S&P 500 Index Chart

Over The Line

The stock market has refused to re-test the March lows which means that the Trillions in central bank stimulus and bailout programs have buoyed the stock and bond markets. In the chart of the S&P 500 index below, we can see that the 61.8% retracement level has been surpassed which raises the odds that the March low was a bottom despite the massive disconnect from the fundamentals. After going sideways for several weeks in April/May, the indices are breaking-out of this consolidation range and may challenge new highs over the summer months.

Chart of the S&P 500 Index - May 2020.  @kiscocap

The fundamentals of the economy are very challenging but the worse it gets, the more bailout programs get passed. This may all look to get resolved towards the pre-election months in the Fall, by the way. Eventually, the fundamentals need to recover and catch-up or high-yield bonds and stocks will come crashing down to reality.

Hedgeye Cartoon. Sell In May.

There was no “Sell In May” event and the seasonality improves over the next several weeks which coincides with many states relaxing COVID-19 protocols. I do expect we will re-visit the risk of the coronavirus in the winter months and I believe that central banks and governments expect this, too. This means that we will see a continuation of bailout packages and central bank bond buying programs until we get a vaccine. From what I read, a vaccine is not realistic until 2021 or maybe longer so we may just have one big market melt-up before there is a reconciliation with the fundamentals. Sounds crazy but there is precedent as equity markets ripped higher in 1999 before a top in March of 2000 after the Fed provided stimulus to counteract the Russian default crisis of 1998. Of course, the amount of stimulus today makes the Fed’s activities in the late 1990s look like child’s play.

Chart of the Week!

Economies recovering from COVID-19.

Economic & Central Banking Snippets 

  • New home sales in April totaled 623k, well better than the estimate of 480k and actually up from 619k in March but down from 717k in February. It was homes priced below the $300k level that held up which helped to lower the median price to the lowest since July 2019. (Boock Report)
  • The UK has sold bonds with a negative yield for the first time after a drop in inflation highlighted how the Bank of England may need to take further steps to revive price growth back to its 2% target. The country sold £3.8bn of three-year gilts at a yield of minus 0.003%, according to the Debt Management Office. The slightly negative yield suggests investors who hold the debt to maturity will get back less than they paid, when accounting for regular interest payments and the return of principal. (FT)
  • Another 2.4m Americans applied for unemployment benefits last week, bringing the total number of first-time applications to 38.6m since the coronavirus pandemic hit the world’s largest economy nine weeks ago. It marked the seventh consecutive weekly decline in initial jobless claims and was in line with analyst expectations of 2.4m applications for the week ending May 16, according to a survey of economists by Refinitiv. (FT)
Applications For Unemployment Insurance.  @kiscocap
  • Since April, activity in some pockets of the economy appears to be perking up—or at least not deteriorating further—as states start to reopen businesses and Americans return to work. (WSJ)
Dining Dip During COVID-19.  @kiscocap
  • New orders for durable goods fell more than 17% in April and the U.S. economy’s first-quarter contraction was slightly steeper than initially estimated. Most economists expect an even bigger contraction for gross domestic product in the second quarter. (WSJ)
Durable Goods Orders May 2020.  @kiscocap

Macro Snippets

  • Barely five months into the year, U.S. investment-grade companies already have issued more than $1 trillion in debt — nearly as much as in all of 2019, which was well above average. And buying shows no sign of letting up, thanks in large part to ultra-low interest rates and the Fed’s promise of “no limit” purchases of Treasury, investment-grade corporate and even junk bonds. (Axios)
  • Boeing plans to dismiss more than 12,000 workers in the US, it said on Wednesday, even as it reactivates the assembly line for the troubled 737 Max. The Chicago jet manufacturer will deliver involuntary lay-off notices to 6,770 employees this week. Another 5,520 employees applied and were accepted for voluntary lay-offs in exchange for severance packages.
  • Highly rated companies including Disney, Apple and ExxonMobil have borrowed $1T in five months as they seek to fortify their balance sheets against the coronavirus-induced economic downturn. “All the big names decided to come in and build up their war chests,” said Shankar Ramakrishnan, senior bonds editor at Informa Global Markets. Aircraft manufacturer Boeing, technology company Oracle and telecoms group AT&T came to market with the biggest deals, raising $25bn, $20bn and $12.5bn, respectively. (FT)
Corporate Borrowing as of May 2020.  @kiscocap
  • AstraZeneca has received more than $1 billion from the U.S. Department of Health. The funds are for the development, production and delivery of the University of Oxford’s COVID-19 vaccine candidate. The British firm also said it has completed agreements to deliver at least 400 million doses starting in September and has secured total manufacturing capacity for one billion doses so far. (Investopedia)
  • Facebook, Shopify and Spotify have joined the growing list of tech companies allowing employees to work from home on a permanent basis or at least until the end of the pandemic. (Investopedia)
  • Latin America’s largest carrier Latam Airlines has filed for bankruptcy protection, the second airline in the region to fall victim this month to the coronavirus crisis. A string of travel industry groups around the world have sought protection from creditors or government bailouts as the Covid-19 crisis wreaks havoc on the sector. Colombia’s Avianca airline filed for bankruptcy protection on May 10, while Lufthansa on Monday agreed a €9bn rescue from the German government. (FT)

That is all for now and thank you for being a subscriber!

Paul J. McCarthy, III
President of Kisco Capital  @kiscocap


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.