Morning Note

Could almost cut and paste yesterday’s morning note: Although this morning it’s not GM and Tyson, it’s:

“Caterpillar says second quarter to be worse than first.”

“Southwest posts first quarterly loss in nine years and warns on outlook.”

“PepsiCo says snacks ease, not cure its lockdown blues.”

“Oil prices fall on brimming storage, bleak recovery prospects.”

And, you guessed it, U.S. equity futures are screaming higher once again this morning. At the moment pointing to a +400-pt open for the Dow.

Here’s macro analyst Cameron Crise pondering the action in equities:

“Judging just by the screens, you’d think that a weaker front crude contract is now bullish for stocks.

Obviously it would be a mistake to impute causality there, but equities certainly trade as if everything is bullish these days. I’m old enough to remember when equities used to worry when USD/JPY broke down through support!

Obviously the most prosaic explanation for the equity rally
is that people are buying them. Usually you can point at a few explanatory rationales, and sure– we can talk about re-opening, hopes of a vaccine, and things of that nature.

But with U.S. stocks now trading at their highest multiple to current year earnings expectations in nearly two decades, this pretty clearly isn’t about the hit to earnings being “not so bad” or a V-shaped recovery.

It’s hard to attribute it to low interest rates when Europe
and Japan both trade at substantially lower current year
multiples (both slightly over 16) and neither has an estimated P/E above the highs of the last 5 years. The U.S. rally has been famously narrow, so maybe it really is all about Amazon’s magic beans or something like that.

If so, we’ll know more by the end of the week. In the
meantime, I guess you’ve got a choice to make about whether to hop on the FOMO rally or not…”

Yes, make no mistake, professionals who do the work are a bit perplexed by the latest action.

Personally, I sympathize with Crise’s commentary, although I’m certain that there’s a ton of short-covering going on right here as well. Again, if pros who do the work believe stocks are trading in lalaland, well, then, short-term speculators are short. And as I’ve illustrated, the data say they are presently so in a big way. And, if you’re short, you’re in trouble when the market moves against you; so you cover, i.e., you buy, and when you are one among many your buying pushes stocks even higher.

Yet another likely booster has to do with the actions of market makers for options. The ones who have written (sold) call options (bets on a rally) on U.S. stocks, for example, have to hedge that exposure or they can get creamed like the shorts. How do you hedge a “short” call position? You buy the underlying security. And when you are one among many your buying pushes stocks even higher.

As you’ve noticed, I continue to draw comparisons of the latest to the 2008 and 2000-2003 bear markets. Bloomberg’s Tom White points out yet another concerning development that dangerously smells too much like 2008:

Here’s a snippet from his commentary this morning:

“Investors have studied everything from power
consumption to the infection curve to figure out if this market rebound is a headfake after the coronavirus crash.

It may also pay to brush up on history — where the signs
look ominous.

For all the cheer spurred by unprecedented policy stimulus,
U.S. financial conditions are behaving in ways that look eerily similar to 2008. If that pattern continues, it means at least one more bout of cross-asset pain is coming.”

I have to wonder if we’re not getting fairly close to capitulation. After the market cleans out a good chunk of the shorts I suspect we’ll be running out of buyers before too long… Assuming general conditions (our primary concern herein) remain as is… 


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