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Authored by Sven Henrich via NorthmanTrader.com,

The broader market has been in a trading range for the past 6 weeks. Following the June highs we’ve seen sizable corrections in small caps, banks and even the $NYSE, $SPX, $DJIA, transports and other sectors while the Nasdaq continues to race to ever more new highs with a few key stocks producing the largest make cap expansion in history.

While charts of tech stocks are stretching to ever more historic extremes $SPX has held key support at the daily 200MA and weekly 50MA as historic stimulus continues to flow through the system with likely more stimulus to come.

In context of this price action Guy Adami, Dan Nathan, and I have decided to offer an as honest and objective discussion about the bull and bear case arguments as we know how to.

Also of key note: Bank earnings are coming next week and they will be closely watched for either relief on lowered earnings expectations supportive of a potential rotation trade to lift markets higher beyond the June highs to perhaps fill the glaring open gap on $SPX near 3,300 or confirmation that the bank’s underperformance in context of yields remaining on the floor signal something amiss with the V shape recovery narrative presumed by investors as they relentlessly chase into tech stocks in complete disregard of valuations.

Since the January 2018 highs the divergence in everything in markets couldn’t be more stark:

With key tech stocks literally exploding vertically in performance:

$NDX is now the farthest disconnected from its daily 200MA and weekly 50 MA since the year 2000 with the chart showing the steepest and most one way rally since that time as well, while equal weight continues to lag dramatically:

Right at the time when $NDX has reached a key trend line with underlying components below their daily 50MAs weakening a process that has repeatedly signaled an impending correction to come:

Notable also as $NDX is reaching far above its monthly upper Bollinger band:

The chase into individual stocks in complete disregard of the historic valuation expansion is something to behold, $TSLA being one of the poster children of this time:

Blinders on and go. “Oh Jesus Christ”:

Everything you need to know about the current market actionpic.twitter.com/eMlWLgEix4

— Sven Henrich (@NorthmanTrader) July 11, 2020

Is it sustainable? Or is the bull case which is based on earnings, valuations, debt expansion not mattering, indeed nothing mattering but liquidity the continued path forward? Or will rotation into the laggards produce the next leg up? Or will it all come crashing down? Or will we just chop in a wide tradable price range for months to come as the forces of momentum and liquidity keep battling it out with the reality of growth, valuations and a continued uncertain future?

All these questions are the basis for our discussion this week.

We hope you find this to be an as earnest, balanced and realistic discussion as you can find anywhere. As Guy said rightfully, we can’t change who we are, but only offer our honest assessments based on decades of experience with a close eye on all the things we see.

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I’ll be posting a separate Market Video focusing on the latest technical implications this weekend (For those not already signed up for these videos please see link to sign up). For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.

Summary:

• US reports 70k+ new COVID-19 cases
• Deaths near 1k for 4th day
• Global case number: 12,689,741
• India cases top 400k
• Japan sees record 430 new cases
• Victoria reports 216 new cases

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The US reported yet another record-breaking single-day number of new coronavirus cases on Friday. And while counts by Johns Hopkins and others put the total at roughly 64k cases, a tally by worldometer put the number of new cases at 71,787, the first time the US has reported more than 70k cases in a day.

Those numbers brought the case total in the US to 3,294,539, while the US also reported another 854 new deaths, bringing the total to 136,735k.

That number marked a fourth day of new deaths trending closer to 1k, a psychologically important level.

Globally, the world recorded 228,000 new cases yesterday, another record high as Brazil and India see cases spiral out of control. That brought the international total to 12,689,741.

Friday’s numbers brought the mortality rate in the US to 4.8%, while the number of total cases in the country, home to the world’s largest outbreak, still represented roughly a quarter of the global total. Globally, there were 12,689,741 confirmed cases as of Saturday morning on the East Coast of the US.

Meanwhile, in Florida, hospitals confirmed that a total of 7,063 patients were hospitalized with the virus in Florida, according to data released Saturday by a state agency. Miami-Dade County is the state leader with 1,601 patients hospitalized, the most in any single county in the country.

While the Sun Belt outbreaks continue to spiral out of control, we noticed an interesting report out of NYC on Saturday. The NYT recently reported that more than 68% of people tested positive for antibodies at a clinic in Corona, a working-class Queens neighborhood,  while 56% tested positive at another clinic in Jackson Heights, Queens.

That compares with just 13% of people tested in ritzy Cobble Hill, a ritzy Brooklyn neighborhood.

India has registered more than 800,000 Covid-19 cases so far, the country’s health ministry announced Saturday.

It reported a record 27,114 new Covid-19 cases on Friday, bringing the nationwide total to 820,916.

This is the third consecutive day that the country has recorded its highest single-day jump in new coronavirus cases.

As Covid-19 cases continue to soar, Indian cities and states are reimposing strict measures to curb the spread.

On Friday, India’s most populous state, Uttar Pradesh, imposed new restrictions for the weekend, leaving only essential services operating.

The South Asian nation has so far tested over 11.3 million samples for coronavirus, according to the Indian Council of Medical Research.

Japan recorded 430 new cases, first time the country has registered more than 400 in a day since April 24, when the countywide emergency order was still in effect. Tokyo contirbted 243 of those, its highest daily jump in new cases yet.

Finally, in Australia, the state of Victoria, home to Melbourne, recorded 216 new coronavirus cases, Premier Daniel Andrews announced Saturday. Of these 186 remain under investigation, while the other 30 have been linked to known outbreaks. The number was down from the 288 cases reported Thursday, the most in a single day in any Australian state. So far, a total of  21,841 cases have been confirmed, along with 995 deaths.

One major problem over the last few months for the auto market was that the price of used vehicles was plunging, pressuring new vehicle sales. 

Now, that trend looks to have reversed in grand fashion. Used car prices are up 9% year over year according to data from the Manheim U.S. Used Vehicle Value Index for June. The spike is being attributed to more people heading back out of the house – as states across the U.S. reach various stages of re-opening – but avoiding mass transit and ride sharing services.

The idea of having your own, quarantined vehicle is now back in fashion and has caused a 50% to 75% drop in mass transit in some major cities, according to Bloomberg.  

In Seattle, public transit usage is down about 70%. According to Bob Foran, chief financial officer for the Metropolitan Transportation Authority, New York City subway and commuter rail traffic is down an astounding 90% over the last 120 days. 

The effects look like they could be relatively permanent, too. A survey conducted by CarGurus.com showed that 44% of people who used mass transit think they will abandon it permanently. Ride sharing services are also feeling the pain: 40% of people surveyed who previously used ride sharing services said they would decrease their usage or stop using such services altogether.

That should bode well for Lyft and Uber…

The survey also found that 20% of people who were looking to buy a car hadn’t been interested in doing so prior to the pandemic. 

Recall, just days ago we were busy highlighting all of the places nationwide where used car prices had crashed.

In January, prior to the virus shutdowns, auto companies had set the tone for the year, starting 2019 just as miserably as 2018 ended, with major double digit plunges in sales from manufacturers like Nissan and Daimler. Since then, things have only worsened, with major markets like China and the U.S. seeing sales fall off a cliff as consumers have been forced to stay home. 

Hilariously enough, it was Manheim that indicated last month that wholesale prices dropped as much as 11% in April and predicted that “this price drop hasn’t fully hit the retail market yet.” Their June report predicted that since “dealers have largely avoided purchasing new inventory in recent weeks, they aren’t in a rush to cut prices as a way to move their existing inventory.” 

They also predicted a sharp drop in retail prices in the coming weeks, stating that “a combination of record supply, damaged consumer confidence, and new car incentives will ultimately create a perfect storm causing retail prices to drop sharply in the coming weeks.”

And despite the fact that between January and May individual U.S. states experienced price drops ranging from 1% to 5%, it looks as though the trend has now reversed significantly, showing this recession’s first actual V-shaped recovery.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Since the March lows, the markets have rallied on optimism of a “V-shaped” economic recovery and constant stimulus from the Fed. So far, that has been the right call. However, in recent weeks, the threats to the bullish thesis have grown.

We recently discussed the Fed’s inflation of an asset bubble. The crux of the analysis was the unprecedented amount of monetary stimulus to counter the “pandemic.”

“The Fed was able to inflate another asset bubble to restore consumer confidence and stabilize the credit markets. The problem is that since the Fed never unwound their previous policies, current policies will have a more muted long-term effect.

However, this time there are 50+ million unemployed, wage growth is declining, and bankruptcies are on the rise. The Fed’s attempt to inflate another bubble to offset the damage from the deflation of the last bubble, will likely not work.”

In the short-term, the Fed’s actions had the intended outcome by providing “stability” to the financial markets.

The Paradox

What is most imperative for the Fed is those market participants, and consumers “believe” in their actions. With the financial ecosystem more heavily levered than ever, the “instability of stability” remains the most significant risk.

“The ‘stability/instability paradox’ assumes that all players are rational. That assumption implies participants will avoid complete destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’”

The problem the Fed, and Global Central banks, currently face is an inability to extract themselves from ongoing monetary policy measures. After the “Financial Crisis,” the Fed had hoped they would be able to reduce their accommodation as economic growth and inflation returned.

Neither ever happened.

A Diminishing Rate Of Return

Instead, as each year passed, more monetary policy was required just to sustain economic growth. Whenever the Fed tightened policy, economic growth weakened, and financial markets declined. The table shows it takes increasingly larger amounts of QE to create an equivalent increase in asset prices.

As with everything, there is a “diminishing rate of return” on QE over time. Since QE requires more debt to be issued, the consequence is slower economic growth over time.

“The relevance of debt growth versus economic growth is all too evident. Debt issuance initially exploded during the Obama administration. It further accelerated under President Trump, and has taken ever-increasing amounts of debt to generate $1 of economic growth.”

In other words, without debt, there has been no organic economic growth.

Importantly, after a decade of unprecedented monetary policy programs in U.S., the risks in the system have been expanded. It is now imperative that everyone continues to “act rationally.”

By not letting the system correct, letting weak companies fail, and allowing valuations to mean revert, the Fed has trapped itself. Such was a point we discussed previously:

“One way to view this problem is by looking at the Nasdaq 100 versus the S&P 500 index. That ratio is now at the highest level ever.”

These levels of extremes rarely exist for extended periods. It currently seems as if “nothing can stop the bullish market.” However, it is always an unexpected, exogenous event, which pops the bubble.

The Bear Case

My colleague Doug Kass recently penned an interesting post on this issue:

“In aggregate terms, COVID -19 will likely have a sustained impact on the domestic economy. Such will be seen in reduced production and profitability for several years and forever in some industries.

At the core of my concerns:

• Important Industries Gutted: Several key labor-intensive industries, such as education, lodging, entertainment, restaurant, travel, retail, and non-residential real estate, all face an existential threat. For these industries, they simply cannot survive the conditions they face. For these gutted industries, we face, at best, an 80% to 85% recovery in the years to come. In the case of some of these sectors like retail, Covid-19 only sped up what was already a secular decline. 

• A Negative Knock-On Effect: Tangential industries, like food and other services surrounding less utilized offices, malls, and other spaces, will also get hit. They, too, face at best, an 80% recovery.

• Widening Income and Wealth Inequality: The combined unemployment impact will run deep and cause adverse economic ramifications and intensified social imbalances.

• A Battered Public Sector: With a lower revenue base, the Federal government and municipalities will cut services (and employment).

• Rising Tax Rates and Redistribution: To fund the revenue shortfall tax rates will steadily increase. Such will exacerbate the disruption described above, and create a less than virtuous cycle.

Negative Impact To Stocks

As Doug also notes, there are substantial impacts to companies individually, which will eventually manifest in lower asset prices.

• Weak Capital Spending: With a large output gap and higher debt loads ($2.5 trillion of Federal Debt and $16 trillion of non-financial debt), the outlook for capital spending is weak over the next several years.

• Higher Costs And Lower Profit Margins: The surviving companies in a post-virus world will face higher costs of doing business. 

• The Competitive Influence of Zombie Companies Exacerbate Lower Profitability: Corporations will face further pressure on profit margins from “zombie companies.” These companies compete aggressively on cost, and take longer to die due to low interest rates and weak loan covenants. 

• Small Businesses Gutted: The greatest brunt from the pandemic is faced by small businesses that historically account for the largest job creators.

• The Specter of a Secular Erosion in Unemployment: Permanent job losses will be surprisingly large, ultimately killing consumption. 

• More Cautious Business Confidence and Spending: The surviving companies were ill-prepared operationally and financially, in early 2020 for the disruptive impact of COVID- 19. Such will force companies to maintain a “buffer” of additional capital (and cash) in the event of another unforeseen event or tragedy. In all likelihood, this will make for less ambitious capital spending and expansion plans relative to the past. 

• Financial Repression Holds Multiple Risks: A sustained period of low-interest rates, necessary (by some) to offset reduced economic growth, could backfire. Repressing interest rates runs the risk of a pension fund crisis, and intransigence on the part of businesses to expand and may impair the U.S. banking system.

• A Political Stasis: Political divisiveness and partisanship could intensify – dimming the probability of effective, pro-growth fiscal policy necessary in a low growth economy.

Overly Bullish

When reading through Doug’s list, the immediate response from readers who have a “bullish bias,” is “yeah…but what about the Fed?”

In the short-term, the Fed’s monetary interventions can certainly lift asset prices. As noted in the table above, the biggest “bang for the buck” is when asset markets are profoundly depressed, and negative sentiment is exceptionally high.

Such is not the case currently with retail investors chasing momentum in the markets with reckless disregard of the underlying investment risk. The sharp rise in the Russell 2000 index, as noted by Sentiment Trader, supports this view:

“Below is the percentage of Russell 2000 firms that have negative operating earnings over the trailing-12 months. It just moved above 30%, the most in over a decade. Only twice before in 20 years have such a high proportion of these small companies lost money. Those two periods were in April 2002 and December 2009 through February 2010.”

Furthermore, you have a near-record number of small traders speculating on asset prices through the use of options.

As noted previously, investors are also using 24-month forward estimates to justify overpaying for assets.

But, by nearly any metric, stocks are extremely expensive. There is only so much “future growth” that can be pulled forward. Eventually, “the piper must be paid.”

The Risks Of Being Bullish

At the moment, none of these risks seem to matter.

What is vital to understand none of these issues will “cause” the “bear market.”

They are just the “fuel” that will exacerbate an eventual decline when the right catalyst is applied. Much like a can of gasoline stored in your garage, gas is inert until introducing the proper catalyst (a match.)

Concerning the financial markets, it will most likely not be a resurgence of the virus, weak economic data, or even a dismal earnings season. Such has already been “priced in” by the market. However, as stated, it will require an unexpected, exogenous event to ignite the fuel. At the point, it will become hard to contain the flames.

From an investment standpoint, it is critical to understand the “risk” under which you deploy capital into overvalued and extended assets.

While it may seem like a “no-lose” scenario due to the Fed’s liquidity programs, mean reversions can, and have previously, occurred.

As Doug concluded:

“While the Federal Reserve can provide the necessary ammunition (and liquidity) to stabilize activity briefly – it is unlikely a longer-term solution.

As we pass another Independence Day, the downcast prospects will impact the markets in the coming weeks and months

These are not an ingredient for a “Bull Market” or rising valuations. Instead, the above factors may be an ingredient to:

1. Increased market volatility.

2. Increasing economic uncertainty and cautiousness in the C-suite.

3. An irregular period of growth.

4. Lower price-earnings ratios.

5. More social unrest.

The U.S. economy and our financial markets now face a crossroad – they are once again decoupling. The test of economic aspiration and market optimism will come in the years ahead.”

Navigating The Risk

Whenever I write an article that discusses a “bearish view” on the financial markets, readers construe it to mean I am sitting in cash, or short the “bull market.”

Nothing could be further from the truth. As stated over the last few weeks, we are currently “uncomfortably long” the market on our portfolios’ equity side. While we continue to hedge our risks to some degree through our bond, gold, and cash holdings, we are still well exposed to potential downside risks.

Having a thorough understanding of the “risk” is to have better control over long-term outcomes. While it is essential to make money while markets are rising, it is even more critical to control the losses. Spending a bulk of your time getting “back to even” is not a long-term investment strategy.

In January and February of this year, we discussed taking profits in stocks like AAPL, MSFT, AMZN, and others. The reason was not some prediction about the impact of the virus, but rather the gross deviation and extension of these positions from long-term means.

That risk reduction benefited us much when the crash came in March.

On Wednesday, we took profits in AAPL, MSFT, NFLX, and AMZN. (Taking profits does not mean we sold the entire position.)

I don’t know what might cause the next correction, or if there will even be one. But what I do know is that when stocks are this extended, overbought, and deviated above long-term means, bad things tend to happen.

Though long off the media’s radar, it remains that a thousand or more US troops are still occupying northeast Syria’s oil rich region, provoking multiple recent dangerous “close call” near-clashes with Syrian and Russian troops who are also patrolling a region considered sovereign Syrian soil.

The latest tense encounter this week as a US military convoy came upon a check point manned by Syrian Army soldiers and pro-Assad militia almost resulted in a direct clash.

Video shows Syrian soldiers halting the US-flagged patrol unit, consisting of three armored vehicles, demanding that they turn back. At one point a Syrian soldier even approaches the doors of the lead American vehicle and is seen waiving his Kalashnikov point-blank at the driver side windows (at 3:40 mark below). 

The convoy then promptly initiates a U-turn and heads in the opposite direction, likely given it was clear that the Syrian soldiers were ready to engage.

“Run baby, run!” the cameraman is heard saying. The incident reportedly took place in western Hasakah along the M-4 highway. The Americans were apparently trying to access a key bridge along the strategic road.

Syrian state media outlet SANA published photos of the encounter, claiming it as a victory against the “US occupation in the village of Mansaf Tahtani” which “forced them to return to their illegal bases.”

In of the official photos released by SANA, a Syrian soldier is seen brandishing a rocket-propelled grenade while walking toward the retreating convoy.

It’s but another reminder that the war in Syria is far from finally settled, though Assad is in form control of most of the country.

Though brief, there’s a rare moment a Syrian soldier points his rifle directly at US troops inside the Army vehicle.

There’s clearly still the potential for major war to erupt once again given the significant presence of US forces in Syria’s most oil-rich area.

Both Damascus and Moscow have repeatedly demanded all American forces leave Syria immediately, and have at times threatened use of force to make that happen, though to some degree an unspoken ‘status quo’ has remained, preventing outright gunfights among major powers on the ground.

After four shootings over 10 days in Seattle’s cop-less ‘autonomous zone’ left two teenagers dead last month, the majority of City Council is now backing proposals to defund the police department by 50% and completely overhaul the city’s 911 system after an activist group, Decriminalize Seattle, launched a pressure campaign to redirect millions of taxpayer dollars to community organizations.

The change would mean firing approximately 1,000 personnel from the Seattle Police Department.

“The status quo is no longer acceptable,” said Council President Lorena Gonzalez in a Thursday statement reproted by KIRO7. “We have to take away the things that no longer and should have never belonged to law enforcement in the first place.“

Others on the council, including budget chair Theresa Mosqueda echoed the sentiment during a news conference, saying “I look forward to implementing the proposals outlined by you all.”

“When millions of people took to the streets to protest excessive use of force and police violence, they were met with excessive use of force and police violence in Seattle and around the country, proving that it’s not just about a few bad actors.“

“It is the institution of policing itself that must be dismantled,” she added.

According to the coalition, its plan to reallocate more than $200 million from the Seattle Police Department’s budget would replace current 911 operations with a civilian-controlled system; scaled up community-led solutions; an investment in housing; and a fund for a “community-created roadmap to life without policing.”

“Ensure that young people and our families have access to the sorts of resources, housing, economic and employment opportunity, health care, education, which actually prevent young people and their families from ever entering the school -to -prison pipeline or the prison industrial complex,” Nikkita Oliver of Creative Justice said.

“You want us as visionaries in thinking through community solutions to policing,” Jaelynn Scott with the Black Trans Taskforce said. –KIRO7

“How many victims would not have to be victims?” said K. Wyking Garrett, CEO of Africatown Community Land Trust. “Because when the police show up, there’s already a victim, and there’s already a suspect, who’s also a victim in certain ways.”

Police Chief Carmen Best pushed back, telling KIRO7: “I respect Councilmember Mosqueda. I think she is very passionate about what she’s doing, but she also needs to think about the fact that public safety and the budget are intertwined,” adding “And we need to make sure we’re doing what’s in the best interests of everybody. It’s really interesting — if anybody recognizes issues of system racism and institutional racism, it’s me.”

“I think it’s rash and irrational to make that decision without having a thoughtful conversation with community members,” she added. “And I’m hoping that the City Council will rethink the plan to do that — without having a plan for how we’re going to re-envision policing and how it will work.”

On America’s Independence Day and a week after President Trump signed an executive order to protect federal monuments from vandalism, a life-sized sculpture of first lady Melania Trump was burned near her hometown of Sevnica, Slovenia. 

Brad Downey, an American Berlin-based artist, told Reuters police contacted him on July 5th about hooligans who torched his sculpture of the first lady. He said the statue was “blackened and disfigured” – and police removed it the next day. 

A statue depicting Melania Trump was removed from where it stood near the first lady’s hometown in Slovenia after after it was set on fire and badly scorched on the 4th of July. https://t.co/LeIdgRpNj2 pic.twitter.com/dUY97SGHKB

— ABC News (@ABC) July 10, 2020

“I want to know why they did it,” Downey said, adding that he would like to interview the arsonist for an upcoming film he is working on. 

Police spokeswoman Alenka Drenik said the investigation “has not been completed yet, so we cannot reveal details due to the interest of further procedures.

The wooden statue of the first lady was unveiled last year – it depicts the first lady as she stood at President Donald Trump’s inauguration day – wearing a light blue coat and waving her left hand. 

A resident of Sevnica told Reuters in 2019 that the statue “does not look as beautiful as she normally is.” 

Downey told CNN locals had been nothing but “supportive” about the statue. They were really proud of this thing.”

Before the virus pandemic, a wooden statue mocking President Trump was burnt in Slovenia’s city of Moravce.