* Starbucks employees will have a week to decide whether to take reduced hours or unpaid leave
The Starbucks (SBUX) announcement after the close supports my general observation in my opening missive today that a "V" recovery is unlikely.

* The market ended modestly in the green today
* 1968 was truly a golden year for music

And if that's not lovin' me
Then all I've got to say
God didn't make little green apples
And it don't rain in Indianapolis in the summertime
And there's no such thing as Doctor Seuss
Or Disneyland, and Mother Goose, no nursery rhyme
God didn't make little green apples
And it don't rain in Indianapolis in the summertime
And when my self is feelin' low
I think about her face aglow and ease my mind
- O.C. Smith, Little Green Apples

The social backdrop is incendiary, the economic and profit outlook are murky, valuations are extended -- but the market continued to steadily improve today, as it has over the last few weeks.

It was a quiet close -- modestly off intraday highs.

Market breadth narrowed to 3-1, still impressive, but half of the robust breadth at the morning's peak levels.

I often write that Mr. Market does his best to hurt the most market participants -- and that might be what is happening today and over the last 1-2 weeks.

I am hearing quite alot of excitement and hyperbole about the market from players and "talking heads."

The shorts, much like the Box Tops 1968 hit, are "Crying Like a Baby." The bulls, are playing their "Green Tambourine" (Lemon Pipers) and acting like they are "Born to Be Wild" (Steppenwolf).

As for me, my "Midnight Confession" (Grass Roots) is that I like my positioning (net short) as my timeframe is not today, tomorrow or next week.

Though, like The 1968 Temptations song, "I Wish it Would Rain" (sunshine, blue skies, please go away").

Based on my calculus, there is limited value in the Indices at current levels -- as the S&P Index has overshot (by about ten percent) my assessment of underlying value.

"Summertime Blues" (Blue Cheer) may lie ahead.

Market breadth narrows a bit into the afternoon - at 3.5-1 advancers/decliners.
Strength in Apple (AAPL) and Procter & Gamble (PG) are helping the averages.

I have been adding to J.M. Schmucker  (SJM) on recent weakness.

The shares sold down to below $107 on May 26th but have rebounded to $116 (+$2/share) today.

Not sure why the "whoosh" last week but I have gotten my cost way down.

I certainly was wrong about the market reversing from morning strength.
Market breadth is suitable for framing, with 4-1 advancers/decliners.
Strength is across the board - in Technology and Financials, in particular.
Banks are benefiting from reports that the explosion in consumers' savings has led to a monumental (several trillion dollars) of new deposits into the banking industry - serving to lower their cost of funds and to reduce their reliance of government funds.

The May ISM manufacturing index rose to 43.1 from 41.5 and that was -0.7 points below the estimate and vs. 49.1 in March. New orders rose +4.7 points to 31.8 after falling by -15.1 points in April. Backlogs rose a slight +0.4 points to 38.2. Employment was higher by +4.6 pts to 32.1 while export orders rose by a similar amount to 39.5. Supplier deliveries, which has kept the headline elevated, but because of supply constraints fell by -8 points to a still high 68 (all 18 industries surveyed are seeing supply issues). Inventories got back above 50 at 50.4 from 49.7 while customer inventories fell by -2.6 points to 46.2. Finally, prices paid rose +5.5 pts to 40.8, a 3 month high. 

In terms of breadth, six industries out of 18 surveyed saw growth vs. two in April and 10 in March. Eleven saw a contraction vs. 15 in April. 

Bottom Line

The ISM's bottom line was on target by saying, "The coronavirus pandemic impacted all manufacturing sectors for the 3rd straight month. May appears to be a transition month, as many panelists and their suppliers returned to work late in the month. However, demand remains uncertain, likely impacting inventories, customer inventories, employment, imports and backlog of orders."

A fair analysis of the economy will only take place after most things, outside of large gatherings which we'll see next year, are reopened and we can see to what extent many small businesses have come back - assuming the medium and large companies all come back-  how many employees have been rehired, what's the spending intentions of the consumer - after the initial spurt of pent up demand - and what's the capital spending/expansion plans of companies going to end up being. 

For perspective, here is the ISM manufacturers PMI for two decades:

Total gut feeling- but I sense a reversal today.

Adding to my Apple (AAPL) short.

Market continues to test technical areas. Bulls dodged a bit of a bullet on China on Friday. Looked like trade war might resume. Both press conference and response were more muted than had been assumed and thereby bulls held the gains.

The idea of a Vee rebound - the hopes are kept alive by continued upbeat news on progress on vaccine and drug treatment, which will allow the possible Vee response to show-up.

Social unrest would impact market mostly if it impacts election polls and see where they come from.

The China situation continues to be watched carefully. Must watch to see if it starts to heat up once again.

Stay safe. Stay healthy.

Arthur

We are now in one of those times, like 52 years ago in 1968, that we and our children will always remember. Many of us have spent the weekend watching America burning in despair. As I write this missive, an extended portion of I-95 (in Palm Beach) has been closed to protesters on Sunday evening.

"Every time a riot develops, it helps George Wallace."
- Martin Luther King, Jr.

We all support peaceful protest and there is little denial that the George Floyd incident opened a wound for many who feel they are not full and equal participants in the social compact of America - providing a glimpse of how little progress we have made since the 1960s.

Somehow I wonder will this unrest begin something bigger this summer?

Meanwhile, the plight of 40 million unemployed will become another hot spot if the economy doesn't recover and employment pick up quickly.

We are now only five months away from what promises to be the most contentious election in history. Social unrest is certainly not going to be market friendly no matter how bad earnings are, and they will be bad, and how many companies fail - and many will - as nightly news showing the restlessness of Americans citizens is bound to lead to dislocations of asset prices.

Fifty Two Years Ago...

1968 was often considered to be one of the most turbulent and traumatic years of the twentieth century in the United States:

* The Vietnam War's Tet Offensive accelerated war in Southeast Asia. Protests against the war intensified.
* Fifteen years after the Korean War, in 1968, the relations between North Korea and the U.S. gave way to a crisis after North Korea captured the Navy intelligence vessel USS Pueblo and its crew. In 2020, we are still engaged with North Korea.
* The 1968 United States presidential election became a referendum on the Vietnam War. A peace candidate had previously emerged in the Democratic Party when Senator Eugene McCarthy challenged the Vietnam War policies of President Johnson, who had refused to seek or accept another nomination for president and had endorsed his vice president, Hubert Humphrey, for the Democratic Presidential nomination. Senator McCarthy's support came primarily from young people, most of whom were subject to the draft or were in deferred status. This divided the country by age as older citizens, a so-called silent majority, tended to support or not actively oppose government policies. Humphrey won the nomination and Nixon was elected president. In 2020, a progressive like McCarthy, Bernie Sanders nearly defeated Joe Biden.
* Martin Luther King was assassinated. The United States erupted in violent riots, the most severe of which occurred in Washington, DC, Chicago and Baltimore. Extensive urban areas of these and many other cities were looted, burned, and destroyed by the rioters and more than 40 people were killed during the month of protest, which led to greater racial tensions between Americans.
* Occurring at the dawn of the television age, the historic events of 1968 played out on TV screens across the country, bringing them home in a way that had never been possible before. In 2020, the events were played out on real time by FaceTime and YouTube.
* In popular culture, 2001: A Space Odyssey was the most profitable film of the year and Apollo 8 was the first manned spacecraft (Borman, Lovell and Anders) to leave the Earth's orbit and the first to reach the Moon, orbit it and return. In 2020, the U.S. launched two astronauts into outer space.
* The 1968 stock market marked the end of the Go-Go Years (with a two year gain of +50%), was speculative with casino stocks, computer leasing (remember Leasco?), nursing home stocks and conglomerates were the market leaders. Gerry Tsai's Manhattan Fund was hotter than a pistol (excuse the pun). From the 1968 peak the S&P Index declined by -36% by mid-1971. Unemployment, which was as low as 3.4% in 1968, reached 6.1% by the end of 1970. In 2020 we made an all-time high in the S&P Index on February 19, 2020 with a closing price of 3386. By mid-March the S&P traded under 2200, a decline of -35%. The unemployment rate in February, 2020 was 3.5%. By April the unemployment rate was 14.7%.



The music was epic in 1968!

Hey Jude (The Beatles), Sitting on the Dock of the Bay (Otis Redding), Sunshine of Your Love (Cream), Mrs. Robinson (Simon & Garfunkel), Tighten Up (Archie Bell and the Drells), Hello I Love You (The Doors), I Wish It Would Rain (The Temptations) and Dance to the Music (Sly and The Family Stone).

I can't name one popular song in 2020! I define anyone reading this to recite the words of Savage (Megan Thee Stallion featuring Beyoncé) - its the top selling song on The Hot 100 chart.  

What The Last 2-3 Months Has Revealed to Me

So many questions, so little time.

The Covid-19 induced shutdown revealed:

* How poorly managed so many of our public companies are. With little in the way of a "cushion" or safety net, many companies and industries were exposed as ill equipped to weather the abrupt downturn - many sought governmental relief.
* How leveraged small, medium and even large businesses were. Reverse financial and operating leverage produced a remarkably quick drop in profits and margins.
* How dependent private businesses and publicly held U.S. corporations (of all size) are on federal support.

The markets have responded to a huge free lunch being heaped out by the Federal Reserve - but free lunches cannot be a permanent condition.

Unfortunately, as we begin the month of June I have an increased amount of economic, profit and market concerns.

Will a growing sense of social and financial disorder and chaos - delivered by income/wealth inequalities, the economic and health consequences of Covid-19, the accumulation of unprecedented debt loads (in the private and public sectors) and the open wound of institutional racism - lead to a change in political leadership in November?

What will it mean for society, our economy and our markets?

Consensus Profit and Economic Expectations Are Too High

* My "fair market value of the S&P moves from 2800 to 2700-2800
* I am moving my trading range from 2550-2950 to 2450-3010.
* Equities are about -10% overpriced

"Price has a way of changing sentiment."
- Divine Ms M (Helene Meisler)

As night follows day, S&P profit and price expectations have risen with the rip your face rally and mother of all squeezes.
I believe these expectations will prove wrong footed.

Indeed, reflecting the concerns expressed recently and in today's opening missive, I am reducing both my S&P 2020-22 EPS estimates and my calculation of "fair market value."

It is important to note that my 2020-22 S&P EPS estimates are substantially below consensus. As an example, my pal Thomas Lee expects 2021 S&P EPS of close to $190/share (or +50% above my forecasts) based on historically strong productivity and margin gains (I am looking for the exact opposite).  One of us will be very right and the other will be very wrong.

I now believe that it will not be until 2023, at the earliest, that S&P EPS exceeds 2019 actual results (which were $165/share and $155/share - before buybacks).

The lynx-eyed Jim Bianco is calling for a 90% economic recovery - he might be too optimistic (as I am thinking 80% to 85%)!

Here are my new estimates:

S&P EPS Old (per share) New (per share):

- 2020E $110 Sub $100
- 2021E $135 $125-$130
- 2022E $155 $145-$155

My new "fair market value" goes from 2800 to a range of 2700-2800 (the mid range is 18.25x estimated 2022 S&P EPS of approximately $150/share).

Based on the above, stocks are approximately -10% overvalued.

To reflect the recent action of the markets and my new EPS projections I am changing my forecast for the S&P trading range over the balance of the year from 2550-2950 to 2450-3010.

Timing Economic "Normalization"

I am shifting my base case back to our "normal lives" to the second half of 2021 (from late summer, 2021). This means that the rate of growth in S&P EPS will not likely normalize (back towards 2019 levels) until about one year from then, or by year-end 2022.

Naturally, the possibility of multiple Covid-19 outbreaks this fall would put a halt of the aforementioned improvement in profit and economic growth - rendering the new normal as very abnormal (leading to big economic and EPS disappointments - even from my non consensus and low projections).

So, we must stay on alert to changing conditions.

Overarching Level of Uncertainty Combines With Shifting and Worrisome Paradigm Shifts

In the Jewish religion at Passover there are asked four questions. as indicated over the last two years, I have three questions that I wake up every morning before trading starts and I ask of myself: I still don't like the answers - today more than ever:

• In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
• In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
• With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?  Some of the important paradigm shifts witnessed over the last few decades are healthy, like the disruption brought on by technology.

Some of the important paradigm shifts witnessed over the last few decades are healthy, like the disruption brought on by technology. But even that shift holds some negative ramifications - for example, privacy is sacrificed, and industries and employment are displaced.

As described recently, the paradigm shifts are deafening (and most are market unfriendly):

* Covid - Induced Shifts In Behavior - As a society will be travelling less and working from and eating at home more:

1. Safety - Consumers will spend more time at home - working at an office and travelling will be more limited. This means more eating at home and less eating in restaurants.

2. Recession - Consumers will probably become more frugal and risk averse after their experience in early 2020. With unemployment abruptly rising by record amounts and the economic outlook still uncertain, the consumer will spend less, save more and reduce the frequency of restaurant visits after their experience in early 2020.

3. Less Competition - More difficult access to capital, much more expensive cost of capital and higher costs of doing business (the $4 billion pandemic cost in Amazon's (AMZN) past quarterly report should be a wake up call) - particularly in a recessionary setting - will result and morph into a slower growth backdrop. This means that less sizable, upstart competition will be reduced (the death knell for small businesses) and Tom Lee's expectation for margin expansion may not be realized.

These three factors will contribute to a fundamental change and demand destruction in the travel, leisure, restaurant, hotel and non residential real estate industries (which represent a large swatch of U.S. employment).

All these industries will be operating less profitably at lower capacity.

Yes, as Tom Lee suggests, businesses will be using less labor than before Covid-19, but consider the impact on consumer demand as the many previously employed reinvent themselves in their search for new job opportunities reflecting a secular downshift in utliization rates in the aofrementioned industries.

As Danielle DiMartino Booth writes this morning:

* As the whole-economy Chicago PMI New Orders-Inventories spread hit a record low in May and backlogs' contraction accelerated, significant supply-demand imbalances persist in the supply chain; supply disruption via longer delivery times adds the risk of higher freight costs.
* While May auto sales will necessarily rebound off April's shutdown-forced lows, a sustainable recovery requires rising income expectations; with lending standards tightening, greater auto manufacturer incentives could spur sales growth but would pinch profit margins further.
* Major discretionary purchases will be dictated by consumers' ability to access financing and shoulder additional monthly payments as layoffs move up the income ladder; the added uncertainty brought on by the rioting will act as a further depressant on spending's revival."

Given these factors, the personal savings rate will likely be ratcheted higher for some time to come - at the expense of consumption. That is not the recipe for domestic economic growth.

* Modern Monetary Theory - In contrast to 1968, MMT proposes dealing with the rising deficit and national debt load by printing more and more money. In turn, it is argued (by Ray Dalio and others) that the implementation of MMT would help equalize the rising income and wealth disparities. MMT has now been an implicit policy in defense of Covid-19 and in an attempt to bring back our domestic economy.

While no one knows for sure what the negative ramifications of MMT may be (but some are quite obvious like pension plan woes), the ready adoption of the theory is worrisome to this observer (and others). Stated simply, the paradigm shift to MMT is ultimately a terrible error of policy and intellect.

* Unbridled Fiscal Spending - Last year (and before Covid-19) the U.S. Treasury posted ever increasing deficits as government spending consistently climbed. Remember, deficits are supposed to decline as an economic recovery matures; now just the opposite is happening, with deficits now approaching 5% of U.S. GDP. There is a growing feeling that, like excessive monetary easing, there is no tipping point nor negative investment ramifications to unlimited fiscal non-restraint. The deficit and our debt load has been placed on its head since the government has come to the aid of our economy and our businesses. There is no need to document the unprecedented spend - it is well known. I remain skeptical of the ability to continue the current pace of fiscal spending and monetary growth without raising inflation and inflationary expectations, and the wrath of the bond vigilantes.

* The Emergence and Dominance of Machines/Algorithms That Worship at the Altar of Price Momentum - Market structure changes represent a fundamental risk. The paradigm shift from active investing (mutual funds and hedge funds) to passive investing (ETFs, quant products and strategies) holds risks that are reminiscent of October, 1987, when the growing acceptance of "portfolio insurance" ended badly in a convulsive move lower in the U.S. stock market.

* "Worsening"Demographic Trends - Reduced birth rates are a contributing factor to the subpar economic trajectory of growth and the diminished global secular growth prospects. Real economic growth is the addition of population/labor force growth plus productivity gains.

* Fading Globalization and Growing Nationalism - The abandonment of the post-World War II political/economic order and the lack of coordination and cooperation among countries in an increasingly flat, networked and interconnected world raise the issue of how slow and inept the reaction will be if the trade wheels do come off. Again, like lower birth rates, this will likely result in diminished secular global economic activity.

* Movement to the Political Right and to the Political Left - A toxic worldwide political setting seems to be a near-permanent shift and has created a bear market in political decency. The death of traditional conservatism (Republicans) and the move toward socialism (Democrats) has created a schism of beliefs that expand political animus and argue in favor of reduced compromise and less likely implementation of much-needed legislation (infrastructure comes to mind). Worrisome to many, including myself, are the social and economic ramifications of the paradigm shift of a widening gap in political beliefs.

* A Widening Income and Wealth Gap - I broached this subject initially in a Barron's "Other Voices" editorial, "The Threat of Screwflation", in 2011. Little has been done policy-wise to address this paradigm shift, which has resulted in political divisiveness and angry rhetoric. Moreover, the promise of financial repression not only results in mischief, incites investment speculation and the misallocation of resources, but also holds the risk that the income/wealth disparity will widen as it benefits borrowers over savers and favors those with bigger balance sheets (real estate and stocks). The threat of this disparity and these expanding gaps between economic classes hold social and political concerns as well - as seen in the past few weeks.

* The Emergence and Dominance of Machines/Algorithms That Worship at the Altar of Price Momentum - Market structure changes represent a fundamental risk. The paradigm shift from active investing (mutual funds and hedge funds) to passive investing (ETFs, quant products and strategies) holds risks that are reminiscent of October, 1987, when the growing acceptance of "portfolio insurance" ended badly in a convulsive move lower in the U.S. stock market.

My Strategy

The rip your face off rally and mother of all short squeezes that I envisioned in early April is likely over and I have capitalized on it as my net exposure was large (long). In the last few days (and weeks) I have profitably eliminated a number of long investment positions including (BA) , (FDX) , (DIS) , (MS) , (HLT) , (H) , (VNO) , (GS) , (VIAC) (a profit in some accounts but not in the aggregate), (CMCSA) , (GLD) , (PZZA) , (TWTR) and (PENN) (ugh!). (I previously liquidated most of my Alphabet (GOOGL) , all of my Facebook FB and Amazon - for large gains).

I am left with no growth names (as I see a pivot to value), a large exposure to financials (even though I have sold my (GS) and (MS) for nice gains), several packaged foods names ( (PG) , (KHC) , (SJM) and (THS) ) and a few speculative stocks (e.g., (GE) ).

I am short the indices (large sized) and bonds. Late last week I reshorted (AAPL) and (CAT) .

Bottom Line

* Getting back to normal will take more time than the consensus expects
* Big picture changes loom on the investment horizon, so do fundamental disappointments
* Many of these paradigm shifts are disruptive and market unfriendly
* There will be some industry winners (healthcare/biotech, internet, packaged foods) but far more industry losers (hotels, airlines, non-residential real estate)
* But, in an increasingly debt laden society where access to the capital markets may be limited, there will be less obvious winners (commercial banks and investment bankers)
* Large companies' moats are deepening (thanks to policy decisions and structural issues) and the Russell (Index) won't likely be crowing

While uncertainty is typically the refuge of hope, we face unprecedented inconclusiveness in the time ahead - in America's social contract, in our health, in the trajectory of economic and profit growth and, of course, in market prices and valuations. The change has been abrupt and, for most, disruptive - incomparable to any experience we have had in the past. When, many now ask, will we "get back to normal", when will we return to our old lives and how will our behavior change? In support, the government has countered with the accumulation of more debt.

However, growth suffers under a pile of debt - which acts as a governor to economic growth.

Zero interest policy has unintended consequences. As an example, low interest rates have led to a massive underfunding of pension and endowment programs including those benefiting the less well off like social security and medical and retirement plans.
If one was concerned about the growing inequality in the U.S., this contrast is a prescription for civil unrest in the near future. We are seeing a whiff of that in the last few days around the country.

The stock market has been celebrating almost daily while small businesses and the average American are suffering. Why not buy stocks if the Fed promises that yields will stay near zero for the foreseeable future and alternative fixed income yields are almost nonexistent? (In other words, TINA - "there is no alternative".) Though most think lunch will continue to be delivered because of low interest rates there is never a free lunch. There are numerous problems in the accumulation of record amounts of debt even when coupled with low rates.

If stocks are supposed to reflect future earnings discounted to the present, the market's price seems extreme because President Trump's policies (and behavior) are likely leading to a greater likelihood of a Democratic victory in November. Corporate taxes will almost certainly be raised to help address the yawning deficit.

The argument that the market is not high relative to interest rates fails to recognize that present interest rates are totally artificial and much lower than they would be without massive Fed support. Such support reflects economic weakness, not strength.

The S&P has overshot the high end of my projected trading range by about 3-4% - and I have moved back to a large net short exposure.
__________

Long KHC (large), PG (large), THS (large), SJM (large), GE (large) (speculative).

Short SPY (large), QQQ (large), AAPL, CAT.

It certainly was an unsettling and disturbing weekend watching all the goings on but the market is looking past it and focused more on the broad reopenings happening throughout the country. Obviously if the protests continue for weeks on end and thus disrupts and delays the reopenings in the major cities or even causes a rise in virus spread, the market would have to shift its focus. The 10 yr yield though just sits there below .70% at .66% and continues to reflect a different belief on the state of the economy than stocks do.

Quietly, the euro heavy dollar index is falling to the lowest level since mid March and thus whatever flight to safety took place in it the last few weeks of March has completely unwound. If I'm right on inflation in the coming 6-12 months, keep an eye on the commodity currencies such as the Canadian$, the Aussie$, the Mexican peso and even the Brazilian real which has been a disaster but has recently bounced off its lows. Also, I remain very positive on gold and silver, particularly the latter.

DXY


Ahead of the May US ISM manufacturing index at 10am, we saw a bunch of PMI's from overseas. China's private sector weighted Caixin PMI got back above 50 at 50.7 from 49.4. Caixin said "The easing of restrictions related to the coronavirus disease pandemic led to a stronger rise in Chinese manufacturing output in May, with the rate of expansion the quickest for over 9 years. However, demand conditions remained subdued, largely due to a notable fall in export orders. As a result, firms continued to trim staff numbers and raised their buying activity only slightly. A lack of new work also led to the first reduction in backlogs of orders since February 2016." As for the outlook, "Business confidence picked up in May, with firms generally optimistic that output will rise over the next year. Positive forecasts were often linked to hopes of a global economic rebound once the pandemic situation improves." Things calmed down in Asia stock markets overnight with the Hang Seng bouncing back by 3.4%, the H share index by 2.9% and the Shanghai comp by 2.2%. The rest of the region was green as well.

Japan's manufacturing PMI fell to 38.4 from 41.9. South Korea's came in at 41.3 vs 41.6. Taiwan's PMI fell to 41.9 from 42.2. We saw rebounds in India to 30.8 from 2.74, Thailand to 41.6 from 36.8, Vietnam to 42.7 from 32.7, Malaysia to 45.6 from 31.3 and the Philippines to 40.1 from 31.6. The underlying theme remains that all of these PMI's, outside of China, are firmly below 50 but hopefully will rebound in the coming months as more of the world reopens.

South Korea's trade data remained very soft in May with exports falling by 23.7% y/o/y but slightly not as bad as the 25.1% expected decline. Imports were down by 21.1% y/o/y, a bit more than the forecast of a 20.6% y/o/y drop. The bright spot within the data was a 7.1% y/o/y rise in the shipments of semi's and a 4% increase in exports to China if working days are adjusted. Exports to the rest of the world were soft. The Kospi closed up 1.8%.

The final read of the Eurozone's manufacturing PMI was left essentially unchanged with the initial at 39.4 which is up 6 pts from April but compares with 49.2 back in February. The UK manufacturing PMI final print was 40.7 vs the initial one of 40.6 and that is up 8.1 pts from April. It was 51.7 in February before the shutdown. Bottom line here is that as things reopen, the data should get better. To what extent is of course the question.

Was Mnuchin buying futures again last night?

S&P futures were -30 handles and are now flat.

More signposts of deflationary pressures:

I posted this after the close in our Comments Section on Friday night:

dougie kass • 3 days ago

Someone is getting squeezed badly in the S&P futures and it looks like a forced short cover after the close.
I put on an additional trading layer of SPY shorts at $305.90 at around 445PM.
Very big.
Dougie

Danielle DiMartino Booth has more on the consumer:

VIPs

• As the whole-economy Chicago PMI New Orders-Inventories spread hit a record low in May and backlogs' contraction accelerated, significant supply-demand imbalances persist in the supply chain; supply disruption via longer delivery times adds the risk of higher freight costs
• While May auto sales will necessarily rebound off April's shutdown-forced lows, a sustainable recovery requires rising income expectations; with lending standards tightening, greater auto manufacturer incentives could spur sales growth but would pinch profit margins further
• Major discretionary purchases will be dictated by consumers' ability to access financing and shoulder additional monthly payments as layoffs move up the income ladder; the added uncertainty brought on by the rioting will act as a further depressant on spending's revival

On February 10, 1964, the Senate took up debate on H.R. 7152. Twenty-one of the Senate's 67 Democrats were from the South and publicly opposed the bill initiating what became the longest filibuster in Senate history. In turn, Democratic majority leader Mike Mansfield appealed to his counterpart, Republican Senator Everett Dirksen: "I appeal to the distinguished minority leader whose patriotism has always taken precedence over his partisanship, to join with me ... in finding the Senate's best contribution ... to the resolution of this grave national issue." In return, Mansfield urged his colleagues on both sides of the aisle: "I appeal to all Senators. We are confronted with a moral issue. Today let us not be found wanting." Twenty-seven Republican senators joined 44 Democrats to end debate on June 10, 1964. The Civil Rights Act passed nine days later.

Even as the country tries to reopen, fresh wounds are being inflicted to our nation's economy and very soul. The partisanship personifies and propagates hatred giving fresh impetus to shelter-in-place. The images splayed across news outlets and social media are reminiscent of the 1968 Chicago riots sparked by the assassination of MLK, when protests spread to 100 U.S. cities. Over the weekend, chaos once again consumed the Windy City and at least 75 other cities as protests over the murder of George Floyd turned violent. Sadly, the evidence points to a disquieting level of planning among extremists on both sides of the political spectrum. Make no mistake, the damage exacted will be equally economic in nature.

Chicago Mayor Lori Lightfoot was not alone among her peers in delaying the phased reopening of the economy. Target will temporarily close seven stores in the Chicago area and 106 nationwide. The timing could not be worse as confidence in consumption is critical. In a survey from April 25-27, Cox Automotive found that 48% of those who had preexisting plans to purchase a car before the coronavirus would do so within 30 days; the remaining 52% would delay their purchase. Triggers that could expedite the purchase decision included deeper incentives and greater security about future income.

As Detroit's Big Three can attest, taking deliberate moves to further pressure margins will not come easy. In the words of QI's Dr. Gates, today's left-side chart captures "demand and supply headwinds in the Chicago PMI converging like an Alberta Clipper." The forward-looking New Orders-Inventories spread (purple line) hit a record low in May, indicating a long climb back to supply-demand balance. Backlogs (orange line) also contracted at a quicker pace, flagging excess capacity and deflation risks. And finally, reflecting the ongoing supply chain nightmare and contrasting with the other two indicators, longer delivery times (green line) persist. Deteriorating supplier performance harken freight surcharges which tack on additional production costs.

Even as auto manufacturers' margins are squeezed, qualifying borrowers for car loans will be increasingly challenging. That brings us back to Friday's focus on households making between $75,000-$100,000 who need to borrow and still qualify for financing even with tighter standards. Though the threshold doesn't quite line up, at $50,000-$100,000, the middle tier of income earners surveyed by the University of Michigan (UofMich) provide a suitable proxy for those receiving the least in the way of stimulus and whose white-collar jobs are at risk due to demand destruction.

In February, this cohort expected robust income growth of 2.5% in the next 12 months. After falling to 1.4% in April, median expectations crashed to 0.5% in May. Lagged data on April personal incomes corroborates. Net of unprecedented government transfer payments and adjusted for inflation, the contraction in personal income deepened to -6.3% in April from -2.8% in March.

That said, aside from those making $50,000 or less (who can't qualify for financing), auto buying plans have fully rebounded. In the aggregate, UofMich auto buying conditions (blue line) are sitting atop their long-run average back to 1978. If only this told us more about car sales (yellow line) for which May data are released tomorrow (excluding the Big Three).

Cox forecasts sales will rise from April's shutdown-associated 8.6-million annualized rate to 11.4 million, a 49% monthly bump that nevertheless remains 33% below last May's level. But what of the rest of the summer? With inventory at a 12-month low, some will postpone their purchases because the model they want isn't in stock. I would argue we don't need to worry about them as much as the nearly half of would-be buyers who have lowered their targeted price point

The risk is affordability and a lack of access to financing act as governors on sales as layoffs work their way up the income ladder. The same can be said of major purchases of every kind.

In a weekend punctuated by dense crowds cheering the SpaceX launch, partygoers swarming the nation's beaches and deadly rioters crowding American cities, we've dismissed that other risk of COVID-19. Perhaps there's only so much we can take. That's human nature. For the quiet majority who were hesitant to venture out and consume before they received emergency calls announcing local curfews for public safety, the uncertainty factor has just increased exponentially.