The Fundamentals – Pulse on the Economy and Capital Markets: 8/17/20 – 8/21/20


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The Fundamentals – Pulse on the Economy and Capital Markets: 8/17/20 – 8/21/20

Executive Summary

The high frequency data is showing that economic activity has started to pick up again after the impact of the Covid case re-emergence this summer, especially Consumer-related activity. The Leading Economic indicators imply that this should continue. One critical reason is the strength of the residential housing market, which had one of its best months ever due to increased demand and declining supply. This bodes well for home builders, building product manufacturers and distributors, industrial trades, retailers such as Home Depot, Lowe’s and auto dealers (pick-up trucks are a very profitable product).

Commercial real estate is a different story with leading indicators implying that there is excess supply.  Meanwhile, the stock market has continued to favor technology and larger companies, a sign of cautious optimism, and that the Fed will come to the rescue if the markets start to decline.

The Markets


The markets continue to gravitate toward technology as the Nasdaq had a very strong week while the more cyclical and domestically-oriented indexes (e.g. Dow Jones, Russell 2000) languished.  This may reflect the demand challenges that non-technology companies realize that they will face moving forward – Boeing (aerospace & defense), WarnerMedia (Media – the old Time Warner), Estee Lauder (Consumer Products) and Wells Fargo (Finance), have all recently announced additional layoffs based upon forecast of future economic activity.

Bond issuance: continues to be strong and August may set another record.

Sustainability & ESG-related bonds are accelerating. According to Goldman Sachs, who is having active ESG-related bond conversations with companies across a variety of industries including technology, utilities, health care, real estate and industrials.

  • Recently, Google and Visa issued Green bonds at very low rates.

The Economic News

We are continuing to see a general improvement in the economythough the rate of improvement has really slowed.

Economic activity has been rebounding after June and July’s summer hiccup from dealing with rising Covid-19 cases in large states.  Consumer activity is starting to improve again while Industrial activity continues the rebound that started in May that lagged consumer.

This says to me that there is a re-stocking of the economy – production activity is greater than demand.  When economic activity slowed in March and April, and facilities closed, the inventory in the economy’s supply chain was drained.  We’re now in the process of re-stocking that inventory, which is why economic activity has been stronger than mobility activities.

New York Fed’s Weekly Economic Index 

Leading Economic Indicators Index was positive, at 1.4% and better than expected 1.1% but declined from June’s 2.0%, confirming that the rate of expansion is likely to be mitigated moving forward.

We see this with the Dallas Federal Reserve’s Mobility and Engagement Index, which tracks level of activity across the country.  More activity should correlate with a better economic environment.  What we’re seeing is the summer negatively impacted activity, and while the economy is better than its recent lows, activity is below what it was 2 months ago.

Dallas Federal Reserve’s Mobility and Engagement Index

High Frequency Data

The High Frequency Data continues to show general improvementespecially consumer-related data, such as OpenTable Restaurant Reservations, Air Travel, Hotel Occupancy and Retail sales.  This data is improving relative to the flat-lining when Covid cases emerged in June and July.

Industrial data has been more consistent in its improvement the last several months, with Railcar Traffic, Staffing and Steel production up 5-11% compared to a month ago.  What this says to me is that the US is adapting to the Covid environment; however, the pace of the recovery will not reflect what was experienced upon “opening up” in May.

Continuing Unemployment Claims were better than expected at 14.8m, below the 15m expected and down from last week’s 15.5m.

Initial Unemployment Claims negatively surprised – at 1.1 million, they were higher than the expected 920k and last week’s 963k.

  • This is just the 2nd time in 19 weeks it has been higher than the prior week’s level.

Johnson Redbook Same Store Sales index – -2.8% for the week, the 3rd consecutive week of “less negative” results.  This reflects consumers increasing willingness to go back into stores.

Real Estate/Housing:
We continue to see strength and optimism in residential real estate and the sectors it directly impacts, such as building products. Commercial real estate tells a different story.

Nat’l Assoc. of Home Builders (NAHB) Survey – 78, better than expected & up from 72 in June.

  • Matched record set in Dec 1998.
  • This optimism is attributed to 1) low interest rates and 2) shift to suburbs after Covid.

Housing Starts – 1.5 million were a blowout, well above estimates and 23% higher than June.

Building Permits – 1.5m, also well above estimates and 19% higher than June.

Existing Home Sales – 5.86m (annualized) vs. expected 5.41m and June’s 4.7m

  • The 25% month-to-month increase is a record.
  • Prices increased 8.5% year over year.
  • Houses for sale (supply) declined 21% from July 2019, the 14th straight yr-over-yr decline.
    • Supply has trended down for 15 years, since housing bubble.

Existing home inventory chart

Those not buying and selling homes were working on their home projects.  Lowe’s reported earnings 30% and Home Depot 10% above expectations on the strength of very strong revenue.

  • HD’s Same Store Sales (growth in an individual store, year over year), a key metric for retailers, was 23%; this more than double any quarter over the last 20+ years.
  • LOW was even stronger – +34% SSS growth – triple its prior record.

Commercial real estate is experiencing a very different picture.  Most architecture firms continued to report a decline in their firm’s billings in July.  The Architecture Billings Index (ABI) reading of 40 in July, is below 50, meaning that billings are declining.

  • The pace of that decline remained at about the same level as in June.
  • Inquiries into new projects continued to show just a modest decline.
  • The value of new signed design contracts slipped from its June level.

By firm specialization

  • Multifamily residential, at a score of 48, was just below the expansion barometer of 50.
  • Commercial/industrial was weakest, at 35, though an improvement from June.
  • Institutional – was stable just below 40.
  • January 2020 was the last month any sector was above 50 – and they all were.

Mall-owner CBL is expected to file for bankruptcy after agreeing to terms with some creditors (link).  CLB came into the Covid recession heavily indebted, but the rent deferments and bankruptcies of its mall-based retail tenants is forcing this restructuring.

Surprisingly, manufacturing disappointed this week – Empire (NY state) Manufacturing and Philadelphia Outlook both came in below expectations.

We are continuing to see improvement in the economy overall.  Railcar Traffic, a barometer for many of the materials used in products, continues to rebound after the Covid-related mid-summer lull.

Railcar Traffic – # of Carloads


S&P said the default rate among junk-related European companies will more than double by June 2021 as the lockdown brings about “arguably the most pronounced deterioration in credit quality ever.”

  • “The pace of credit deterioration in the first half of the year… was the most pronounced in the history of speculative-grade European corporates that we rate.”


Economists polled believe the economy will not recover to pre-pandemic levels for two years.

  • The BOE said the economy would not recover to its pre-crisis level until the end of 2021.
  • GDP is expected to expand 6.2% in 2021, after contracting 9.7% this year, the poll predicted.


  • Exports fell 19% y/y, an improvement from June’s -26% fall.
  • The decline was driven by weak auto sales to the US.
  • Core machinery orders, a leading indicator of business spending, unexpectedly fell 7.6% m/m and 22.5% y/y to a 7-year low.

A Few Stories that Caught My Eye

  • How Main Street and Wall Street are disconnected – what we’ve been talking about (link)
  • BofA Merrill Lynch estimates the cost of re-shoring out of China for US and Europe to be about $1 trillion – which in a Covid world, just doesn’t sound like such a large number (link)
  • For China’s landlords, Rent-to-Riches fades as rental rates decline (link)