Working things out. Stocks closed mixed yesterday as traders continued to weigh the upsides of tomorrow with the tough realities of today. The number of new weekly jobless claims is slowly falling but the number is still high and continuing claims rose slightly indicating that Americans are not getting rehired so fast.
N O T E W O R T H Y
Stay safe. American Airlines (AAL), United Airlines (UAL), Delta Airlines (DAL), Nordstrom (JWN), Norwegian Cruise Lines (ACLH), Alaska Air (ALK) were all at the top of the S&P500’s biggest winners yesterday with AAL soaring by +41.0%. Should I just end my note here? As I have written multiple times, it is my job to worry about the downside. Those of you who know me personally know that I take that responsibility really, really seriously. That doesn’t mean that I am a “Downer Dan”, I am just careful, really careful - especially when it comes to investments. Being careful involves weighing lots of facts, BOTH negative and positive, in order to determine how well a company or the economy might behave not just in the far future, but also the near term and mid-term. Let’s start with the far future… the long run. The famous economist John Maynard Kaynes wrote that “in the long run we are all dead”.
With that statement, he meant to relate that we should focus on the nearer term when assessing the fate of the economy because that truly affects us. Let’s dispatch with long run for now with the following: everything will eventually be good in the long run and statistics show that our portfolios will probably be in better shape. Let’s focus for a moment on the short run. American Airlines announced yesterday that it would increase its flights by +74% in July. The news came on the heels of a report that China would allow some US flights back to China a day after President Trump said that he would block Chinese flights from entering and leaving the US this month. United Airlines announced that it would resume flights to more than 150 US and Canadian destinations in July. So things are all back to normal, huzzah! But what about that footnote that mentions the fact that United’s capacity in July will be 30% of last year's at this time? I would hardly say that 30% is back in business. It is certainly better than last month’s figure when seeing a commercial jet fly overhead was a novelty, kind of like that rare sighting of the Concord back in the day (I am aging myself). But is that worth a +16.2% price gain for UAL?
The short run will continue to feature the battle between good spirits and bad news. Up until now the market has been really good at digesting bad news while maintaining a positive outlook for the future. Uncomfortable, but I get it. Investors are expecting bad news from companies and the economy. Good news, less expected, gets to lead the markets. Unfortunately the short run will also hold some unexpected bad news. Companies have been doing all sorts of things to keep the lights on. Laying off unessential workers while borrowing money from the banks and the public (bond offerings) was the first step to offset the epic fall in revenues. The next wave, which may have already begun is the laying off of some less-than-non-essential workers. This morning the Bureau of Labor Statistics will release its monthly employment situation numbers which are expected to show that an additional -7.5 million Americans lost their jobs in May. The report will detail the job losses by industry and many economists believe that losses will be more spread out than in the past reports. In other words, the losses will go beyond travel and leisure and will likely start to include management layoffs as well. The question is, how long can companies meet their cash flow requirements on cost reductions and additional borrowing? Some analysts believe that we will see a second wave of business failures in the summer as cash flows diminish. The country appears to be turning a corner, but the near-term growth is not going to be fast enough to save every company.
The middle run, meaning next year, might not be so rosy either. Yesterday’s weekly Jobless Claims number showed that roughly 43 million Americans lost their jobs as a result of the pandemic. One analyst noted that the number of losses is greater than the population of California… for reference. Today’s number is expected to show that the Unemployment Rate reached 19.1%, a number not attained since the Great Depression, during which the number surged to 25%. That many folks unemployed is large and expected to grow further in the months ahead. It is clear that we are at a turning point and activity is picking up while many experts are hoping that credible virus therapies will be available as early as 1Q21. That is positive, but in reality, rehiring all of the recently unemployed overnight is not simple and it will likely take an extended period of time. That means that the reality will continue to be out of sync with expectations. As aforementioned, lower cash flows can only be fixed with cost cutting measures and borrowing for so long. For United Airlines, an announcement of operating at 30% capacity causing the stock to rally by +16.2% in one day worries me. How long could you last if your monthly income was only 30% of what it was last year?
THE MARKETS
Stocks posted a mixed close yesterday as a slightly worse than expected jobs report kept stocks down for most of the session. By the end of the day airlines and cruise lines helped to stave some of the index losses and a surge in Boeing helped the Dow close slightly in the green. The S&P500 fell by -0.34%, the Dow Jones Industrial Average advanced by +0.05%, the Russell 2000 was unchanged, and the Nasdaq Composite Index gave up -0.69%. Bonds gave up ground and 10-year treasury yields climbed by +8 basis points to yield 0.82%. OPEC+ is reportedly close to a deal which would extend planned production cuts and has reportedly reached a deal with non-compliant Iraq, all WHILE YOU SLEPT.
NXT UP
- Nonfarm Payrolls (May) are expected to have declined by -7.5 million compare to last month’s loss of 21.537 million jobs.
- The Unemployment Rate (May) is expected to come in at 19.1%, up from last month’s read of 14.7%.
- Next week, we will have JOLTS Job Openings, PPI, CPI, University of Michigan Sentiment, and the FOMC will meet next week to discuss policy. Check back on Monday for calendars and details.