Horrific
The largest economic contraction, quarter over quarter, then seasonally adjusted, and then annualized since such records have been kept.
The Bureau of Economic Analysis put a -32.9% print to the tape for the advance estimate (first look of three) for the size of the U.S. economy. Of course, many of the components that make up the GDP of a nation this size are quite complex and the data in this report are quite incomplete. Basically, very basically, we add spending on both the private and public side to investment and (usually) in our case subtract net exports. The fact is that, as always in this first estimate, many lines are blank, such as Gross Domestic Investment.
The advance estimate always ends up revised, sometimes substantially, and given the size of this contraction my expectation is that the coming revisions have a chance to be among the largest that we have ever seen. There is no guarantee which way that adjustment goes. Still, as economists, as interested individuals who may have been referred to as "the math kids" growing up, we are dealing with nothing more than statistics. Conditions in the real world, though softened due to the aggressive actions taken by both fiscal and monetary authorities, remain potentially catastrophic. You have just witnessed a statistical catastrophe.
Numbers? OK, let's do numbers.
The GDP print actually beat expectations. In terms of Real GDP, this was not the worst, but something like the fifth-worst quarter in recorded U.S. history. Oh, and if we did not annualize GDP, then our -32.9% becomes a negative 9.5%. That's for the ones who think the U.S. is being outperformed around the world. Not true. The rest of the world has been kicked in the teeth as well.
Musical Chairs
Zero dark-thirty. Friday morning. I look in the mirror. What the..? Eyebrows turning white. To match my beard. Permanent change. Months and months of seemingly endless issues are taking their toll.
Global? National? Regional? Personal? All of the above. My world has been a rough place for most of the year. I'm sure that yours has been as well, even if one has only suffered through quarantine. I told readers back when the world stopped after this pandemic forced a reversed globalization of nearly all economies that the $22 trillion U.S. economy could end up around $15 trillion. I did no math there, I pulled that number from the imaginary cloud above my head, so don't email me over it. Thank you.
The truth is that the U.S. and global economies likely will be incapable for quite some time of fully reflating to 2019 levels. Vaccines will help, but certain industries have been forced to evolve ahead of their time. Certain industries have entered into their twilight before they would have otherwise. Those jobs are gone.
That smaller total economy will carry a much higher debt burden than did the larger economy that we so recently enjoyed. The third quarter will look spectacular, but only in comparison to the second quarter and in isolation. Future economic growth will be sluggish and will need to be managed.
Debt market price discovery is now artificial through necessity as the central bank will need to remain a permanent price-insensitive investor. In effect, this skews everything else.
Equity valuations? No, those will not normalize anytime in the short- to medium-term future. Just not possible. The music has stopped, will do so again, and each time the master of games removes another chair.
Real world? Initial jobless claims appear to have found a support level. Same for continuing claims. This is what keeps me up at night. Not enough chairs. The $600-per-week stipend that the federal government has been padding state unemployment benefits with is indeed very expensive. There may be some who do not deserve, there are others who depend, and still others probably frightened to return to a job dealing with the public. That added benefit runs out here on Friday, while negotiations over a next-phase fiscal support package continue. (Guess what, D.C.? Not only do you need to meet on something here, this is not the final phased support package of this crisis that you will argue over. Trust me. Now, get over yourselves.)
What is the human cost of pulling back on benefits prior to the economy's ability to safely absorb available supply across labor markets? What is that cost at a national, corporate or household level? I ask, because I really don't know... and most of you know that I am no Keynesian. That said, I believe myself human. I don't think it prudent to force the supply side of labor markets prior to such markets properly developing a publicly safe demand side. This is not a political stance, I do not do those publicly. This is a concern.
Interesting
So, on a day that the mandated halt placed upon economic activity was put into numerical terms for Americans, equity markets took an early beating and then rallied ahead of a spate of high-level earnings reports that would be released by the likes of Amazon (AMZN) , Apple (AAPL) , Facebook (FB) and Alphabet (GOOGL) all of which are holdings of Jim Cramer's Action Alerts PLUS charitable trust. It really is no wonder that equities came off of almost dire levels, as the Information Technology sector led the way and as the Internet as an industry led the Communications Services sector to a second-place finish for the day. It should also not come as any surprise as economic reality slapped investors across the face that the Energy, Materials (despite a soft dollar), Financial and Industrial sectors occupied the four bottom rungs of our daily performance tables.
The truth, for me at least, is that the day left a bullish taste in my mouth. After all, the S&P 500 gave up a mere 0.38% on the day. This came on reduced trading volume at the New York Stock Exchange as trading volume in aggregate for the index itself printed 26% below its own 50-day trading volume simple moving average (SMA). Again. A month since the two have met. In other words, nothing resembling institutional distribution happened in earnest on Thursday across the S&P 500 or at the New York Stock Exchange. What there was... was a mildly negative churn.
Now, up at Times Square, a different tune was sung for sure. Not truly bullish, but more bullish than what we saw downtown. The Nasdaq 100 and the Nasdaq Composite both scored gains of more than 0.4%, as trading volume increased slightly at the market site. Losers beat winners by a small margin at the Nasdaq, while advancing volume edged declining volume. Then came earnings.
The Rotation?
There have been fits and starts. At times the attempt to rotate out of growth and into value has been quite robust, even volatile. I agree that every dog has its day, and that day will come for such names. However, I don't think that day will be today. I could be wrong. The big four, FAANG minus Netflix (NFLX) , reported on Thursday evening. One thing is certain, and this is a certainty we most likely already understood. Economic shutdowns that drive persons to both work and recreate from home are net positives for these four. Even Apple, where I had doubts.
Facebook beat on both the top and bottom lines. Daily active users popped 12%, as did monthly active users. As Facebook has come under intense scrutiny as far as antitrust issues are concerned, there also has come an advertising boycott campaign meant to force the firm to police content at a higher level across all platforms. With growth like this, does that boycott continue forth as advertising budgets become unlocked once the public health crisis finally abates? There may be some serious value unlocked in this name at that time.
Alphabet also beat expectations on both lines. Google Cloud impressed. YouTube not so much. Search declined less so than expected, but TAC (traffic acquisition cost) was not a problem or at least not a growing problem as far as I can see. Still, net cash provided by operating activities and free cash flow crushed consensus. The firm continues to return cash to shareholders.
Four for one. Wow. More highly priced stocks need to do this. Apple just knocked the cover off the ball. Was I ever wrong about this one. Gee whiz. Apple posted double-digit growth in both sales of products and in services as well as in each geographic region. Do I still have questions concerning dollar valuations and the impact upon importing parts and finished goods? Of course. Still, it's hard to argue with successful results. Hard to argue with the four-for-one stock split that will take place after the close of business on Aug. 24. I really, really, really like that.
New Price Target?
Probably a necessity. $3,300? Not there, but closing in. Let's just say I will not be making sales today, and this one is under review until I can watch market reaction to this report for a few days. All hail mighty Amazon, the night's big winner in my humble opinion. We had been told that the firm would likely spend its entire operating profit over a number of quarters just making the business safe for both employees and consumers. Still, Amazon beats. Still it grows. Still, it is essential to just about all of us. Certainly to me.
Out-performance across the board? Of course not. Revenue at Amazon Web Services (AWS) will be a negative mention for the bears on Friday morning. That number printed at growth of 29% for the quarter, slightly below the consensus view, and off from 33% growth a quarter ago. That said, as Microsoft (MSFT) and now Google Cloud have been taking market share, Amazon's slice of the pie has been mired in a state of slow contraction for a year and a half. Know what? AWS operating income grew 58% on an operating margin of 31%. That's what. Margin for this business has been growing quarterly.
Away from AWS, Amazon's e-commerce business has kept America going throughout the pandemic (along with Walmart (WMT) ). This unit crushed estimates and showed year-over-year growth of 48%, and contributed more than half of the firm's entire quarterly revenue number. This is the business that drives advertising revenue, which is still filed under "Other" in these releases. "Other" revenues expanded 41% for the quarter and beat expectations. The e-commerce business also drives "Third-Party" sellers (growth of 52%) and "Subscription Services" that include Prime membership, Kindle, Audible, Amazon Music and video services. The one negative is that this business also drives higher shipping costs.
For the current quarter, Amazon guides revenue to a range of $87 billion to $93 billion (consensus: $86.4 billion) and operating income of $2 billion to $5 billion (consensus: $3.1 billion) despite the assumption of more than $2 billion in expenses directly related to dealing with negative impacts of Covid-19.
There will be volatility. There will even be profit taking. Jim Cramer always says "Own it, don't trade it" when he speaks about Apple, and that has been good advice for sure. Trading Apple has made me some dough. Had I followed his advice closely, I would have done far better. How Jim feels about Apple is how I feel about Amazon. I'll trade a portion, but the core position? That's on a lockdown of its own.
Economics (All Times Eastern)
08:30 - Employment Cost Index (Q2): Expecting 0.6% q/q, Last 0.8% q/q.
08:30 - Personal Income (June): Expecting -0.8% m/m, Last -4.2% m/m.
08:30 - Consumer Spending (June): Expecting 5.5% m/m, Last 8.2% m/m.
08:30 - PCE Price Index (June): Expecting 0.7% y/y, Last 0.6% y/y.
08:30 - Core PCE Price Index (June): Expecting 1.0% y/y, Last 1.0% y/y.
09:45 - Chicago PMI (July): Expecting 43.9, Last 36.6.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 181.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (ABBV) (2.20), (AON) (1.92), (CAT) (.72), (CVX) (-.89), (CL) (.69), (ITW) (.71), (MRK) (1.05), (WY) (.00)
After the Close: (BCC) (.46)
