OUCH!

Delta reported passenger revenue collapsed 83% in Q3. It is burning $18 million/day = $1+ billion/month with $21B cash on hand. UAL has $19.4B in cash burning through a mere $25M/month which is improved from $40M three months ago. All the share repurchases of recent years isn’t worth much as reserves.

Europe & the USA are reporting new cases which should happen with increased testing. That most are or nearly asymptomatic is an untold story which keeps fear up within the population. “The easier to control you with, my dear” paraphrasing the wolf to Little Red Riding Hood. Without a compromised immune system, the death rate is minimal but that gets no press coverage. An important distinction between deaths from or with Covid is rarely made or reported. Europe’s largest cities are facing more drastic lockdowns with rising infection rates. Herd immunity is impossible if there is no herd.

Risk off day. Without another stimulus funding in the household checkbook, retail market speculation has dropped off. Reduced demand is causing ETF developers to reduce shares. DPs still rotating out as money flow remains negative for equity investment funds.

To move back to all time highs and beyond, good fundamentals are required and hard to come by. Per data from Arbor Research, of companies larger than $300 million, almost 15% do not have enough in earnings (EBIT) to cover interest expense. Without low rates and bond buyers to refinance existing debt plus obtain operating capital, the zombies would be in Chapter 11, if not 7.

So far, the week’s return for S&P remains positive with the rising risk of a double top developing. Earnings and the election will take a few more weeks to resolve. Expect more choppiness within the trading range. As long as the 50-SMA remains inviolate, long-term commitments will likely hold. Election seasonality suggest a bottoming by month’s end. By then, the conflict between the Biden-favoring media polls and the massive attendance of Trump rallies will be close to resolution.

One must be careful about what is wished for because it might happen. Apparently, that is the case with the Fed once thinking it could temporarily intervene in the Treasury market as a “facilitator on call.” With the market growing from $13T to $20 in five years, it is much like the adage of “having a cat by the tail.” The Fed can’t sit this one out, maybe ever.

Fed Vice Chair Clarida spoke Wednesday announcing the recession may already be over making it one of the deepest and shortest in history. GDP, however, will not reach pre-Covid levels this year nor will employment. The IMF forecast is for a loss of $28T of global output over the next five years.

In Wednesday’s webinar, Jack asked about XLU’s advance. My explanation is that it reveals increasing investor trepidation about market conditions. It is a risk-off indicator. This AM, Chaikin Analytics highlighted it.

Key Chart – Utilities Select Sector SPDR Fund (XLU)
“ The Utilities Select Sector SPDR ETF (XLU) has seen the intensity of its relative weakness improve over the past two weeks. This prompts the question, are equity investors rotating into this group for its defensive properties or are fixed income investors rotating into this group due to paltry yields in the treasury market…If support is tested and Utilities are strong, a defensive stance may be in order.” 

Regards,

Don Creech
2323 Alaska Ave. E.
Port Orchard, WA 98366
360-620-8635