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Frequent Contributor

From Barron’s, May 25, 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: A great week for stocks that continue their march higher and unconcerned. The news has been improving – the Fed Chair Powell has been reassuring; positive news on vaccine; more states reopening. Still, the SP500 has been flat for almost a month. It is caught between trillions of liquidity and huge drop in earnings. When it has been trapped between 50-dMA [2,700] and 200-dMA [3,000] for so long, the next move is more likely to be down. YTD SP500 is down -8.5% and Nasdaq Comp up +7.8%, but David Rosenberg notes that his Payment Stress index [includes banks, REITs, etc] is down -25% and Reopening index [includes malls, airlines, hotels, etc] is down -40%. He is looking for a retest of the lows. Risks are known: 2nd wave of Covid-19 in Fall; US-China tensions; deep recession. But the outcomes are uncertain. Be careful with new buys near rebound highs.

Market breadth is narrow, in fact lousy. Nasdaq comp is up YTD and is driven by its 10 big stocks [MSFT, AAPL, AMZN, GOOGL, FB, etc] but typical Nasdaq stock is down -19%. As the economy reopens, attention will shift from current leaders [expensive growth] to laggards [cheaper value]. A similar observation can be made for SP500.


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. ]


For the week [index changes only], DJIA +3.29%, SP500 +3.20%, Nasdaq Comp +3.44%, Russell 2000 +7.84%. DJ Transports +9.14%; DJ Utilities +2.61%. US$ index (spot) -0.60%, oil/WTI futures +12.98%, gold futures -1.07%.

YTD [index changes only], DJIA -14.27%, SP500 -8.52%, Nasdaq Comp +3.92%. [R2000 -18.76%]


Pg M4, Europe: Swiss temporary staffing agency Adecco [ADEN.sw/AHEXY] is attractive near all-time low. It will benefit from reopening and economic rebound in many countries that it operates in.


Pg M4, Emerging Markets: Where is China’s corporate debt crisis? With yields falling, many corporates have high single-digit returns and there may be more upside. Corporate debt in December 2019 was 120% of GDP [vs 50% in the US] and that has gone up due to Covid-19. But consumer debt is only 44% of GDP [vs 75% in the US]. Foreigners are buying hard-currency denominated debt including HY property debt. Young people buy condos or homes before getting married with 30-40% down payments and new constructions are sold out almost a year in advance.


Pg M6, Commodities: Gold rally [+15% YTD] should continue but moves will be volatile; it is only 7.4% from all-time high of $1,891.90 on 8/22/11. Global monetary and fiscal stimulus and rising debt would support gold.


Pg M5, Options: Slack [WORK] is a top at-home stock. Ahead of its earnings on June 4, sell puts and buy calls to take advantage of its high implied volatility.

[SP500 VIX 28.16 (still high), SKEW 125.78] [10-Yr TYVIX 4.71] [Yahoo Finance data]


Pg M23, M28: A great week in Europe [Finland +6.88%, Belgium +0.25%] and an up week in Asia [Malaysia +3.13%, HK –5.38% (China flexing muscle)]. The equity CEF index [data to Thursday] outperformed the DJIA and its discount was -7.5% [wide fluctuations between -4% to -16% over the last few weeks].

Treasury rates 3-mo yield 0.12%, 2-yr 0.17%, 5-yr 0.34%, 10-yr 0.66%, 30-yr 1.37% [Treasury data*]. Dollar was down, DXY 99.78, -0.58% [M31]. Gold [Handy & Harman spot, Thursday] was flat $1,734; the gold-miners fell [M34]. [^XAU was at 124.24, -1.87% for the week]

*Treasury Yield-Curve

Top FDIC insured savings deposit rates*: Money-market accounts 1.49%; 3-mo Jumbo CD 0.50%, 1-yr CDs 1.29%; 5-yr CDs 1.98% [M29].

*For local rates


Pg 23, [Online] Cover,Small Businesses Are the Key to Reviving the Economy. They Face an Existential Threat”. Many small businesses [SBs; less than 500 employees] that survived 9/11 and 2008-09 may have trouble this time. SBs account for 50% of employment, 50% of GDP, 40% of business revenues. Small-cap R2000 [a crude proxy for SBs] is still down -20% YTD vs large-cap SP500 that is down only -8% YTD. Two rounds of PPP have helped but the business hasn’t picked up enough to recall employees. PPP has been to support employees, not the SBs themselves. Many SBs that use freelancers/contractors [e.g. events-related SBs] are not eligible for PPP. Tax filing delay to July 15 has also helped. SBs have smaller cash cushions and lesser access to credit. Almost 50% of SBs remain closed; 67% of jobs lost are in SBs. Industries hurt the most will be those where social-distancing is difficult [retail, restaurants, personal services]. Retail sales are down even for grocers and other essential businesses that are open. It is unclear how many SBs will fail and how many temporary layoffs will become permanent. The fate of SBs is tied to the outlook for consumers.


Supplement Guide to Wealth with Top Advisor Guide by states. Soft features are on family values; liquid-alternative funds [OEFs/ETFs with hedge-fund like strategies; mentioned are OEFs RLSIX, ABRVX, AVOLX, AQMIX, ABYIX, MAFIX, CPRFX, BDMIX, JHQRX, DRRIX, CMNIX, BXMDX; ETFs CLIX, TAIL, DBMF, PHDG]; active funds for this weird market [equity OEFs TRBCX, QASGX, AMRFX, AKREX, ODMAX; bond OEFs BAGIX, FTBFX, PONAX, DFGBX; active tech ETF ARKK].


Pg 7, Up and Down Wall Street: People at home are hooked on streaming, videogames, cooking/baking and day-trading. Zero-commissions, fractional-trading [now everyone can own little bits of AMZN, GOOGL, TSLA, etc], deep stock dive in March, CARES stimulus checks and being stuck at home have contributed to the growth of day-trading. The odd-lot volume is up; small lot [ < 10 contracts] options volume is up; bank transfers to brokerages are up. TINA and FOMO are in full force due to ZIRP. They are not all chasing momentum and speculative healthcare stocks but are also playing with depressed stocks [airlines, energy, F, GE, etc]. This retail stock mania has been a significant factor in +30% move from March lows, but is it sustainable?

High-quality munis are offering higher after-tax returns [accounting for federal, state and local taxes] than some HY corporates; 30-yr AAA munis have yield spread of 60 bps over similar Treasuries; mentioned are some examples from GA, OH, CA, NY. Strong states include WA, WI, FL, VA, UT; weak states include IL, KY [guess who recently suggested a bankruptcy route for states?], NJ. Munis are lagging as they haven’t gotten the same boost from the Fed as corporates and MBS. There are also concerns about soaring Covid-19 related state and local budget deficits [$200 billion?] – these aren’t directly related to the previous pension deficit problems. Funds mentioned are OEF VWLTX; CEFs BTT, NEA.


Pg 9, Streetwise: People at home are doing more outdoor activities – biking, boating, barbeques, inflatable/regular pools. Private L.L. Bean online sales are up even with most of its stores closed [its normal in-store sales are only 25%]. Beneficiaries include RV makers [WGO], pool suppliers [POOL], picnic/camping products [YETI], decking materials suppliers [TREX], landscaping suppliers [SITE], etc. These are in addition to the typical at-home plays [ZM, PTON, WORK, FB, AMZN, EBAY, etc]. Retailers with significant e-commerce operations are also doing well [WMT, TGT, LOW, HD, etc].

[Hough’s piece wasn’t picked but it fits here] ViacomCBS [VIAC] will have live sports in June [PGA on June 11; NFL in Fall; initially without fans] to supplement entertainment and news. Its ad-supported free streaming Pluto TV has grown rapidly globally. There is a backlog of shows and their production will start ASAP in Summer. Ads are picking up in Q2 and Q3 will be much better. Film releases have been delayed [A Quiet Place 2, etc]. Work from home using Zoom/ZM has been fine. The stock has rebounded from the low.


More later….

1 Reply
Explorer ○○

Re: From Barron’s, May 25, 2020 (Part 1)

Thanks Yogi !!!

Another great synopsis.

I prefer to see the markets / S&P as range bound and contained for now,  rather than "trapped".  Trapped may suggest market volatility is to diminish?  Just as Rosenburg is way too bearish, any suggestion that a 2700 - 2720 ish  50 DMA may be the next bottom is likely way too bullish.  I would agree that a test of the 50 DMA would be a great place to fill 25% to 33% of the current wish limit orders on our shopping lists for putting towards some partial trading later,  and establishing some LT investment positions. The next <1 year bottom is likely closer to 2450 or near some 50% retracement levels of current highs.  But that could also include the R-2000 retrenching to it's own 50 DMA levels.  My IWM shares are still down 1% and 2% on some 2017 cost basis'.  

Market breath has INDEED been narrow.  Late in the previous week and all last week I was dumping tranches of the outperforming TECH AND FAANGs.  First dumping the trading shares of FDN, then letting a couple PNQI (FB)  shares go, dumping 4 shares of FTEC,  this past Thursday it seemed as if the king had no clothes trying to stay above $2400 in the previous 3 weeks and was continuously slipping below that.  So I dumped a highest cost basis share of AMZN @ $2508.87.  then I sold one of my QQQ shares.   As you / Barrons point out our attention is already shifting.  ALK put on a  22% five day rally.  NJR put on an 11.2% five day rally.  Airlines and Utes and Frampton (?) coming alive?   Maybe the entertainment and hospitality themes can accommodate the old boy before the summer's end?  

The consensus interest rate outlook may also be a bit too sanguine.  Maybe the currencies of the other G-7 will finally strengthen but if they continue weakening and the Euro moves to par the US $ then ZIRP can easily morph into NIRP very quickly.  Not sure which is chasing it's own tail US interest rates or GOLD "the  other currency" but still not that widely accepted as such.   I have gold hitting some resistance near $1787 as the small numismatic / guaranteed purity premium of bullion coins pushes those up to over $1810 on the bid.  The sellers before taxes clearing a full $1800 after shipping and other handling costs to get such merchandise insured, to a dealer for sales.  Beyond that it will be the continuing floods of liquidity both from the FED and the US Treasury exacerbated by weak economic conditions that send gold gradually towards $2400.  Until that occurs the possibilities of NIRP in the US become ever more probable.  AS gold moves over the old records of 2011 also precipitiated by economic uncertainty of a nascent rally out of the 2009 lows and a year that saw an 18% decline in stocks (RE-TEST), the majors and especially the Jrs will be putting more and more less than 5 gems per ton ore into productions.  In the last rally the majors conically ramped their shareholders by with holding the windfalls on production margins from them in order to pursue purchase of grossly over valued proven reserves often 100s of miles beyond existing or still non existing infrastructures of roads and power lines.  NEM is one company that has acknowledged their poor behavior and is perhaps attempting to index it's dividends if ever so loosely, to spot gold prices.  The US trade and socio-economic tensions with China seem to also be building.  China widely regarded as being the worlds largest gold producer with the most in reserves.  Their latest versions of THE Pandas gold bullion coins are greatly improved on artistic and casting quality.   Vs the old prune on a MAPLE (?)

IMO WORK AND ZM are a bit too risky DOCU is probably a better idea and will look even better when some big FAANG or equivalent market Cap buys them out. 

Savings deposits are morphing into the "NEW" bonds as far as what vehicles are left to lend stability and ballast to portfolios against volatility.  Given the ridiculous excess of the FED AND the US Treasury it is only a matter of time now as to when the markets themselves take on the task Powell set for himself AND THE Fed when he became the Fed chair heir apparent into the 2018 4th quarter and the ensuing rout in bond FUNDS which turned out not to be SAFE and not to be bonds either.  

I understand the long list of funds is Made up of funds that seek to even out volatility.  I recognized the AKREX of the list as one standout.  But more for out performance in general.  Others I like are MGGPX, AOFAX, FTQGX, BIOPX, KLCAX, ETGLX, LGLAX, WAMCX, MACGX, PSGCX, WMCRX, PHSKX, CTCAX or CTHCX and CPOAX.  ETFs QQQ, FDN, IETC, and PNQI As previously offered,  stuff on the wish list on any move towards or below the S&P  50DMA or in the small caps R2000 50DMA.  It is often a good idea when buying O/E funds to include a few "C" share options.  "C" shares have no entry loads but they also do not have ST trading fees either.  So if  "C" share allocation to Tech, small cap or large cap ends up posting a +7%  4 week gain you can just pay that 1% (LOAD) and harvest a +6% of at least something of the purchases with no onerous ST trading fee. In most C share funds those 1% exit loads are repealed after one full year and go away. 

People at home are day trading?  Day trading has a very broad interpretation and can also be interpreted as seeking gains in ultra ST trades of a week even up to to 3 or 4 weeks or longer.  The broadening of the market movers was showing at the end of this last week.  ALK moved up 22% in just the last 5 trading days.  NJR up +11% in the same 5 days.  The "Summer"  ice and snow melts in Alaska are peaking and rivers are rising near their headwaters enticing the salmon to run.  So there is plenty of fresh fish cargo coming out of Alaska for the airline?  So many remote areas only served by boat or passenger jet /air freight service.  NJR is coming up on the usually global warming enhanced summer A/C demand period.  8 or 9 million enduring brutal summer temps creating more and more NG demand for the electric utes.  

Looking at the muni Markets...On the list of states we find all the usual suspects with under funded pension funding fiascos.  Illinois, KY, NJ, PA CT and RI have all intentionally pursued deliberate pension under funding which as Madame Death predicted is affecting their municipal bond credit ratings.  If a bank can not repo a piece of Real Estate it has taken as collateral and utilities can not shut off those who can not and the rest who refuse to pay, what guarantees are left even for revenue bond holders that the income stream acknowledged as being due to pay P&I will not be pirated to meet actuarially unsound and persisting ridiculous benefit DECOMPRESSION pension payouts ?  The US public pension funds just had their worst fiscal qtr ever ending March 31.  Many will end their 2020 fiscal years on 6/30/20 but not have any fiduciary obligation to report their fiscal year end audit results until sometime in Dec.  During the holidays when no one wants to pay attention to such boring stuff as we instead party hardy on a Ship of Fools.   At least Illinois has a lot of people 17 million, to share in the $28 billion or so in under funding of pension obligations.  On a per capita basis though there are a lot of states with less than 3 million pops that have even bigger unfunded liabilities on a per capita pop basis, even with less than $10 billion in unfunded liabilities.  

Maybe it is ironic that Mitch McConnell of KY has to lead the opposition to wholesale national profligacy but the debate is now shifting in Washington as to how much of a bailout the national public pensions with nearly $200 billion in under funding will receive.  Won't the most profligate states generally the "blue"  states with the highest SALTs DESERVE to get most of those public pension bailouts WITHOUT first adopting any kind of accountability such as ERISA which has worked fairly well despite  some failures, since 1974 for the private sector unions.

So last W/E it was Macy's this W/E it's Hertz.  So long "GOOD NEIGHBOR SAM".  Let Hertz show you the way to Chapter 11 next W/E.  Something similar as to the developing clarion call,  based on that famous quote from John Paul Jones?


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