Bad News is Good News

The worse may be yet to come… as the banks warn of the ‘extraordinary economic uncertainty’ ahead…

And so it begins… JPM, C, WFC all reporting results… by now we know that both JPM and C beat the estimates and maintained their dividends while WFC failed to beat the lower bar and cut its dividend… no real surprise at all… but what we did learn is that all 3 of the banks are in fact readying themselves for what they think is going to be tougher times ahead… and Jamie Dimon – JPM CEO – makes it very clear… “this is not a NORMAL recession…”  and with that statement, we found out that these 3 – have allocated $28 billion (last quarter) to loan loss reserves, bringing their total reserves to more than $80 billion for both their commercial divisions and consumer banks… as they prepare for what is expected to be a wave of both consumer and business defaults… Now this ‘provision’ is sharply higher than what they allocated during the first 3 months of the year – Jamie had JPM (America’s biggest bank by assets) put away ‘a little extra’  as they expect unemployment to remain in the mid double-digits well into 2021 and GDP struggles to regain its footing… Citibank CEO – Mikey Corbat re-iterated this tone by saying that “this pandemic has a grip on the economy, and it doesn’t seem likely to loosen until vaccines are widely available” (something that may be a bit closer than some think). Expect this to be the story as we move thru this week and hear from the likes of MS, BAC, GS as well as some of the other regional superbanks… By the end of the day – investors rewarded JPM +0.6%, while they punished C and WFC down 3.9% and 4.6% respectively.

And the broader stock market took it all in stride… opening a bit weaker as the headlines hit the tape only to find a bid before 10 am as analysts and investors tuned into each of the investor conference calls to find out more… and then Fed Governor Lael Brainard took to the internet and said that she expects the recovery to face strong headwinds and that ‘fiscal support will remain vital’… (again suggesting that the FED and the administration ain’t going anywhere). So, stocks began a slow and steady advance as the day wore on… sending the Dow substantially higher – +556 pts or 2.13% (think industrials moving into the sun), the S&P rose 42 pts or 1.3%, the Nasdaq regaining 97 pts or 0.9% and the Russell adding 24 pts or 1.7%.

Once again – it is clear that investors/traders and algos continue to feel that bad news is good news… The selloff on Monday afternoon ignited by California’s decision to re-close businesses is now nothing but a distant memory. Now as we have been discussing for some time – investors and asset managers are taking advantage of the surge in tech names… using them as an ‘ATM’ when they need to raise some cash and re-allocate it to industries that have underperformed – thus the move in the Dow Industrials… Remember that the Dow has been the laggard here… still down 6.4% on the year while the S&P is only off 1% and the Nasdaq is UP 17%! So expect to see some more pressure on tech as portfolio managers re-balance portfolios to reflect their outlook… And as you can see – yesterday at least – it appears that many now believe that the industrial complex has some room to go…

And all of that feel good stuff only got better after the close – when Moderna (MRNA) reported in the New England Journal of Medicine – that the vaccine trial they are engaged is has produced a ‘robust immune response’ (think anti-bodies) in ALL of the patients in the trial and that the side effects do NOT appear to an issue… raising hopes around the country and the world that we may get a vaccine later this year – even if it is only used in extreme cases as development by a range of other pharmaceutical companies continues into 2021 – Look – it will take time to develop and distribute but with each passing day it appears we are getting closer and THAT is a positive, so let’s stop all the negativity and focus on the positives and focus on waking up from  this nightmare… And this will be the story today… leaving earnings from GS just an afterthought… now the expectation is for them to report $3.94/sh… and like JPM – I would expect them to ‘beat that number’ and like the others – we can expect a substantial allocation to loan loss reserves as well – but I think the Moderna news (and thus the virus conversation) and the China/Hong Kong news today will outweigh anything that Goldy has to say… Other names in the earnings till today include UNH (they beat $6.91/sh vs. the expected $5.25/sh), BK, PNC, USB and PGR…

So what’s the China/Hong Kong news? It’s about the end of HK’s special status as a trading partner… Trump – in a move that has been discussed – pulled the trigger to end HK’s special status as a trading partner in an attempt to put pressure on and sanction China for its recent moves concerning Hong Kong. This move – is sure to give Xi Xi a migraine, but it’s not like he was unaware of this consequence… the US made it very clear that we would retaliate by ending the status if China moved ahead with that sweeping national security law 3 weeks ago. Trump then took to the Rose Garden to make this announcement saying that ‘No administration has been tougher on China than this administration.” And this morning’s WSJ reports that the UK is set to ban  British telecoms from purchasing any new equipment from Huawei Technologies for their 5G network… in a further sign of deteriorating conditions between China and the developed world and the expectation is for other countries to fall in line and if so – this will have a substantial impact on the HK economy (and thus the Chinese economy) at a time when Xi Xi can least afford it. China did not sit still and immediately vowed to take strong countermeasures urging America to ‘correct its wrongdoings and stop interfering in Hong Kong affairs…’ Oh boy – can’t wait to see how this plot line develops…

Overnight – most Asian markets advanced on the virus news – while Chinese stocks came under pressure as US/China tensions mount. The BoJ (Bank of Japan) reported today that their countries economy is ‘likely to improve gradually though the pace is expected to be only moderate’ as the pandemic continues to run its course. By the end of the day – Japan + 1.6%, Hong Kong flat, China – 1.3% and ASX +1.8%.

European stocks are UP… as the vaccine news takes center stage… Period. Yes, it is also earnings season – but once again the vaccine news is much more important… At 6:45 am – FTSE +1.18%, CAC 40 +1.7%, DAX +1.30%, EUROSTOXX +1.25%, SPAIN +0.43% and ITALY +1.28%.

US futures are UP again as expected… they have been up ever since the Moderna news hit the tape last evening… Dow futures are now +440 pts, S&P’s are up 41pts, the Nasdaq is up 86 pts and the Russell is up 35 pts. Now yes, any positive earnings results will only add to the risk on mood and if there are misses – then expect that stock to be punished individually vs. the broader market – which is usually what happens when we have such an anxious market… one negative story in a big stock can bring down the broader market… as their concerns get plastered across the media… but today – it just feels different…

And it is TAX day – July 15th… all of your 2019 Federal and State taxes need to be postmarked by 11:59 pm today… and now the conversation about withholdings for 2020 are taking center stage – especially in the high tax states that have seen an exodus because of the virus… A name that comes to mind is New York… and the city is expected to lose some $300 million of tax revenues because of the closure of the city and people working from home or other states… and since they are no longer working in NYC – then they don’t have to pay city taxes – or do they? Oh boy… here is another battle that is sure to define NYC tax policy in the year ahead… Can you just see Andy’s head blowing off his shoulders now?

Oil is up this morning once again up and thru $40/barrel… after the API reported a sharp drop in crude inventories… even as the market awaits any news out of the OPEC zoom meeting that ends today… Look – I have been screaming about his for months now… energy demand isn’t going anywhere… and the news yesterday reports that crude inventories fell by 8.3 million barrels vs the expected decline of 2.1 million barrels – Clearly suggesting that demand is alive and well despite the pandemic… Today – we will hear from the EIA (Energy Info Admin) to see if they confirm what the API said yesterday. And by this afternoon – we will find out what OPEC has decided to do… Will they extend their production cuts of 9.7 million barrels/day or will they ease up and reduce the cuts to 7.7 million barrels a day… thereby adding supply to the chain… Just fyi – OPEC expects demand to surge by a record 7 million barrels per day in 2021… just sayin’ – We remain in the $35/$45 range.

On Friday – I said that the S&P is struggling with 3200 as we await the beginning of earnings season… On Friday we blew thru it and on Monday we gave it all back… Tuesday took us right back to 3197 and this morning news is about to take it to 3230 on the opening… on its way to fill the gap created back in February when the S&P was trading at 3335 and gapped down to 3257 on February 24th… Now that won’t happen today – but if we get more vaccine news then expect that investors will fill that gap sooner rather than later…

Take good care –

Kp


sausage and peppers

Chicken Sausage & Sweet Vinegar Peppers

Again – another great dish to make for a Saturday BBQ…

You will need: Thighs & legs, (bone in/skin on), s&p, olive oil, sweet Italian sausage, Vinegar peppers, garlic, white wine, chicken broth, marinated artichoke hearts, thin sliced potatoes, s&p and flour. Total time 1 hr. start to finish…

Preheat oven to 375 degrees – Preheat grill for cooking the sausages

Season chicken pieces with s&p – heat up oil in frying pan – when hot – reduce heat to med/hi – now add chicken and brown on all sides – maybe 10 mins total. While this is cooking – place the sliced potatoes in the baking dish – season with s&p – add a splash of oil. Now remove the chicken from the frying pan and place in the baking dish and put in the oven and continue to cook for about 30 mins…

Next – cook the sausage on the grill – careful not to burn… maybe like 10 mins total… remove from grill and let rest for 3 or 4 mins then cut into bite size pieces. In the meantime – add the chopped garlic to frying pan (that still has the juices and oil from chicken) along with sliced vinegar peppers – sauté. Now add the sausage and some white wine and reduce (5 mins) – next add chicken broth and the artichoke hearts… sauté for another 5 – 8 mins…

In a separate bowl – whisk together some flour and milk (you can use water) and add to the frying pan – allowing it to cook and thicken a bit… do not let it get too thick – you can add a bit of broth if you need to. Re-introduce the chicken/potatoes to the frying pan and allow to simmer for 2 or 3 more mins.

Now serve on a large warmed platter family style. Accompany with a large mixed salad dressed in a balsamic vinaigrette dressing.  Enjoy your favorite chilled White wine.

Buon Appetito.

 

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Kenny Polcari

Kenny is the editor of Morning Thoughts and has been with Seven Figure Publishing since 2019.

Kenny is a CNBC exclusive contributor appearing on shows like The Halftime Report, Power Lunch, and Closing Bell. His market commentary has reached audiences across the nation on media outlets such as Bloomberg, Fox, ABC, and more.

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