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In a continuing clean-up effort amid a dangerous and potentially toxic environment, leaking chemical containers are posing a challenge to crews working to inspect and secure the Beirut port section which was site of what’s being deemed the largest non-military munitions explosion in history on August 4.  

“Chemical experts and firefighters are working to secure at least 20 potentially dangerous chemical containers at the explosion-shattered port of Beirut, after finding one that was leaking, according to a member of a French cleanup team,” the AP reports.

Chemical containers were in many cases found punctured following the detonation of over 2,500 tons of ammonium nitrate. 

“French and Italian chemical experts working amid the remains of the port have so far identified more than 20 containers carrying dangerous chemicals,” AP continues.

“We noted the presence of containers with the chemical danger symbol. And then noted that one of the containers was leaking,” one French chemical expert working at the site said. “There are also other flammable liquids in other containers, there are also batteries, or other kind of products which could increase the risk of potential explosion,” he added.

An international response team working with the Lebanese government is attempting to identify and contain any leaked chemicals at ground zero for the blast — which was feared to have emitted dangerous gases into the air over the city in the wake of last Tuesday’s deadly accident. The death toll has risen to over 200, including more than 6,000 injured, many of them severely.

More has been learned and confirmed about what precisely started the deadly fire which detonated the highly explosive and volatile ammonium nitrate, commonly used in fertilizer and professional explosives.

Lebanese media as well as Reuters has widely reported the fire started after welding work was done in the very warehouse containing the volatile chemical compound.

It appears the welding crew had no idea that both ammonium nitrate and (astoundingly) a cache of fireworks were being stored on site.

ROCKED: Eyewitness video shot from a boat off Beirut shows a dramatic new angle of the explosion that killed at least 160 people and injured thousands, with the Lebanese government resigning on Monday amid anger and unrest in the wake of the blast. https://t.co/6tgFYYPUPA pic.twitter.com/vjlwKm4brS

— ABC News (@ABC) August 11, 2020

It was reportedly maintenance work on the door of Warehouse 12 – now location of a huge crater which has forever altered the port and coastline.

Port officials reportedly tried to warn top government officials and the Lebanese judiciary for years that the ammonium nitrate, stored there since 2013 in unsafe conditions, was a ticking time bomb in their midst. 

Authored by Lance Roberts via RealInvestmentAdvice.com,

Mentally, it has been a challenge to marry a market challenging all-time highs against a backdrop of weaker earnings, falling profits, surging unemployment, and a recessionary economy. Yet, here we are. While the bulls have set S&P targets to 3750 over the next 12-months while bearish signals persist. For investors it will be the difference in determining the “light” from the “train.” 

As discussed in “Bulls Chant Into A Megaphone,” 

“A breakout of the consolidation range, which was capped by the June highs, would put all-time highs into focus.” 

Of course, we also discussed the importance of the issue of the “capitalization effect” on the market’s advance, mainly since Apple and Microsoft make up such a significant weight. As noted by Sentiment Trader last week:

“The most significant stock in the U.S. and nearly the world, Apple, keeps powering higher. At the end of June, the value of Apple alone was almost 80% of the Russell 2000 index’s market capitalization. As of today, it’s nearly 90%. Such is astounding – in the past 40 years, no single stock has come close to dwarfing the value of so many other companies. “

Recapping The Math

“Currently, the top-5 S&P stocks by market capitalization (AAPL, AMZN, GOOG, FB, and MSFT) make up the same amount of the S&P 500 as the bottom 394 stocks. Those same five also comprise 26% of the index alone. “

“What investors are missing is that the top-5 stocks are distorting the movements in the overall index.

Putting $1 into each of the top-5 stocks has the same impact as putting $1 into each of the bottom 394 stocks. Such is not a true representation of either the market or the economy. 

As we have noted recently, if you own anything OTHER than those top-5 stocks, your portfolio is likely underperforming the market this year.”

The distortion in the markets caused by the flows into the Mega cap stocks will most certainly be a problem. While investors have chased markets higher, these Megacaps will eventually also lead the markets lower. 

The question, as always, is the timing and catalyst, which eventually reverses the money flows. 

In the meantime, the question is, what is the most logical next target for the S&P 500 if bulls can achieve new “all-time” highs? 

Bulls Target 3750

Technical analysis works well when there are defined “knowns” such as a previous top (resistance) or bottom (support) from which to build analysis. However, when markets break out to new highs, it is becomes much more of a “wild @$$ guess” or “WAG.”

Lately, the bulls are running amok trying to predict how much higher the bull market can go. As noted on CNBC:

“We may stall here for a while into the fall, … but I think you’re going to get a rocket ship coming in the fall. I think the S&P is going to trade out above 4,000.” – Jeffrey Saut

When discussing the current “risk/reward ranges,” , 4000 was one of the targets discussed. To wit:

“With the markets closing just at all-time highs, we can only guess where the next market peak will be. Therefore, to gauge risk and reward ranges, we have set targets at 3500, 3750, and 4000 or 4.4%, 12.2%, and 19.5%, respectively.” 

“Given there is no good measure to justify upside potential from a breakout to new highs, you can personally go through a lot of mental exercises. While there is certainly a potential the market could rally 19.9% to 4000, it is also just as reasonable the market could decline 22.2% test the March closing lows. 

Just in case you think that can’t happen, just remember no one was expecting a 35% decline in March, either.”

No Real Basis For 4000

The problem with calls for “S&P 4000” is there is no technical or fundamental basis for the assumption. 

From a fundamental perspective, if we assume current 2021 estimates are correct, the market will be trading at 26x forward reported earnings. However, given estimates are regularly 30% too high, forward reported earnings will be closer to $130/share leaving valuations at 30x. 

Valuations may not seem to matter currently. However, if the economy continues to lag, and employment and wages weaken, they will. Corporate earnings and profits are going to become more critical. Already, the deviation between the market and corporate profits is at extremes. As with all extremes, an eventual reversion completes the cycle.

Furthermore, given the depth of the profits decline, it is improbable that earnings will remain at these levels and not worsen.

Importantly, while “valuations” may not seem to matter at the moment, they always, without exception, eventually do.

Technical Deviations

Secondly, the technical trends don’t support S&P 4000 either.

From the 2009 lows, the S&P has traded withing a fairly defined trend channel, as shown below. The upper bullish trend line, which coincides with the February 2020 market peak and the polynomial trend line, suggests 3750 as the next target.

As noted above, such would suggest a 12.2% advance from Friday’s close. While Saut’s 4000 number sounds excellent, such would violate trends that have existed for 11-years. 

Furthermore, 3750, much less 4000, is going to stretch the deviation from the long-term bullish trendline (lower line) to more extreme levels. The last time the market reached this extreme was in February of this year. It is also notable that 3750 also intersects with the accelerated trendline from the 2016 lows. 

As noted previously, trend lines and moving averages tend to act as “gravity.” The further away from the trendline, the market becomes, the greater the pull becomes.

Warning Signs

It the short-term, the market seems to be headed higher. However, it is worth remembering that every previous peak of the market since 2016 has been from “all-time” highs.  

With the market at all-time highs, there are numerous warning signs of excess built up, which could trigger a reversion. 

• Low participation

• An extremely low put/call ratio (speculative excess)

• Markets trading 2- and 3- standard deviations above their means.

• Large deviations from respective 200-dma’s

• High levels of investor optimism (chart below)

• A historical deviation between value and growth.

• A high level of equity allocations 

• Technical extremes (RIAPro technical gauge below)

Currently, the evidence is mounting that markets are reaching the limits of the current move. By itself, these signs reflect the prevailing extremely bullish attitude of market participants. However, much like an explosive, at some point, an unexpected, exogenous event occurs. That event is the catalyst which ignites the chain reaction. The ensuing “reversion” to the trend catches overly confident “bulls” off guard.

Light At The End Of The Tunnel

The problem for investors currently is there is precious little that hasn’t already been fully priced into the market.

• A full economic recovery
• A return to full unemployment
• More stimulus
• Low bond yields
• No recession
• A return to pre-pandemic earnings levels

The problem comes when one, or more, of those things, fails to occur. Paul Singer of Elliot Management had a significant point in this regard:

“We cannot think of another time when the basic terms and conditions of making – and more to the point keeping – money were more challenged. The planet’s central bankers seem desperate to hold up all stock markets and keep them from tumbling to the floor. They think that’s the way to run monetary policy and, actually, fiscal policy as well. The fact that public policy is on a slippery slope to monetary ruin – and the slide is steepening – escapes their limited reasoning capability. 

They appear to think that so long as there is a model or theory to support their policies and no immediate catastrophe, they can keep doing it. The political winds are hot and fierce, blowing in the face of economic freedom and profits. There has never been a time when it was more important to protect the downside, so that at least nominal capital values are preserved. 

However, the reason capital doesn’t just build and build (given all the geniuses in the investment world) is simple: With normal approaches to money management, the march up in compounded value gets interrupted by big losses or wipeouts at infrequent, unpredictable intervals. Sometimes one can “see the train a’comin’”

However, most of the time, investors don’t see the “train,” but mistakenly believe it’s the “light at the end of the tunnel.” 

Conclusion

Price action still confirms relative weakness as shown by the percentage of stocks above the 200-dma. Furthermore, the recent rally was primarily focused in the largest capitalization-based companies. These indications suggest market action remains reminiscent of a market topping process rather than the beginning of a new leg of the bull market. With the market trading 3-standard deviations above its 50-dma, and very overbought, such was the same setup we saw at the beginning of the year. 

I am not suggesting that the market is on the precipice of another 35% plunge. I am suggesting that the current market and economic dynamics are not as stable as they were following previous market corrections. 

The challenge for investors will be the navigation of the markets to ensure they see the “train,” and not the “light.”

Importantly, while the “always bullish” media tends to dismiss warning signs as “just being bearish,” such unheeded warnings have been detrimental.

Complacency is not a great option for managing your capital.

President Trump on Monday said he’s “very seriously” considering slashing the capital gains tax via executive order, according to Bloomberg.

“We’re looking at also considering a capital gains tax cut, which would create a lot more jobs,” said Trump during a White House news conference.

The president can’t unilaterally cut the 20% long-term capital gains rate without Congress, but some advisers tell him he could issue an executive order that would slash tax bills for investors when they sell assets. The move, known as indexing capital gains to inflation, adjusts the original purchase price of an asset when it is sold so no tax is paid on appreciation tied to inflation. –Bloomberg

The move would undoubtedly face legal challenges by Democrats – which is apparently why President George H.W. Bush’s administration ditched a similar plan, according to the report. Though given Trump’s weekend executive order bypassing Congress to renew lapsed coronavirus relief funds and delay payroll taxes – it’s hard not to wonder if the capital gains tax announcement is designed to goad his political opponents into openly opposing actions that benefit US taxpayers during an election year.

Last year, Trump passed on the idea of indexing capital gains to inflation despite urging from conservatives such as Sen. Ted Cruz (R-TX) and Americans for Tax Reform President Grover Norquist – saying “it’s not something I love.”

Most of the benefit of the tax cut would go to America’s highest earners, with the top 1% receiving 86% of the benefit, according to Bloomberg, citing 2018 estimates by the Penn Wharton Budget Model – and could reduce federal tax revenue by $102 billion over a decade.

Trump is also considering a “cut in the middle income tax” which would require Congress to pass legislation – a move which is unlikely to happen before the end of the year.

Authored by Phillip Magness via The American Institute for Economic Research,

In recent congressional testimony Dr. Anthony Fauci, the primary architect of the Trump administration’s COVID response, painted a bleak picture about the United States’s ability to contain the pandemic. According to Fauci’s narrative, the United States is experiencing a resurgence in regional COVID outbreaks because it failed to sufficiently lock down back in March, and failed to comply with the existing lockdown orders. Fauci specifically contrasted this situation to several European states that imposed lockdowns around the same time, claiming the latter as a successful model for COVID containment.

There are several immediate problems with Fauci’s arguments, including the fact that COVID cases are showing clear signs of a summer resurgence in the same European countries that allegedly tamed the virus through harsh lockdowns in the spring. The American news media however has seized on Fauci’s narrative, and used it to call for renewed lockdowns. The New York Times and the Washington Post both editorialized in favor of a second stricter wave of nationwide lockdowns lasting until October – this despite there being no clear evidence that lockdowns actually work at taming the virus.

So how does the evidence behind this narrative stand up under empirical scrutiny? Let’s consider the claims.

Did the United States react too late?

According to the pro-lockdown narrative, the United States is experiencing a second COVID wave because it took a lackadaisical approach to locking down. We allegedly closed too late and reopened too early, leading to a failure to tame the virus in the spring. This same narrative often holds up Europe as a counterpoint for what a cautious, responsible, and evidence-based reopening process supposedly looks like.

I’ve investigated this claim previously using start and end dates for the lockdowns in various countries. Simply put, it is entirely without merit.

Most of the United States went into lockdown during the second and third weeks of March, following a set of Trump Administration recommendations that were based on the now-discredited Imperial College epidemiology model of Neil Ferguson. In total, 43 of 50 American states imposed shelter-in-place style lockdowns, with the holdouts consisting almost entirely of rural western states with low population density and few signs of the outbreaks that plagued the cities of the northeast at that time.

As far as timing goes, the US lockdowns came into effect at almost exactly the same time as not only Europe but the majority of the world. A few early outbreak hotspots such as Italy preceded this shutdown by about 2 weeks, and a handful of countries (Sweden, Taiwan, Belarus) bucked the international trend. But otherwise, the timeline clearly confirms that the American response directly coincided with most other countries.

Did the US reopen too early?

What about reopening then? As I also previously discussed, the United States has generally lagged behind most of Europe in removing the lockdown measures from March and April. Most European countries began their reopening efforts in late April or early May. As of June 1st, the United States’s COVID response stringency score – a measurement of lockdowns and related closures maintained by Oxford University’s Blavatnik School of Government – outranked every Western European nation except for Ireland and Belgium.

Although some US states such as Georgia, Colorado, and Texas began to reopen in late April, this process began no earlier than the first of their European counterparts. Far more often, American states have lagged behind Europe by as much as a month or longer. Several hard-hit states such as New York, New Jersey, and Massachusetts, as well as population centers such as California, adopted a strategy of extremely cautious and tepid reopening. Many extended their shelter-in-place mandates until late May or even June. They also adopted lengthy bureaucratic reopening guidelines that spread the process over several phases to the point that most of the US remains more heavily restricted than Europe to this very moment.

Equally revealing, we may still see the clear effects of the United States’ slower reopening in key metrics from Google’s publicly released cell phone mobility data. From the start of the lockdowns in March until roughly mid-May, US mobility patterns map almost identically onto at least three European countries that similarly locked down: Germany, the Netherlands, and Finland. All three of these countries began to reopen during the first and second weeks of May. Large swaths of the US, and particularly its population centers, remained under lockdown or only a heavily restricted reopening at this point.

The divergence in policies is clearly visible in Google mobility patterns. Whereas Germany, Finland, and the Netherlands all returned to near-normal levels of mobility in late May and June, the United States’ reopening process stalled around the same time and remains at a plateau that is still well-below normal.

The pattern also appears when we compare the US to other European countries, including those that – at least temporarily – had more stringent shelter-in-place orders in effect. In most European states, mobility patterns rebounded past the United States in early to mid-June after the American reopening stalled. Today, only the UK exhibits a more pronounced closure than the US while Spain similarly plateaued.

Were the US lockdowns less stringent than Europe?

According to Fauci’s testimony, the US imposed far less-stringent lockdown measures than Europe, which he then attributes to the resurgence in cases. This is a complex question to answer because European states varied quite a bit in their lockdown policies and the duration of each. That much noted, nation-level scores such as the Oxford stringency index belie the claim.

The Oxford index uses a 0 to 100 score to measure stringency, awarding points for a variety of policies including border closures, school closures, event cancellation, non-essential business closures, and shelter-in-place mandates, as well as other non-pharmaceutical interventions such as public information campaigns. From the start of the lockdowns in mid-March until June, the United States stringency score sat at 72.69 out of 100. This was comparable to the peak score for the Netherlands (79.63), Germany (73.15), Norway (79.63), Denmark (72.22), and Switzerland (73.15). It was also above Finland’s peak score (60.19) as well as Sweden (40.74), the latter of which did not go into lockdown and only adopted more modest social distancing guidelines.

The US did have a less-stringent score than some of the hardest-hit European countries – but only temporarily. Italy (93.52), France (90.74), Ireland (90.74), and Spain (85.19) imposed more stringent lockdowns than the US, but only for about two months between March and April before rapidly relaxing their restrictions.

Fauci presumably had this much smaller list of countries in mind when he claimed they employed a stricter lockdown than the US, although the evidence is flimsy at best. Measured on a per-capita fatality basis, Italy and Spain had more severe outbreaks than the US, and France currently sits at near-parity. These patterns may change, particularly as each country experiences a second wave in the late summer, but they do not exhibit even modest inverse correlation with the lockdown policies of each country. If anything, the more-stringent policies in locales such as Italy and Spain were likely reactive – they were imposed out of desperation in response to a viral outbreak that appeared to be spinning out of control in these early months. Indeed, the mobility data suggest as much with the most severe declines from the March-April period occurring in the hardest-hit locales and generally starting slightly before they went into lockdown.

Returning to the United States, we see similar variation in the mobility declines when we compare hard-hit states such as New Jersey and Massachusetts with non-lockdown states such as Wyoming and South Dakota (New York breaks somewhat from this trend somewhat, although this is likely a result of substantial in-state variation between hotspots such as New York City and the rest of the state).

These data suggest the claimed effects of more-severe lockdowns cannot be separated from either severity of the outbreak in a given region or the voluntary behavioral responses to the same. This problem afflicts both the worst-hit European countries and the worst-hit US states, but it does not illustrate a failure to impose sufficient lockdowns in each. 

In sum, there’s no clear evidence that aligns with Fauci’s claims about European lockdown stringency. On the whole, the US locked down at a comparable level to several European countries according to the Oxford index, with the exception of the hardest-hit locales – and those locales only surpassed us during their peak outbreaks of March and April, followed by a much more rapid relaxation of the restrictions. Meanwhile the US has clearly retained its lockdown policies for longer than almost all of Europe, and continues to stall behind Europe’s reopening process.



Is the US less compliant with public health mandates than Europe?

Although it is more of an implication than a claim from Fauci’s testimony, the media has embraced a final narrative that asserts the United States is less-compliant than Europe in obeying public health mandates. If this were true, the US might have nearly identical policies in place on paper and yet still perform poorly compared to European states where compliance was higher.

Unfortunately, compliance with public health mandates during COVID is difficult to measure. One exception is also a flashpoint of political debate in its own right – the wearing of masks. 

Fortunately, extensive survey data exist to track mask-wearing habits of the public since the start of the pandemic. Last month the Economist magazine published a comparison of available survey response rates over time. Briefly summarized, roughly 70% of the US population indicates that it currently wears masks in public places. Mask-wearing has exceeded 60% in the US since early April, despite following several weeks of contradictory advice on masks from public health officials including Fauci himself. US mask-wearing rates are also higher than Canada. It also lags only slightly behind the roughly 80-90% usage rates in east Asian countries, where masks were already a much more common pandemic response.

The fascinating twist to the mask story though is Europe. Mask usage soared in Spain, Italy, and France during the peak of their outbreaks, topping just over 80% or slightly above the US. But mask-usage in Northern Europe remains far below US levels even to this day. No Scandinavian country topped 20% in mask usage even at the April peak of the pandemic (they’ve since declined in number), and the United Kingdom hovers at only 30% in the most recent polling from late June. All said, US mask-wearing is only slightly behind the worst-hit parts of Southern Europe and well ahead of Northern Europe. Insofar as masks may be used to signal compliance with a specific and high-profile public health mandate, there does not appear to be any evidence that the US has fallen behind other countries.

Making sense of it all

Collectively, the data above offer no clear support behind four major claims of the pro-lockdown narrative being spun by American media outlets in the wake of Fauci’s testimony. To the contrary, several data points directly conflict with both the express claims of Fauci’s testimony and its implied interpretations, as advanced by outlets such as the New York Times. The US response to the COVID-19 pandemic largely paralleled Europe in its early months, and only diverged from that pattern in the opposite direction of the media’s narrative. While Europe began to reopen and did so earlier and faster, the United States reopening has stalled.

What then are we to make of the recent case surges in the southern US and on the west coast? Most likely, they reflect the regional nature of the virus’s spread as it migrates into population centers than largely escaped the first wave in March and April. The threat of further spread remains a public health concern, particularly as it pertains to vulnerable populations such as nursing homes. But its pattern has little if anything to do with the lockdown orders – an ineffectual approach to mitigating the virus, but also one with severe social and economic harms.

Unfortunately, the pro-lockdown position favored by Fauci and several US media outlets has become a matter of ideological commitment. Whether they are doing so to rationalize the costs we have already incurred from this disastrous approach or to further politicize the pandemic response for a variety of electoral and partisan purposes, they have embraced a pro-lockdown stance that is unchained from any evidence or clear data.

It should not be surprising that their accompanying narrative to justify that stance is similarly detached from reality.

A headline-grabbing story originating in the Detroit Free Press shocked the college and sports world on Monday by reporting the Big Ten is set on cancelling the fall football season on coronavirus concerns. “It’s done,” a high-ranking source in the Big Ten was cited in the report.

“Multiple sources said early Monday morning that presidents voted 12-2 to not play this fall, though the Big Ten said Monday afternoon no official vote had taken place,” according to the report, which was enough to drive headlines declaring the season was canceled. 

However, an avalanche of pushback and public outry, from some players, coaches, and even the president of the United States, left the decision anything but final. “The student-athletes have been working too hard for their season to be canceled,” Trump tweeted in response alongside the hashtag #WeWantToPlay, with a shared tweet by Clemson quarterback Trevor Lawrence.

The student-athletes have been working too hard for their season to be cancelled. #WeWantToPlay https://t.co/lI3CCKZ4ID

— Donald J. Trump (@realDonaldTrump) August 10, 2020

One college sports commentator noted: “A wild and wacky Monday ended without clarity from the Big Ten about a football season. Instead, the wait continues on a decision to play this fall, while pressure builds from some leagues and coaches.”

The immediate public pushback appears to have worked or at least it delayed things, and reports now say the season might not be cancelled after all, with more high level Big Ten meetings set for Tuesday morning.

Not expecting any news tonight from #B1G, per sources. More meetings in the morning, sources say. In all my years covering Big Ten, can’t remember a day when the league seemed more divided (presidents vs. coaches). Certainly could see presidents opting against a full postponement

— Adam Rittenberg (@ESPNRittenberg) August 11, 2020

Thus far the Ivy League, the Pac-12, and the Mid-American Conference, have all canceled their seasons.

While the majority of college presidents appear to stand on the side of cancellation for the sake of safety amid the pandemic, there are said to be other options being considered, like mere postponement of the game schedule. 

Whatever happens, severe controversy is already ensured, given as SI describes:

“All of this was sparked by the Big Ten’s impending move to cancel its season. More than 24 hours after first reports published from ESPN, Yahoo Sports and SI of the Big Ten’s potential plans, the conference still hasn’t made an announcement and is now gripped in an internal strife that poured out into public Monday.”

pic.twitter.com/NKvTXIpdqw

— TexAgs (@TexAgs) August 10, 2020

And further: “From high-ranking politicians to the league’s own coaches, a variety of personas strongly voiced their support for a 2020 season, some of them specifically targeting the Big Ten and commissioner Kevin Warren.”