Investment Idea

Follow the money

11 May 2020 | 6 min read

The massive surveillance of the Coronavirus in the media, reports of death rates and different countries strategies, gives us a feeling that we know more about this disease than the plague. Time will still be needed before the picture becomes clearer when life can return to something similar that what we had before the Coronavirus.

In the 1600s, the world suffered by the plague and Samuel Pepys followed this in his famous diaries. On April 30, 1665 he wrote: "Great fears of the sickness here in the City it being said that two or three houses are already shut up. God preserve us all!"

In London, the Company of Parish Clerks printed “bills of mortality,” the weekly tallies of burials.

Because these lists noted London’s burials – not deaths – they undoubtedly undercounted the dead. Just as we follow these numbers closely today, Pepys documented the growing number of plague victims in his diary.

At the end of August, he cited the bill of mortality as having recorded 6,102 victims of the plague but feared “that the true number of the dead this week is near 10,000,” mostly because the victims among the urban poor weren’t counted. A week later, he noted the official number of 6,978 in one week, “a most dreadful number.”

You can read the whole article here:

The massive surveillance of the Coronavirus in the media, reports of death rates and different countries strategies, gives us a feeling that we know more about this disease than the plague. But just as Pepys fumbled in the dark, we are also fumbling in the dark. Different countries test and report in a different way. There are also different strains of the virus, so even if the experience is that we have more information, it is doubtful whether we see clearer than Pepys. Time will still be needed before the picture becomes clearer when life can return to something similar that what we had before the Coronavirus. The Swedish epidemiologist Johan Giesecke is, in many respects the father of the disputed Swedish strategy. But the burning question that he poses to other countries is how they can open their quarantines without getting the population infected.

The graph above shows how all western countries seem to have reached flat-out curves in term of mortality, but they are still in a horizontal position. Only time will tell which strategy has been the best and whether it has been successful to have a more liberal attitude as in Sweden or tougher restrictions such as in Norway.

Last Friday the unemployment figures came from the US. They showed that 20.5 million jobs disappeared during Q1 2020. It is a figure that is shockingly high but still does not show the whole reality. The figure is based on surveys and the Bureau of Unemployment Statistics notes that seasonal adjustments to deal with the shock-like figures give a 5 million lower number – so we are really talking about a loss of 25 million jobs. Since when has it become acceptable to have adjustments here or there of 5 million jobs?

In the graph above the NFP figures is entered against the S&P500. As can be seen they follow each other reasonably well (which is also true if you pull the graph further back in time). It´s no wonder, given that the number of jobs reflects the economy and the stock market also reflects the economy. But note that this time it is a big difference. Normally, the stock market goes down and then the job figures also decline with this shift in time. This is probably happening simultaneously, but job reporting also take time. But this time the number of jobs decline, but the stock market does not fall. The difference can be explained by state aid. To that you can add an expectation from investors that there will be a V-shaped recovery. We find it difficult to fit into the optimistic crowd. Sure, the grants provide belief, but the whole effect of the Corona-shutdowns on the global economy will not. This is unless the states completely take over the economies, including a nationalization of almost all companies.

We can understand that some rich countries such as the United States, Japan or China etc. can provide gigantic support to their economies. But Italy, Spain, Greece and all smaller emerging economies will not be able to pursue US policy as their central banks do not have the Fed´s credit. The picture above illustrates each country´s share of the global economy and all these countries are linked to each other. Less purchasing power in Argentina, Mexico and the Middle East will sooner or later generate less demand in other countries.

In all this joy over state aid, one can note that the German Constitutional Court has ruled that the ECB’s support goes against the German constitution. The ECB clearly states that they do not respond to this court but to the European Court of Justice, but they have in the past given notice to give the Court reasons for support. Although we believe that politicians will overrun the court, which politicians are entitled to if they enact new laws. This shows the seriousness that lies beneath the surface. Is it right to give all this generous support?

The ECB says that it only follows the mandate for price stability, but of course is all politic cosmetics in this context.

EUR does nevertheless hold up rather well to the USD. The currency pair EUR/USD is trading downwards towards a support at 1.077:

In case of a break on the downside, the next level can be found around 1.063 where the currency pair was trading in March. Does the pair instead break up above EMA9 and MA20 serving as a first levels of resistance, the next resistance can be found around 1.098 where MA50 and Fib 38.2 meet up.

The US stocks also continue to be a leader, rising on the steam of state aid. However, investors are rational in the frenzy and are primarily investing in tech companies.

Tech heavy Nasdaq also closed last week on a strong note, above resistance at 9 160. The next level can be found around 9 227 followed by 9 450:

Speaking of tech stocks – on Friday, Apple broke up above resistance. Next level to be reached is found around 312.6 USD. If the share manages to break this level as well, previous tops from February 2020 is the next target:

Netflix is another tech share that has outperformed the broader market. As can be seen in the graph below, the share bounces nicely on rising a MA20 and is not trying to reach previous high from April 2020 serving as resistance:

Note the negative divergence between the share and MACD. Another downwards movement might thus be needed to build new energy.

During last week, another 160 of the S&P 500-companies released their Q1 2020 reports. We are now up to 87 percent of the total and thus approaching the final figures. The proportion that delivered profits over forecasts has risen marginally from 67 to 68 percent in the past week. Prior to Q2 2020, analysts have revised down earnings expectations for these 436 companies having reported so far by an average of 46 percent. That figure can be compared to 37 percent downward revision for the 276 companies that had reported a week ago.

The graph above shows the p/e figure for the S&P figure index since 2000. It is thus the implied multiple that is obtained when current share prices for the included companies are divided by the analyst´s forward earnings forecast. At their lowest, this figure was during the Lehman crash in H2 2008 (only between 8 and 9 times). During the current Corona crisis, the P/E’s fell to a low of 12 times after the sharp fall in share prices in late March and early April 2020. Since then there has been a sharp bounce back up in share prices and at the same time as analysts have sharply revised down their corporate earnings estimates. As a result, the S&P500 companies are now trading at P/E 20.4 times, which is one of the highest quotes in the last two decades. We need to go back to the IT crash after the year 2000 to witness something similar, which should give some reflection.

S&P 500 is also lagging the tech heavy Nasdaq index and is currently wrestling with Fib 61,8 serving as a resistance:

Note how EMA9 is now again upwards sloping signaling that momentum is gaining in strength. In case of a break to the upside, the next level can be found around the psychologically important 3 000-level where MA200 as well as MA100 meet up.

As S&P 500 lags Nasdaq, OMXS30 comes after S&P 500. Positive is that OMXS30 last week bounces off. MA20 is the level to be reached on the upside is Fib 50:

The situation is similar for the German DAX index that is targeting Fib 50 serving as a resistance on the upside:

Brent oil reclaimed Fib 23.6 during last week but is now facing new resistance in the shape of a falling trendline and a declining MA50. A rising EMA9 and MA20 serves as support on the downside:

Note the positive divergence between MACD and the oil-price. In case of a break above MA50 and the falling trendline, Fib 38.2 around 37.1 serves as the next level of resistance.