[Market Madness] Edition 0073
Stress Test
In need of weekend relief
Well folks, we’ve seen a lot today. Personal income for the month of May fell only 4.2%, compared to the expected 6.0%. Additionally, consumer confidence for May rose a record 8.2%. Despite these pieces of good news, market sentiment still looms on the rising daily new case figures here in the states. I won’t get into the semantics too much here today, the continued new headlines about case spikes and reopening rollbacks speak for themselves for now.
Elsewhere, the Fed conducted their annual stress tests of major banks, including a special case scenario for another COVID 19-type economic shock. The results came back showing all the major banks passing. Some came close to approaching cautionary levels of capital requirements., requiring the Fed to make some recommendations for Q3. Overseas, the markets were mostly green, signaling positive outlooks for the recovery efforts in other countries. For us in the states, not so much. We are seeing larger market movements down in response to the bad COVID 19 news. Let’s just skip to the weekend, shall we?
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Fundamentals
Friday Close:
Dow Jones Industrial Avg: -2.84%
S&P 500: -2.42%
NASDAQ: -2.59%
US 10 YR: 0.647%
Crude OIL: $38.21
Market Madness Portfolio: -1.78%
COVID 19 Global Cases: 9,820,486
Indices Overseas:
FTSE 100: +0.20%
Nikkei 225: +1.13%
Hang Seng: -0.93%
TEDRATE: 0.15
LIBOR (3 month): 0.30600%
Banks on a close watch
The much awaited Fed stress test results appeared as a mixed bag. The major finding tells us that major U.S. banks are healthy, but come into warning level territory for capital level requirements in the wake of a COVID 19-type scenario. The Fed has implemented a rule that banks must pause share repurchases and maintain current dividend levels into the third quarter. Other worries rise from the report as it suggests that more damage to the banking sector could be realized if the economy does not snap back. Given the current resurgence of new cases across the U.S., this is a growing concern for the U.S. economy and banking sector at large.
“In a worst-case scenario, where unemployment remains high and the economy doesn’t bounce back for a few quarters, the 33 largest U.S. banks would suffer heavy loan losses that would erode the capital buffers meant to keep them on stable financial footing, the Fed said when it announced the results of its annual stress tests.” (excerpted from article)
The guidelines set out for the Fed regarding Q3 are interesting, as I learned myself that share buybacks are the main way banks return capital to its shareholders. It is, however, better to be safe than sorry for the Fed, especially given everything else they are doing to prop up the economic system. Capital plan re-submissions are also required later in the year to provide an update on bank’s stress levels.
Outlooks are cloudy to say the least. It was a smart move for major banks to set aside several hundred billion dollars to protect against loan losses; I think that was a major boost in the stress test results. The road to reopening has been one marked either by strong attention to safety and science or that of playing politics. NY Governor, Andrew Cuomo, called out the states that ‘played politics’ with their reopening plans and now ‘they lost.’
And who says there isn’t always a punch of politics to everything?
Regardless, there is still a rising problem here in the states, and its also becoming a political one. One of the few things that Donnie and the democratic party have agreed on ever would be the need for an additional round of stimulus checks. The republicans have laughed this idea off, suggesting that enough spending on stimulus has been done already. As of today, 33 states have reported a spike in their case numbers, suggesting that the problem is growing. The economic impact of a stronger second wave could dampen recovery path projections into a whole host of new, contorted shapes, including the “w-shaped” and “U-shaped” recovery tracks. Each come with their own ramifications for every party involved, from increased loan losses at banks, to more bankruptcy filings, and even another decline in consumer confidence and spending.
Read more here on CNBC and here on WSJ.
Ford’s revival effort
Now this is not a car and truck newsletter, but many analysts are suggesting that the future success and life of Ford as a company hangs in the balance of their ability to revitalize and deliver on the 2021 F-150.
Ford is hoping to bring its standard and hybrid models of the F-150 back into the spotlight, with a fresh boost of car tech to compete. Amid an ongoing $11 billion corporate restructuring plan, Ford is banking on some success on this new line of truck. The company went back to the drawing board for this new 14th generation, keeping what was loved, and redesigned what customers didn’t like. The hybrid model will be a first step toward their all-electric truck that is expected within the next two years.
There is value to discussing the movements Ford is making. We’ve seen through Tesla Motors that creating an all-electric vehicle that consumers want is not that hard. Ford is stepping up to the plate, hoping to get a slice of the all-electric pie along with Toyota and others. This helps up the level of choice for consumers in brands and competition among manufacturers, bringing down prices to a more affordable level. The debut days of Tesla vehicles were nearly 6 figures and did not have middle market potential. Now, their newer models have a competitive middle market price point, and with a little more competition from other auto manufactures, we could see all-electric vehicles enter more entry-market pricing.
The push to electric is great for the reduction effort that shift plays in reducing carbon emissions. However, we often forget that the electricity going into your home comes from a plant that is also dumping loads of carbon emissions into the air — a far bigger problem than just the cars. The mass adoption of electric vehicles, I think, will bring about a shift in consumer preferences toward adopting solar panels and other solar power production. I know that they’ve been around for a long time, but they too have seen massive price decreases with increased competition between producers and offshore production plants. Tesla, as an energy production company, was also working to develop roof shingles that doubled as individual solar panels, something much more attractive that the bulky reflective panels we are used to. Once those leave development and testing, and gain market appeal, the dash to solar could have real movement.
One element of the COVID 19 shutdowns that is often left out of the conversation is the minimal level of emissions we saw globally for some time while nearly everything was closed. Although that is impossible to maintain with full production given the current technology, I think we all saw a glimpse of the damage the global infrastructure causes and how finding technologies to mitigate and even reverse that damage is necessary. A successful launch of an all-electric vehicle by Ford that is reliable and affordable will help move us in the right direction in the electric and solar market.
Quick Takes
The puzzle Wall Street cannot solve. (via WSJ)
Grocery Brand Albertsons debuted on the NYSE yesterday with a lower than expected $16/share IPO. (via CNBC)
Amazon to pay a little over $1 billion to buy self-driving startup Zoox. (via CNBC)
NY Gov. argues reopening process in some states was too political and not enough following of the facts — “You played politics with the virus and you lost”. (via CNBC)
May personal income figures reveal a drop of only 4.2% (compared to the expected 6.0%). (via CNBC)
U.S. - Chinese tensions could have global impacts. (via CNBC)
Reader’s Corner
The reader decided to take this summer Friday to enjoy their latest book binge, Night Film by Marisha Pessl.
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