11202020 :: Friday finance week in review

A partial digest of what we learned:

  • Holy vaccine, Act II.

    The good news: Not only did Moderna come through with some exceptional early-look news of its own—94.5% efficacy for their mRNA vaccine—but upon completion of the Pfizer-BioNTech study, the latter partnership’s final figure is 95% efficacy, not 90%. They have applied to the FDA for emergency authorization as of Friday, November 20.

    The application will not be reviewed until Thursday, December 10, when VRBPAC, the committee advising the FDA on vaccines, takes a look at the data. If, as expected, they advise the FDA to approve the vaccine, and the FDA moves to do so, the first front line healthcare workers may begin receiving their doses as soon as a few days thereafter. However, that may not fully transpire until the middle to end of December, or, perhaps more practically, the start of 2021.

    This set of events could mark additional “normalcy” milestones for the markets, as the path to post-pandemic life becomes less nebulous. Patience and precautionary living will still our best options, though, as it’ll take a while to roll out vaccines to the global population and many things remain to be seen. For instance, how long will immunity last? Can the inoculated become reinfected through prolonged exposure to the sick? Will the virus mutate significantly enough to threaten a vaccine’s efficacy?

    That last question brings us to the potentially bad and diametrically opposed news: Denmark is culling (exterminating) its entire mink population numbering some 15-17 million animals because the livestock, and a small number of humans, have become jointly infected by a mutated SARS-CoV-2 virus. The mutation is significant enough that it is causing concern among the country’s health authorities over whether it will set back existing vaccine development efforts.

    Being zoonotic, the virus jumps between other animals and humans, and possibly back and forth. In Denmark’s case, it is suspected to have jumped from humans to farm-raised mink, mutated, and then jumped back again in mutated form. Unfortunately for all, the issue isn’t isolated to a limited corner of Denmark.

    Ireland is also planning to cull its mink population over similar fears, while Sweden is investigating its own farms. And the fallout isn’t limited to Europe, either.

    Here in the United States, four states lead the country in mink farming: Wisconsin, Utah, Michigan, and Oregon. That’s a decent geographical distribution. Wisconsin and Utah have reported thousands of deaths among their mink livestock from SARS-CoV-2 infection. Before, we knew cats and dogs to become infected, but no major reports of widespread death in those domesticated animal populations have emerged.

    Mink are a different story. The virus is proving extremely fatal for them. And again, there are confirmed cases in Denmark, at least, that it has jumped back to human hosts in mutated form.

    These and other findings may spell further difficulty ahead. Hence, despite all the positive vaccine news, US indices finished down Friday, as well as for the week. Mimicking equities, bond yields tightened over the week.

    Only oil finished the week higher than where it started. Are crude traders placing bets others aren’t willing to place right now? Watch those headwinds.

    [tracking: SPY, VTI, QQQ, XLK, EDC, VWO, VXUS, LQD, VXX, XLE, TMV, GLD, VB]
  • Speaking of headwinds, Trump still has not conceded. If anything, he is making good on his image as an indefatigable champion of himself. He and his re-election campaign, as well as his legal team, have busied themselves with a multi-pronged effort to invalidate the results of the election. Most recently, these included a hell of a press conference held by Giuliani et al, seemingly devoid of any basis in reality, where fraudster election officials, illegal ballots, communist money from Venezuela and Cuba, and computerized voting software meet.

    Of the state dealings, the approach to Michigan was a more dubious flex. Michigan state GOP members were invited to the White House to meet with Trump to discuss the state’s electors. Following the visit, those politicians issued a joint statement. As with many other responses to Trump & Co of late, that of Michigan’s GOP leaders was, for the time being, reassuringly supportive of the actual law. In summary, they stated that they met with Trump; they requested federal assistance to counter the impact of the pandemic; they declared that “the law” and “normal process” will be followed with respect to Michigan’s electors; and that they have seen nothing that would change the outcome of the election in their state, “yet.”¹

    Meanwhile in Wisconsin, Trump has requested and will pay for a recount in two counties only, Dane and Milwaukee. The process is underway, after Trump representatives attempted to convince the state’s canvassing board to toss out certain ballots. These included ballots where missing address information was filled in by election clerks (for which there is historical precedent), and absentee ballots where voters legally declared themselves “indefinitely confined.”

    In the Pennsylvania matter pending with SCOTUS, no further action on the part of SCOTUS has yet been taken. Additionally, neither side has submitted any further filings, nor have any other states filed amicus briefs in support of the GOP’s position. At the same time in a US district court in PA, the Trump campaign is seeking to get ballots tossed out, prevent the state from certifying its election results, or simply have the Republican majority state legislature pick the victor.

    As for Georgia, it went blue and stayed blue through a statewide hand recount that was called for by state officials but was spuriously said to have been automatically triggered by the circumstances of the vote. Biden is to receive Georgia’s 16 electoral votes as the election results have now been certified, and Secretary of State Brad Raffensperger, a Republican, defended the outcome. Mind you, Trump can still legally petition for a machine recount.

    In the period following the initial counting of ballots, Raffensperger has received death threats and calls to resign, among other things. Yet, he has chosen to stand by the numbers, and the outcome. To his credit, that contrasts with the behavior of some in his party.

    With that said, it was Raffensperger who unequivocally pronounced that a recount had to be performed and then led the way into a statewide hand recount. He did so [1] without ever once providing specific references to any existing law that would support the claim that a recount was necessary and automatic given the situation, and [2] without offering any clear detail of the perceived discrepancy or issue that state law indicates is called for when officials elect to pursue a recount. All this contradicts Georgia state legal code O.C.G.A. § 21-2-495.

    It is also Raffensperger who now wishes to see several changes made to existing voting processes:

    1. The ability for his office to “actually replace boards and replace county election officials.” Exactly how would this not lead to the dominant political party in a state stacking election posts with loyalists? We need more independence in such positions, not less.

    2. Institute a photo ID requirement of some kind when a voter requests an absentee ballot online. The request portal already uses a state-issued ID number verification process. Fees and acquisition of new/renewed IDs may prove a barrier to entry, and there may be additional tech burdens on voters to submit such information.

    3. The ability to more strongly challenge voter registrations. Ostensibly, this would be to clean voter lists of people who had died, moved, or were otherwise ineligible to vote in the state. However, as recently as September of this year, it was reported that Georgia officials had possibly already wrongfully purged 198,351 residents from voting lists for having moved when, in reality, it appears they had not. What is it exactly, then, that Raffensperger would hope state officials gain from further strengthening their capacity to question the rolls?²

    These points above do not bode well for fair elections in Georgia moving forward.

    Back to the national stage, anything that roils the presidential transition is problematic, to say the least. Over the next two months, it is likely that Trump will keep trying to secure the presidency for himself somehow. What’s more, no president voted out has ever refused to leave office, so there is no proven playbook for such a scenario. It’s possible that it would come down to the Secret Service completing their own transition, as well as the military complex refusing to recognize Trump anymore as commander in chief. Or will Twitter be the final arbiter?

    For the markets and the country, the transition is a hurdle that must be cleared. Indeed, it’s nothing short of a transition that must take place. Otherwise, we wake up in a slightly different country tomorrow.

    Proceed with caution.

  • Mnuchin has announced that any unused government funds provided to the Federal Reserve for its various lending programs be returned by the end of the calendar year, citing “law” (the Cares Act). Importantly, this decision affects investment-grade LQD as well as high-yield HYG, two corporate bond ETFs that benefitted from the Fed put this year with central bank purchases routed through BlackRock.

    While Mnuchin voiced the opinion that corporate debt no longer needed support, he said he had requested a 90 day extension for the other four facilities in question. The Fed quickly issued a counter statement that it would prefer to see all programs left in place and open into 2021. It’s not a good time to be scaling back accommodation. However, the Fed also responded that it would return any unused funds.

    If LQD and HYG are no longer to receive said support, the funds may not garner the same investor confidence. In that case, a correction may be on the way, but junk funds such as HYG may be impacted first and/or more significantly.

    In general, the markets may not appreciate Mnuchin’s move, here. Notably, this may also leave hard-hit states and municipalities, among others, in a lurch. They have been receiving aid from the Fed while famously being denied any further fiscal stimulus in the political battle over relief between the House and the White House. That assistance in particular is one of the sticking points in the ongoing fiscal stimulus negotiations.

    It is believed that the Fed will settle upon other accommodative measures within the monetary policy realm at its meeting in the middle of December. Mnuchin is set to discuss fiscal stimulus options leveraging the unused funds with McConnell, while Pelosi and Schumer will meet separately with Biden. To reiterate, we may not see any new fiscal stimulus until the dead of winter, 2021.

    [tracking: LQD, HYG, SPY, VTI]
  • Initial jobless claims in the US rose to 742k for the week ending November 14, reversing the recent downtrend. Given expectations, this was a “surprise” jump up from the week prior. It serves as another reminder that the labor picture and economic stability are tenuous at best. It’s no time to get lulled into a sense of security that things are improving.

    To add to this, 320k+ more people applied for PUA, up from 296k the week prior.

    [tracking: SPY, VTI]
  • Mortgage applications again declined overall, but this time there was a bounce back in homebuyer applications while refis saw a decline.

    Building on previous weeks’ newsletters, the real estate thesis here is that the housing market will enter a period of decline as labor weakness remains and the pool of qualified buyers at current prices, especially, is exhausted. As construction continues at a decent clip, increased supply and decreased demand may pass each other in the night, leading to eventual oversupply in certain areas and/or home types, especially townhomes and condos. Also, certain locales will see a greater decline in interest than others.

    The downturn in commercial real estate will persist as businesses of various sizes and large operations such as malls fail, while other businesses yield office space that can afford to do so. A rebound in commercial real estate is hard to imagine until the health crisis is properly managed and there is a concerted shift back to in-person activity and the face-to-face workplace.

    At the same time, the Fed will likely absorb souring (C)MBS.

    [tracking: XLRE, NLY, VNO, SPG]
  • Used car trends, based on data supplied by Carvana and CarGurus, imply that unsold vehicles are accumulating and prices are falling. As I gather more data points, I’ll plot them here.

  • Sovereign matters:

    • Fitch revised downward Belarus’s outlook to negative, due to the political crisis in the wake of a disputed Lukashenko “re-election,” low forex holdings, and banking sector vulnerability.

    • Moody’s upgraded Croatia, citing the country’s eurozone accession efforts and decreasing exposure to forex denominated debt.

    • Fitch has placed Guatemala on negative watch, given that the country missed a coupon payment due toward the beginning of the month. Should the nation fail to make the payment during the current grace period in effect until the beginning of December, it will be considered as having defaulted on its obligations and downgraded to a restricted default rating.

    • Fitch and Moody’s both downgraded South Africa, as government debt is high and on the rise.

    [tracking: EDC, VXUS, VWO]
  • We're now at 130,750 US fatalities strictly classified as pneumonia with no acknowledgement of COVID-19 on the death certificates, per CDC excess deaths data. That’s an average of 401 people per day. We haven’t seen pneumonia figures like these since the 1930s and earlier. This is in addition to the latest official coronavirus death toll of 254,320.

    Across all cause-of-death categories, we’re witnessing 113% of the deaths that we would have expected in a non-pandemic year given historical trends. Hospitals are reportedly overwhelmed and understaffed, we’re going to surpass 200k cases in a single day (and then some), and approved treatment options are limited and tricky to administer.


¹ Shirkey, Mike. “My statement on our meeting with the President today.” Twitter (November 20, 2020).

² Fowler, Stephen. “Georgia Certifies Results; Election Official Says The ‘Numbers Don’t Lie.’” NPR.org (November 20, 2020).