Operation Warp Speed Hits a Roadblock

Leo Kolivakis  |

Image: Wile E. Coyote. Source: Pension Pulse

Fred Imbert and Thomas Franck of CNBC report the Dow drops 700 points to end the week as coronavirus spike raises concern over the economy:

Stocks fell sharply on Friday amid concerns over the rising number of coronavirus cases in the U.S. and its impact on the economic recovery.

The Dow Jones Industrial Average declined 730 points, or 2.8%. The S&P 500 slid 4.2% and the Nasdaq Composite dropped 2.6%.

Those losses led to the major averages’ second weekly drop in three weeks. The Dow and S&P 500 fell 3.3% and 2.9%, respectively, for the week and the Nasdaq lost 1.9% in that time period.

“Coronavirus cases are spiking and reopenings are being delayed, which at a minimum will impact earnings,” said Tom Essaye, founder of The Sevens Report. “The resurgence in coronavirus cases is raising concerns that the rebound may be short-lived as voluntary or potentially more government mandated economic shutdowns are becoming increasingly likely.”

Texas Gov. Greg Abbott said Friday the state will roll back some of its reopening measures as coronavirus cases and hospitalizations continue to rise. “At this time, it is clear that the rise in cases is largely driven by certain types of activities, including Texans congregating in bars,” Abbott said in a release.

Florida announced it would suspend “on premises consumption” of alcohol at bars in the state after reporting a surge of nearly 9,000 new virus cases. In Arizona, the number of cases jumped by 5.4%, topping a seven-day average of 2.9%. At a nationwide level, the daily average number of confirmed coronavirus cases is now more than 33,000.

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Shares of companies that would benefit from an economic reopening tumbled. United Airlines, American and Delta all slid more than 3%. Cruise operator Norwegian Cruise line dropped 5%.

Jon Hill, rates strategist at BMO, said virus fears are making investors rethink positions ahead of the weekend, which is similar to the trading action seen in March and April. This is favorable for bonds and negative for stocks, as investors worry the economy may not rebound as sharply as expected. “It’s very possible some of the optimism we saw in the datas could pull back hard in July and August.”

The U.S. 5-year Treasury yield dropped to a record low of 0.29%. The 3-year rate also slid to an all-time low of 0.17%. Yields move inversely to prices.

Banks under pressure after Fed stress test

The Federal Reserve’s annual stress test of the major banks showed some banks could get close to minimum capital levels in scenarios related to the coronavirus pandemic.

Because of this, banks must suspend share repurchase programs and cap dividend payments at current levels for the third quarter. Wells Fargo and Capital One may be forced to cut their dividends, according to a Morgan Stanley analyst.

The announcement sent some bank shares lower on Friday. Bank of America and JPMorgan Chase both fell more than 5%. Wells Fargo slid 7.4% and Goldman Sachs fell 8.7%.

Meanwhile, Nike shares slid 7.6% on the back of a surprising quarterly loss for the apparel giant. The company reported a loss of 51 cents per share and revenue of $6.31 billion for its fiscal fourth quarter. Nike’s quarterly revenue reflected a drop of 38% on a year-over-year basis.

The losses on Friday came despite a record rise in consumer spending in May. The Commerce Department reported Friday that spending increased 8.2% last month, a positive sign for the U.S. economy amid a growing number of negative coronavirus headlines.

The government’s report on how much Americans spent on goods and services in May was the largest one-month gain dating back to records beginning in 1959. Consumer spending represents more than two-thirds of economic demand in the U.S.

Alright, it's Friday afternoon and I have a lot to cover this week, so let me get right to it.

Let's start with the health crisis where the news is grim and getting grimmer by the day:

And to make matters worse, there's a "mask mutiny" going on down south:

There are extremely ignorant people politicizing masks but let me be clear: if everyone wore a mask in crowded places, practiced social distancing, washed their hands often and took a healthy dose of vitamin D, we would not only flatten the curve, we would get rid of this bloody virus!

And before you point the finger at the US, look at what's going on in the UK:

People are just plain nuts. There's a pandemic going on, and they're congregating one on top of the other as if it's just another summer day!

Admittedly, the mortality rate for younger adults isn't high and the official data is skewed but still, why risk getting ill and spreading this virus to your loved ones?

Still, the resurgence of coronavirus isn't a second wave. It's still just the first wave, and it's disheartening watching the actions of reckless people all over the world, including here in Montreal, not able to exercise any discipline whatsoever and refusing to wear masks (you can find masks everywhere now).

So, as coronavirus spreads throughout most states, especially Arizona and the top three most populous states of California, Texas and Florida, we shouldn't be surprised that stocks are getting pounded again.

But that's not the full story as to why stocks are plunging, there are other factors at play.

Brian Sozzi, Editor-at-Large of Yahoo Finance reports here comes a 20% stock market plunge if Trump and Democrats don't agree on more COVID-19 stimulus:

Add the potential of not getting another massive new fiscal stimulus plan as beginning to weigh on the minds of otherwise exuberant investors.

“I think you are looking at a 10% to 15% range minimum [if there isn’t a new stimulus plan],” warned EvercoreISI senior managing director Dennis DeBusschere on Yahoo Finance’s The First Trade. “And then from there it’s going to be about your expectation for the policy response. So you probably go down 10% to 15%, and then we’ll all wait around to see if that 10% to 15% causes the political apparatus to get moving quickly. And if you ultimately get nothing, by the way, you know it’s a down 20%. And you know, we’ll reassess from there.”

In March, lawmakers passed the $2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES). It surpassed the $700 billion bailout package handed out to Wall Street during the Great Recession, underscoring the extent of the COVID-19 fueled economic downturn.

Under the plan, individuals were eligible for up to $1,200 (depending on income level) or $2,400 for married couples in stimulus checks. Children under 17 were granted $500. Those checks began hitting bank accounts in mid-April. Those unemployed were allowed to claim an extra $600 a week in benefits, known as a “top up” on Wall Street.

But with those checks largely being spent on everyday essentials and the unemployment “top up” set to expire at the end of July, households could take a big hit soon...one that the rallying stock market has overlooked.

Businesses could also take it on the chin again despite various sectors receiving loans under the CARES Act. If there isn’t more stimulus for businesses, then they may be at risk of a second wave of bad financials as states lock down again amid rising COVID-19 infections and deaths. Many simply may not survive fresh state lockdowns.

All of this puts pressure on lawmakers to act. While the Trump administration has floated a potential $2 trillion infrastructure plan, the Republican party is being viewed as lukewarm on another big fiscal stimulus plan. Meanwhile, a Democratic proposal for a $3 trillion stimulus plan would be all but dead on arrival in the Republican controlled Senate.

I've long stated, once the stimulus ends, that's when the real pain will emerge.

A lot of unemployed people in the US (and Canada) are receiving stimulus checks but that money will run out and that's when people will start freaking out.

Of course, the Democrats and Republicans might get together to extend the stimulus but with so much political discord and elections right around the corner, I wouldn't be so sure it's a done deal.

Speaking of politics, some think Biden's surge in the polls, especially in swing states, is also impacting the stock market:

But it's way too early to tell who will win the next presidential election and I'm not convinced Biden is bad for Wall Street even though he will likely repeal some of Trump's corporate tax cuts.

A friend told me today: "If I were advising Biden, I'd say keep your public appearances to a minimum every week (no more than three) and never talk more than five or ten minutes. Stay on message and let Trump tweet and yap away and effectively destroy his chances of reelection."

At this point, I agree, it's Joe Biden's election to win or lose depending on how he plays his cards.

Anyway, that's politics, it will sort itself out and like I said, it's too soon to tell who will win in November (don't count Trump out!).

What else is going on in the background? Well, it's end-of-quarter and stocks surged in Q2 so large global pensions, sovereign wealth funds and large asset managers are rebalancing their portfolio to lock in some of those gains from equities:

Here is a little trick: when stocks are experiencing a very tough quarter, you want to rebalance at the end of the quarter to buy more of them, especially when the Fed is very accommodating, and when they're ripping higher, you want to take money off the table.

Funny things happen at the end of the quarter in markets when there are big moves (up or down) so you need to pay attention because global pensions and global allocators don't wait till the last day to rebalance their massive portfolios.

Of course, top hedge funds and quant funds know this well which is why they too increase their buying or selling activity at the end of the quarter after a big up or down quarter.

But the final nail in the coffin for stocks and this is a big one, is what is going on with the Fed's balance sheet, and it shrank for a second week in a row:

Now, I wouldn't get too excited about this as it's not a huge decline but it's worth monitoring.

Moreover, earlier this week, former New York Fed President, Bill Dudley, came out stating the Fed can easily take its balance sheet up to $10 trillion (from the current $7.2 trillion):

Maybe but as I keep warning, money printing can't Trump a depression, and as CalPERS's CIO Ben Meng told me yesterday, the Fed and US Treasury can only buy some time, unless the health crisis is dealt with, you will see "tertiary effects" impacting markets.

I've been very skeptical of the big bounce in stocks since late March, it's very impressive but it's just the mother of all bear market rallies, once insolvencies pile up, the market will experience another vicious downturn.

Has the summer plunge arrived? I don't know but we are definitely due for a major pullback on the Dow (DIA), S&P 500 (SPY) and even the red hot Nasdaq (QQQ):

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It seems like a lot of portfolio managers are piling into tech shares but as Michael Gayed points out, it's getting very "top-heavy" and we saw what happened with Facebook today:

I was telling my wife earlier, the best investment Zuckerberg ever made was Instagram, people love that crap! She agreed and told me: "Facebook is for dinosaurs, Instagram is where it's at."

That's true, but if other large corporations follow Unilever, Facebook is in big trouble which is why Zuckerberg is worried.

But it's not just Facebook and FANG stocks, tech stocks that are hedge fund and mutual fund hotels, like NVIDIA and Adobe have been ripping higher, making new record highs and they're cruising for a bruising:

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Even Jim Cramer is starting to get worried as tech stocks rally like it's 1999:

And if you think tech shares are on fire, check out shares of Wayfair, one of the best-performing large cap stocks this quarter, up a whopping 267% over the past three months (see full list here):

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Now, that's what I call a Viagra recovery but my wife isn't surprised, she says everyone is buying stuff from Wayfair (translation: mostly women) and "the company has a great return policy".

Whatever, when I see big V-charts like that from a retailer, I put it on the to short list and couldn't care less about their return policy.

What a joke this market has become, as the Fed unleashed a liquidity tsunami, the bears got monetary coronavirus and the bulls are enjoying the last liquidity orgy in what day traders aptly call the "easiest game you'll ever play".

Of course it's easy when Uncle Fed is digitally printing $3 trillion in weeks and everyone is chasing the latest momo stock up.

This week, it was Vaxart which surged, reaching a crescendo today on massive volume before some selling occured (stock still ended up 28% but was up way more earlier):

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What caused this frenzy? Reuters reports that Vaxart Inc said on Friday it would test its experimental oral COVID-19 vaccine on monkeys infected with the new coronavirus in a study funded by the Trump administration's vaccine-acceleration program called "Operation Warp Speed".

I've been trading biotech shares for years and a lot of "investors" snapping up these "vaccine stocks" are going to get their head handed to them. It's a disaster waiting to happen, and they are better off buying lottery tickets.

None of the top biotech funds I track are buying this crap, it's typically Renaissance Technologies (RenTec) which is known for pumping & dumping these small biotechs, or some obscure fund I never heard of.

Lastly, the S&P Bank ETF (KBE) got clobbered today, down 6%, led by shares of Goldman Sachs which were down 9%:

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So much for that big V-shaped recovery! And don't tell me this is all about the Fed's stress tests. Yields are plunging, and banks smell deflation on the horizon. They're cooked, stick a fork in them!

If you ask me, Operation Warp Speed can't come soon enough, if they don't find something soon, stocks are headed for a meltdown this summer.

On that cheery note, enjoy your weekend. Once again, I thank all of you who value the work that goes into this blog and take the time to show your support by donating via PayPal on my site.

Below, CNBC's Meg Tirrell reports on the CDC's update on the coronavirus pandemic in the United States. Younger people are getting it and spreading it!

Also, Florida and Texas announced a pause in their reopening plans as coronavirus cases continue to climb. Separately, the CDC says it's possible the number of infections in the U.S. could be 10 times higher than the confirmed case count. Dr. Scott Gottlieb, member of the boards of Pfizer, Tempus and biotech company Illumina and former FDA commissioner, joins "Squawk Box" to discuss.

Third, David Zervos, Chief Market Strategist at Jefferies and Liz Young, BNY Mellon Investment Management, join "Closing Bell" to talk about the markets.

Fourth, Cornerstone Macro's Carter Worth breaks down the second half. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Brian Kelly and Jeff Mills.

Fifth, Mohamed El-Erian, chief economic advisor at Allianz, joins "Squawk Box" to discuss Wednesday's market plunge as well as the prospects for an economic and financial recovery from the coronavirus crisis.

Lastly, Gita Gopinath, chief economist at the IMF, joins "Squawk on the Street" to discuss the global economy and debt levels. Listen very carefully to her, she's extremely smart and basically takes a V-shaped economic recovery off the table.


Leo Kolivakis is a Canadian-based senior analyst specializing in pension funds and investments across public/private markets.

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Equities Contributor: Leo Kolivakis

Source: Equities News

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer. The author of this article, or a firm that employs the author, is a holder of the following securities mentioned in this article : None

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