US Futures gapped down again on Monday adding to Friday's losses. Calls for a reality check are starting to be made, experts that were saying "don't fight the Fed" presuming that the massive stimulus would keep markets from falling got caught flatfooted on Thu when EU figures came out. I do think that the stimulus will create a host of zombie companies but cannot avoid an earnings-driven recession as the consumer economy has stopped dead.
Weak manufacturing PMIs whacked European shares ending over 2% down. The US was a different story, after a bad start, a late rally lifter the DOW from -300 to +50, it seemed that again US markets celebrated bad news of shocking US factory orders and durable goods orders indicating that manufacturing output is in retraction in line with weak consumer demand. I re-iterate that although players seem to believe that the massive stimulus and bail-outs will solve all problems, these do not lift earnings for all. Some sectors will benefit from expected increased Gov. spending to create jobs and also due to some wind-down of globalization assisted by grants, however, at the end of the day, the consumer still represents 70% of the US economy... the 30+m unemployed won't be spending and so companies won't have the increased earnings the markets are factoring into stock prices. A recent example is Carnival Lines offering their cruises at an average of $28/day inclusive of all meals (it's probably cheaper than staying home). Airlines and other sectors, even commercial rentals, will be forced to follow along similar lines... offering prices that are below cost to help pay the cost of maintaining existing assets, such action will generate negative earnings, requiring increasing debt and/or depleting capital, markets pricing stock on projected positive earnings is pie-in-the-sky. As Bwick pointed out a few post ago... The Buffett Indicator still shows that stock prices are "Significantly Overvalued". Based on historical S&P Cap v. GDP ratio, it is likely that anyone entering the market now will end the year with a negative return (including dividends).
Trump is pushing for a full reopening of businesses and it appears that most State Governors will go along with that while trying to keep social distancing in place, markets are rallying on the news without due-diligence consideration of what the new environment looks like, I believe that over-optimism is detached from reality. The 30m unemployed won't disappear overnight and earnings guidance for Q2 and Q3 is yet to be announced, I still think that a new sell-off will be inevitable when the damage to the economy will be quantified, something that can be done once re-opening is in full swing. Up until now, optimism was based on hope, now we will see bankruptcies & guidance telling markets whether the hope was in line with reality. Hertz is a recent casualty, many more iconic and even more unheard-off companies will close, shrink or restructure, once the bail-outs stop paying their workers, many of those workers will join the 30m unemployed. This is the reality.
US markets stayed flat most of the session to then tumble almost 1% in the last few minutes, Movement wasn't enough to predict the next direction but considering that the US economy is on the verge of re-opening, one would expect the knee-jerk reaction of optimistic bulls would overpower the bears but, at least for Wed, the bears were in charge. Perhaps the 20.2m drop in private payroll for April (the worst one month job lost in history) or the overall unemployment rate brushing 20% had something to do with sell-off. I haven't bashed the Euro experiment for a while but calls to abandon the experiment are heating up again, this time instead of the Southern countries making the noise it was the European Commission itself warning that the disparity in growth rates among countries in the common-currency area could put the future of the euro at risk. Slow-motion realization by Commission but it's about time the whole experiment was looked at seriously and hopefully abandoned at a cost to the Germans and a gain for all the others. GDP in the Eurozone has collectively contracted 7.7% in Q1.
A frightening statistic: It's been shown that in NY 66% of new infections were from people who had largely been sheltering in place.
Fri unemployment figures saw a record number of Americans lose their job, and yet stocks moved higher. A paradox? considering the emotional toll on millions of people without a job, not to mention their bosses who might have lost the whole business, I'd say the effected people should feel insulted to see markets celebrate their misfortune. More analysts than not are in "herd" mentality justifying the rally by saying "The Fed is more than compensating for a reduction in earnings so just ignore the bad because things always recover" Even Warren Buffett joined that chorus by saying “Nothing can stop America, the American miracle, the American magic has always prevailed and it will do so again.” But, I don't see Mr Buffett buying, in fact, he has sold quite a lot. Maybe he is seeing what I see... the stimulus is supposed to preserve jobs... it pays the workers, the rent and transfers much of the burden to large landlords and banks ordering these not to evict, not to foreclose, forgive interest, don't charge penalties and defer mortgage payments. If the stimulus was to keep business going and workers employed with the above measures, why then are there 20+m unemployed? Perhaps the stimulus is by-passing many so many small businesses are shutting down and many "big" landlords and banks are cutting staff due the lost earning imposed on them. In simple terms, Buffett is not ignoring the bad and neither am I, things will recover but many businesses won't survive and few will get to the pre-March level for quite some time. I see average earnings remaining in recession for many quarters, markets won't be able to ignore that and will eventually reflect reality. I acknowledge that I am in the minority to see things differently but I see them in the only way that makes sense to me.
Here is a breakdown of lost jobs, the largest sector, representing a third of the total is unlikely to recover for at least 2 years. The purchasing power of the consumer (70% of the US economy) is greatly diminished, believing that all will be back to normal in 6 months or so is unrealistic. I again say that there are many unknowns creating an environment of deep uncertainty, never have I seen markets rally on uncertainty.
I put money where my mouth is. I am currently positioned for a sell-off, perhaps to halfway between current and 23rd March lows.