foxex: Highly Uncertain

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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. US markets sell-off as Fed points to more downside risks

2. Food price inflation hits the kitchen

3. Food stocks hit 52-week highs

4. Rail carloads remain depressed

Markets Closed

Dow
23,247.97
−516.81 (-2.17%)

S&P
2,820.00
−50.12 (-1.75%)

Nasdaq
8,863.17
−139.38 (-1.55%)

VIX
35.26
+2.22 (+6.72%)

Bitcoin
$9,213.42
+$388.12 (+4.08%)

US 10-Yr Yield
0.649
−0.029 (-4.28%)

Image credit: Andrei Kravtsov/Getty

Markets Today

U.S. markets started strong but fell into a steep sell-off as Fed Chair Jay Powell said the economic outlook remains "highly uncertain," and there are more downside risks ahead. Investors listened, and if they weren't thinking about selling over the past few days, many made that decision today. All sectors of the S&P 500 went negative, even technology. The Nasdaq is now negative for the year after clawing its way back into the green last week.

Many big investors are also throwing water on the market's recent rally, calling it overvalued and divorced from reality. The legendary investor, Stanley Druckenmiller, says he has never seen valuations this disproportionate, and David Tepper of Appaloosa Funds says only 1999 exceeded 2020 in terms of stocks being overvalued. Just two examples of noteworthy bulls acting very bearish.

Airline stocks fell to fresh coronavirus-crisis lows again today, and bank stocks continue to trade lower as their futures are directly tied to this highly uncertain economy.

Headlines:

The U.K. economy contracted 2% in the first quarter of 2020. This is the fastest decline in output since the fourth quarter of 2008. GDP fell by 5.8% in March, the biggest monthly fall since the series began in 1997. Services and construction saw record declines on the month with education, car sales, and restaurants all falling substantially.
New Jersey announced the first steps in opening its economy as the state saw revenue plummet 60% in April, losing an unprecedented $3.5 billion of revenue last month. The data, from state officials, are the first full monthly tally since Governor Murphy closed businesses, workplaces, and government services on March 21st.
New tax breaks totaling about $650 billion are starting to flow to U.S. businesses, giving them quick cash and longer-term help to ride out the economic downturn, according to the WSJ. So far, more than 50 publicly traded companies have disclosed tax savings and deferrals totaling at least $2.8 billion, according to securities filings.
Shares of Cisco Systems (CSCO) are up 4% in after-hours trading after the company reported better-than-expected fiscal third-quarter earnings. Revenue dropped 8% year over year, steeper than the 4% decline in the prior quarter.
Copenhagen-based A.P.Møller-Maersk expects volumes in Q2 to decrease by as much as 25%. In a press release full of nautical references (visibility remains low, weather the storm), the largest container ship operator in the world said global demand continues to be significantly affected due to the pandemic.
Twitter has told employees they can work from home permanently if their position allows it. The company is aiming to gradually reopen offices after September, and most business travel is suspended until then too. "Opening offices will be our decision, when and if our employees come back, will be theirs," it said in a blog post.
Shares of General Electric fell to a 29-year low on Wednesday, as sentiment toward the airline industry continued to sour with the impact on travel from COVID-19 pandemic expected to linger for years to come.
India has announced a $264 billion economic stimulus package, which is around 10% of the country's GDP. The country has also extended its income tax filing deadline to Nov. 30th, 2020. The full details are expected over the next few days.

chart courtesy Wilshire.com

Fed Sees More Downside Risks

When does a liquidity problem become an insolvency problem? That's what the U.S. Federal Reserve is worried about, and why we should be worried, too.

Fed Chair Jay Powell sat for a Q&A session with the Peterson Institute for International Economics this morning. He was pretty candid about the downside risks facing the U.S. and global economies as we try to climb our way out of a deep and sudden recession.

Despite pledging upwards of $3 trillion on quantitative easing measures, funding the overnight repo market, lending to municipalities, and buying corporate bond ETFs, the Fed says more help is needed.

Powell said the recovery is largely dependent on a number of questions surrounding the virus:

How long it will take for treatments to manifest?
Will the end of social distancing spur new outbreaks?
When will consumer and business confidence return?

"The answers to these questions will go a long way toward setting the timing and pace of the economic recovery," he said. "Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes."

So, what else is the Fed willing to do? Would it consider negative interest rates, as other developed economies have embraced, and President Trump would like to see?

Not now, according to Powell. "The committee's view on negative rates really has not changed. This is not something that we're looking at."

Inflation Alert, In Your Kitchen

April's Consumer Price Index (CPI) report in the U.S. saw a historical plunge for consumer prices, mostly driven by the collapse in oil prices. Most other categories were lower, but not food—especially the Food at Home category.

According to the BLS, the Food at Home CPI grew 4.1% in April, compared to 1.1% in March, from the same periods a year ago. That was the highest inflation in that category in eight years. According to Bank of America Research, the price spikes were due to heavy demand from stay-at-home consumers, and the lack of price reduction promotions on the part of food retailers. With robust demand and lines out the doors, food stores are dropping discounts and promotions, helping to keep prices high while they can.

charts courtesy BofA Research

Organic Sales Spike

More home cooking has also led to more purchases of organic products. Sales of the Organic/Natural foods category spiked 70% in mid-March and have remained fairly elevated since. Sales of conventional foods have also spiked, but remain more constant. Meat and produce have become more expensive as concerns about shortages grow. While that has led to higher retail prices, commodity prices for those goods continue to fall on supply fears.

chart courtesy YCharts

Food Stocks Hit 52-Week Highs

Given that, we shouldn't be surprised to see several food stocks, organic and conventional, hitting 52-week highs today. We are ripping through boxes of cereal (at least we are in my house), and that is sending Cheerios maker General Mills (GIC) to an annual high. We are also making 'healthier' choices, which has been a boost for Hain Celestial, owner of Garden of Eatin', and Earth's Best brands. B&G Foods, which owns Cream of Wheat and the Green Giant brands, has also benefitted, as has United Natural Foods, a wholesaler of natural food products.

But Transport Loads Remain Low

In yet another example of the disconnect between supply and demand, rail car loads are still woefully low. The drops in the shipping of autos, oil and petroleum products, and coal have led the decline. However, the drop in farm products and grain has also been pronounced, given consumer demand. That said, restaurants and food chains are the biggest buyers of those products, and until they are open and serving at close to capacity, expect rail car loads to remain depressed.

chart courtesy MorganStanley

More News:

Charts Suggest That Global Infrastructure Stocks Could Be Headed Lower

McDonald's Stock Could Offer Profitable Short Sales

LVMH: 3 Ways To Own

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(chart courtesy YCHARTS)

Enterprise IT services firm, Synnex Corp, rose today after releasing a business update. Biotech firm, Moderna, rose after receiving a "Fast Track" designation from the Food and Drug Administration for its coronavirus vaccine. Blackrock bounced back after a sell-off yesterday caused by PNC dumping its entire stake in the firm.

Oil and gas firms such as drilling-services firm Transocean and natural gas producer, Range Resources, fell today as prices for fossil fuels have continued to fall. Cosmetics firm Coty also fell after an analyst downgrade this morning.

Word of the Day

Insolvency

Insolvency is a term for when an individual or organization can no longer meet its financial obligations to its lenders as debts become due. Before an insolvent company or person gets involved in insolvency proceedings, it will likely be involved in informal arrangements with creditors, such as setting up alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in cash inflow, or an increase in expenses.

photo courtesy Mattel

Today in History

May 13th, 1999:

Barbie goes high-tech as Mattel Inc. acquires The Learning Co., a maker of educational software, for $3.5 billion. This turns out to have been a mistake. By year-end, Mattel has taken $342 million in "restructuring charges" resulting from the acquisition. After only 16 months, Mattel sells The Learning Co. to Gores Technology Group for no cash up front, the assumption of The Learning Co.'s debt, and an undisclosed percentage of its future profits (if it ever has any). That means Mattel lost roughly $4 billion on the acquisition, with nothing to show for it—making the deal one of the worst in modern history.

(www.mattel.com)