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Market Corrects As COVID Cases Surge 06-26-20

Market Corrects As COVID Cases Surge 06-26-20

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3 years ago

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In this issue of “Market Corrects As COVID Cases Surge.”

  • Market Holds Bullish Support
  • From Bubble, To Bust, To Bubble
  • The Problem With 2-Year Forecasts
  • A Bearish Pattern Remains
  • Portfolio Positioning
  • MacroView: Rationalizing High Valuations Won’t Improve Outcomes
  • Sector & Market Analysis
  • 401k Plan Manager

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Catch Up On What You Missed Last Week

Note:

I am on vacation next week, so while I will post a newsletter next weekend, it will only be a short market update as I will not have access to all of my usual data. However, I assure you everything will return to normal on my return.

If you have any questions, I will continue to answer every question, every day. That is between sleeping on the beach, fishing, skiing, or eating. 

Market Corrects As COVID Cases Surge

Three overriding catalysts were driving the correction this past week:

  1. The market had gotten a good bit ahead of fundamentals.
  2. The surge in COVID cases is undermining the V-Shaped recovery narrative.
  3. End of the quarter portfolio rebalancing, which managers postponed in March.

We will go through each of these in more detail. However, let’s start with where we left off last week and update our risk/reward ranges.

Currently, the risk/reward dynamics have become slightly less favorable. The good news is that the 50-dma and 200-dma are so close there is strong support short-term. Such should give the bulls a bit of optimism. However, a breakdown below that level and things will get ugly quickly.

  • -2.2% to consolidation highs vs. +3.1% to the top of the current downtrend. (Positive)
  • -8.9% to previous consolidation lows vs. +7.7% to previous rally peak (Negative)
  • -13.1% to March bounce peak vs. +12% to all-time highs. (Negative)
  • -18.4% to April 5th lows vs. +12% to all-time highs. (Negative)

As shown, with the sell-off on Friday, the short-term oversold condition, a reflexive rally next week would not be surprising. Given that COVID concerns are escalating, it may be wise to use any rally to reduce risk further and increase hedges.

The Market Is Well Ahead Of Fundamentals

Part of the correction over the last two weeks is coming partially from the realignment of stocks back to reality. We specifically mentioned some of the more visible issues last week, but it was interesting to watch the “Daytraders Favorites” crash back to Earth (No pun intended.)

As we addressed on Tuesday, it is hard to justify paying current valuations.

“Furthermore, given the depth of the economic crisis, 49-million unemployed, collapsing wages and incomes, and a resurgence in the number of COVID-19 cases, estimates are still too high. During previous economic downturns, earnings collapsed between 50% and 85%. It is highly optimistic, given the current backdrop, that earnings will only decline by 20%.”

fully invested bears, Technically Speaking: Unicorns, Rainbows, & Fully Invested Bears

6-Downside Risks

With States now beginning to back off of reopening plans, it is highly likely current earnings estimates will need to be guided lower over the next couple of months.

The most significant risk to investors currently is a “reliance on certainty” about future outcomes, when, in reality, there is no certainty at all. As Mike Shedlock pointed out just recently, there are numerous risks still present.

Six Downside Risks 

  1. The future progression of the pandemic remains highly uncertain.
  2. The collapse in demand may ultimately bankrupt many businesses.
  3. Unlike past recessions, services activity has dropped more sharply than manufacturing—with restrictions on movement severely curtailing expenditures on travel, tourism, restaurants, and recreation and social-distancing requirements and attitudes may further weigh on the recovery in these sectors. 
  4. Disruptions to global trade may result in a costly reconfiguration of global supply chains. 
  5. Persistently weak consumer and firm demand may push medium- and longer-term inflation expectations well below central bank targets.
  6. Additional expansionary fiscal policies— possibly in response to future large-scale outbreaks of COVID-19—could significantly increase government debt and add to sovereign risk.”

Again, the market is trading well ahead of underlying fundamentals. While the “Fed Put” may indeed put a “floor” below stocks, that doesn’t mean they can’t correct to realign with economic and fundamental realities.

COVID Makes A Second Appearance

As we discussed previously, the market rallied from the March lows based on 4-underlying premises:

  1. There would be no second-wave of the virus.
  2. There would be a vaccine available by year-end. 
  3. The economy would fully recover back to pre-pandemic levels.
  4. And, of course, “The Fed.”

While the bullish fantasy indeed prevailed over the last couple of months, suddenly, the world has shifted. The hope was that cases in the U.S. would slow into the fall before the potential onset of a “second wave” during a more traditional “flu season.” Unfortunately, the spike in cases in the still ongoing “first wave” will delay economic recovery longer.

In Texas, where I live, the Governor has shut-down bars again, is keeping businesses at reduced capacity, and potentially will reverse more if needed.

My wife went to the doctor recently for a test, and she received the “ole’ swap up the nose.” While the test came back negative. The doctor told my wife that COVID lives in the lungs and not the nasal cavity. Therefore, while her test was negative, it could be a false negative. If the doctor is correct, the real numbers of infected could be 10x higher. Such confirms a recent Reuters article:

“Government experts believe more than 20 million Americans could have contracted the coronavirus, 10-times more than official counts, indicating many people without symptoms have or have had the disease, senior administration officials said.

The estimate, from the Centers for Disease Control and Prevention, is based on serology testing used to determine the presence of antibodies that show whether an individual has had the disease, the officials said.”

If true, the ramifications could substantially impair the bullish thesis.

Timing Couldn’t Be Worse

Without a bill to extend more Federal Aid via Payroll Protection Programs and increased unemployment benefits, the ongoing restriction on trade will likely lead to a further surge in bankruptcies and layoffs.

“According to Bloomberg data, no less than 13 U.S. companies sought bankruptcy protection last week, matching the global financial crisis’s peak. The filings, led by the perennially weak consumer and energy sectors, were the most for any week since May 2009.”

There is a virtual spiral between job losses and bankruptcies. As more individuals lose their jobs, they have less to spend. Since consumption is what drives earnings for businesses, they have to lay off workers to stay in business. Pay attention to the “continuing claims,” which will tell the story of the economic recovery. (That doesn’t look like a “V”)

End Of The Quarter Rebalancing

There was one other factor which has weighed on stocks this past week, which was noted recently by Zerohedge:

“When adding all the other possible sources of the month- and quarter-end forced rebalancing, the total amount ‘for sale’ soars to an unprecedented $170 billion according to calculations by JPMorgan.

In the latest Flows and Liquidity report from JPM’s Nikolas Panagirtzoglou, writes that after correctly pointing out at the market lows on March 23rd that there is a massive $1.1 trillion in rebalancing flow into equities, all of that has since balanced out, and three months later, we are looking at a substantial outflow of about $170BN before month-end, resulting in a ‘small correction.'”

This rebalancing of portfolios was postponed by pension and mutual funds in March as they did not want to sell at market lows. That decision worked out well then, but now they need to rebalance portfolios by selling equities and buying bonds. We can see this action by looking at the performance between the S&P 500 index and Treasury Bonds over the last two weeks.

This rotation is either likely close to completion, or will complete early next week. As we stated previously, this is why we hedge our equity portfolios with fixed income. The risk offset reduces downside volatility and allows the portfolio to weather tough patches in the market.

With the market very oversold short-term, it would not be surprising to see a reasonably decent reflexive rally into the start of July. However, that rally will likely be an excellent opportunity to rebalance risk and rethink exposures accordingly.

Portfolio Positioning Update

As stated last week, with our portfolios almost entirely allocated towards equity risk in the short-term, we remain incredibly uncomfortable.

Our positioning in fixed income and gold has hedged the portfolio against the latest decline in the very short-term. Still, with the market getting very oversold short-term, as shown below, we expect a reflexive rally off of current support next week.

Most likely, we will use any counter-trend bounce to reduce equity risk a bit, rebalance exposures, and focus our attention on capital preservation for the next couple of months. With the virus resurfacing, the potential risk of disappointment to the earnings and economic recovery story has risen.

While it is easy for the mainstream media to write articles and post comments about the markets, it is an entirely different matter when you manage money. Currently, there is a battle raging between the fundamental and “hope” driven narratives.

On the one hand, it’s easy to see the fundamental problems in the market and the economy, which argues for much less risk exposure. However, on the other, you have the Fed and a Government, ready to throw money at, and “jawbone,” the markets at a moment’s notice.

Trying to navigate the two is like trying to thread a needle, in a moving car, on a bumpy road, with your eyes closed. Given we aren’t prescient, we will have to resign ourselves to doing the best job we can for our clients with the information we have available.

That is a fancy way of saying, “we are going to give it our best guess.”

The goal remains the same as always, protect our client’s capital, reduce risk, and try to come out on the other side in one piece.

Sometimes, however, it just gets messy.

The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO

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The post Market Corrects As COVID Cases Surge 06-26-20 appeared first on RIA.

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Government

Menendez indictment looks bad, but there are defenses he can make

The indictment of Sen. Bob Menendez is full of lurid details – hundreds of thousands of dollars in cash stuffed into clothes among them. Will they tank…

Published

2 hours ago

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September 24, 2023

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Senate Foreign Relations Committee Chairman, Sen. Bob Menendez, D-N.J., right, and his wife Nadine Arslanian. AP Photo/Susan Walsh, File

Reactions came quickly to the federal indictment on Sept. 22, 2023 of New Jersey’s senior U.S. senator, Democrat Bob Menendez. New Jersey Gov. Phil Murphy joined other state Democrats in urging Menendez to resign, saying “The alleged facts are so serious that they compromise the ability of Senator Menendez to effectively represent the people of our state.”

The indictment charged Menendez, “his wife NADINE MENENDEZ, a/k/a ‘Nadine Arslanian,’ and three New Jersey businessmen, WAEL HANA, a/k/a ‘Will Hana,’ JOSE URIBE, and FRED DAIBES, with participating in a years-long bribery scheme…in exchange for MENENDEZ’s agreement to use his official position to protect and enrich them and to benefit the Government of Egypt.” Menendez said he believed the case would be “successfully resolved once all of the facts are presented,” but he stepped down temporarily as the chairman of the Senate’s influential Committee on Foreign Relations.

The Conversation’s senior politics and democracy editor, Naomi Schalit, interviewed longtime Washington, D.C. lawyer and Penn State Dickinson Law professor Stanley M. Brand, who has served as general counsel for the House of Representatives and is a prominent white-collar defense attorney, and asked him to explain the indictment – and the outlook for Menendez both legally and politically.

What did you think when you first read this indictment?

As an old seafaring pal once told me, “even a thin pancake has two sides.”

Reading the criminal indictment in a case for the first time often produces a startled reaction to the government’s case. But as my over 40 years of experience defending public corruption cases and teaching criminal law has taught me, there are usually issues presented by an indictment that can be challenged by the defense.

In addition, as judges routinely instruct juries in these cases, the indictment is not evidence and the jury may not rely on it to draw any conclusions.

A man in a suit pointing at a poster board with various photos on it.
Damian Williams, U.S. Attorney for the Southern District of New York, speaks during a press conference on Sept. 22, 2023 after announcing the Menendez indictment. Alexi J. Rosenfeld/Getty Images

The average reader will look at the indictment and say “These guys are toast.” But are there ways Menendez can defend himself?

There are a number of complex issues presented by these charges that could be argued by the defense in court.

First, while the indictment charges a conspiracy to commit bribery, it does not charge the substantive crime of bribery itself. This may suggest that the government lacks what it believes is direct evidence of a quid pro quo – “this for that” – between Menendez and the alleged bribers.

There is evidence of conversations and texts that coyly and perhaps purposely avoid explicit acknowledgment of a corrupt agreement, for instance, “On or about January 24, 2022, DAIBES’s Driver exchanged two brief calls with NADINE MENENDEZ. NADINE MENENDEZ then texted DAIBES, writing, ‘Thank you. Christmas in January.’”

The government will argue that this reflects acknowledgment of a connection between official action and delivery of cash to Sen. Menendez, even though it is a less than express statement of the connection.

Speaking in this kind of code may not fully absolve the defendants, but the government must prove the defendants’ intent to carry out a corrupt agreement beyond a reasonable doubt – and juries sometimes want to see more than innuendo before convicting.

The government has also charged a crime called “honest services fraud” – essentially, a crime involving a public official putting their own financial interest above the public interest in their otherwise honest and faithful performance of their duties.

The alleged failure of Sen. Menendez to list the gifts, as required, on his Senate financial disclosure forms will be cited by prosecutors as evidence of “consciousness of guilt” – an attempt to conceal the transactions.

However, under a recent Supreme Court case involving former Gov. Bob McDonnell of Virginia for similar crimes, the definition of “official acts” under the bribery statute has been narrowly defined to mean only formal decisions or proceedings. That definition does not include less-formal actions like those performed by Sen. Menendez, such as meetings with Egyptian military officials.

The Supreme Court rejected an interpretation of official acts that included arranging meetings with state officials and hosting events at the Governor’s mansion or promoting a private businessman’s products at such events.

When it comes time for the judge to instruct the jury at the end of the trial, Sen. Menendez may well be able to argue that much of what he did not constitute “official acts” and therefore are not illegal under the bribery statute.

This case involves alleged favors done for a foreign country in exchange for money. Does that change this case from simple bribery to something more serious?

The issue of foreign military sales to Egypt may also present a constitutional obstacle to the government.

The indictment specifically cites Sen. Menendez’s role as chairman of the Senate Foreign Relations Committee and actions he took in that role in releasing holds on certain military sales to Egypt and letters to his colleagues on that issue. The Constitution’s Speech or Debate Clause protects members from liability or questioning when undertaking actions within the “legitimate legislative sphere” – which undoubtedly includes these functions.

While this will not likely be a defense to all the allegations, it could require paring the allegations related to this conduct. That would whittle away at a pillar of the government’s attempt to show Sen. Mendendez had committed abuse of office.

In fact, when the government has charged members of Congress with various forms of corruption, courts have rejected any reference to their membership on congressional committees as evidence against them.

Three men in suits, standing in front of a fire engine.
NJ Gov. Phil Murphy, left, seen here in 2018 with fellow Democrats Sens. Robert Menendez and Cory Booker, has called on Menendez to resign. AP Photo/Wayne Parry

How likely is Sen. Mendendez’ ouster from the Senate?

Generally, neither the House nor Senate will move to expel an indicted member before conviction.

There have been rare exceptions, such as when Sen. Harrison “Pete” Williams was indicted in the FBI ABSCAM sting operation from the late 1970s and early 1980s against members of Congress. He resigned in 1982 shortly before an expulsion vote. With current Democratic control of the Senate by a margin of just one seat, Sen. Menendez’ ouster seems unlikely even though the Democratic governor of New Jersey would assuredly appoint a Democrat to fill the vacancy.

“In the history of the United States Congress, it is doubtful there has ever been a corruption allegation of this depth and seriousness,” former New Jersey Sen. Robert Torricelli said. True?

That seems hyperbolic. The Menendez case is just the latest in a long line of corruption cases involving members of Congress.

In the ABSCAM case, seven members of the House and one Senator were all convicted in a bribery scheme. That scheme involved undercover FBI agents dressed up as wealthy Arabs, offering cash to Congressmembers in return for a variety of political favors.

In the Korean Influence Investigation in 1978 – when I served as House Counsel – the House and Department of Justice conducted an extensive investigation of influence peddling by Tongsun Park, a Korean national in which questionnaires were sent to every member of the House relating to acceptance of gifts from Park.

Going all the way back to 1872, there was the Credit Mobilier scandal that involved prominent members of the House and Vice President Schuyler Colfax in a scheme to reward these government officials with shares in the transcontinental railroad company in exchange for their support of funding for the project.

Stanley M. Brand does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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International

Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von der Leyen just said what?…

This past Wednesday, President of the European…

Published

3 hours ago

on

September 24, 2023

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Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von der Leyen just said what?...

This past Wednesday, President of the European Commission Ursula von der Leyen delivered a speech before the 2023 Atlantic Council Awards in New York, where she sounded the alarm over the specter of nuclear war centered on the Russia-Ukraine conflict. But while invoking remembrance of the some 78,000 civilians killed instantly by the atomic bomb dropped on Hiroshima at the end of WWII, she said her warning comes "especially at a time when Russia threatens to use nuclear weapons once again". She  actually framed the atomic atrocity in a way that made it sound like the Russians did it. Watch:

There was not one single acknowledgement in Von der Leyen's speech that it was in fact the United States which incinerated and maimed hundreds of thousands when it dropped no less that two atomic bombs on Japanese cities.

Here were her precise words, according to an Atlantic Council transcript...

You, dear Prime Minister, showed me the meaning of this proverb during the G7 summit in Japan last year. You brought us to your hometown of Hiroshima, the place where you have your roots and which has deeply shaped your life and leadership. Many of your relatives lost their life when the atomic bomb razed Hiroshima to the ground. You have grown up with the stories of the survivors. And you wanted us to listen to the same stories, to face the past, and learn something about the future.

It was a sobering start to the G7, and one that I will not forget, especially at a time when Russia threatens to use nuclear weapons once again. It is heinous. It is dangerous. And in the shadow of Hiroshima, it is unforgivable. 

The above video of that segment of the speech gives a better idea of the subtle way she closely associated in her rhetoric the words "once again" with the phrase "shadow of Hiroshima" while focusing on what Russia is doing, to make it sound like it was Moscow behind the past atrocities.

Via dpa

Russian media not only picked up on the woefully misleading comments, but the Kremlin issued a formal rebuke of Von der Leyen's speech as well:

In response to von der Leynen's remarks, Russian Foreign Ministry spokeswoman Maria Zakharova accused the European Commission president of making "no mention whatsoever of the US and its executioners who dropped the bombs on populated Japanese cities."

Zakharova responded on social media, arguing that von der Leyen's assertions on Moscow's supposed intentions to employ nuclear weapons "is despicable and dangerous" and "lies."

Some Russian embassies in various parts of the globe also highlighted the speech on social media, denouncing the "empire of lies" and those Western leaders issuing 'shameful' propaganda and historical revisionism.

Tyler Durden Sun, 09/24/2023 - 13:15

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International

Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Via Middle East Eye,

Saudi Arabia has sentenced a secondary schoolgirl…

Published

4 hours ago

on

September 24, 2023

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Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Via Middle East Eye,

Saudi Arabia has sentenced a secondary schoolgirl to 18 years in jail and a travel ban for posting tweets in support of political prisoners, according to a rights group.

On Friday, ALQST rights group, which documents human rights abuses in Saudi Arabia, revealed that the Saudi Specialised Criminal Court handed out the sentence in August to 18-year-old Manal al-Gafiri, who was only 17 at the time of her arrest.

Via Reuters

The Saudi judiciary, under the de facto rule of Crown Prince Mohammed bin Salman, has issued several extreme prison sentences over cyber activism and the use of social media for criticising the government.

They include the recent death penalty against Mohammed al-Ghamdi, a retired teacher, for comments made on Twitter and YouTube, and the 34-year sentence of Leeds University doctoral candidate Salma al-Shehab over tweets last year.

The crown prince confirmed Ghamdi's sentence during a wide-ranging interview with Fox News on Wednesday. He blamed it on "bad laws" that he cannot change. 

"We are not happy with that. We are ashamed of that. But [under] the jury system, you have to follow the laws, and I cannot tell a judge [to] do that and ignore the law, because... that's against the rule of law," he said.

Saudi human rights defenders and lawyers, however, disputed Mohammed bin Salman's allegations and said the crackdown on social media users is correlated with his ascent to power and the introduction of new judicial bodies that have since overseen a crackdown on his critics. 

"He is able, with one word or the stroke of a pen, in seconds, to change the laws if he wants," Taha al-Hajji, a Saudi lawyer and legal consultant with the European Saudi Organisation for Human Rights, told Middle East Eye this week.

According to Joey Shea, Saudi Arabia researcher at Human Rights Watch, Ghamdi was sentenced under a counterterrorism law passed in 2017, shortly after Mohammed bin Salman became crown prince. The law has been criticised for its broad definition of terrorism.

Similarly, two new bodies - the Presidency of State Security and the Public Prosecution Office - were established by royal decrees in the same year.

Rights groups have said that the 2017 overhaul of the kingdom's security apparatus has significantly enabled the repression of Saudi opposition voices, including those of women rights defenders and opposition activists. 

"These violations are new under MBS, and it's ridiculous that he is blaming this on the prosecution when he and senior Saudi authorities wield so much power over the prosecution services and the political apparatus more broadly," Shea said, using a common term for the prince.

Tyler Durden Sun, 09/24/2023 - 11:30

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