Aug 21, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “Don’t think about the start of the race, think about the ending.” - See who said it and why it matters at the bottom.

1 big thing: Economists foresee an unemployment "tsunami" coming

Data: U.S. Department of Labor; Chart: Andrew Witherspoon/Axios

The exponential growth of claims for the Pandemic Emergency Unemployment Compensation (PEUC) program are worrying economists and previewing a weakening U.S. labor market in the coming months.

What's happening: The PEUC is a CARES Act program for unemployed Americans who have exhausted the 26 weeks of unemployment benefits they get from their state.

  • It has grown from 27,000 people on April 11 to 1.3 million as of Aug. 1.

Why it matters: The number of PEUC recipients has been over 1 million for four straight weeks and has increased each week. Worse, it's likely made up of people who lost their jobs before the wave of business closures that hit the U.S. in mid-March.

What we're hearing: "The real tsunami is coming," Mark Zandi, chief economist at Moody's Analytics, tells Axios. "My guess is at this point hiring in the industries that have been hit hard is going to abate."

  • "That leaves us with very little job creation in the rest of the economy but with still high levels of layoffs."
  • "I think the labor market is set to start weakening again here, particularly if Congress and the administration don’t get it together and pass more support."

What's next: "It becomes a longer tale of recovery with more labor market friction," says Julia Coronado, president of MacroPolicy Perspectives.

  • "You’re starting to see unemployment spells last a long time. The longer you’re out of the labor force and disconnected from your prior employer, the harder it is to reconnect."

The bottom line: "The recovery would be faster and more robust with the fiscal stimulus and there’s a lot more risk of a protracted, slower recovery and even some backtracking without it."

2. Catch up quick

President Trump said during a campaign event Thursday that he will impose tariffs on U.S. companies that don't move jobs back to the country if he is reelected. (Bloomberg)

3. Leading economic indicators suggest weak end to 2020
Data: The Conference Board; Chart: Axios Visuals

The Conference Board's index of leading economic indicators increased for the third straight month in July but at a far slower pace than in the previous two months.

Why it matters: “Despite the recent gains in the LEI, which remain fairly broad-based, the initial post-pandemic recovery appears to be losing steam," Ataman Ozyildirim, senior director of economic research at The Conference Board, said in a statement accompanying the index's release.

  • "The LEI suggests that the pace of economic growth will weaken substantially during the final months of 2020.”

What it means: The 10 components of index for the U.S. are...

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods and materials
  • ISM index of new orders
  • Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
  • Building permits, new private housing units
  • Stock prices, 500 common stocks
  • Leading Credit Index
  • Interest rate spread, 10-year Treasury yields less Fed funds rate
  • Average consumer expectations for business conditions
4. Summer travel is ending, and so might airlines' modest recovery

Illustration: Sarah Grillo/Axios

Axios' Joann Muller and I write: The peak leisure travel season is almost over, and without conferences or events to woo business travelers this fall, the airline industry's modest recovery could quickly lose altitude.

Why it matters: Investors have been snapping up airlines as bargain stocks lately — encouraged, in part, by reports of potential progress toward a coronavirus vaccine that could boost depressed air travel.

What's happening: The reopening trade has been very popular since the start of August, with hotels like Marriott and Hyatt each gaining 12%, airline stocks represented by the JETS ETF up 9% and MGM Resorts surging 30%.

  • They have far outpaced the S&P 500's 3% gain during that time and even the red hot Nasdaq's 4%.

Investors seem to be betting that furloughs and other deep cost cuts — and perhaps another round of federal aid — will put airlines in decent shape for financial recovery when air travel picks up again.

  • "Companies now sit at a lean and mean position that you rarely get to except after a depression," Jim Paulsen, chief investment strategist at the Leuthold Group, tells Axios.
  • "CEOs are hunkered down for the worst and have virtually no costs on the books — that's a recipe for profitability on the bottom line that’s not appreciated by Wall Street."

Yes, but: Short sellers — investors who bet that companies' stocks are overpriced and profit when they fall — are lining up to bet against the airlines, with $95 million of new short sales over the last week, according to data firm S3 Partners.

  • Airline shorts are up $3.15 billion for the year.

By the numbers: According to trade group Airlines for America's data:

  • As of mid-August, domestic passenger volumes are still down 70% from a year ago; international travel is down 88%.
  • The average domestic flight is 47% full, vs. 88% a year earlier.
  • About 717,000 people passed through TSA checkpoints per day in mid-August, vs. 95,000 in mid-April and more than 2 million per day pre-COVID.
  • Airlines' operating revenues plummeted an average of 86.5% in the second quarter.

Almost all of those who are flying are leisure travelers — people visiting friends and family, or taking domestic vacations after being cooped up all spring.

Bank of America analysts are sounding a note of caution: "We are only a few weeks away from moving out of peak leisure travel season, and into a more business-heavy period."

  • "With corporate volumes not moving meaningfully off of trough levels, we believe there could be risk to domestic volumes as we move into September."

What to watch: The recovery will be bumpy, airline executives warn and a vaccine won't immediately end the pandemic.

  • "I think it's probably two to three years," Delta CEO Ed Bastian told "Axios on HBO" in June.
5. Short sellers pile into American Airlines

Data: S3 Partners; Chart: Axios Visuals

Loaded with debt and cutting back on coronavirus safety precautions, American Airlines has attracted a lot of attention from short sellers who may be betting on a bankruptcy.

Driving the news: American’s stock fell 1.4% Thursday after it announced plans to suspend service to 15 small U.S. cities in October after the terms of its CARES Act aid requiring the flights expires.

Where it stands: The company’s $29 billion in adjusted net debt “likely leaves it crippled for years to come,” Raymond James analyst Savanthi Syth said in a recent note.

  • That's especially worrisome given the decreasing likelihood for more coronavirus relief from Congress in the near term.

The intrigue: Short sellers have accumulated $2.04 billion of short interest in American, more than double the next closest airline, and have been increasing positions, despite fees to borrow that are five times higher than most other airlines.

  • Short sellers own nearly one-third of available shares.

Between the lines: American's lack of a credible safety policy during the coronavirus pandemic and announcement that it would fly full flights in July also may have weighed on the company's stock.

  • It set American apart from other major airlines, like Delta and Southwest, which had instituted in-writing restrictions on flight capacity.
6. The Challenge: One month in
Data: FactSet; Chart: Axios Visuals

Don't call it a comeback! One month in, I am once again leading the 2020 Rabouin Investing Challenge™ against my 18-year-old cousin.

Background: Senya graduated from high school earlier this year and as a graduation present I sent her $500. But I told her she had to invest it and that each quarter we would compete to see who could assemble the best portfolio.

Portfolios: I've got a double serving of gold ETF, IAU; the Direxion work from home ETF, WFH; and EMQQ, the emerging market eCommerce ETF.

  • She's holding logistics REIT Prologis; eBay; Rite-Aid; Gap; and Conagra.

State of play: Gap stock skied high in late July after the company announced a new partnership with PopSugar, and it has caught a second wind thanks to the reopening trade over the last two weeks, up 17.5%. Unfortunately for her, Rite Aid is down 11%.

  • Thankfully gold has rebounded over the past two days. That combined with a bounce in EM tech over the past week helped pull me ahead.
Dion Rabouin

Thanks for reading!

Quote: “Don’t think about the start of the race, think about the ending.”

Why it matters: On Aug. 21, 1986, Usain Bolt, the first man in Olympic history to win both the 100-meter and 200-meter races in world record times, was born.

  • Bolt was also the first man in history to set three world records in a single Olympic Games.