SPX - S&P 500 Index

Hero To Zero

Many things went from hero to zero this week as the Fed threw cold water on the prospects for a 2020 recovery and the market rolled over in a fashion that warns of significant downside. Last week, we had good news with a much better than expected jobs report and now the cold reality of COVID-19 relapses, social unrest and a pessimistic message from the Fed have pulled the rug out from the stock market.

As the chart below shows, we have broken an uptrend from the March low with the stock market being down as much as 7% on Thursday. This type of price action is similar to February when the S&P began to plummet. Perhaps, a bit too early to sound that alarm bell but we did have a 4-day island top and there is still some room to go before we hit the first retracement level at 2834 which is another 7% lower than the close on Friday. If there is an acceleration through 2600 then the March low may very well be re-tested.

Chart of the S&P 500 Index 6/12/2020.


SPX: S&P 500 Index

The close on Friday is far from any major support level so it is likely this sell-off continues into next week. A failure of the market to recognize the path of how this all plays out may well be the reason why investors de-risk – a self-fulfilling condition. Overall, the Fed’s interventions are creating too large of a distortion field around prices for investors to remain confident of how to confidently allocate capital. This quote below from Peter Fisher (ex US Treasury and Federal Reserve official) sums it up well in my opinion:

“Because of the Fed’s interventions, market prices and credit spreads don’t have the information content that we think they have. The Fed is mucking up what prices mean.”

Chart of the Week!

As the following chart shows, the ratio of market capitalizations (as measured here by the very broad Wilshire 5000 index) to GDP is even higher now than it was shortly before the dot-com bubble burst.

This chart shows the Wilshire 5000 to nominal GDP ratio as a measure of stock market valuations over time.



Economic & Central Banking Snippets 

  • Japan’s first-quarter GDP declined less than was originally thought, according to revised data. The third largest economy in the world shrank at an annual rate of 2.2% instead of 3.4%. This follows a 7.2% decline in the prior quarter and confirms that the country has slipped into its first recession in over 4 years. (Investopedia)
  • The U.K. economy shrank a record 20.4% in April as businesses and workers reeled under the lockdown designed to control the coronavirus pandemic. The contraction means the nation has effectively seen almost 18 years of growth wiped out in two months. (280 Securities)
  • The Federal Reserve Board on Monday expanded its Main Street Lending Program to allow more small and medium-sized businesses to be able to receive support. The Board lowered the minimum loan amount, raised the maximum loan limit, adjusted the principal repayment schedule to begin after two years, and extended the term to five years, providing borrowers with greater flexibility in repaying the loans.
  • The number of Americans seeking unemployment benefits eased further to 1.5m last week, following an unexpected return to hiring as the US reopens its economy after 12 weeks of coronavirus-related shutdowns. (WSJ)
  • The cost of food bought for home consumption rose 1% in May following April’s increase of 2.6%, which was the largest month-over-month jump in grocery prices since 1974. Other categories also saw wild swings. Airline fares and lodging away from home posted their biggest annual drops on record. Meantime, the cost of outdoor equipment and supplies, and recreation services posted their largest increases on record, showing how consumer preferences have shifted during the pandemic. (WSJ)
This chart shows Consumer Prices compared to one year ago.



Macro Snippets

  • PG&E expects to raise $5.75 billion through public offerings of common stock and equity units to fund its emergence from Chapter 11. Up to $1.25 billion will be reserved for large shareholders and 25% will be allocated to retail investors. (Investopedia)
  • OPEC and its oil-producing allies have agreed to extend production cuts by one more month to the end of July. In April, the group decided to cut production by 9.7 mb/d (10% of global supply) in May and June to balance the oil markets after the novel coronavirus hit demand. Countries that exceeded their quotas, like Nigeria, Angola and Iraq, have agreed to compensate with extra cuts. (Investopedia)
  • Chesapeake Energy is preparing a potential bankruptcy filing, according to a Bloomberg report. Shares fell 80% today after climbing a stunning 181% yesterday. That’s been a pattern with companies filing for bankruptcy protection. (Investopedia)
  • American oil producers are reopening the spigots. Scores of shale drilling companies turned off wells to reduce output when U.S. oil prices fell to negative territory in late April. Now that more of the world is reopening and prices are rebounding to nearly $40 a barrel, companies are starting to turn some of those wells back on. Even so, American oil output is still widely expected to drop in 2020. That is because shale wells lose steam quickly, and companies have sharply cut back on the number of new wells they are drilling. The decline in new oil-drilling activity is likely to remain a drag on employment and the national economy
Chart of US Oil RIGs in the United States (WSJ).


  • Hertz Global Holdings Inc., the bankrupt car-rental company, asked their bankruptcy judge to allow the company to raise new equity from a counterintuitive stock rally while under severe financial strain. The car-rental company hopes to raise up to $1 billion in new equity, a seemingly unprecedented move from a large bankrupt company eager to capitalize on market anomalies. (WSJ)

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.