David Fuller and Eoin Treacy's Comment of the Day
Category - General

    China's Cautious Economic Reboot Is a Warning for the World

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    While factory output rose for the first time since the virus struck and state investment improved, private investment remained anemic. Worryingly for manufacturers who are already battling deflation and a slump in global demand, inventories are stacking up as supply outstrips demand.

    The data underscore that China’s economic recovery will be gradual, with little sign of the kind of snap-back some had expected when the crisis began. It also suggests a revival led by supply will create excess capacity and disinflation unless demand soon catches up -- both at home and abroad.

    “Unlocking the economy is a more challenging and complex task than locking it down,” said Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte. in Singapore. China’s experience is sobering for governments seeking to ease virus-related curbs in the hope of offsetting the deepest recession in decades. Policy makers including Federal Reserve Chairman Jerome Powell and International Monetary Fund Managing Director Kristalina Georgieva have warned that recovery is still a way off.

    Some signs of China’s recovery -- especially in production -- could be seen in a sweep of data released Friday that showed industrial output rose a better-than-expected 3.9% from a year earlier, reversing a drop of 1.1% in March and a deep slump in the first two months of the year. Fixed-asset investment decreased 10.3% in the first four months, a smaller decline than the 16.1% drop in the January-March period.

    Retail sales slid 7.5% though, more than the projected 6% drop, as shoppers preferred to avoid crowds and instead move their purchases online. Restaurant and catering receipts slumped by 31.1% from a year earlier, after a 46.8% collapse in March.

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    Email of the day on inconsistency in medium-term trends.

    Eoin - appreciate your use of both the P&F and weekly chart against the moving average in your discussion of Microsoft.  When evaluating the consistency pattern of stocks (Microsoft and others), how do you "adjust" for circumstances such as COVID 19?  Clearly, Microsoft was negatively impacted like many other equities in the COVID induced meltdown, but has also rebounded more smartly than others.  Thanks, as always, for your insight and willingness to share same.

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    Email of the day - on gold miners

    Thank you for the excellent commentary at the moment. Please could you tell me how much further the Gold Miners could appreciate, in your opinion. They have already come quite a long way this year but money still seems to be going in to the big miners such as Barrick and Newmont. Yet when the stock market suffers big pull-backs- the Gold Miners can often be whipsawed

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    Email of the day on working from home

    I can only agree with you having worked from home since the early 2000s (maybe you remember my office at home when you were with Bloomberg in Luxembourg). It fits well with businesses like ours where financial data et al. are immaterial or small ones focused on selling on internet. It is more difficult for activities where in situ interpersonal relationship is more important (journalism for example).

    However, the time spent in endless and useless meetings where their organization or required presence has more to do with politics than business. Undoubtedly, working from home will increase productivity and reduce cost due to less space required at offices. As for retail, this should affect office prices.

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    Druckenmiller Says Risk-Reward in Stocks Is Worst He's Seen

    This article by Katherine Burton and Melissa Karsh for Bloomberg may be of interest to subscribers. Here is a section:

    “The consensus out there seems to be: ‘Don’t worry, the Fed has your back,’” said Druckenmiller on Tuesday during a webcast held by The Economic Club of New York. “There’s only one problem with that: our analysis says it’s not true.”

    While traders think there is “massive” liquidity and that the stimulus programs are big enough to solve the problems facing the U.S., the economic effects of the coronavirus are likely to be long lasting and will lead to a slew of bankruptcies, he said.

    “I pray I’m wrong on this, but I just think that the V-out is a fantasy,” the legendary hedge fund manager said, referring to a V-shaped recovery.

    Druckenmiller’s remarks are among the strongest comments yet by a Wall Street heavyweight on the bleak outlook facing the U.S. They also stand in contrast to the optimism that has pushed the S&P 500 Index to rally almost 30% since its March low even as the pandemic has brought the economy to a standstill, seized up credit markets and ended the longest bull market in history.

    The damage spurred the Federal Reserve to unveil a raft of emergency lending programs and Congress to unleash almost $3 trillion in stimulus funds. But those programs aren’t likely to spur future economic growth, Druckenmiller said. “It was basically a combination of transfer payments to individuals, basically paying them more not to work than to work,” he said. “And in addition to that, it was a bunch of payments to zombie companies to keep them alive.”.

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    The European Central Bank is deluding itself over German court ruling

    This article by Wolfgang Munchau for the Financial Times may be of interest to subscribers. Here is a section:

    The ECB is, of course, not subject to German law. As an EU institution it answers to the European Court of Justice. But this ruling is binding on the Bundesbank. I doubt that Jens Weidmann, its president, will want to fob off the German judges with a superficial response.

    The ruling only allows the Germans to take part in the asset purchase programme for another three months unless they find a way to comply. Theoretically, the ECB could proceed without Germany. But I would strongly advise against it because that could precipitate a eurozone break-up.

    Since its 1993 ruling upholding the legality of the Maastricht treaty, the German constitutional court has become more radical. But it avoided outright confrontation, until last week.

    I find the most troubling aspect of this ruling is the assertion that the ECJ was also transgressing its competences by approving the bond buying and has gone ultra vires, in the Latin jargon of German constitutional lawyers.

    This part of the ruling raises deeply troubling issues for the relationship between the EU and its member states. The German court accepts the principle that EU law overrides national law for areas they specifically recognise lie within the EU’s competence. But they reserve the right to decide whether the EU and the ECJ are operating inside or outside their legal remits. It sets a troubling precedent.

    The smartest response to this ruling would be for the EU to address the problems of the eurozone head on: lack of convergence between north and south, debt sustainability and, most important right now, the issuance of mutualised debt to finance a recovery fund.

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    Yelp's Link to Brick & Mortar Ad Base Keeps JMP on Sidelines

    This note by Jeremy R. Cooke for Bloomberg may be of interest to subscribers. Here is a section:

    Yelp shares are down as much as 15%, the most since late March, on a risk-off day for the market; JMP (market perform) in a note Wednesday highlights worries that the local search site will continue to suffer from social distancing and stay-at-home mandates affecting its advertising base.

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    Twitter Says Employees Can Work From Home After Virus Recedes

    This article by Sarah Frier for Bloomberg may be of interest to subscribers. Here is a section:

    “If our employees are in a role and situation that enables them to work from home and they want to continue to do so forever, we will make that happen,” Twitter said in the post. “If not, our offices will be their warm and welcoming selves, with some additional precautions, when we feel it’s safe to return.”

    The company has more than 35 offices worldwide, including in Paris, New York and Toronto.

    “We’ve been very thoughtful in how we’ve approached this from the time we were one of the first companies to move to a work-from-home model,” Twitter said in a statement. “We’ll continue to be, and we’ll continue to put the safety of our people and communities first.”

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