A $6.7 billion market on close buy propelled a late-day surge.

Thanks for reading my Diary today.

Enjoy the evening.

Be safe.

Here is my list:

1. Covid-19
2. The scientific community (and their quest for a vaccine)
3. Fed Chairman Jay Powell
4. S&P EPS
5. Robinhood and its Band of Merry Traders
6. David Portnoy @stoolpresidente
7. The Presidential polls
8. President Trump
9. The Nasdaq Chart
10. Amazon
11. Amazon
12. Amazon
13.The 10 year US note yield
14. Apple
15.The Governors of Florida, California and New York

From Neil 'The Real Deal' (who I know was being facetious!):

Neil S

World seems more normal now that Doug is back to uber-bearish. ;-)

Dougie Neil S

I am far from being uber bearish - If I was I would be far more short than I am now.
We have come off a grossly undervalued market in which I moved very large long.
I capitalized on the rally and when Mr Market moved to close to 10% above my fair market value I began to short.
Each time, at 3223, 3150 and 3140 I shorted. Heavily at higher levels.
Moves to 3000-3050 I covered profitably - in aggregate.
At current prices I believe we are about 12% overvalued - not a condition for uber bearishness in my view.
If it wasn't for my spec bsket of worthless stocks (that I am short) - my net exposure on the short side would be even lower.
Those that were bearish for 800-900 S&P points (and were critical of my buying in March because the charts were for shit) and now, because of price changing their views (and better charts) and are now bullish (and critical of my market concerns) could be right this time.
And though I never exhibit their confidence, I am fading their optimism as I faded their pessimism months ago.
Stay tuned.
Price is what you pay, Neil The Real Deal, value is what you get.
That's my mantra.
Dougie

* Traders and investors may be "whistling past Covid's spread"

In yesterday's "Sell In June and Avoid the Swoon", I argued that the equity market faces a near perfect storm of economic, health, social, geopolitical and political risks that are multiplying in quality and impact - at a point in time that valuations and stock prices are arguable elevated.

I wrote that there were a number of important questions that investors have to answer today in order to position in the markets - and that I would spend the next few days elaborating upon my answers to the questions.

Let's start with the first two questions:

1. How much worse will the spread of Covid-19 be as we move into the fall? (Answer: Probably worse) Over the last few days, the virus has been spreading nationwide. Governor Cuomo just expanded a quarantine on eight more states, bringing it to a total of 16 states that are experiencing a spread in Covid-19. Yesterday Dr. Fauci had some worrisome comments on the pandemic's spread over the next few months. Until a vaccine is found, business conditions will not improve measurably - with the brunt of the pain felt by the gutted restaurant, lodging, travel, office building, entertainment, and education sectors.

2. What is the timeline for a vaccination? (Answer: 2021) Dr. Fauci suggested that a vaccine could be available as early as the first few months of 2021. 

The market has come off of its highs because of an announcement made by FCC Chairman Pai on Twitter (TWTR) .

I am in constant amazement how everyone caught the March bottom, how everyone is confidentially fully invested in high beta momentum Nasdaq now (flush with memorized sound bytes) and how only dunces own value stocks.

I have heard this refrain before...

It ends predictably.

Ideally I would plan on moving to large-sized short on a move in the S&P towards 3150 (that is assuming no change in fundamentals).

That is the approximate point of failure in the last two rallies, but perhaps everyone sees what I see!

It wouldn't be the first time.

As I warned in my prior post on shorting speculative stocks regarding my basket names - this nonsense routinely happens and I simply will not expose subs to individual names for this reason.

The better than expected confidence number was fueled by strength in Texas and California.

Given the spread of Covid-19 in those two states, it is reasonable to expect next month's data to suffer.

I am currently medium-sized in net short exposure.

I am anxious to expand my shorts further but I'm giving the market a wide berth.

(Monday's notes appear at the end.) 

Stocks rallied smartly as expected yesterday. However, the bulls were tested shortly after the opening rather than the afternoon as traders had expected. 

The rally was reinforced by several technical commentators who put out slightly bullish proposals during the day. 

Today will be the end of the quarter, which will have traders watching the close to see if there is any rebalance of the spread between fixed income and stocks. 

Also of import will be the appearance of Powell, Mnuchin and Dr. Fauci in Congress today. They could play an important role. 

Overnight, futures were somewhat erratic but upbeat news from China "mini rally attempt" but seems to be going nowhere. 

We think we are still in the churning phase. 

Stay Safe. 

Arthur

__________ 

In Thursday's comments we said that Ye Olde Traders Handbook suggested that the choppiness would continue through the end of the month. Actually, the pattern suggested in the Handbook could last not only through the end of the month but possibly as long as two weeks. We should have also noted that the same pattern suggested in the Handbook said that we could see one to three more 2% down moves, which we actually saw on Friday. We had assumed that it would not begin until sometime next week but we now have one under our belt. 

Friday's market, which coincided with the Russell Rebalancing was a bit nasty, although the Russell was not down more sharply than the other averages. 

The Bulls managed to stay above the June 15th lows that we had noted in the comments - they being Dow 24583 and S&P 2965 so they are still in defensive mode but in relatively good shape. Breaking those lows could indicate more severe selling would follow. Also helping the bulls was the fact that both the Dow and the S&P seemed to hold right around the 50 DMA. A place that has supported them in the past. That will make the coming week somewhat critical. 

Overnight futures are rallying sharply. Primarily on strong hopes that the Boeing recertification in the next two days is successful. Also on implication that Gilead will make a treatment for the virus far more available and a bit of a bounce-back in the banks. 

The Chesapeake apparent bankruptcy is a being partly shrugged off but may be a strong indication of further weakness in the energy sector. We think the market could stutter a bit in the afternoon after a strong opening. 

Stay safe.

Arthur

__________ 

Update: 

Traders will look to see if there is any reaction after the Boeing test flight finishes, which according to my sources could be somewhere between 2:30/3:30 Eastern time. 

Probably too early for news but traders will be homing in on the newsticker for any hint of any problems or success.

Arthur

Sorry to get somewhat political here but I wanted to comment on the civil liberties argument that some are giving for not wanting to wear a mask. The fallacy with the argument is that one's civil liberties end when they threaten the health and safety of another individual. I can't drive on the other side of the road or go thru stop signs whenever I want arguing it's my civil liberty right. I can't yell fire in a crowded movie theater and call it free speech. Not wearing a mask risks the health of other people. Some can argue that the virus is driving the bus here in terms of reopening our economy but we can do a MUCH better of job of maneuvering thru it.

China said its state sector weighted manufacturing and services PMI for June improved from May. The manufacturing PMI rose to 50.9 from 50.6 and that was a bit above the estimate of 50.5. With its economy reopening and others around the world too, export orders rose to 42.6 from 35.3 and new orders were up as well. Business expectations though were down slightly to 57.5 from 57.9 and vs 54 in the month prior. The services PMI, which is becoming much relevant in China relative to manufacturing, increased to 54.4 from 53.6 and that matches the highest since March 2019, again measuring the direction of the improvement, not the degree. That was also better than expected but the expectations component moderated after the May gain. Just by having most of their economy reopened, the numbers go up. The Shanghai comp was higher by .8% but the H share index was flat while the Hang Seng was up by .5%. The offshore yuan is little changed.

Things are done quite differently in Japan when it comes to their labor market as employment for life still exists but also company balance sheets are the best in the world so they can retain employees much better than others. Their unemployment rate in May rose but to just 2.9% from 2.6% in April. That still is the highest in 3 years and demand for fresh labor is weak as the jobs to applicant ratio fell to 1.20 from 1.32. This said about the unemployment rate, if we look include those employed but not working, the rate is 10% vs 11.6% in April. The Japanese economy is challenged along with everyone else but they've been diligently about mask wearing and the corporate sector is in good shape. The Nikkei ralied 1.3% and quietly the 40 yr JGB yield is at the highest level since March 2019 as the BoJ has avoided buying that far out on the curve. Japanese stocks are attractive relative to other global markets.

JAPANESE UNEMPLOYMENT RATE

Just by reopening, more people of course spend money. French consumer spending in May bounced back by 36.6% after falling by 19.1% in April and 16% in March. No more color needed here. The euro is giving up what it gained yesterday. The CAC is up slightly.

Out of Europe also came the June CPI figure and it was up .3% y/o/y with a core rate up by .8%. That core rate has been very steady over the past few years. Mario Draghi (from the sidelines) and Christine Lagarde, along with many ECB members, won't be happy with these numbers but the suffering European family likes the cost of living relief. Bonds yields in Europe are lower.

The first short in my basket of worthless/bankrupt companies has bitten the dust this week - Chesepeake Energy (CHK) .
I expect the next shot to be fired by Hertz (HTZ) .
There will be many more bankruptcies to come in the oil and gas, non residential real estate, lodging, restaurant and other industries ... hopefully, from my perch, about 10 more!
The problem with shorting these stocks are that the idiot speculators (of a Robinhood-kind) bid up the stocks routinely - making them far too speculative for me to discuss in my Diary (the pain can be too great for the average investor).
Case in point, CHK which traded over $65/share a few weeks ago (in the after hours) for no, good darn reason.
Another one, HTZ which traded over $6.25/share a few weeks ago, as well - again, for no, good darn reason.

* Deep thoughts on June 30

We are now about one half through the year.

I may be overreacting but something smells to me. The world is changing and the market isn't looking seriously at the change that is unfolding.

In the trading and investing world we often look myopically at market action -- we focus on "what happened today, this week or over the last month."

Social change appears real and with it, structural change to the economic framework of many of the world's major and democratic industrial nations.

The virus masks many things but the change in the summer of 2020 may be looked at as a turning point in time. And it is not one friendly to capitalism and freely working markets.

Come the end of summer and election season will be in full bloom. With it, in combination with social upheaval and virus concerns, comes a period in time that is about as uncertain as I can remember in my investing career.

The Fed and its counterparts abroad will do what they can to stabilize what they can. Supporting a fragile, interconnected and flat system which, at this point, is being held together by a series of polarized opposite, uneven and perhaps divergent goals of almost everything and everyone.

With that in mind it feels counterintuitive (and, at times, almost ludicrous) to be overweighted or even equally weighted long risk assets (like stocks).

The only problem is where doesn't it feel wrong? To most, cash appears safe (CITA -- "cash is the alternative") but not as safe as in previous times of market upheaval as money printing is finally on the edge of debasing what's holding everything together, faith in the paper that it's printed on.

To say I am bearish at these expanded price/earnings levels and general market optimism may be an understatement. The problem is I just don't know and it is difficult to ascertain where to hide.

When President Trump took office the S&P Index was about 2250. It sounds crazy (and though my baseline assumption is a trading range of 2500-3100 in the S&P Index) but it is not out of the question that it could threaten that level when he leaves office in January 2021 again.

Of course I freely admit I have little faith in my beliefs playing out, as fighting the dirty float (delivered after the financial crisis) has turned the markets upside down -- with reduced natural price discovery -- leaving me with one certainty and that's uncertainty itself.

Danielle DiMartino Booth on Texas:

Positive data from the Dallas Fed's Manufacturing Survey echo other regional Fed surveys' V-shaped recoveries; also echoing other regions, employment, hours worked and the backlog of unfinished work, a gauge of future demand, have not yet turned positive.

The majority of respondents to the Dallas Fed survey do not expect revenues will retake pre-COVID levels for at least a year from now; company outlooks remain at depressed levels and tellingly, current capital expenditures fell to a fresh record low.

Energy sector players are even more despondent with 8 in 10 cutting production tied to stubbornly low crude prices; unless crude holds steadily above $35bbl, the string of shale bankruptcies will continue curtailing Texas capital expenditures further.

What's the first thing that comes to mind when you hear "Texas"? BBQ? Cowboys? Football - of the American variety? Longhorns? Ridiculously hot summers? Southern hospitality? How do you fancy dinosaurs? As per the Texas Parks and Wildlife Department, fossils of 21 different dinosaurs have been discovered across the vast 268,597 square miles. Kicking it off in the Panhandle, three from the Triassic period were found across that arid expanse, eight from the Early Cretaceous period were unearthed in the Hill Country of central Texas and, finally, ten from the Upper Cretaceous period once roamed the Big Bend region. We joke you not, one even was named Alamosaurus. And who could forget that? The mammoth herbivore weighed in at thirty tons and measured seventy feet in length - two school buses lined up end-to-end.

We feel as old as dinosaurs trying to remember the last time we didn't write about the coronavirus. We wish we could avoid the subject as it pertains to the Lone Star State. Alas, in the week ended June 29, reports put the average daily seven-day rolling case count at a record 5,381. According to Johns Hopkins University's latest tally, total cases have hit 155,401, ranking Texas 4th in the nation behind New York, California and New Jersey.

The state may have had to re-shutter its bars, but you'd never sense it had skipped a beat judging by its latest manufacturing sector. Mimicking other Federal Reserve regional surveys, the Dallas Federal Reserve's Manufacturing Survey sported the latest example of a V-shaped recovery. June production bounced back to 13.6, nearly round tripping to the pre-COVID level of 16.4 in February. The capex outlook has brightened for the first time in four months (purple line).

Despite the rebound in output, and also echoing other regional Fed surveys, measures including employment, hours worked and the backlog of unfinished work - which guides future labor demand - have yet to return to positive territory. The same goes for current capex (green line). Spare capacity is apparent in its abundance, slack that won't be ameliorated by the surge in Texas' coronavirus positivity rates and hospitalizations.

Speaking of uncertainty, the Dallas Fed added a special section in its June survey querying the impacts of COVID-19. The key takeaway from the pie chart inset above: this is not a temporary shock to the Texas industrial sector that feeds the number one export state.

A 52% majority expected revenues to return to pre-COVID levels four quarters or more forward. More than half. At least a year. Full stop. Top-line concern isn't just a Texas story. FactSet noted last Friday that at -27.7%, the Industrials sector should report the second largest year-over-year revenue decline of all 11 S&P 500 sectors in 2020's second quarter. If realized, it would mark the largest revenue decline for the Industrials sector since FactSet began tracking this data in Q3 2008.

Texas's key energy sector reflects even bleaker prospects. The Dallas Fed Energy Survey revealed the business activity index-the broadest measure of conditions facing Eleventh District energy firms-fell from -50.9 in the first quarter to -66.1 in the second quarter. It was the lowest reading in the survey's four-year history and indicates a significant contraction in activity.

With this as backdrop, at -51.0, the company outlook (blue line) was still running at a very depressed level in the second quarter after the first-quarter's abysmal -75.0 reading. And the current capex showed no turnaround in sight for energy firms, falling to a fresh low of -68.5.

Special questions were also posed in the Energy Survey such as, "When do you expect U.S. drilling and completions activity to return to pre-COVID-19 levels?" Among the respondents, 42% said '2021,' while 39% indicated '2022,' and 16% said 'never.' Another nugget: 82% of exploration and production firms shut in or curtailed production in the second quarter. Within that cohort, a resounding 94% of executives cited low wellhead prices as the primary reason behind the decision.

All of these results should be viewed in light of median expectations for crude oil prices to be $40 per barrel by year end. Through yesterday's session, West Texas Intermediate (WTI) continued to trade in a sideways range in the upper $30s. From a technical perspective, June's three tests of the $40 resistance failed without a sustained move through this apparent ceiling.

Failure to push WTI higher could lead to more cutbacks in output and capex, especially in the shale sector. As noted in yesterday's Daily Shot, nearly a third of U.S. shale firms are technically insolvent at $35 per barrel, while an additional fifth would be stressed. That's dangerously close to more permanent damage from depressed oil prices.

Drillers are probably wishing they could find another Torosaurus, a fossil from the Big Bend region that means 'bulllizard.' Unless the count declines further from here, there's nothing bullish around the bend for WTI given Texas' 112 up-and-running oil and gas rigs.