Stocks & Equities

What Happened Yesterday?

Joining the dots (and dashes)

Yesterday saw swings in the markets, some key stocks in the US in particular, and equal swings in our underlying backdrop. Let’s try and join them into a coherent whole.

From the dots side we need to start with the plotters at the Fed. Dallas Fed President Kaplan spoke yesterday – and made a classic error, noting Fed emergency lending facilities “won’t be left in place indefinitely” and that “he is a believer that we will need to get bac to more unaided market function without as much intervention from the Fed. We’re just not at that point yet.” The key point/dot here is that our Robin Hood-y/Barstool-y markets clearly do not want to conceive of EVER going back to “unaided function”. They are predicated on a quite logical assumption that any reduction in central bank liquidity will result in a crash, which will result in the resumption of said liquidity. More money, please. And don’t think about taking it away.

From the dashes side, the US moved beyond not taking a formal stance on maritime disputes while insisting on freedom of navigation to openly calling some Chinese claims in the South China Sea illegal. In short, the Chinese 9-dash line showing the South China Sea as its own is rejected. Does one need to join many dots or dashes to see where such conflicting claims can lead? Not towards any kind of return to the US-China economic status quo ante at least.

Yes, and crucially, Bloomberg reports the US will not be specifically targeting the HKD peg over Beijing’s actions on Hong Kong by limiting access to USD because “it would be difficult to implement and might end up hurting the US”. It seems the ‘because markets’ side of the Trump administration has the upper hand over the geostrategic hawks here; naturally this is also the case with the de minimis EU response given in foreign policy dey are de mini-me and only understand markets – Germany’s foreign ministry just removed the Taiwanese flag from its website, for example.

This is a positive because such a US policy to be able to turn off the taps the same way the Fed can turn them on (and on and on) remains the financial equivalent of war as potent as the two US carrier strike groups now in the region. Yet there does not seem to be much dot and dash joining from the US side: how does it confront China over the South China Sea and Hong Kong, which is says it wants to, if ‘because markets’ is the White House rule?

Decoupling, perhaps. As Reuters reports the “The Trump administration plans to soon scrap a 2013 agreement between US and Chinese auditing authorities…a move that could foreshadow a broader crackdown on US-listed Chinese firms under fire for sidestepping American disclosure rules.” So new Chinese listings in the US, it would seem. At least that’s more business for Hong Kong – but then why leave the peg alone and let the US lose out without effecting any real change? Again, the dots and dashes don’t join up.

Indeed, the risks of stronger US actions are arguably still there. Sanctions over Hong Kong still loom and would end up having the same negative effect on HKD, and CNY, if applied as in Iran (whom China is signing a 25-year geostrategic cooperation agreement with.) Moreover, the UK has stated they expect 200,000 Hong Kongers to arrive over the next four years. That’s far less than 10% of those allowed to come, but still points to a huge drain of capital/FX reserves if each migrant arrives with savings; more so if US, Australia and Canada see a similar number.

In which case, it’s a good job Chinese exports were up 0.5% y/y in June (vs. -2.0% consensus) and even imports were up 2.7% (vs. -9.0% consensus). But can we really expect this export trend to continue in H2 with lockdowns coming back and the back of the US increasingly up? Even Europe is miffed, given if there is one thing mercantilists don’t like, it’s mercantilism.

Could someone help Joe join the dots too? Either the apology tour won’t be very apologetic, or new US liquidity will lift boats other than American, or the US is going to continue America First anyway as it reflates. (Of course, to really close itself off it would need to impose capital controls on inflows….which are not going to happen ‘because markets’. )

Meanwhile, as a harbinger of how bad our Q2 is going to look when we get the data, Singapore’s GDP collapsed -42.1% q/q annualised.

This time last year one would have been brave to say even -4.2%. How the world changes. Indeed, with reports that: Covid-19 now infects more than 13 million people; natural immunity after catching it only lasts a few months; the latest Hong Kong outbreak variant is 30% more infectious than the previous wave; a large percentage of those who survive even moderate cases apparently end up with permanent heart damage; and as articles dribble out asking what the world looks like if we don’t get a vaccine at all, it’s perhaps time to join a few more dots and say ‘Dash it’.


A few weeks ago I was sucked into the positive vibe of surprisingly strong economic numbers and a sense the virus was diminishing. I was expecting stocks to have hit new record levels in June. For a moment on Monday, it felt like they did as the S&P turned briefly positive on the year… but then it faded. It felt like the last bloom of a fading rose….

Markets feel tired – I expect we’re in for long summer stuck in a rut. The economic data looks more sobering while the virus is still burning its way through the sunshine states, and threatens a southern hemisphere resurgency. Expectations aren’t quite what they once were…. For the meantime…

As Q2 Earnings season accelerates… just how painful could it get? Read More


BlackRock Makes A Run On Asian Stocks

Now that BlackRock has largely taken over Wall Street, whispers from its corridors are heavily weighted, and the latest two are troubling: It’s downgrading U.S. stocks and prefers the Asian market.

In other words, the king of Wall Street says it’s time to diversify.

After major market movement that has seen U.S. equities bounce back from a dismal March, BlackRock sees a new surge in COVID-19 cases as likely to put a dent in this trend.

On Monday, BlackRock–which oversees nearly $6.5 trillion in global assets–downgraded U.S. stocks from neutral to overweight, and advised clients to start shopping internationally for diversification.

Why? Because the amazing performance of the U.S. equities market this summer has largely been propped up by trillions of dollars in government stimulus and the Federal Reserve’s effort to save the corporate bond market by buying the bonds.

Now, unemployment checks will dry up. More stimulus remains in question, and COVID-19 is no longer flattening–it’s reviving itself with a vengeance as Americans in large numbers decide they simply don’t care or are impervious to the virus.

What investors will be watching carefully is the next policy decision to come out of Congress and the White House about stimulus. If they announce there will be no more unemployment benefits when they end in three weeks, there could easily be an equities sell-off…CLICK for complete article

The Days Of Madness Are Upon Us


I used to think the “believe 6 impossible things before breakfast” line from Alice Through the Looking Glass was one of the funniest things ever written. Until this year.. I’ve come to understand it’s a statement of simple fact for this corona-addled age. I really can’t believe just how confused, conflicted, unfocused and distracted the various threads of society are becoming.

While the virus is still lashing its way around the globe – hitting the Southern Hemisphere in winter – it does feels like its passing. Look for what happens in terms of new cases and outbreaks in Oz over the coming weeks for potential clues about a second wave to hit the North come autumn.

The Pandemic has become the defining event of the decade. As it eases, there are a whole series of unexpected releases occurring. Not just in terms of surprisingly strong snapback economic numbers due to 3 months of repressed consumer spending, but also in terms of bizarre behaviours as tension eases. As the global economy tries to rebalance after the shock, it feels we’re being deluged in a sea of delusional noise and madness..

Let me try to explain… without using the word “unprecedented”. Full Article


Biggest Decline In Earnings…Ever


Over the last quarter, the “Death of Fundamentals” has become apparent as investors ignore earnings to chase market momentum. However, throughout history, such large divergences between fundamentals and price have resulted in low future returns.

This time is unlikely to be different.

“During the second quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the median Q2 EPS estimates for all the companies in the index,) declined by 37.0% (to $23.25 from $36.93) during this period. How significant is a 37.0% decrease in the bottom-up EPS estimate during a quarter? How does this decrease compare to recent quarters?

During the past five years (20 quarters), the average decline in the bottom-up EPS estimate has been 3.2%. Over the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate has been 3.4%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate has been 4.6%. Thus, the decline in the bottom-up EPS estimate recorded during the second quarter was much larger than the 5-year average, the 10-year average, and the 15-year average. 

In fact, this marked the largest decline in the quarterly EPS estimate during a quarter since FactSet began tracking this data in Q1 2002. The previous record was -34.3%, which occurred in Q4 2008.

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