugs chloroquine and hydroxychloroquine.

Retail investors are driving stocks such as gaming PENN [+184% since March low] that don’t have much institutional following. Is day-trader Dave Portnoy of Barstool Sports the new Warren Buffett?

 

More later….

YBB
5 Replies
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Explorer ○○○

Re: From Barron’s, June 22, 2020 (Part 1)

Thanks Yogi...

MS CEO Jim Gorman has vigorously opposed the concept of well capitalized healthy banks cutting their dividends.  Why aren't these FED vice-nitwits threatening NEM for just RAISING their quarterly dividend from 14 cents to 25 cents?  

Prepare portfolios for the impact of the inequality of income.  People ARE preparing for Winston Churchill's admonition.  Socialism in making every one equal makes every one equally miserable.  It is also increasingly clear that Trump is unlikely to get re-elected.  Gerry Ford, Carter, Bush 41, were all defeated by the recessions that persisted in their time as President.  So people are rushing to buy homes which will return in the most profligate high SALT states, to being a tax shelter and appreciate wildly in the next Great Inflation II.  People are hoarding cash in MM acts and Banks where the FDIC guarantees "THE BUCK".  People are then likely to increasingly put more of that cash into physical cash as well.  Physical cash can be MOSTLY hidden from wealth taxes, as States like NJ have a 2% exit tax on anyone trying to leave intact.  Future shortages of larger denomination physical cash supplies could be a pathway to the use of more compact and durable units of physical gold.  Madame Death's scenario for muni debt may have just turned out to be early rather than wrong.  Warren would be thought to have been very shrewd if he dumped all his airline stocks LAST week.  Maybe I am just imagining that there are a lot more TV ads for tribute/commemorative facsimile gold plated replica coins for sale, with strict limits. The more ways we figure out to pry well earned wealth away from those who worked the hardest and longest to get it the more varied will become the avenues of preserving it.  If precious metals companies have inadequate supplies of gold bullion coins to meet order demand, are they paying a high enough bid price?  A $1787 spot price seems close to where most sellers would clear before taxes $1800 on most gold bullion coins they sell back to a dealer.  That is with about $10 of insurance and shipping costs. 

TIPs vs TBTF bank  preferreds as also made recs in this week's Barrons?  What kind of inflation protection could you hope to get in that type of preferred,  if you drew the 2.25% that TIPs probably will struggle to produce in the forward 12 months , and then continuously re-invested the overage near another 2.25% in more TBTF bank preferreds.  How long did even that junk bank WFC-L persist below $1300?  Cuts in TBTF bank dividends will not effect their payments of Preferred stock dividends unless the Bank eliminates the common dividend altogether.   TBTF ETDs as MER-K are likely even safer than the traditional preferred shares of BAC. So many new TBTF bank preferreds are now issued as convertible to a varying interest rate at the first call date.  Many of those will add LT inflation and interest rate risk protections.  MER-K ...Great for Roth investing.  The Secure Act may eventually necessitate creating legislation limiting Roth conversions.  Preparing for higher taxes.... 

Bar Stool Sports vs Warren?  Barrons is going towards a New Yorker Magazine format with the clever cartoons and jokes?

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Participant ○

Re: From Barron’s, June 22, 2020 (Part 1)

When is confirmation bias no longer confirmation bias? When it comes seeking you (SE algorithms notwithstanding). The Greenspan put was one put too many. The Powell put is probably one too many. At least, that seems to be the overwhelming consensus that seeks me out. If you want further evidence of distortions, FX is now perfectly negatively correlated to the S&P 500.

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Contributor ○○○

Re: From Barron’s, June 22, 2020 (Part 1)

Thanks YBB.

What concerns me the most:

Income inequality: There is worry that recovery may be like K instead of V, U, W; in a K recovery, some industries will recover quickly while others may see long and slow declines before rebounding. While wealthy save, much of the consumption comes from middle- and lower- income classes.

Wall Street/Stock Market unrest: As societal issues and speculation collided, trading in some unlikely stocks surged... A 20-year old committed suicide after incurring gigantic losses from options trading. There is crazy and irrational speculation in the market.

 

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Frequent Contributor

Re: From Barron’s, June 22, 2020 (Part 1)


@Mortmain wrote:

When is confirmation bias no longer confirmation bias? When it comes seeking you (SE algorithms notwithstanding). The Greenspan put was one put too many. The Powell put is probably one too many. At least, that seems to be the overwhelming consensus that seeks me out. If you want further evidence of distortions, FX is now perfectly negatively correlated to the S&P 500.


So what is the significance of FX being perfectly negatively correlated to SP 500 after taking into account that 20% of the Market cap of the SP 500 consists of 4 FAANGs and MSFT?

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Frequent Contributor

Re: From Barron’s, June 22, 2020 (Part 1)


@51hh wrote:

Thanks YBB.

What concerns me the most:

Income inequality: There is worry that recovery may be like K instead of V, U, W; in a K recovery, some industries will recover quickly while others may see long and slow declines before rebounding. While wealthy save, much of the consumption comes from middle- and lower- income classes.

Wall Street/Stock Market unrest: As societal issues and speculation collided, trading in some unlikely stocks surged... A 20-year old committed suicide after incurring gigantic losses from options trading. There is crazy and irrational speculation in the market.

 


This is nothing new. Back in the 1990s when day trading became a popular obsession with retail investors there were many instances of suicide and even murder by day traders who lost their stakes due to bad trades.  A day after a day trader was wiped out because of leveraged trades when stock market dropped 200 points after a bad economic report, he walked into the office where he traded stocks and killed 9 people in addition to his wife and 2 children. Google Mark Barton. 

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