United States

In this briefing:

1. SPX Trendline Breach and 2,950 Risk Pivot This Week
2. Poverty/Economy/Hong Kong/UK-China/EU-China
3. What Professional Career Risk Looks Like
4. Smartkarma Webinar

1. SPX Trendline Breach and 2,950 Risk Pivot This Week

S&P 500 (SPX INDEX) broke trendline inflection support at 3,165 that triggered a bear break and signal to put on short protection.

2. Poverty/Economy/Hong Kong/UK-China/EU-China

China News That Matters

• How rich is China now?
• Excavators sell well; trade still disappoints
• One year on, Hong Kong braces for Beijing victory
• UK reconsiders its China ties
• So do the EU and NATO

3. What Professional Career Risk Looks Like

This is a market that defines professional career and business risk. Should investors adopt a momentum approach or maintain caution in the face of valuation and macro risk?

There are no easy answers. The decision between an investment approach based on price momentum versus valuation and macro risk assessment depends on how the market narrative will develop over the next few months. As we progress into Q2 earnings season, will the market narrative and focus be healing, re-hiring, increased capital expenditures and low cost of capital, or an unexpected layer of costs to re-open, lower capacity and reduced demand, and continuing uncertainty?

During these unusual period of severe bifurcation between valuation and macro risk and price momentum, the investment professional is forced to make a decision based on what he believes the dominant investment regime will be in order to minimize career and business risk. This amounts to the classic Keynesian investing beauty contest, where investors do not try to determine the winner based on some investment criteria, but based on what he believes other investors think will be the winner.

Our base-case scenario calls see a period of “revenge consumption” euphoria, followed by further signs of stagnant recovery. Investors will also have to face the risk of a second wave of infection in the fall, which will result in either another partial or full lockdown that slows economic growth and raises financial stress. Even if the authorities opt to forego a lockdown for political reasons, there may be a sufficient number of individuals who choose to stay home for precautionary reasons, which will have the same effect as a partial lockdown.

Professional investors who want to manage business risk in this environment of heightened volatility can consider our series on this subject:

• How Much Business Risk Is Hiding in Your Portfolio?
• Set the Right Benchmark to Beat the Competition
• Managing Stock Specific Risk in Your Portfolio

For copies, please contact Ed Pennock at [email protected] or at +1 (647) 287-6800.

4. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

• A second wave of COVID-19 cases in the US
• Unexpected lockdowns in Beijing
• Diminished short-base after extensive covering
• Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
• An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.

In this briefing:

1. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target
2. Stocks/Hong Kong/Covid-19/US-China/Jobs
3. Double Bubble, Double Trouble?
4. Vertex IPO Preview – A Tax Service SaaS Solution Provider
5. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment

1. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target

S&P 500 (SPX INDEX) is teetering on a more bullish break point that will define a wave 5 thrust higher or secondary pullback within the summer flat corrective range with support near 2,950.

3,220 and 3,080 will act as key break points for a continued rally or second part of a summer pullback cycle (the later is the favored sequence for a pullback from 3,200).

July cycle peak should align with increased virus cases/concerns and overshadow liquidity over the summer.

ISM, demand and growth data spikes have come off of low bases but due to deteriorate as US re opening faces significant speed bumps.

Macro remains bullish on weakness until liquidly support fades.

2. Stocks/Hong Kong/Covid-19/US-China/Jobs

China News That Matters

• Bull run in a China shop 
• State security sets up shop in Hong Kong
• WHO arrives for crucial, long-delayed investigation
• Sanctioning the rival superpower
• New jobs for a new era

3. Double Bubble, Double Trouble?

A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?

Is this just a double bubble, and does that imply double trouble ahead?

We are not sure. We are torn between Bob Farrell’s Rule No. 4:

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

And Rule No. 7.

Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.

Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.

4. Vertex IPO Preview – A Tax Service SaaS Solution Provider

Vertex (VERX US) is getting ready to complete its IPO in the U.S. market in the coming weeks, trying to raise $100 million. Vertex provides comprehensive tax solutions and its focus has been on providing automated solutions to companies’ indirect tax processes, including sales tax, seller’s use tax, consumer use tax, and value-added tax (“VAT”), among others.

The company’s software is more effective and comprehensive in calculating and automating the indirect tax reporting as compared to numerous other existing enterprise resource planning (ERP) software which was not built for complex tax management. Established in 1978, Vertex has more than 4,000 customers, including over half of the Fortune 500, and provides tax support to its customers in over 130 countries.

Competition – Vertex’s major competitors include Avalara, Thomson Reuters, Davo, Exactor, Walters Kluwer, Sovos, and Tax Jar. Most of its competitors are privately held but a few including Avalara Inc (AVLR US)  are publicly traded. Among the competitors, Vertex will be most closely compared to Avalara which completed its IPO in June 2018 at the stock price of $24 per share and Avalara’s stock price has surged 485% since its IPO. 

The company generated sales of $321.5 million (up 18% YoY) and an operating profit of $31.9 million in 2019, from an operating loss of $2.8 million in 2018. The company had an impairment of assets totaling $32.7 million in 2018. Excluding this amount, it would have had an operating profit of $30 million in 2018. The company had sales of $89.2 million (up 19.6% YoY) in 1Q 2020. However, it had an operating loss of $28.2 million in 1Q 2020, from an operating profit of $7.8 million in 1Q 2019. 

5. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment

In our previous insight, we spoke about 5G being a disappointment, a possible delay in 5G adoption, and how WiFi-6 could take its place. In this insight, we look at 6G, which is still a developing technology. 6G is the sixth generation of wireless technologies, with extreme coverage and capacity. 6G network systems are expected to support data rates at a speed of 1 terabit per second (Tbps), 8000 times faster than 5G, with an end-to-end latency of one microsecond. The increase in IoT applications triggered the expansion of 5G, and it is now stimulating the demand for the 6G networks as well. Our key points based on the first look at 6G, are:

• 6G is still a remote concept and will take another 15 years to be fully deployed (i.e. by 2035) since there are many necessary technological and technical advancements to be made before a 6G product is introduced to the market.
• Most developments and the initiation of projects come from the South Korean and Chinese players. In our opinion, South Korea could take the lead, as China is currently focusing on developing its 5G networks, and China’s Huawei is also having issues with the expansion of its 5G networks.
• South Korean mobile manufacturers like Samsung and LG are likely to benefit due to their increased initial commitments focusing on 6G, and this might give them an edge over Chinese and U.S. manufacturers like Apple or Huawei.
• The U.S. manufacturers have a head start in 6G semiconductor technology. However, given the reduced size requirement for base stations and, eventually, for mobile phones, we believe that Japanese MLCC players could closely compete with the U.S. chip manufacturers.

Previous related insights:

5G for the Next Big Turn of a New Decade 

Will 2020 See Successful Deployment of 5G? 

Lockdown To Accelerate WiFi 6: A Threat to Anticipated 5G Deployment? 

5G Delay and Disappointment – Will Murata Suffer? 

In this briefing:

1. Poverty/Economy/Hong Kong/UK-China/EU-China
2. What Professional Career Risk Looks Like
3. Smartkarma Webinar

1. Poverty/Economy/Hong Kong/UK-China/EU-China

China News That Matters

• How rich is China now?
• Excavators sell well; trade still disappoints
• One year on, Hong Kong braces for Beijing victory
• UK reconsiders its China ties
• So do the EU and NATO

2. What Professional Career Risk Looks Like

This is a market that defines professional career and business risk. Should investors adopt a momentum approach or maintain caution in the face of valuation and macro risk?

There are no easy answers. The decision between an investment approach based on price momentum versus valuation and macro risk assessment depends on how the market narrative will develop over the next few months. As we progress into Q2 earnings season, will the market narrative and focus be healing, re-hiring, increased capital expenditures and low cost of capital, or an unexpected layer of costs to re-open, lower capacity and reduced demand, and continuing uncertainty?

During these unusual period of severe bifurcation between valuation and macro risk and price momentum, the investment professional is forced to make a decision based on what he believes the dominant investment regime will be in order to minimize career and business risk. This amounts to the classic Keynesian investing beauty contest, where investors do not try to determine the winner based on some investment criteria, but based on what he believes other investors think will be the winner.

Our base-case scenario calls see a period of “revenge consumption” euphoria, followed by further signs of stagnant recovery. Investors will also have to face the risk of a second wave of infection in the fall, which will result in either another partial or full lockdown that slows economic growth and raises financial stress. Even if the authorities opt to forego a lockdown for political reasons, there may be a sufficient number of individuals who choose to stay home for precautionary reasons, which will have the same effect as a partial lockdown.

Professional investors who want to manage business risk in this environment of heightened volatility can consider our series on this subject:

• How Much Business Risk Is Hiding in Your Portfolio?
• Set the Right Benchmark to Beat the Competition
• Managing Stock Specific Risk in Your Portfolio

For copies, please contact Ed Pennock at [email protected] or at +1 (647) 287-6800.

3. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

• A second wave of COVID-19 cases in the US
• Unexpected lockdowns in Beijing
• Diminished short-base after extensive covering
• Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
• An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.

In this briefing:

1. Stocks/Hong Kong/Covid-19/US-China/Jobs
2. Double Bubble, Double Trouble?
3. Vertex IPO Preview – A Tax Service SaaS Solution Provider
4. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment
5. May Chip Shipments Up, but Outlook Is Confused

1. Stocks/Hong Kong/Covid-19/US-China/Jobs

China News That Matters

• Bull run in a China shop 
• State security sets up shop in Hong Kong
• WHO arrives for crucial, long-delayed investigation
• Sanctioning the rival superpower
• New jobs for a new era

2. Double Bubble, Double Trouble?

A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?

Is this just a double bubble, and does that imply double trouble ahead?

We are not sure. We are torn between Bob Farrell’s Rule No. 4:

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

And Rule No. 7.

Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.

Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.

3. Vertex IPO Preview – A Tax Service SaaS Solution Provider

Vertex (VERX US) is getting ready to complete its IPO in the U.S. market in the coming weeks, trying to raise $100 million. Vertex provides comprehensive tax solutions and its focus has been on providing automated solutions to companies’ indirect tax processes, including sales tax, seller’s use tax, consumer use tax, and value-added tax (“VAT”), among others.

The company’s software is more effective and comprehensive in calculating and automating the indirect tax reporting as compared to numerous other existing enterprise resource planning (ERP) software which was not built for complex tax management. Established in 1978, Vertex has more than 4,000 customers, including over half of the Fortune 500, and provides tax support to its customers in over 130 countries.

Competition – Vertex’s major competitors include Avalara, Thomson Reuters, Davo, Exactor, Walters Kluwer, Sovos, and Tax Jar. Most of its competitors are privately held but a few including Avalara Inc (AVLR US)  are publicly traded. Among the competitors, Vertex will be most closely compared to Avalara which completed its IPO in June 2018 at the stock price of $24 per share and Avalara’s stock price has surged 485% since its IPO. 

The company generated sales of $321.5 million (up 18% YoY) and an operating profit of $31.9 million in 2019, from an operating loss of $2.8 million in 2018. The company had an impairment of assets totaling $32.7 million in 2018. Excluding this amount, it would have had an operating profit of $30 million in 2018. The company had sales of $89.2 million (up 19.6% YoY) in 1Q 2020. However, it had an operating loss of $28.2 million in 1Q 2020, from an operating profit of $7.8 million in 1Q 2019. 

4. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment

In our previous insight, we spoke about 5G being a disappointment, a possible delay in 5G adoption, and how WiFi-6 could take its place. In this insight, we look at 6G, which is still a developing technology. 6G is the sixth generation of wireless technologies, with extreme coverage and capacity. 6G network systems are expected to support data rates at a speed of 1 terabit per second (Tbps), 8000 times faster than 5G, with an end-to-end latency of one microsecond. The increase in IoT applications triggered the expansion of 5G, and it is now stimulating the demand for the 6G networks as well. Our key points based on the first look at 6G, are:

• 6G is still a remote concept and will take another 15 years to be fully deployed (i.e. by 2035) since there are many necessary technological and technical advancements to be made before a 6G product is introduced to the market.
• Most developments and the initiation of projects come from the South Korean and Chinese players. In our opinion, South Korea could take the lead, as China is currently focusing on developing its 5G networks, and China’s Huawei is also having issues with the expansion of its 5G networks.
• South Korean mobile manufacturers like Samsung and LG are likely to benefit due to their increased initial commitments focusing on 6G, and this might give them an edge over Chinese and U.S. manufacturers like Apple or Huawei.
• The U.S. manufacturers have a head start in 6G semiconductor technology. However, given the reduced size requirement for base stations and, eventually, for mobile phones, we believe that Japanese MLCC players could closely compete with the U.S. chip manufacturers.

Previous related insights:

5G for the Next Big Turn of a New Decade 

Will 2020 See Successful Deployment of 5G? 

Lockdown To Accelerate WiFi 6: A Threat to Anticipated 5G Deployment? 

5G Delay and Disappointment – Will Murata Suffer? 

5. May Chip Shipments Up, but Outlook Is Confused

The SIA released the monthly WSTS semiconductor shipments statistics for May, and with it a statement that the chip market seemed resistant to COVID-19.  On the whole revenues have fallen back to trend thanks to the recent market collapse, but China’s response to that country’s outbreak shows what may be in store for other regions.

In this briefing:

1. Double Bubble, Double Trouble?
2. Vertex IPO Preview – A Tax Service SaaS Solution Provider
3. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment
4. May Chip Shipments Up, but Outlook Is Confused
5. U.S. Equity Strategy: Buy The Dips

1. Double Bubble, Double Trouble?

A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?

Is this just a double bubble, and does that imply double trouble ahead?

We are not sure. We are torn between Bob Farrell’s Rule No. 4:

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

And Rule No. 7.

Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.

Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.

2. Vertex IPO Preview – A Tax Service SaaS Solution Provider

Vertex (VERX US) is getting ready to complete its IPO in the U.S. market in the coming weeks, trying to raise $100 million. Vertex provides comprehensive tax solutions and its focus has been on providing automated solutions to companies’ indirect tax processes, including sales tax, seller’s use tax, consumer use tax, and value-added tax (“VAT”), among others.

The company’s software is more effective and comprehensive in calculating and automating the indirect tax reporting as compared to numerous other existing enterprise resource planning (ERP) software which was not built for complex tax management. Established in 1978, Vertex has more than 4,000 customers, including over half of the Fortune 500, and provides tax support to its customers in over 130 countries.

Competition – Vertex’s major competitors include Avalara, Thomson Reuters, Davo, Exactor, Walters Kluwer, Sovos, and Tax Jar. Most of its competitors are privately held but a few including Avalara Inc (AVLR US)  are publicly traded. Among the competitors, Vertex will be most closely compared to Avalara which completed its IPO in June 2018 at the stock price of $24 per share and Avalara’s stock price has surged 485% since its IPO. 

The company generated sales of $321.5 million (up 18% YoY) and an operating profit of $31.9 million in 2019, from an operating loss of $2.8 million in 2018. The company had an impairment of assets totaling $32.7 million in 2018. Excluding this amount, it would have had an operating profit of $30 million in 2018. The company had sales of $89.2 million (up 19.6% YoY) in 1Q 2020. However, it had an operating loss of $28.2 million in 1Q 2020, from an operating profit of $7.8 million in 1Q 2019. 

3. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment

In our previous insight, we spoke about 5G being a disappointment, a possible delay in 5G adoption, and how WiFi-6 could take its place. In this insight, we look at 6G, which is still a developing technology. 6G is the sixth generation of wireless technologies, with extreme coverage and capacity. 6G network systems are expected to support data rates at a speed of 1 terabit per second (Tbps), 8000 times faster than 5G, with an end-to-end latency of one microsecond. The increase in IoT applications triggered the expansion of 5G, and it is now stimulating the demand for the 6G networks as well. Our key points based on the first look at 6G, are:

• 6G is still a remote concept and will take another 15 years to be fully deployed (i.e. by 2035) since there are many necessary technological and technical advancements to be made before a 6G product is introduced to the market.
• Most developments and the initiation of projects come from the South Korean and Chinese players. In our opinion, South Korea could take the lead, as China is currently focusing on developing its 5G networks, and China’s Huawei is also having issues with the expansion of its 5G networks.
• South Korean mobile manufacturers like Samsung and LG are likely to benefit due to their increased initial commitments focusing on 6G, and this might give them an edge over Chinese and U.S. manufacturers like Apple or Huawei.
• The U.S. manufacturers have a head start in 6G semiconductor technology. However, given the reduced size requirement for base stations and, eventually, for mobile phones, we believe that Japanese MLCC players could closely compete with the U.S. chip manufacturers.

Previous related insights:

5G for the Next Big Turn of a New Decade 

Will 2020 See Successful Deployment of 5G? 

Lockdown To Accelerate WiFi 6: A Threat to Anticipated 5G Deployment? 

5G Delay and Disappointment – Will Murata Suffer? 

4. May Chip Shipments Up, but Outlook Is Confused

The SIA released the monthly WSTS semiconductor shipments statistics for May, and with it a statement that the chip market seemed resistant to COVID-19.  On the whole revenues have fallen back to trend thanks to the recent market collapse, but China’s response to that country’s outbreak shows what may be in store for other regions.

5. U.S. Equity Strategy: Buy The Dips

New developments outlined in today’s report are of the bullish variety. The way we see it, the positives continue to heavily outweigh the negatives. With positive new developments and essentially nothing new to be worried about, our view remains bullish. Buy the dips. In today’s report we highlight attractive Groups and stocks within Consumer Discretionary and Materials: CD-46 Retailers, Home Improvement, CD-30 Internet Retailers, CD-55 Lawn & Garden, and MA-27 Gold, Western Hemisphere, Small-Cap.

In this briefing:

1. What Professional Career Risk Looks Like
2. Smartkarma Webinar

1. What Professional Career Risk Looks Like

This is a market that defines professional career and business risk. Should investors adopt a momentum approach or maintain caution in the face of valuation and macro risk?

There are no easy answers. The decision between an investment approach based on price momentum versus valuation and macro risk assessment depends on how the market narrative will develop over the next few months. As we progress into Q2 earnings season, will the market narrative and focus be healing, re-hiring, increased capital expenditures and low cost of capital, or an unexpected layer of costs to re-open, lower capacity and reduced demand, and continuing uncertainty?

During these unusual period of severe bifurcation between valuation and macro risk and price momentum, the investment professional is forced to make a decision based on what he believes the dominant investment regime will be in order to minimize career and business risk. This amounts to the classic Keynesian investing beauty contest, where investors do not try to determine the winner based on some investment criteria, but based on what he believes other investors think will be the winner.

Our base-case scenario calls see a period of “revenge consumption” euphoria, followed by further signs of stagnant recovery. Investors will also have to face the risk of a second wave of infection in the fall, which will result in either another partial or full lockdown that slows economic growth and raises financial stress. Even if the authorities opt to forego a lockdown for political reasons, there may be a sufficient number of individuals who choose to stay home for precautionary reasons, which will have the same effect as a partial lockdown.

Professional investors who want to manage business risk in this environment of heightened volatility can consider our series on this subject:

• How Much Business Risk Is Hiding in Your Portfolio?
• Set the Right Benchmark to Beat the Competition
• Managing Stock Specific Risk in Your Portfolio

For copies, please contact Ed Pennock at [email protected] or at +1 (647) 287-6800.

2. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

• A second wave of COVID-19 cases in the US
• Unexpected lockdowns in Beijing
• Diminished short-base after extensive covering
• Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
• An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.

In this briefing:

1. Smartkarma Webinar

1. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

• A second wave of COVID-19 cases in the US
• Unexpected lockdowns in Beijing
• Diminished short-base after extensive covering
• Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
• An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.

In this briefing:

1. Smartkarma Webinar
2. Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021

1. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

• A second wave of COVID-19 cases in the US
• Unexpected lockdowns in Beijing
• Diminished short-base after extensive covering
• Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
• An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.

2. Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021

We agree with the FOMC projection of a short and sharp recession, but not with its sanguine view about inflation; we expect the next rate hike within a year from now. Given the 19.55 million net job losses in March-May 2020 (more than double of the 8.36 million jobs lost in Feb08-Oct09), massive slack remains in the labour market. However, we think the huge fiscal stimulus (13% of GDP this year, 5% next year) and continuing monetary stimulus will accelerate the recovery, and particularly cause inflationary pressures to emerge by early-2021 as the economy rebounds, necessitating a tightening of monetary conditions by mid-2021. M2 (+24% YoY in May 2020) is already growing more than twice as fast as at the peak of QE-I, and is bound to generate inflation once real GDP grows decisively in 4Q 2020 and 1H 2021, normalizing velocity. We recommend Buying US banks, which will benefit from the steady steepening of the US yield curve. 

The over-correction in the job market in April (with 20.7 million jobs cut) was partly reversed in May 2020, with 2.5 million net new jobs added; the net job loss of 19.55 million in Mar-May 2020 is still more than double of all jobs lost (8.36 million) in the last recession (Feb08-Oct09). The extreme volatility over the last 3 months should not obscure the fact that the unemployment rate is still a lofty 13.3% (having never been above 11% between 1948 and March 2020). We continue to expect a V-shaped recovery, but 3Q 2020 will still be part of the down-slope of the V because of weak consumption. The FOMC agrees: their median forecast for the unemployment rate is 9.3% in 4Q 2020 with 5% real GDP growth in 2021, and 3.5% in 2022. 

At the peak of QE-I in the aftermath of the GFC (“Lehman crisis”), M2 was only growing 10.4% YoY (January 2009) despite the YoY doubling in the monetary base. This time, with the monetary base growing only half as rapidly, money supply (M2) has already accelerated to 24% YoY growth. A collapse in the velocity of money is the key reason why inflation will not rise in the near-term. Once the unemployment rate is below 9% by end-2020, and confidence in the economy is restored, velocity will normalize. If the FOMC is still growing its balance sheet at the end of 2020 (as it now promises to do), core inflation is likely to be above 2% by 1Q 2021. With social distancing rules in place, the “full-employment” (NAIRU) unemployment will be lower (around 6%), a level we expect to be reached by mid-2021. The Fed will be obliged to tighten monetary conditions (first by reining-in base money, then restoring a reserve requirement) in 1Q 2021, and will be obliged to raise the Fed Funds rate no later than mid-2021. Given this trajectory, we would recommend equities emphatically over bonds, and specifically US banks as beneficiaries of a steadily steepening yield curve.     

In this briefing:

1. Smartkarma Webinar
2. Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021
3. Post-Covid 19 – Economic Reality Bites

1. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

• A second wave of COVID-19 cases in the US
• Unexpected lockdowns in Beijing
• Diminished short-base after extensive covering
• Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
• An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.

2. Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021

We agree with the FOMC projection of a short and sharp recession, but not with its sanguine view about inflation; we expect the next rate hike within a year from now. Given the 19.55 million net job losses in March-May 2020 (more than double of the 8.36 million jobs lost in Feb08-Oct09), massive slack remains in the labour market. However, we think the huge fiscal stimulus (13% of GDP this year, 5% next year) and continuing monetary stimulus will accelerate the recovery, and particularly cause inflationary pressures to emerge by early-2021 as the economy rebounds, necessitating a tightening of monetary conditions by mid-2021. M2 (+24% YoY in May 2020) is already growing more than twice as fast as at the peak of QE-I, and is bound to generate inflation once real GDP grows decisively in 4Q 2020 and 1H 2021, normalizing velocity. We recommend Buying US banks, which will benefit from the steady steepening of the US yield curve. 

The over-correction in the job market in April (with 20.7 million jobs cut) was partly reversed in May 2020, with 2.5 million net new jobs added; the net job loss of 19.55 million in Mar-May 2020 is still more than double of all jobs lost (8.36 million) in the last recession (Feb08-Oct09). The extreme volatility over the last 3 months should not obscure the fact that the unemployment rate is still a lofty 13.3% (having never been above 11% between 1948 and March 2020). We continue to expect a V-shaped recovery, but 3Q 2020 will still be part of the down-slope of the V because of weak consumption. The FOMC agrees: their median forecast for the unemployment rate is 9.3% in 4Q 2020 with 5% real GDP growth in 2021, and 3.5% in 2022. 

At the peak of QE-I in the aftermath of the GFC (“Lehman crisis”), M2 was only growing 10.4% YoY (January 2009) despite the YoY doubling in the monetary base. This time, with the monetary base growing only half as rapidly, money supply (M2) has already accelerated to 24% YoY growth. A collapse in the velocity of money is the key reason why inflation will not rise in the near-term. Once the unemployment rate is below 9% by end-2020, and confidence in the economy is restored, velocity will normalize. If the FOMC is still growing its balance sheet at the end of 2020 (as it now promises to do), core inflation is likely to be above 2% by 1Q 2021. With social distancing rules in place, the “full-employment” (NAIRU) unemployment will be lower (around 6%), a level we expect to be reached by mid-2021. The Fed will be obliged to tighten monetary conditions (first by reining-in base money, then restoring a reserve requirement) in 1Q 2021, and will be obliged to raise the Fed Funds rate no later than mid-2021. Given this trajectory, we would recommend equities emphatically over bonds, and specifically US banks as beneficiaries of a steadily steepening yield curve.     

3. Post-Covid 19 – Economic Reality Bites

A severe global recession is baked in the cake is the realisation steadily dawning on market commentators and institutions. Corporate profits have collapsed. Debt levels are rising rapidly. Both are ingredients for investment led economic downturn. So far markets buoyed by cheap liquidity markets have chosen to ignore economic reality but that might be changing.

In this briefing:

1. Smartkarma Webinar
2. Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021
3. Post-Covid 19 – Economic Reality Bites
4. Intel. How Should We Interpret Jim Keller’s Untimely Departure?

1. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

• A second wave of COVID-19 cases in the US
• Unexpected lockdowns in Beijing
• Diminished short-base after extensive covering
• Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
• An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.

2. Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021

We agree with the FOMC projection of a short and sharp recession, but not with its sanguine view about inflation; we expect the next rate hike within a year from now. Given the 19.55 million net job losses in March-May 2020 (more than double of the 8.36 million jobs lost in Feb08-Oct09), massive slack remains in the labour market. However, we think the huge fiscal stimulus (13% of GDP this year, 5% next year) and continuing monetary stimulus will accelerate the recovery, and particularly cause inflationary pressures to emerge by early-2021 as the economy rebounds, necessitating a tightening of monetary conditions by mid-2021. M2 (+24% YoY in May 2020) is already growing more than twice as fast as at the peak of QE-I, and is bound to generate inflation once real GDP grows decisively in 4Q 2020 and 1H 2021, normalizing velocity. We recommend Buying US banks, which will benefit from the steady steepening of the US yield curve. 

The over-correction in the job market in April (with 20.7 million jobs cut) was partly reversed in May 2020, with 2.5 million net new jobs added; the net job loss of 19.55 million in Mar-May 2020 is still more than double of all jobs lost (8.36 million) in the last recession (Feb08-Oct09). The extreme volatility over the last 3 months should not obscure the fact that the unemployment rate is still a lofty 13.3% (having never been above 11% between 1948 and March 2020). We continue to expect a V-shaped recovery, but 3Q 2020 will still be part of the down-slope of the V because of weak consumption. The FOMC agrees: their median forecast for the unemployment rate is 9.3% in 4Q 2020 with 5% real GDP growth in 2021, and 3.5% in 2022. 

At the peak of QE-I in the aftermath of the GFC (“Lehman crisis”), M2 was only growing 10.4% YoY (January 2009) despite the YoY doubling in the monetary base. This time, with the monetary base growing only half as rapidly, money supply (M2) has already accelerated to 24% YoY growth. A collapse in the velocity of money is the key reason why inflation will not rise in the near-term. Once the unemployment rate is below 9% by end-2020, and confidence in the economy is restored, velocity will normalize. If the FOMC is still growing its balance sheet at the end of 2020 (as it now promises to do), core inflation is likely to be above 2% by 1Q 2021. With social distancing rules in place, the “full-employment” (NAIRU) unemployment will be lower (around 6%), a level we expect to be reached by mid-2021. The Fed will be obliged to tighten monetary conditions (first by reining-in base money, then restoring a reserve requirement) in 1Q 2021, and will be obliged to raise the Fed Funds rate no later than mid-2021. Given this trajectory, we would recommend equities emphatically over bonds, and specifically US banks as beneficiaries of a steadily steepening yield curve.     

3. Post-Covid 19 – Economic Reality Bites

A severe global recession is baked in the cake is the realisation steadily dawning on market commentators and institutions. Corporate profits have collapsed. Debt levels are rising rapidly. Both are ingredients for investment led economic downturn. So far markets buoyed by cheap liquidity markets have chosen to ignore economic reality but that might be changing.

4. Intel. How Should We Interpret Jim Keller’s Untimely Departure?

Overnight Intel announced the resignation of Jim Keller  effective June 11, 2020, due to personal reasons. Keller is a world-renowned chip designer, widely respected for his work with Apple Inc (AAPL US),  Advanced Micro Devices (AMD US),  Tesla Motors (TSLA US) among others.

His departure comes after just over two years at Intel Corp (INTC US) and appears to have in the works for some time based on Intel’s press release. To say the least, this move was unexpected. How should investors interpret his untimely departure?