Hindsight will be 2020

Daily Thoughts on Financial Reality

  • Thoughts from Thursday, August 13, 2020
    1. FANMAG – still pressing higher, but isn’t this a bit much?

    FANMAG, if you were wondering, stands for Facebook, Apple, Netflix, Microsoft, Amazon and Google.  These companies have been doing the heavy lifting of the markets for the past 3 years, but as of late, they have gone to new heights.  FANMAG value as a group is now bigger than all of the companies in the Financials, Industrials, Materials, and Energy sectors of the S&P 500 COMBINED.  In an even crazier example, Apple’s value is nearly equal to that of the entire Russell 2000 index.

    There are two ways this ends:  ugly or a disaster.  History is always our guide here, and in the past, every time we have seen similar extremes, the end result is these companies losing 40%+ in another correction.  Will that start tomorrow?  Probably not.  But thinking that these companies are untouchable could be a giant mistake if you are buying today hoping they will continue to sky-rocket.

    1. Unemployment claims

    Wall Street and politicians are cheering the latest weekly unemployment claims released today since they were less than 1m.  That may seem like a big deal, and as this chart shows, the trend for new unemployment claims continues to fall slowly but surely.

    But keep this perspective…until COVID-19, there was NEVER a single week of 1m claims.  EVER.  Continuing claims counting all unemployment assistance amounts to 28m people per the same report.  Do you know how many people are in the workforce in America?  Roughly 160m.

    So the math says 28/160 = 17.5% of Americans are receiving some form of unemployment benefit.

    Employment drives an economy.  If we can’t get people back to work, the economic doldrums will continue for many years to come.

    1. Netflix rally ahead?

    At this point, we are hearing all the excuses why stocks are not over-valued.  Recovery is here.  Fed won’t let us down.  It’s a new era for technology so tech companies should be valued more.  I can go on and on and on.  But then this article caught my attention, and I wonder if anyone else is paying attention to how irrational the arguments are for Netflix.  The stock has rallied 40% since April 1st.  Is that not exceptional?  While maybe not on par with some of the other outrageous tech companies, how can 40% over 3 months NOT ALREADY BE CONSIDERED A BREAKOUT?

    Here are the reasons (greed…total return since 4/1/2020):  

    TSLA is up 339%

    AAPL is up 92%

    NVDA is up 88%

    AMZN is up 67%

    FB is up 57%

    But 40% is a stark contrast to its 3-year growth of 292%, so maybe the whining and disappointment is justified?
    https://www.thestreet.com/investing/trading-netflix-stock-breakout

  • Thoughts from Friday, July 31, 2020

    Earnings from Big Tech Don’t Matter

    • Stimulus put more $ into the economy.
    • Travel and entertainment spending simply moved to tech.
    • Services spending plummeted while people still bought stuff online.
    • Everyone was online significantly more than ever.

    3rd and 4th quarter are what really matter. How will these companies do when there is no stimulus? When unemployment affects finally take root? While re-opening has been shaky at best, people are beginning to spend elsewhere.

    Don’t get me wrong. These companies should still grow. But not at the rate Wall Street expects and not at a rate that justifies their current valuations.

    https://www.wsj.com/livecoverage/google-amazon-facebook-apple-earnings

  • Thoughts from Tuesday, July 28, 2020

    CASH

    One of the bullish arguments out there is that there is a lot of cash on the sidelines, and as soon as “investors” are comfortable, they will start buying stocks again.  Well, I am not 100% sure that is the case as I have explained with all that is happening through Robinhood and online trading.
    But here is a good chart.  It actually shows money markets are at all-time highs (I think there are a lot of reasons, most of them related to extreme corporate borrowing over the past few months, so many companies are sitting on billions in cash.  Some is at the bank.  Some is in money markets, etc.).  But here’s the catch:  major recessions followed the last 2 peaks.  Is this time different?  And the current extreme is nearly double the past extreme in 2008.  Does that mean a potential correction is significantly worse than we can imagine?  Only time will tell.

    GEOPOLITICS

    With all the attention on COVID, social justice, unemployment and the stock market, geopolitical issues have been virtually ignored.  Unfortunately, there are some developments that are concerning:

    • China-US tension is growing: Trade, Virus, South China Sea
    • Turkey and Greece are poking each other and talking about war (seriously…I’m not kidding)
    • Middle east tensions are rising between Israel and everyone else
    • Global trade volumes are 15% lower than last year, which is bad for everyone and countries are starting to voice their irritation with each other (China/South Korea, US/Everyone, Europe/Asia ex-China)

    Pressure is mounting everywhere.

    BIG 3

    No, not the Big 3 automakers.  I am talking about Apple, Amazon and Microsoft.  The consensus is that these companies are untouchable.  COVID will make them better and stronger and eliminate weaker competition.  Not many have the nerve to come out and say they are over-valued, but they are.  Just as in 2000 when there was a belief that technology companies should be viewed differently and permanently more valuable, we have the same arguments today.


    Here is a great chart from The Felder Report

    John Mauldin makes some quick and easy commentary about it, so I am not going to repeat him here.  Just take a quick read in his latest commentary (https://www.mauldineconomics.com/frontlinethoughts/valuation-inflation)

    Nuff said.  Bubblicious.  #ThisTimeIsNotDifferent…it’s worse.

  • Thoughts from Friday, July 3

    It’s been another long week full of good information on the stock market and economy, so I want to take a quick look at some of the developments.

    1. Jobs Report – 4.8m new jobs, falling unemployment rate, record continuing unemployment claims.

    You read that right.  It seems contradictory.  The Bureau of Labor and Statistics reported more new jobs than expected along with a falling unemployment rate.  But at the SAME TIME, they also reported a RECORD number of continuing unemployment claims…over 31 million.  As “Mish” says in the article below, the “strength in the report is relative”.  The broader U6 unemployment rate is 18%.  I don’t know about you, but it seems that these numbers are so big they feel unreal.  But the reality is that over 31m people are receiving unemployment benefits, many more are unemployment and NOT receiving benefits, so the actual unemployment “rate” is irrelevant.  If continuing claims persist for another few months, any hope of a significant and quick economic recovery is gone.  Bottom Line – the US economy cannot be bouncing back with a vengeance when 20% of its workforce is out of work. https://www.thestreet.com/mishtalk/economics/jobs-rebound-by-4-8-million-but-huge-headwinds-remain

    1. Consumer Confidence is rising – Rebound in June

    Consumer confidence should be rebounding, but the challenge will be going forward with significantly rising COVID-19 cases and more importantly hospitalizations, will the consumer retreat?  But here’s the thing, while confidence rebounded in June, it is still 30% below it’s peak in February.  30%.  Another big and hard to believe number.  How long could it take to get back to pre-pademic levels?  As extra unemployment benefits sunset, home and car loan forbearances need to be repaid and the virus continues to leave a fog of uncertainty around the world, it will likely be many YEARS before the consumer is indeed comfortable again. https://www.financial-world.org/news/news/economy/5895/us-consumer-confidence-picks-up-in-early-june-as-unemployment-glooms-linger/

    1. More Gvt Spending – are there consequences?

    One of the things we keep hearing in the media and those that are bullish about the stock market is that the Gvt needs to spend more and the Federal Reserve needs to do more in order to keep stock prices high.  First, as we have discussed before, history has shown that more Fed intervention is only artificial and eventually become irrelevant to stock prices.  Second, numerous academic studies, including those done by various Federal Reserve banks, have shown that additional Gvt spending is not a significant multiplier to long-term economic growth.  For every $1 spent, the affect has less than a $1 of economic productivity.  What does that all mean?  Well, it means that when the Gvt spends money, it doesn’t really help the economy very much.  In fact, it take away from private spending and growth.  This is why Gvt deficits and debt are counter-productive over time.  

    But nevertheless, the opinion still stands that the Gvt and the Fed should to more because the are not consequences to borrowing.  For you and me along with businesses and local governments, when we borrow, we have to pay it back.  Is the US Gvt different?  Yes and No.  For now, the consequences seem small and distant but as the Federal debt has now soared past $26 trillion and the Federal Reserve has over $7 trillion on its balance sheet, when will it all matter?  And why are we trying to save the stock market?  Should saving people be the priority? https://www.marketwatch.com/story/what-could-save-the-stock-market-in-julymore-government-borrowing-and-federal-reserve-money-printing-2020-07-01?mod=home-page

  • Thoughts from June 29, 2020

    Interim Note

    So I was writing the next section of WHY I AM STILL A BEAR, and towards the end I re-read everything and realized it was horrible.  Sorry!  That happens sometimes.  I feel like I am running a bit on fumes right now, so for today, I am going to go back to the usual format of highlighting some stories/thoughts on the day:

    1. Major employer layoffs:  IBM, Accenture, HSBC, Quantas, Nike

    Big companies are announcing layoffs.  When the pandemic started and the world shut down, it made sense that retail companies laid people off.  So when we look at the unemployment claims from March and April, it is somewhat understandable.  The problem is now.  It is nearly July.  Unemployment claims this month are still stuck around an aggregate of 20 million workers.  That is a big number, and the picture is getting uglier.  HSBC announced 35,000 layoffs worldwide, and companies like IBM and Accenture didn’t announce layoffs, but thousands have received their walking papers.  Unfortunately, this is just he beginning. https://www.forbes.com/sites/jackkelly/2020/06/24/white-collar-wall-street-professionals-will-witness-layoffs-and-bonus-cuts/#6937e8153875

    1. More bankruptcies….Chuck E Cheese?!?

    Growing up I didn’t get to Chuck E Cheese as often as I would have liked.  In fact, I think I had one birthday there when I was eight, so when my wife asked what I wanted to do for my 25th birthday, I said CHUCK E CHEESE!!! Seriously…it was fun, but a little lame at the same time.  That was more than a few years ago, and now Chuck has filed for bankruptcy but don’t fret too long.  As with most corporate bankruptcies these days, the company will actually still be in business but its debt will get reorganized and the equity shareholders will be wiped out and new ownership will be put in place.  And it makes sense, not only for CEC to reorganize, but a lot of companies.  This is a good list, but it is growing daily…including today with Chesapeake Energy filing last night and GNC late last week.  Again, like the layoffs above, I fear this has only just begun. https://fortune.com/2020/06/29/companies-filing-bankruptcy-2020-during-coronavirus-pandemic-covid-19-economy-industries/

    1. IMF projection – not a good sign

    The International Monetary Fund (IMF) is notoriously poor at forecasts, so their latest is a stark warning.  Of all the major “global” experts, the IMF latest economic forecast is the most pessimistic, projecting -4.9% global growth for 2020.  That may not sound like a lot, but it is significant.  The bigger concern is that since the IMF is rarely correct and the vast majority of the time is too OPTIMISTIC, we could be looking at an even worse global economic landscape this year.  I would not be surprised to see it closer to 7%, especially since China is barely growing and Europe the US and Japan will all be negative contributors. https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020