We would like to propose a challenge: tweet about each of the 100 cases in the library. We call it the #100Cases challenge. If you complete the challenge, please email me, and I will send you an autographed bookplate. The videos will be freely available till May 31, so there is no cost to play along.
Phil Miles, my law school classmate, took the challenge between October 2019 and February 2020. He tweeted about one case a day, with some short observations. It was a very impressive effort. Here are some of his tweets.
Day 1: #SCOTUS100 Chisolm v. Georgia – Allowing federal lawsuits against states turns out to be unpopular… among states. 11th Amendment incoming.
Day 21: #SCOTUS100 Gonzales v. Raich – Growing a plant in your house and consuming it is still covered by the Commerce Clause. The Court relied in part on the dictionary definition of "economic" – presumably did not consult a dictionary for the definition of "commerce."
Day 89: #SCOTUS100 New York Times Co v Sullivan – Defamation of public figures requires actual malice… thus protecting NYT’s long-standing tradition of negligently publishing false information.
Weird, nobody questioned this corporation’s right to 1A free speech protections ????
We would like to propose a challenge: tweet about each of the 100 cases in the library. We call it the #100Cases challenge. If you complete the challenge, please email me, and I will send you an autographed bookplate. The videos will be freely available till May 31, so there is no cost to play along.
Phil Miles, my law school classmate, took the challenge between October 2019 and February 2020. He tweeted about one case a day, with some short observations. It was a very impressive effort. Here are some of his tweets.
Day 1: #SCOTUS100 Chisolm v. Georgia – Allowing federal lawsuits against states turns out to be unpopular… among states. 11th Amendment incoming.
Day 21: #SCOTUS100 Gonzales v. Raich – Growing a plant in your house and consuming it is still covered by the Commerce Clause. The Court relied in part on the dictionary definition of "economic" – presumably did not consult a dictionary for the definition of "commerce."
Day 89: #SCOTUS100 New York Times Co v Sullivan – Defamation of public figures requires actual malice… thus protecting NYT’s long-standing tradition of negligently publishing false information.
Weird, nobody questioned this corporation’s right to 1A free speech protections ????
“From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.
As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance.
Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”
Honestly, no one knows for certain. However, there are 5-questions that “Market Bulls” need to answer if the current rally is to be sustained.
These questions are not entirely technical, but since “technical analysis” is simply the visualization of market psychology, how you answer the questions will ultimately be reflected by the price dynamics of the market.
Let’s get to work.
1. Employment
Employment is the lifeblood of the economy. Individuals cannot consume goods and services if they do not have a job from which they can derive income. From that consumption comes corporate profits and earnings.
Therefore, for individuals to consume at a rate to provide for sustainable, organic (non-Fed supported), economic growth they must work at a level that provides a sustainable living wage above the poverty level. This means full-time employment that provides benefits, and a livable wage. The chart below shows the number of full-time employees relative to the population. I have also overlaid jobless claims (inverted scale), which shows that when claims fall to current levels, it has generally marked the end of the employment cycle and preceded the onset of a recession.
This erosion in jobless claims has only just begun. As jobless claims and continuing claims rise, it will lead to a sharp deceleration in economic confidence. Confidence is the primary factor of consumptive behaviors, which is why the Federal Reserve acted so quickly to inject liquidity into the financial markets. While the Fed’s actions may prop up financial markets in the short-term, it does little to affect the most significant factor weighing on consumers – their job.
Question: Given that employment is just starting to decline, does such support the assumption of a continued bull market?
* * *
2. Personal Consumption Expenditures (PCE)
Following through from employment, once individuals receive their paycheck, they then consume goods and services in order to live.
This is a crucial economic concept to understand, which is the order in which the economy functions. Consumers must “produce” first, so they receive a paycheck, before they can “consume.” This is also the primary problem of Stephanie Kelton’s “Modern Monetary Theory,” which disincentivizes the productive capacity of the population.
Given that Personal Consumption Expenditures (PCE) is a measure of that consumption, and comprises roughly 70% of the GDP calculation, its relative strength has great bearing on the outcome of economic growth.
More importantly, PCE is the direct contributor to the sales of corporations, which generates their gross revenue. So goes personal consumption – so goes revenue. The lower the revenue that flows into company coffers, the more inclined businesses are to cut costs, including employment and stock buybacks, to maintain profit margins.
The chart below is a comparison of the annualized change in PCE to corporate fixed investment and employment. I have made some estimates for the first quarter based on recent data points.
Question:Does the current weakness in PCE and Fixed Investment support the expectations for a continued bull market from current price levels?
* * *
3. Junk Bonds & Margin Debt
While global Central Banks have lulled investors into an expanded sense of complacency through years of monetary support, it has led to willful blindness of underlying risk. As we discussed in “Investor’s Dilemma:”
“Classical conditioning (also known as Pavlovian or respondent conditioning) refers to a learning procedure in which a potent stimulus (e.g. food) is paired with a previously neutral stimulus (e.g. a bell). What Pavlov discovered is that when the neutral stimulus was introduced, the dogs would begin to salivate in anticipation of the potent stimulus, even though it was not currently present. This learning process results from the psychological “pairing” of the stimuli.”
That “stimuli” over the last decade has been Central Bank interventions. During that period, the complete lack of “fear” in markets, combined with a “chase for yield,” drove “risk” assets to record levels along with leverage. The chart below shows the relationship between margin debt (leverage), stocks, and junk bond yields (which have been inverted for better relevance.)
While asset prices declined sharply in March, it has done little to significantly revert either junk bond yields or margin debt to levels normally consistent with the beginning of a new “bull market.”
With oil prices falling below $20/bbl, a tremendous amount of debt tied to the energy space, and the impact the energy sector has on the broader economy, it is likely too soon to suggest the markets have fully “priced in” the damage being done.
Question:What happens to asset prices if more bankruptcies and forced deleveraging occurs?
* * *
4. Corporate Profits/Earnings
As noted above, if the “bull market” is back, then stocks should be pricing in stronger earnings going forward. However, given the potential shakeout in employment, which will lower consumption, stronger earnings, and corporate profits, are not likely in the near term.
The risk to earnings is even higher than many suspect, given that over the last several years, companies have manufactured profitability through a variety of accounting gimmicks, but primarily through share buybacks from increased leverage. That cycle has now come to an end, but before it did it created a massive deviation of the stock market from corporate profitability.
“If the economy is slowing down, revenue and corporate profit growth will decline also. However, it is this point which the ‘bulls’ should be paying attention to. Many are dismissing currently high valuations under the guise of ‘low interest rates,’ however, the one thing you should not dismiss, and cannot make an excuse for, is the massive deviation between the market and corporate profits after tax. The only other time in history the difference was this great was in 1999.”
It isn’t just the deviation of asset prices from corporate profitability, which is skewed, but also reported earnings per share.
The impending recession, and consumption freeze, is going to start the mean-reversion process in both corporate profits, and earnings. I have projected the potential reversion in the chart below. The reversion in GAAP earnings is pretty calculable as swings from peaks to troughs have run on a fairly consistent trend.
Using that historical context, we can project a recession will reduce earnings to roughly $100/share. (Goldman Sachs currently estimates $110.) The resulting decline asset prices to revert valuations to a level of 18x (still high) trailing earnings would suggest a level of 1800 for the S&P 500 index. (Yesterday’s close of 2626 is still way to elevated.)
The decline in economic growth epitomizes the problem that corporations face today in trying to maintain profitability. The chart below shows corporate profits as a percentage of GDP relative to the annual change in GDP. The last time that corporate profits diverged from GDP, it was unable to sustain that divergence for long. As the economy declines, so will corporate profits and earnings.
Question: How long can asset prices remain divorced from falling corporate profits and weaker economic growth?
* * *
5. Technical Pressure
Given all of the issues discussed above, which must ultimately be reflected in market prices, the technical picture of the market also suggests the recent “bear market” rally will likely fade sooner than later. As noted above”
“Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”
Importantly, despite the sizable rally, participation has remained extraordinarily weak. If the market was seeing strong buying, as suggested by the media, then we should see sizable upticks in the percent measures of advancing issues, issues at new highs, and a rising number of stocks above their 200-dma.
However, on a longer-term basis, since this is the end of the month, and quarter, we can look at our quarterly buy/sell indication which has triggered a “sell” signal for the first time since 2015. While such a signal does not demand a major reversion, it does suggest there is likely more risk to the markets currently than many expect.
Question: Does the technical backdrop currently support the resumption of a bull market?
* * *
There are reasons to be optimistic on the markets in the very short-term. However, we are continuing to extend the amount of time the economy will be “shut down,” which will exacerbate the decline in the unemployment and personal consumption data. The feedback loop from that data into corporate profits and earnings is going to make valuations more problematic even with low interest rates currently.
While Central Banks have rushed into a “burning building with a fire hose” of liquidity, there is the risk that after a decade of excess debt, leverage, and misallocation of assets, the “fire” may be too hot for them to put out.
Assuming that the “bear market” is over already may be a bit premature, and chasing what seems like a “raging bull market” is likely going to disappoint you.
Bear markets have a way of “suckering” investors back into the market to inflict the most pain possible. This is why “bear markets” never end with optimism, but in despair.
US Reports 500+ Casualties In ‘Deadliest Day Yet’, Confirms Largest Jump In New COVID-19 Cases: Live Updates
Summary:
US reports more than 500 deaths for first time
US confirms largest one-day case jump
Russia reports jump in cases, deaths
Maryland, Virginia and DC all locked down
Thailand warns it will prosecute all “April Fools Day” coronavirus jokers
China plans to announce “asymptomatic” carriers of the novel coronavirus
Dr. Fauci warns he fears virus will return this fall
Ford, GE warn 100-day window for producing 50k ventilators doesn’t start until April 20
Spain reports third straight ‘deadliest day yet;’
Orban takes unilateral power in Hungary
* * *
Yesterday, the entire Washington DC area was shut down as the governors of Maryland and Virginia joined Muriel Bowser, the mayor of Washington, DC, in issuing “shelter in place” orders, as the region joined Greater New York, San Francisco and the rest of the Bay Area, Cook County, Greater Seattle and LA County in being completely locked down.
Still, the US case total climbed at an almost unbelievable rate, as the US case total passed 164,000 Tuesday morning, as stock futures traded mildly in the red, though they were essentially flat on the session.
On Monday, it was America’s turn, as the US reported more than 500 deaths for the first time, according to reports published early Tuesday.
But it’s not just that: The US has recorded the biggest daily jump in new cases of any country since the novel coronavirus first made the jump from animal to human (or…whatever) in Wuhan back in December. Even as the overall percentage rate slowed, the US still added more than 20,000 cases on Monday, with its daily rate slowing to 14% from 16%, per the FT. Monday also marked the first time that the US reported more than 500 deaths from COVID-19 in a single day, according to the Washington Post.
Worldwide, 61,404 people were diagnosed with COVID-19 on Monday, bringing the global total to 786,876, while the death toll increased by 3,723 to 37,839, on track to double in less than a week.
A day after the country started expanding a lockdown first rolled out in Moscow late last week, Russia reported 500 new cases of coronavirus on Tuesday, its largest daily increase by far, as the total number of infections surged 27% to 2,337. While the number of deaths recorded nearly doubled overnight to 17.
On Tuesday, Thailand warned on Tuesday that it would criminally prosecute anyone who claimed to have coronavirus as an April Fool’s Day prank, while, in the US, another individual has been arrested for making a terrorist threat by coughing on them and pretending to be carrying the coronavirus.
Most of the new cases reported in the US yesterday – cases and deaths, that is – happened in New York. In a tribute to medical workers battling the virus on the front lines, the Empire State Building flashed red and white on Monday night to symbolize “America’s heartbeat,” lighting up the top of the iconic building.
Amusingly, Beijing announced on Tuesday that it would start disclosing the number of patients who are asymptomatic but found to have contracted the virus. The decision to be more ‘transparent’ with its numbers makes one wonder why China is doing this now? After all, if China were testing on the level of, say, South Korea, it’s possible that you could have seen millions of cases. Is Beijing really going to try and retake the No. 1 spot as the US comes along and starts mass reporting? Or is this merely a ploy to try and make their accounting look more legitimate at a time when even mainstream medical experts are speculating that the true extent of the US outbreak likely won’t ever be known, according to the SCMP.
A new “coronavirus bill” passed by the Hungarian Parliament on Monday granted PM Viktor Orban sweeping new powers to lead the country, the Washington Post reported. Orban now has the power to govern “unchallenged for as long as he sees fit,” a move rights groups said effectively suspends democracy in the European Union member state in the name of fighting the virus, though this isn’t the first time that the “illiberal” whiners have accused Orban of “flexing” his authoritarian tendencies.
The NHC promised to start including the “asymptomatic” figures starting on Wednesday, as Beijing clarifies that it already asks health workers to record this data, which is…interesting, to say the least.
As of as of Monday, there were 1,541 asymptomatic carriers under medical observation on mainland China, including 205 imported cases, officials told SCMP. Data previously shared with the SCMP suggests that the ratio of so-called “silent” (asymptomatic) carriers to diagnosed sick could be as high as one to three, which would be enough to put China back in the lead for most cases worldwide.
With President Trump finally seeming to accept that hundreds of thousands of lives are depending on what he decides to do with the federal coronavirus response, Dr. Fauci warned Monday night that he is already bracing for a second coronavirus outbreak in the fall, when flu season starts again.
“In fact, I would anticipate that that would actually happen because of the degree of transmissibility,” Fauci responded when a reporter asked about the potential reemergence of the virus in a few seasons.
Also, a troubling caveat: After announcing yesterday plans to build some 50k ventilators in 100 days, Ford and GE, which will be working on a product model by Airon Corp., added that the 100-day clock won’t start until April 20, and it’s likely that most of the ventilators won’t be ready until after the US surge, if one still happens.
To the chagrin of its critics, the US is leaning into its sanctions against the Iranian regime at a time when the Iranian people are desperate, facing an outbreak that far outpaces the country’s ability to control or suppress it. The Europeans, meanwhile, have come up with a counterweight: the German Foreign Ministry confirmed Tuesday that a new ‘financial mechanism’ was used for the first time to export “medical goods from Europe to Iran.” The hope is that the new INSTEX – Instrument in Support of Trade Exchanges – system would shield the involved parties from US sanctions that have hampered Iranian efforts to import medicine and other medical supplies. It essentially operates as a clearing house for trade credit points.
The announcement came as Iran confirmed 141 new coronavirus deaths and over 3,000 new cases within the last 24 hours on Tuesday morning. At least 2,898 people have died in the country already, authorities said. INSTEX was a critical piece of EU efforts to preserve the JCPOA – better known as the Iran deal – following the Trump Administration’s decision to torpedo it.
In other news, WaPo reports that the DHS asked states in a Sunday memo that all gun shops be considered “essential” and should be allowed to continue working, while their workers should be considered “essential” workers.
For the third day in a row, Spain on Tuesday announced 849 coronavirus deaths over the last 24 hours, marking another record ‘deadliest day yet’ in an outbreak that has now taken 8,189 lives in the country.
The National Rifle Association (NRA) has joined other gun rights groups in challenging COVID-19 control measures that ban the sale of firearms. In a federal lawsuit filed on Friday, the NRA argues that California Gov. Gavin Newsom’s (D) March 19 business closure order, which Los Angeles County Sheriff Alex Villanueva has interpreted as covering gun dealers, violates the Second Amendment and the right to due process.
Villanueva’s interpretation is not only constitutionally questionable but seemingly untenable in light of new guidance from the federal Department of Homeland Security. In an advisory issued on Saturday, the department added firearm retailers to its definition of the “essential critical infrastructure workforce.” Newsom’s order specifically exempted “federal critical infrastructure sectors.”
In California, the NRA’s complaint notes, “individuals are required to purchase and transfer firearms and ammunition through state and federally licensed dealers” so required background checks can be completed. Newsom’s order, as interpreted by Villanueva, therefore prevents Californians from lawfully acquiring firearms or ammunition until the edict is relaxed or rescinded. “Such a de facto prohibition on the right to keep and bear arms is categorically unconstitutional under the Second Amendment,” says the NRA, which was joined in the lawsuit by the Second Amendment Foundation, the Firearms Policy Coalition, the California Gun Rights Foundation, a Los Angeles County resident, and a Burbank gun dealer.
While “the circumstances posed by the [COVID-19] outbreak are noteworthy,” the complaint says, they “do not excuse unlawful government infringements upon freedom.” In fact, the NRA argues, “the need for enhanced safety during uncertain times is precisely [why] Plaintiffs and their members must be able to exercise their fundamental rights to keep and bear arms.”
In addition to exempting “federal critical infrastructure sectors,” Newsom’s order said he “may designate additional sectors” but did not suggest any or list criteria for choosing them. The order also said “Californians must have access to such necessities as food, prescriptions, and health care,” items they may leave their homes to obtain. But it did not say what other goods or services might count as “necessities.”
That same day, the Los Angeles County Department of Public Health issued an order requiring the immediate closure of all “non-essential businesses.” It allowed continued operation of “essential businesses,” including “establishments engaged in the retail sale of…household consumer products” and “products necessary to maintaining the safety, sanitation, and essential operation of residences.”
Last Tuesday, Villanueva declared that gun dealers are “non-essential” and announced that his deputies would be forcing them to close. The next day, the sheriff said he was suspending that anti-gun operation pending Newsom’s determination of whether firearm sales should be allowed to continue. But on Thursday, after Newsom said he would let local sheriffs decide that issue, Villanueva reiterated that gun stores are “non-essential” and “must close to the general public” to comply with the orders from the governor and the county. Violating the state and county orders is a misdemeanor punishable by up to six months and up to 90 days in jail, respectively.
San Diego Sheriff Bill Gore, by contrast, has said gun stores perform a “valuable public service” and may continue to operate in his jurisdiction. In Gore’s view, gun dealers enhance public safety by allowing enforcement of background checks and California’s 10-day waiting period for firearm purchases. He worried that Californians might turn to the “black market” if they cannot legally buy guns for self-protection.
In addition to running afoul of the Second Amendment, the NRA says, the business closure orders are so vague that they violate the right to due process: “The subject Orders do not define critical terms; they encompass protected and non-protected actions; they omit definitions of key terms; they operate as complete bans; they do not require specific intent to commit an unlawful act; and they permit and encourage arbitrary and erratic arrests and convictions with too much discretion committed to law enforcement. This breadth and built-in vagueness run afoul of the due process clause because the subject Orders fail to give adequate guidance to those who would be law-abiding, to advise them of the nature of the offense with which they may be charged, or to guide courts in trying those who are accused of violating such Orders.”
The Firearms Policy Coalition (FPC), one of the plaintiffs in the California lawsuit, recently persuaded Pennsylvania Gov. Tom Wolf (D) to reverse a policy that required gun stores in that state to close. Although the Pennsylvania Supreme Court rejected the FPC’s application for extraordinary relief, three justices strongly dissented, saying “it is incumbent upon the Governor to make some manner of allowance for our citizens to continue to exercise this constitutional right.”
The FPC also challenged the closure of gun stores under a COVID-19 order issued by New Jersey Gov. Phil Murphy (D). On Monday, Murphy announced that gun dealers will henceforth be considered “essential” businesses, citing the new guidance from the Department of Homeland Security.
“I am pleased that Gov. Murphy is finally recognizing and honoring our constitutional right to bear arms, especially amid this State of Emergency,” said state Sen. Michael Testa (R–Cumberland). “The Second Amendment is essential to all law-abiding citizens, particularly for increased safety, security, and self-protection. New Jerseyans’ rights to purchase a firearm should have never been infringed upon in the first place.”
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The National Rifle Association (NRA) has joined other gun rights groups in challenging COVID-19 control measures that ban the sale of firearms. In a federal lawsuit filed on Friday, the NRA argues that California Gov. Gavin Newsom’s (D) March 19 business closure order, which Los Angeles County Sheriff Alex Villanueva has interpreted as covering gun dealers, violates the Second Amendment and the right to due process.
Villanueva’s interpretation is not only constitutionally questionable but seemingly untenable in light of new guidance from the federal Department of Homeland Security. In an advisory issued on Saturday, the department added firearm retailers to its definition of the “essential critical infrastructure workforce.” Newsom’s order specifically exempted “federal critical infrastructure sectors.”
In California, the NRA’s complaint notes, “individuals are required to purchase and transfer firearms and ammunition through state and federally licensed dealers” so required background checks can be completed. Newsom’s order, as interpreted by Villanueva, therefore prevents Californians from lawfully acquiring firearms or ammunition until the edict is relaxed or rescinded. “Such a de facto prohibition on the right to keep and bear arms is categorically unconstitutional under the Second Amendment,” says the NRA, which was joined in the lawsuit by the Second Amendment Foundation, the Firearms Policy Coalition, the California Gun Rights Foundation, a Los Angeles County resident, and a Burbank gun dealer.
While “the circumstances posed by the [COVID-19] outbreak are noteworthy,” the complaint says, they “do not excuse unlawful government infringements upon freedom.” In fact, the NRA argues, “the need for enhanced safety during uncertain times is precisely [why] Plaintiffs and their members must be able to exercise their fundamental rights to keep and bear arms.”
In addition to exempting “federal critical infrastructure sectors,” Newsom’s order said he “may designate additional sectors” but did not suggest any or list criteria for choosing them. The order also said “Californians must have access to such necessities as food, prescriptions, and health care,” items they may leave their homes to obtain. But it did not say what other goods or services might count as “necessities.”
That same day, the Los Angeles County Department of Public Health issued an order requiring the immediate closure of all “non-essential businesses.” It allowed continued operation of “essential businesses,” including “establishments engaged in the retail sale of…household consumer products” and “products necessary to maintaining the safety, sanitation, and essential operation of residences.”
Last Tuesday, Villanueva declared that gun dealers are “non-essential” and announced that his deputies would be forcing them to close. The next day, the sheriff said he was suspending that anti-gun operation pending Newsom’s determination of whether firearm sales should be allowed to continue. But on Thursday, after Newsom said he would let local sheriffs decide that issue, Villanueva reiterated that gun stores are “non-essential” and “must close to the general public” to comply with the orders from the governor and the county. Violating the state and county orders is a misdemeanor punishable by up to six months and up to 90 days in jail, respectively.
San Diego Sheriff Bill Gore, by contrast, has said gun stores perform a “valuable public service” and may continue to operate in his jurisdiction. In Gore’s view, gun dealers enhance public safety by allowing enforcement of background checks and California’s 10-day waiting period for firearm purchases. He worried that Californians might turn to the “black market” if they cannot legally buy guns for self-protection.
In addition to running afoul of the Second Amendment, the NRA says, the business closure orders are so vague that they violate the right to due process: “The subject Orders do not define critical terms; they encompass protected and non-protected actions; they omit definitions of key terms; they operate as complete bans; they do not require specific intent to commit an unlawful act; and they permit and encourage arbitrary and erratic arrests and convictions with too much discretion committed to law enforcement. This breadth and built-in vagueness run afoul of the due process clause because the subject Orders fail to give adequate guidance to those who would be law-abiding, to advise them of the nature of the offense with which they may be charged, or to guide courts in trying those who are accused of violating such Orders.”
The Firearms Policy Coalition (FPC), one of the plaintiffs in the California lawsuit, recently persuaded Pennsylvania Gov. Tom Wolf (D) to reverse a policy that required gun stores in that state to close. Although the Pennsylvania Supreme Court rejected the FPC’s application for extraordinary relief, three justices strongly dissented, saying “it is incumbent upon the Governor to make some manner of allowance for our citizens to continue to exercise this constitutional right.”
The FPC also challenged the closure of gun stores under a COVID-19 order issued by New Jersey Gov. Phil Murphy (D). On Monday, Murphy announced that gun dealers will henceforth be considered “essential” businesses, citing the new guidance from the Department of Homeland Security.
“I am pleased that Gov. Murphy is finally recognizing and honoring our constitutional right to bear arms, especially amid this State of Emergency,” said state Sen. Michael Testa (R–Cumberland). “The Second Amendment is essential to all law-abiding citizens, particularly for increased safety, security, and self-protection. New Jerseyans’ rights to purchase a firearm should have never been infringed upon in the first place.”
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