Month: February 2020

Authored by Peter Garnry, head of Equity Strategy, Saxobank,

Summary: 

In this equity update we talk about the growing evidence of the global supply chain grinding to a halt which could very quickly lead to a significant impact on economic activity. Something that is clearly not being discounted in equity markets. So it naturally begs the question whether yesterday’s new all-time high was a false breakout.

On January 20 on our Market Call podcast we flipped our tactical view on equities from long to short as the unknowns and nonlinearities created hidden risks that should be avoided. Our communicated stop loss was new highs in S&P 500 and that came yesterday as on balance earnings have been good and investors buying the narrative of monetary and fiscal impulse offsetting whatever weakness coming out of China. Being honest to our stop loss we flipped our tactical view. Already today we trending somewhat down in Brent crude and global equities. That coupled with price action among global logistics firms and indications on demand in China and Asia is making us questioning whether the breakout yesterday was false.

The global supply chain freezes

One thing that is getting more and more evident is that the global supply chain is clogging up with shipping prices tumbling as ships are idling in ports. Maersk, the world’s largest shipping company, have seen it shares tumble 23% from the peak in December and 6% since the coronavirus hit the official newswire on January 20.

Today the world’s largest car manufacturing plant in South Korea was also added to the casualties as Hyundai suspended production due to lack of parts coming from China. With fine-tuned global supply chains manufacturing companies could grind to a halt or partial halt as China is the world’s factory.

The second derivative of this is lower revenue after inventories are depleted which then quickly eats into operating cash flow generation and then cash balance. If a company is operating with a low cash balance this means that credit lines have to get increased with banks running greater risk. It’s not difficult to see that a couple of more weeks and this could develop into a full blown disaster for global growth.

One of the world’s largest logistics firms, DSV Panalpina, was out with its 2019 annual report today and the CEO was sending a warning signal to the market that’s probably just drowning in the regular news flow.

It is difficult to predict the market situation in 2020; currently the corona virus situation is impacting global supply chains and creating uncertainty. However, at this stage it is not possible to predict the financial impact,” says Jens Bjørn Andersen, CEO

Source: DSV – 2019 Annual Report

The impact from the coronavirus is real and the economic costs are accelerating and even worse the companies best positioned in the global supply chain cannot even indicate the cost short-term. On Monday we will go through the global logistics industry and the dynamics playing out in the global supply chain. Going into the weekend we maintain our long equity view respecting the price momentum, but we maintain a flexible mindset and will flip to short if the news and price action on balance changes enough to the downside.

Six women of color have quit Sen. Elizabeth Warren’s Nevada campaign just before the state’s caucuses over a “toxic work environment in which minorities felt tokenized and senior leadership was at loggerheads,” according to Politico.

The six staffers represent just under 10% of Warren’s 70-person Nevada team. Three of them said they felt marginalized by the campaign, and that things only got worse after they took their concerns to human resources or their superiors.

“During the time I was employed with Nevada for Warren, there was definitely something wrong with the culture,” said field organizer Megan Lewis, who joined the campaign in May and left in December. “I filed a complaint with HR, but the follow-up I received left me feeling as though I needed to make myself smaller or change who I was to fit into the office culture.”

Another recently departed staffer, also a field organizer, granted anonymity because she feared reprisal, echoed that sentiment. “I felt like a problem — like I was there to literally bring color into the space but not the knowledge and voice that comes with it,” she said in an interview.

She added: “We all were routinely silenced and not given a meaningful chance on the campaign. Complaints, comments, advice, and grievances were met with an earnest shake of the head and progressive buzzwords but not much else.” A third former field organizer who was also granted anonymity said those descriptions matched her own experience. –Politico

This couldn’t come at a worse time for Warren as the Feb. 22 Nevada caucuses are fast approaching. Of note, the ex-Native American Senator came in third during this week’s Iowa caucuses. Politico notes that Warren has visited Nevada the least – spending just 12 days there, which was apparently another factor in her campaign staff’s discontent. What’s more, Warren’s campaign has scaled back their TV ads in the state by around $140,000.

Responding to the departures, Warren’s campaign said in a statement: “We strive for an inclusive environment and work hard to learn and improve,” adding “We have an organization of more than a thousand people, and whenever we hear concerns, we take them seriously. It’s important that everyone who is part of our team has a voice and can be heard. That’s why we are proud that we have a unionized staff and clear processes for issues to be addressed.”

Read the rest of the report here.

With the sellside piling in and rushing to outforecasting itself on how much global GDP growth will be hit in Q1 (and onward) as a result of the global coronavirus pandemic, which prompt Goldman to slash 2% from its global Q1 GDP forecast, and JPM to predict that China’s economy has effectively frozen in the first quarter, it was only a matter of time before the Fed jumped on the bandwagon and used nCoV-2019 as the latest bogeyman giving Powell free reign to cut rates and/or launch QE5 (as a reminder QE4 which was launched to “fix” the repo market is set to wind down in Q2).

And sure enough, in the latest semi-annual Monetary Policy Report submitted to Congress, the Coronavirus indeed makes a triumphant appearance, with the Fed board warning that the coronavirus outbreak “presented a new risk” to the economic outlook for the U.S. and warned of disruptions in global markets.

Specifically, with “fragilities in the corporate and financial sector” leaving China vulnerable to adverse developments, “because of the size of the Chinese economy, significant distress in China could spill over to U.S. and global markets through a retrenchment of risk appetite, U.S. dollar appreciation, and declines in trade and commodity prices” the Fed warned, adding that “the effects of the coronavirus in China have presented a new risk to the outlook.”

In short: if a global virus pandemic is about to halt global growth, the Fed is confident it can fix it by just making money even cheaper and/or printing it outright.

Never one to miss a market downtick, the Fed also pointed out that “in recent weeks, equity and bond markets gave up some of their gains as uncertainty about the economic effects of the coronavirus weighed on investors’ sentiment.” It was not immediately clear if the Fed has hit “refresh” since last Friday, when stocks soared over 3% in the past week, rising to new all time highs as markets priced in precisely the likelihood that the Fed would step in and “fix” any stock selloff as a result of the world’s global pandemic in decades.

The report, which was published ahead of Powell’s Feb 11 biannual testimony before Congress in which he will discuss the economy and monetary policy before the House Financial Services Committee, and the Senate banking panel the following day, also noted that “asset valuations are elevated and have risen since July 2019, as investor risk appetite appears to have increased”, oblivious to the grotesque irony that it was the Fed’s own balance sheet expansion by half a trillion dollars that sparked this asset “elevation”, and which shows no signs of slowing down. As a reminder, overnight SMBC Nikko explained just how the Fed’s balance sheet expansion is elevating stock prices: we urge Powell and all members of Congress to read the post.

In addition to noting “elevated asset valuations”, which as we showed recently as the highest since the dot com bubble..

… a section on financial stability was more descriptive than the previous report on possible points of stress. The Fed said that low interest rates had elevated asset valuations, and it also pointed to risks in the corporate debt markets. Specifically, the Fed has now joined the fallen angel downgrade warning, stating that “the concentration of investment-grade debt at the lower end of the investment-grade spectrum creates the risk that adverse developments, such as a deterioration in economic activity, could lead to a sizable volume of bond downgrades to speculative-grade ratings. Such conditions could trigger investors to sell the downgraded bonds rapidly, increasing market illiquidity and causing outsized downward price pressures.”

Of course, the Fed also discussed the Repocalypse – the event that triggered not only the hundreds of billions in liquidity injections via repo, but also QE4 – noting that volatility in repurchase agreement markets in September “highlighted the possibility for frictions in repo markets to spill over to other markets.”

Finally, the report also dedicated a section focusing on the slowdown of manufacturing in the U.S. in 2019. The Fed attributed the decline to a range of issues including international trade tensions, weak global growth, softer business investment, lower oil prices affecting drillers and the slowdown in production of Boeing Co.’s 737 Max airliner, to wit:

The slump in manufacturing last year is attributable to several factors, including trade developments, weak global growth, softer business investment, lower oil prices engendering a cutback in demand by drillers, and the slower production of Boeing’s 737 Max aircraft due to safety issues

Ominously, the Fed also said that when considering the implications of these declines in manufacturing production for the broader economy, “it is important to recognize that this weakness has likely spilled over to other sectors.”

Which is code for “even more money printing is guaranteed“. The only question is if it comes before or after negative rates.

The full report can be found here (pdf link):

Authored by Mac Slavo via SHTFplan.com,

The United States has implemented travel restrictions in recent days to keep the fast-moving coronavirus that has crippled much of China from spreading across America. But one epidemiologist is warning it won’t work…

“I have never seen instances where that has worked when we are talking about a virus at this scale,” epidemiologist Jennifer Nuzzo, a senior scholar at Johns Hopkins University’s Center for Health Security, testified before the House Foreign Affairs subcommittee.

Respiratory viruses like the one that’s sickened more than 24,300 across the globe and killed at least 490 in China “just move quickly,” she said, according to a report by CNBC. 

“They [new viral outbreaks] are hard to spot because they look like many other diseases. It’s very hard to interrupt them at borders. You would need to have complete surveillance in order to do that. And we simply don’t have that,” she said.

She also says that worrying about stopping the spread of the virus, when you can’t do that is diverting resources away from fighting the disease. So far, the best way to fight the virus is to wear a face mask.  Even a surgical mask is better than nothing. Masks have been slowly becoming available for purchase again, however, the price on them has risen quite a bit.  There is obviously more of a demand than supply right now.

Rep. Ami Bera, D-Calif., chairman of the House Foreign Affairs Subcommittee on Asia, the Pacific, and Nonproliferation, announced the hearing last week.

“While the threat of the coronavirus is relatively low in the United States at this time, we must be vigilant and prepared,” Bera said in a statement.

“I look forward to hearing from our expert witnesses on ways in which we can plan and respond to this virus. Congress needs to ensure the administration has the tools it needs to respond to and limit the outbreak.”

The U.S. government has implemented mandatory quarantine measures for the first time in about 50 years, health officials said last week. Flights from mainland China are being funneled through 11 U.S. airports, officials said, where all passengers are being screened for symptoms. Travelers from Hubei province are being quarantined for 14 days.

We keep hearing how the ruling class isn’t doing enough to protect us. 

Isn’t it obvious by now that they don’t really care? They need us for one thing: tax cattle.  Our health is the least of their concern. 

When it comes to deadly outbreaks such as this one, and any other future outbreaks, you’re better off preparing the best you can on your own.  Learn to grow and raise your own food, learn to quarantine yourself, and make sure you protect yourself and your family from infections while keeping your immune systems going strong.

Trump’s ‘best week‘ has just gotten a little better, after the US Court of Appeals for the DC Circuit tossed out Congressional Democrats’ third attempt to nail Trump after claiming he is in violation of the Constitution’s Emoluments Clause.

In a Friday decision, the court vacated a district court judge’s ruling that the Democrats had standing to sue Trump for accepting foreign payments at his Washington DC hotel, according to law.com – adding that the court would not participate in a political debate.

“Because we conclude that the Members lack standing, we reverse the district court and remand with instructions to dismiss their complaint, said Judges Karen LeCraft Henderson, Thomas Griffith and David Tatel in a per curiam opinion.

They found that, after past U.S. Supreme Court rulings on individual legislators’ ability to sue, “only an institution can assert an institutional injury provided the injury is not ‘wholly abstract and widely dispersed.’”

“Here, regardless of rigor, our conclusion is straightforward because the members—29 Senators and 186 members of the House of Representatives—do not constitute a majority of either body and are, therefore, powerless to approve or deny the President’s acceptance of foreign emoluments,” the opinion reads. –law.com

“The Members can, and likely will, continue to use their weighty voices to make their case to the American people, their colleagues in the Congress and the president himself, all of whom are free to engage that argument as they see fit,” the judges added. “But we will not—indeed we cannot—participate in this debate.”

As law.com notes, the ruling may finally signal the end of a lawsuit that has now stretched into its third year.

As we pointed out overnight, the big story in today’s jobs report would not be the January payrolls increase, which as we observed earlier was impressive, surging by 225K, well above the 165K consensus forecast, but the historical revisions to Payrolls data, which would be reduced by as much as half a million jobs as a result of the BLS’ recalibration of its business birth/death adjustment.

Sure enough, the reason why the market is in a risk-off mood and why yields are tumbling again, is because as expected, the payrolls revisions did indeed wipe out as many as 520K jobs in 2018 (as of April 2019), and the delta in December was a sizable and negative 422K, with 152.383 million pre-revision jobs contrasted to the 151.961 million post-revision.

The chart below shows the change in monthly payrolls pre and post-benchmark revision, and there are two things to note here: i) the bulk of the downward revisions took place during 2018, which means that the Fed launched its tightening cycle and was hiking rates based on false payrolls information even as yields were sliding with the bond market sniffing out the underlying misreported payrolls weakness, and ii) the February 2019 payroll gain was revised to just 1,000 from 56,000… but it was still a positive 1,000, as a negative number would have broken the string of 112 consecutive positive monthly increase in payrolls.

The best way to visualize the substantial revision lower to payrolls is in the Y/Y jobs growth chart, which shows that instead of rising as much as 1.9% in late 2018 when the Fed was already set to reverse its monetary policy to dovish, jobs were in fact growing at a far slower pace annually; and after a tumultuous 2018 and 2019, the pre- and post-series have now converged to roughly 1.4% annual growth.

There was a silver lining: in contrast to the negative job revisions, the growth of average hourly earnings looked stronger reaching a peak of 3.5% yoy on February 2019 (up from 3.4% yoy previously) as fewer working hours helped boost earnings.

The BLS also incorporate population controls to its household survey which helped boost the labor force participation rate which consequently bumped up the unemployment rate to 3.6%.

On net, the biggest loser here is Trump, as the annual revisions took some of the shine off one of President Donald Trump’s bragging points, as Bloomberg put it, cutting 2018’s job gain to just 2.31 million from 2.68 million, while the increases in 2017 and 2019 were roughly unchanged at about 2.1 million, meaning that each year under Trump — while still strong — has been slightly slower than the 2.35 million increase in the final year of Barack Obama’s presidency.

Authored by Sven Henrich via NorthmanTrader.com,

New highs again for tech as $NDX keeps relentlessly crawling higher, now 16.2% extended above its 200MA. As outlined yesterday’s it’s a key warning signal.

This latest rally has produced another warning signal and that is the leadership in $NDX is narrowing dramatically. Narrowing leadership has spelled trouble for $NDX in the past, especially as it is building tightening and steep price channels and/or wedge patterns.

Now we can observe this again, specifically in new highs versus new lows:

Note during the summer rally of 2018 $NDX built a tightening wedge patter and new highs versus new lows started showing ever more pronounced weakening. Indeed the final highs in October 2018 came on virtually flat new highs versus lows. Markets broke down shortly after that.

Similar weakening patterns can be observed in the 2019 rallies before they produced short term corrections.

Since October (thanks Fed) $NDX has embarked on its steepest and most narrow channel in many years. Last week’s coronavirus scare landed $NDX on the support trend line, this week’s coronavirus optimism rally has brought $NDX back to its upper channel trend line. Algo ping pong?

Be that as it may but note the dramatically lower expansion in new lows versus new lows on this latest rally versus the previous January rally.

What’s driving it? Simple: Many components in $NDX are much weaker than record prices on the index indicate. And we can also see this in the number of components above their 50MA. Much weaker on the latest rally to new highs:

This is also a pattern of weakening participation and a negative divergence that has signaled a coming breakdown in the index.

It may be said that this index is being held up by 5-10 market cap heavy stocks that everybody owns with 3 asset managers controlling a 22%-25% voting share of them.

Narrow leadership, very narrow. This works as long as nobody sells. Recent history suggests that the combination of these signals and a high extension above the index above its 200MA continue to make $NDX an index at high risk of sizable reversal to come.

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