Chart of the S&P 500 Index

Weak Sauce

Last week we had a break in trend that was significant as it marked what is likely the end of the retracement (or bounce) from the March low. The island top in the chart below is rare in the longer time frames and the exhaustion gap we saw in Friday’s trading session is a sign that weaker prices are likely next week. The first downside project is the 38.2% (2,835) which is 8.5% lower from Friday’s closing price.

This is a six month chart of the S&P 500 Index with technical analysis provided by Kisco Capital.


Will it stop there or go much lower because of the economy on pause? Well, there are storm clouds on the horizon in the form of earnings reports which are just 2-3 weeks away. The Q1 reports showed some impact of COVID-19 (two weeks in March) but now we will see just how deep the solvency rabbit hole goes as many companies will report a massive drop in revenues for Q2.

Solvency risk will be the talk in the credit markets so bond spreads will move wider (higher yields) despite the Fed’s stimulus programs. So far, there has been ample liquidity but the bad news is that it all comes from one entity – the Fed. Banks used to be liquidity providers to the bond market but not after the Volcker rule that was part of the Dodd-Frank Act in 2010. Where will the second wave of liquidity come from? Something to think about when bonds are downgraded and rating sensitive investors are required to sell as per their regulatory mandates.

Jerome Powell warned Congress this week that they should continue with additional stimulus packages as this problem is not going away anytime soon as many consumers will be out of work for an extended period of time. Reading between the lines you could say that he is nervous about these earnings reports and maybe the stock market got the hint.

Chart of the Week!

Statistic chart on how comfortable consumers are being mobile amid the COVID-19 crisis.


Economic & Central Banking Snippets 

  • Federal Reserve Chairman Jerome Powell said during a hearing Wednesday before the House Financial Services Committee that Congress ending its authorization of ambitious stimulus programs too soon could jeopardize economic improvements made thus far. A number of the programs are nearing their expiry date and have been shown to make a positive contribution to the economy, but Powell maintains support is still needed and it would be unwise to withdraw it prematurely.
  • Applications for unemployment benefits in the U.S. fell less than forecast last week, showing only gradual improvement from the worst of the pandemic-related layoffs even as states re-open more of their economies. Initial jobless claims for regular state programs totaled 1.51 million in the week ended June 13, down slightly from an upwardly revised 1.57 million in the prior week. (280 Securities)
Chart of US Unemployment insurance as of June 2020 (WSJ). 

  • The Bank of England is expected to expand its bond-buying program by 100 billion pounds ($125 billion) with economists on the lookout for hints of more radical polices such as negative interest rates or yield-curve control. (280 Securities)
  • U.S. consumers are skipping loan payments. Americans have missed payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit, suggesting that the flood of layoffs has left many without the means to keep up with their debts.
This is a chart from the Wall Street Journal that shows the level of debt deferments by consumers due to the coronavirus (June 2020).


Macro Snippets

  • Calpers is to move deeper into private equity and private debt by adopting a bold leverage strategy that the $395bn Californian public sector pension fund believes will help it achieve its ambitious 7% rate of return. In a presentation to the Calpers board, Ben Meng, chief investment officer, said the giant fund would take on additional leverage via borrowings and financial instruments such as equity futures. Leverage could be as high as 20% of the value of the fund, or nearly $80bn based on current assets. The aim is to juice up returns to help the scheme, the largest public pension in the US, achieve its growth target. (FT)
  • Congress faces deadlines this summer over how to address expiring provisions of relief measures for businesses and unemployed workers, after allocating nearly $3 trillion in emergency spending earlier this year.
This chart shows the amount of Federal debt as a percentage of GDP. The levels are quite elevated.

  • Restaurants face a cash crunch. Many are finding that reopening is harder than closing because revenues are almost impossible to predict and, in addition to financing their reopenings, restaurants need to pay overdue bills.
Chart of seated diners according to Open Table.

  • BP said it will write off up to $17.5bn from the value of its assets as the UK oil major revises long-term energy price assumptions. BP said coronavirus would have a lasting impact on the global economy and energy demand and sees the pandemic only accelerating a global shift towards cleaner fuels. (FT)
  • US corporate debt is approaching 50% of GDP, a new record.
U.S. Corporate debt divided by GDP. 

  • Market moves Hertz suspended a $500m share sale on Wednesday, frustrating traders who boosted the bankrupt car rental group despite the likelihood that its equity value is nil. (FT)
  • Many leveraged loan borrowers are violating their debt covenants as revenues tumble and leverage spikes. Most creditors are letting borrowers slide for now by amending loan documents and, in some cases, asking for higher interest (and other concessions).
Chart of the number of times relief was given on covenants by debt holders in leveraged loans.

  • Shares in Wirecard fell by 66% after the German fintech group said that auditors at EY could not confirm the existence of €1.9bn in cash reported in its accounts, and that “spurious cash balances” may have been provided by a third party. The payments group said on Thursday that there were indications a trustee of Wirecard bank accounts had attempted “to deceive the auditor and create a wrong perception of the existence of such cash balances”. (FT)
  • Hilton is cutting nearly 22% of its corporate workforce globally, in what is one of the deepest job cuts so far by a major lodging company. The job reductions amount to 2,100 corporate employees, Hilton said Tuesday. The hospitality company said it is also extending its corporate pay cuts, reduced hours, and furloughs for up to three more months. (Investopedia)
  • McDonald’s said U.S. same-store sales fell 5.1% in May as the chain reopened dining rooms. Outside of the U.S., sales were more sluggish as franchises throughout Europe remain closed. Global same-store sales plunged 29.8% in the first quarter and are expected to recover more slowly. (Investopedia)

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.