Last week's stock market was a mixed bag: The three major indices all rose for the second straight week. A more granular look shows that sector results were about 6/5 in favor of market gain - value growth was concentrated in technology, health care, and consumer discretionary, while real estate, materials, and financials took it in the chops. Add to that, falling Treasury yields, a firming dollar, and a plunging oil market, is it any wonder the CEO Optimism Index slipped below its 2008 level?
Federal stimulus programs (SBA's PPP and EIDL programs and Treasury's Stimulus Checks) got off to a rocky start. Lack of guidance and information from the agencies - and utter disregard for program guidelines by some financial institutions, led to an anomaly: By most reasonable measures, the programs launched successfully. But, even businesses that successfully navigated the process are pissed off. For now, we needn't worry too much about PPP and EIDL - those programs "sold old" in less than 2 weeks. Stimulus checks, so we are told, are on their way. An additional round of stimulus has been widely discussed and expected: actual progress on one is invisible.
Then - there is oil: The Saudis and Russia came to a tenuous truce in their price war - but not before global surpluses - fed by diminished demand and a couple of months of pumping like drunken sailors - taxed the system's capacity. With storage at a premium and no one who wants oil - crude was trading at MINUS 37 earlier today - Producers are paying to have the stuff hauled away! This is probably not a long term condition but one thing is obvious: Now is not an optimal time to short crude. (LOL) In case you are interested, pump prices have dropped - but nowhere near as much as the drop in crude prices -- funny how that works, huh? I suppose its also not the time to point out: "When you find yourself in a hole - Stop Digging."
China published its GDP report last Friday - and it was more credible than usual even if we still couldn't reconcile it. For what it was worth - China says its GDP shrank by ~6.8% in March. That figure is in-line with what we estimate for the US economy (~7.2%) so we aren't going to quibble about it.
Both the US and China face a common dilemma: What if we bring capacity back on line and there is no-one to buy the products. At a guess, we are not going to see a radical increase in US manufacturing activity or consumer spending even when the isolation rules are eased. Both US and China are critically dependent on global supply chains for both inputs and outputs. Those chains are now, and probably will remain for quite some time, deeply entangled in their own woes.
The US employment market continued its plunge - adding another ~5MM to the unemployment rolls. This brings our four week total to around 22 million new jobless. The stock market has, thus far, shrugged off this development. That's something we'd certainly comment on, but for our "just the facts" standard for our weekly screed. With manufacturing and production unlikely to return quickly to pre-isolation levels, a great many of the newly unemployed may become long-term casualties.
First Quarter Corporate Earnings reports are coming in - there is an unprecedented amount of red ink out there. The current batch of reports reflects only the first month of isolation: we won't see the real damage until 2nd quarter reports begin in July. Even so, what we can see is grim - and the forward projections are even grimmer. Hang on to your hats folks, it's going to be a long bumpy ride.
And finally, this thought: There is probably a limit to sovereign finance - a balance sheet tipping point beyond which it is unsafe, maybe impossible, to stretch e.g. Fed Funds. I have yet to see discussion of where that point my lie - or what we are going to do if we reach it. Any takers?
CYOA: This is not a recommendation or suggestion to buy or sell any security. Speak to your investment advisor for suggestions tailored to your risk preferences and objectives. Steven Roy Management and Cambyses Capital are affiliated with Cambyses Financial Advisors, LLC, A registered Investment Advisor.