Rolling Thunder

The S&P chart below shows that prices have continued to weaken and roll lower after a 4-day island top was created in the first week of June. This type of formation indicates an exhaustion of buying which traps buyers who are forced to liquidate positions at a loss. Prices tried to rally in mid-June but failed to follow-through as COVID-19 cases keep rising which prolongs the recovery period for certain states that may not fully get back to business until 2021.

This is a chart of the S&P 500 ETF (SPY).

Let’s not forget that the Q2 earnings reports come out in July and will fully reflect the shutdown effects of the coronavirus. Some of the stimulus acts by Congress will need to be extended for several more months and the uncertainty around the Presidential election is fast approaching.

The policies of the Fed won’t be going anywhere but everything has their limitation. The Fed is buying $80B monthly in bonds but that may not be enough to support the stock market. There is a distinct correlation in the chart below between stock prices and the Fed’s bond buying so equities may fade here just on this limitation of “only” $80B.

Another reality is that the Fed’s policies are fueling the next debt bubble in the high-yield market. In every credit cycle, there is always an acceleration in debt creation before bond prices crash.

High Yield Bond issuance through July 2020.

Most buyers of this debt have been structured products called CLOs (Collateralized Debt Obligations) which tend to do a poor job in discriminating between good and bad credits. This means that underwriting standards deteriorate which increase the probability that bondholders get lower recoveries in a bankruptcy. Not a good paradigm and a sign that a credit cycle is nigh.

This is a chart of the June 2020 issuance in junk bonds.

Chart of the Week!

The U.S. reported 40,184 new COVID-19 cases on Thursday, its highest-ever single-day total since the start of the pandemic, according to data from Worldometer. The previous high was on April 24, when the country reported just over 39,000 new cases. Texas, California, Florida, Arizona and Georgia were the states reporting the highest number of new cases on Thursday. (Knowhere Briefing)

Statistica chart on the increasing rate of COVID-19 in the United States vs Europe.

Economic & Central Banking Snippets 

  • Consumer spending, which represents more than two-thirds of economic demand in the U.S., remained far below pre-pandemic levels, down 12% from February. Personal consumption, the amount Americans spent on goods and services, rose 8.2% in May from a month earlier, the Commerce Department said Friday. That was more than double the prior all-time high since record-keeping began in 1959. (Investopedia)
  • Existing home sales tumbled in May, but realtors expect that it will represent the bottom. Sales of existing homes in May fell 9.7%, compared with April, to a seasonally adjusted annualized rate of 3.91 million units, according to the National Association of Realtors. Sales were down 26.6% annually. That is the largest annual decline since 1982, when interest rates were about 18%. It is also the slowest sales pace since Oct. 2010.
FRED chart of Existing Home Sales - June 2020.
  • The number of Americans seeking unemployment benefits was higher than forecast for a second straight week, adding to signs that the recovery is cooling amid a pickup in coronavirus cases. Initial jobless claims in regular state programs fell to 1.48 million last week from an upwardly revised 1.54 million in the prior week. (280 CapMarkets)
  • While jobless claims have slowed in each of the past 12 weeks, the number of unemployed workers has remained near 20m. Continuing claims — the number of people actively collecting benefits — edged down again to 19.5m in the week to June 13, equivalent to 13.4 per cent of the workforce. (FT)
  • International trade has fallen off a cliff. The U.S. merchandise trade deficit widened in May as exports fell faster than imports. The Netherlands Bureau for Economic Policy Analysis recorded a historical 12.1% decline in the world trade volume in April as economies around the globe grappled with the coronavirus.
US Trade in goods on a monthly basis.
  • The Federal Reserve has capped dividends and banned share buybacks by big US banks as it released an analysis showing Covid-19 could trigger $700bn of loan losses and push some lenders close to their capital minimums. Announcing the results of a trio of exercises on the health of America’s top lenders, the Fed said 33 banks that underwent “stress tests” would be banned from buying back their shares until at least the fourth quarter of this year. (FT)

Macro Snippets

  • Amazon is buying self-driving car startup Zoox for over $1 billion, according to reports from The Information and the Financial Times. This could either be to aid its delivery ambitions or to compete with the likes of Waymo in the space. Founded in 2014, Zoox has raised close to $1 billion in funding, according to Crunchable. (Investopedia)
  • I have filled my tank once since March…
A chart of gasoline demand in the United States.
  • Nike reported a surprise loss for the fiscal Q4 quarter. Revenue plunged 38% year-over-year to $6.3 billion. Digital sales increased 75% and made up 30% of total revenue. The company will be cutting jobs as it refocuses on selling directly to consumers. (Investopedia)
  • Unilever will halt U.S. ads on Facebook and Twitter for the rest of the year, citing hate speech and polarized politics as the key reasons for its decision. Other brands, including outdoor gear company Patagonia, Verizon Communications Inc., and Ben & Jerry’s—a Unilever subsidiary—have also pledged to boycott ads on Facebook and Instagram. (Investopedia)
  • Macy’s Inc. will cut about 3,900 corporate and management jobs to slash costs in an effort to weather the long-term effects of the Covid-19 pandemic on the reeling retail sector. The restructuring, announced Thursday, is expected to save the company $365 million this fiscal year, then about $630 million a year going forward. (280 CapMarkets)
  • Speaking of commercial real estate, it has been a good run but a correction to valuations in this sector will be long lasting.
Commercial Real Estate prices.
  • One big obstacle to returning to the office: the commute. About three quarters of Manhattan office workers take the bus or subway to work. Crowded subway cars raise the risk of infection, but keeping a distance between commuters could make it much harder to get to work on time. If more people switch to cars, traffic jams could worsen significantly. (WSJ)
This is a chart of directions in Apple maps in New York City.
Paul J. McCarthy

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


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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