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Frequent Contributor

From Barron’s, June 8, 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: The stock market is always right. The fantastic stock rebound from March 23 low had anticipated a rapid turnaround in the job market. And previously, stocks were falling already by the time WHO declared Covid-19 pandemic on March 11. Some jobs improvement is due to small businesses recalling workers so that their PPP loans can be waived. Improved jobs data may reduce the likelihood of a new stimulus bill but remember that election is 5 months away. Booming stock market and rising Treasury yields may cause the Fed to tighten. What to buy now? Cyclicals and value stocks are catching bids now while momentum stocks have faded – sort of the last shall be first and the first last. Top 25% of stocks by valuation have P/E of 38.3 while the rest 75% have P/E of only 14.5. So, the broad market is not expensive. And expect hiccups along the way.

Airline stocks [AAL, UAL, SAVE, etc] were flying high on just a hint of good news and there may have been a short-squeeze; bearish analysts reiterated their bearish recommendations. Domestic leisure travel [ALGT, SAVE, JBLU, ALK] may rebound faster than business and international travel. Some highly indebted airlines [AAL] may have to issue equity. To avoid specific stock risks, consider airline companies ETF JETS that includes US and international airlines, airport and terminal service companies and some manufacturers.

 

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 but now there are noticeable single-digit % probability for rate rise.

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

 

For the week [index changes only], DJIA +6.81%, SP500 +4.91%, Nasdaq Comp +3.42%, Russell 2000 +8.11%. DJ Transports +10.07%; DJ Utilities +2.43%. [Airline companies ETF JETS +33.13%]. US$ index (spot) -1.41%, oil/WTI futures +11.44%, gold futures -3.50%.

YTD [index changes only], DJIA -5.00%, SP500 -1.14%, Nasdaq Comp +9.38%. [Airline companies ETF JETS -33.22%]

 

Pg M4, Europe: UK’s GlaxoSmithKline [GSK] is attractive due to its pipeline of drugs. It will spinoff consumer-health division [brands Advil, Panadol]. It has a joint venture Viiv Healthcare with PFE.

 

Pg M4, Emerging Markets: US-China trade tensions won’t impact Taiwanese TSM, S Korean Samsung Electronics, SK Hynix. Much of their technology is US-based, so these chip makers will need US license/approval to sell to Chinese companies such as Huawei. But there are loopholes – they may sell to 3rd parties or claim to sell items not using US technology.

 

Pg M6, Commodities: Oil has made a huge comeback as supply and demand are coming into balance. There are production cuts from OPEC+ [its next meeting is June 6-7 or 9-10] and the US and rebound in demand as economies reopen; inventories may fall in Q3. But there is risk that supply-demand imbalances may develop again in Q4 – lower seasonal demand; possible 2nd wave of Covid-19; rise in production if prices are high.

 

Pg M5, Options: To play this incredible gravity defying market, sell calls and/or puts on stocks or stock indexes. [Typically, one sells/writes calls on stocks that one is willing to give up on decent bounce, or sells puts on stocks one is willing to own on declines]

 

[SP500 VIX 24.52, SKEW 129.87] [10-Yr TYVIX N/A] [Yahoo Finance data]

 

Pg M25, M32: A great week again in Europe [Greece +7.04%, Belgium +6.73%, Denmark +1.16%] and a great week in Asia [Indonesia +7.69%, HK –0.65%] [weekly data missing] The equity CEF index [data to Thursday] outperformed the DJIA and its discount was -7% [wide fluctuations between -4% to -16% over the last few weeks].

Treasury rates 3-mo yield 0.15%, 2-yr 0.22%, 5-yr 0.47%, 10-yr 0.91%, 30-yr 1.68% [Treasury data*]. Dollar was down, DXY 96.95, -1.35% [M28]. Gold [Handy & Harman spot, Thursday] fell to $1,683, -2.6%; the gold-miners fell [M30]. [^XAU was at 114.87, -4.36% 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 1.49%; 3-mo Jumbo CD 0.50%, 1-yr CDs 1.24%; 5-yr CDs 1.59% [M26].

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

 

Pg 22: Cover Story, “Twitter is Once Again Leading the National Debate. Jack Dorsey Says That He’s Ready This Time”. TWTR fwd P/E 80; fwd P/S 6.5. Algorithmic tagging of tweets has upset President Trump who issued an Executive Order to dilute legal protections for social-media platforms that exist under 1996 CDA, Section 230, but that is unlikely. TWTR stock has lagged its peers. Ad revenue from events [sports, concerts, product launches] is down due to Covid-19 business shutdowns. Platform is being upgraded. Activists Silver Lake and Elliott Management are involved. CEO Jack Dorsey is running both TWTR and SQ.

 

Pg 6, Up and Down Wall Street: Wall Street rally defies Main Street’s stark realities [Covid-19 impact (deaths; business shutdowns); riots/demonstrations]. Explanations include concentration of stock ownership among the wealthy; markets looking far beyond the near-term troubles; humongous monetary and fiscal stimulus. The stock and bond market rebounds have been spectacular – Nasdaq Comp was at all-time high intraday on Friday and other major indexes were within striking distances from their all-time highs [but sector performances have been very uneven and uncoordinated]. The jobs report was bad but not as bad as expected. Due to depressed earnings, the stock P/E is among the top 10% in history [but that isn’t unusual in the middle of a recession]. There is a huge disconnect between the stock market and economy.

That was a huge miss on jobs report, +2.5 million jump vs –7.5 million decline expected; unemployment rate fell to 13.3% vs 19.1% expected. Recent and more frequent data were indicating that the jobs report may be better than expected but what were the reasons for such a huge miss? Possibly strong monetary and fiscal boosts; misclassification of status [e.g. of workers formally on payroll but not working]; limited opening up of restaurants that employ millions. Last week, the period for the use of PPP was extended to 24 weeks [vs 8 weeks before] and some terms were relaxed [only 60% has to be used for payrolls vs 75% previously]. On the other hand, state and local government payrolls continued to shrink. President indicated support for another stimulus bill that may include support for state and local governments and for infrastructure spending. Signs of recovery may reduce prospects for a new stimulus bill but remember that this is an election year and politicians may suffer if they ignore police, firefighters, healthcare workers and teachers while bailing out the airlines.

 

Pg 9, Streetwise: What to do when both bulls and bears make sense? Stick to the allocation that you are comfortable with. Bulls are looking far beyond into the future, but bears say that we have to get through the bad current conditions first. SP500 earnings estimates are $126 for 2020 [vs $162 in 2019] and $180 for 2021 due to the magic of huge monetary and fiscal stimulus. Full recovery may take a long time. Suburban housing may become attractive again although Zillow [Z] hasn’t noticed that in the searches if its listings databases. But people who have overinvested in big houses may not see much price appreciation.

 

More later….

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