HedgEYE Star Wars

ACT III: A New Hopium

HedgEye Cartoon. Star wars cell with Luke Skywalker and Yoda.



A very significant week as the economy had a huge surprise regarding a comeback on the jobs market (see below) as certain states allowed their economies to re-open for business. There is even an argument that next month will also improve as New York and California have only allowed a modicum of their economies to re-open. Not to mention the technicals which are confirming a bottom from the March low.

As you can see in the chart below, we are in an uptrend from the 2009 low that has a very distinct upper trend line (blue) which has acted as resistance when tested. The COVID-19 crash is a 38.2% retracement of this uptrend which is a typical support level. So, from this perspective it looks as though the S&P 500 will continue on its uptrend.

A chart of the S&P 500.


SPX: Index of the S&P 500

The “V” off the March low is rare but the trillions in stimulus have provided enough liquidity that the market is looking past the Q2 contraction in the global economy. I have also highlighted the four times the S&P 500 became overbought according to the RSI (Relative Strength Index) with yellow vertical lines and you can see that we are currently not near an overbought condition. This leaves for some continued momentum to the upside in the coming months and the S&P 500 won’t hit the 2009 trend line until about 3,500 (3,200 currently). This could be a nice set-up for a rally in the summer months ahead.

What is the roadmap for the remainder of 2020? I think the jury is out on breaking the March low – the market had its chance and it didn’t happen. There is not much on the calendar until July where we will get Q2 earnings which will look predictably terrible. The central banks will also keep pumping in liquidity until there is a vaccine which looks like a 2021 event.

Admittedly, there should be some volatility around the election in November and a potential re-lapse of COVID-19 as the weather turns cooler into the Fall months. However, I think the spread will be less severe as we are all prepared to practice social distancing to curtail an outbreak. But this also means that there could be a second wave of furloughs for workers in the leisure/hospitality and construction sectors (see chart below) as states shut-down for a second time. In this scenario, unemployment will remain elevated for some time which provides the backdrop for central banks to continue their stimulus programs well into 2021.

Chart of the Week!

As the following chart shows, almost every industry reported a gain in employment in May, with leisure & hospitality by far the biggest winner of the month. Expectations were -7.5mm, so this was a massive swing to the upside at +2.509mm. While the unexpected rebound of the job market is certainly cause for optimism, it needs to be noted that employment had dropped by more than 10 million in April and that unemployment remains historically high at 13.3%. (Statistica)

Jobs Gains In May 2020



Economic & Central Banking Snippets 

  • The European Central Bank has added an extra €600bn to the bond-buying program it launched to support the eurozone’s pandemic-stricken economy as it steps up efforts to stop the region sliding into a deflationary spiral. The move to increase the ECB’s pandemic emergency purchase programme (PEPP) to a new total of €1.35tn was slightly larger than most economists’ expectations and means the central bank is on track to buy a record total of more than €1.7tn of assets this year. (FT)
  • Initial jobless claims on Thursday totaled 1.877mm, a touch above the estimate of 1.833mm but down from 2.126mm last week. It’s the 9th straight week of moderation but still remains at very high levels. Continuing claims, delayed by a week, were 21.5mm, up from 20.8mm in the week prior. (Boock Report)
  • According to the Mortgage Bankers Association, home purchase applications continue to power on, rising 5.3% m/o/m and now has it higher by 17.5% y/o/y. 
  • The Reserve Bank of Australia kept rates at a record low of .25% but highlighted the green shoots. “It is possible that the depth of the downturn will be less than earlier expected. The substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period… There has also been a pick up in some forms of consumer spending.”
Australia’s GDP 2020.



Macro Snippets

  • Zoom Video Communications saw its revenue surge 169% year over year in Q1 2021 (fiscal) to $328.2 million, smashing analyst expectations. Customers with more than 10 employees rose 354% to almost 270,000. The number of daily meeting participants peaked at 300 million. Gross margin, however, went from 82.7% in the previous quarter to 68.4% in this quarter. Revenue is expected to be between $495 million and $500 million in the second quarter. (Investopedia)
  • The CEO of one of the country’s biggest chicken producers and three other industry executives were indicted for allegedly conspiring to fix prices on chickens sold to restaurants and grocery stores, the Justice Department’s first charges in a continuing criminal antitrust probe. The one-count indictment, returned by a federal grand jury in Colorado, allege current and former senior executives at Pilgrim’s Pride and Claxton Poultry Farms fixed prices and rigged bids from 2012 to 2017. (WSJ)
  • U.S. oil prices notched their largest monthly gains on record in May, recovering a big chunk of the losses caused in March and April when the country went into lockdown to counter the spread of the coronavirus. All that unburned fuel swamped refineries and storage facilities and sent oil prices into negative territory for the first time.
US Crude Oil Futures May 2020.


  • Luxury conglomerate LVMH may back out of the deal to buy Tiffany & Co., according to a report from Women’s Wear Daily. Board members are reportedly concerned about the novel coronavirus outbreak, the civil unrest in the U.S. and Tiffany’s ability to cover its debt covenants at the end of the transaction. (Investopedia)
  • Amazon is expanding its aircraft fleet as it sees phenomenal demand during the pandemic. The company yesterday announced it is leasing an additional 12 Boeing 767-300 converted cargo aircrafts from Air Transport Services Group (ATSG). They will join the 70 aircrafts currently in the fleet. Amazon Air is also opening three new Regional Air Hubs this year and in 2021. (Investopedia)
  • American Airlines Group on Thursday joined other carriers in restoring some flying that was curtailed due to the coronavirus pandemic, as parts of the country start to reopen. Demand is on the rise in states that are opening up, such as Texas, Florida and Arizona. There is less appetite for travel to and from places like New York, Chicago and San Francisco, said Vasu Raja, American’s senior vice president of network strategy. (WSJ)
  • Latin America is the new epicenter for Covid-19, with regional cases topping 1.1 million and the curve only getting steeper. Brazil and Mexico are posting among the fastest infection rates and logging daily death records. Viral illness is also rising in Peru, Colombia, Chile and Bolivia. (FT)

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

Paul J. McCarthy


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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