Market Briefing For Monday, July 12

Summer swoons aren't uncommon; although usually it's August famous for the 'Dog Days'; not July. Covid - especially the 'variants on the move' - throws a monkey-wrench not just at seasonal patterns but Fed-based presumptions for top-line growth continuing to beat, if not surprise, as global growth persists (or at least people 'presume' that). Confusion: simplify. It's 'not' post-Covid.

Notice I said 'global'; while most analysts seem to view this as just the US, as it relates not just to Covid, but to revenue. For a large proportion of earnings, for a lot of Industrial and not just technology companies, income from outside the United States in aggregate often exceeds what's seen domestically.

I must say a word about the Heat Dome; which is now having forecasts for a highest temperature 'on Earth' of 132 degrees in Death Valley tomorrow. That is hotter than in Saudi Arabia. Also in California; I've occasionally mentioned earthquakes; and we had a 6.0 on the CalNev (Calif./Nevada) border today; a flurry of 4.0-5.0 temblors followed. USGS says it's an unknown area; but that happens to be the same region of the Lake Tahoe shakers just weeks ago.

A lot of the pre-earnings optimism relates to what should be solid Quarters for many companies; but many of these same companies may not survive future Quarters quite as solid; especially if they give overly-optimistic guidance. For now I'm thinking they err on the conservative side: they know Covid is back (it never went away; it encountered a basic vaccine; then reality disconnected to a degree; and was always challenging in much of the world).

Despite wishing it would be otherwise, 'Delta variant' is here; Lambda pending as you know (mostly in South America so far). More on that in a moment; but I am making a point similar to mine about Delta the airline last night: you might go and buy new aircraft and hire (or recall) pilots and staff; but that won't have any effect on the virus. What it can do is dampen the Q3 and Q4 earnings that cannot depend on filling seats (in airline parlance: low load-factor prospects).

I've been talking about Delta Covid for a couple weeks; and airline stocks for a key sector, have been easing down in-sync with worries over global spread. I could also point-out the Tokyo Olympics are scaled-down in so many ways; not just denying spectators. Airlines, hotels, restaurants; all were geared-up to handle crowds that won't materialize; no matter how good the TV coverage of the games (I'll looking forward to watching parts in 4k; in Tokyo actually in 8k). Media tells you Japan loses a Billion but makes 17 Billion still on the games; I suspect a heavier 'hit' across sectors. And Japan is only 3% or so vaccinated.

Speaking of Asia; I don't believe media is properly covering South Korea's big Covid (Delta variant) outbreak. The capitol city Seoul had the 2 worst days for new cases 'ever', and has been shut-down for the next two weeks. Drastic but that's not the point. The point is South Korea had done a great job corralling it on the earlier waves; so this is a good hint of the trend in Asia. Will the market care about this here? Yes; but not quite the same as in February; when 'crash' alerts from me in early February were not followed by many other warnings.

 

And that relates back to global growth; because nobody has solved this yet as far as a knockout blow to Covid; and that is what the global economy / stocks requires. The South Korean story is core to this; because they just shut down everything pretty much; after the 'worst two days' on-record of new cases. All of that was this week; and is being soft-pedaled by media. Again in Seoul the capitol city; for the next two weeks no groups beyond 3 are permitted. That's not only news; but South Korea was proficient in containing Covid early-on. ..

Markets rallied, rather than declined on Friday, ignoring potential impacts of a slew of provisions in the broad legislation signed by the President against the alignment of how one defines competition and worker prospects in the USA.

Longer-term implications won't be meaningful for big corporations 'for now'; at the same time there's an unpredictability about Government regulations. Just a for-instance is the possible return of 'net neutrality. I'm unsure I concur with the comparisons to trust-busting of Teddy Roosevelt or the desperately urgent shifts accredited to FDR (even as much of it began under Hoover; with a great insult being wanting to name the dam 'Boulder' instead of 'Hoover'... but broad plans for recovery were crafted and often implemented before he left office).

Regardless, the pro-competitive aura surrounding the President's remarks did echo my reflections the other day (although he didn't make the comparison of how China treats its monopolists who expand too-far-afield primary business operations). That being nothing against big companies; but not when stifling competition, which I realize has been ongoing for decades .. in more ways I'm thinking than Biden mentioned. That's why I've on occasion referred to the US Chamber of Commerce as the global Chamber of Commerce as typically they have sided with international business initiatives and against domestic one.

It may well be about time anti-competitive trends are reformed. One notable mention was licenses for basis jobs being valid if a worker moves. There's a word for the long discussion he referenced: reciprocity between states. That is hardly different than having you move and get a new Driver's License without a fresh driving 'test', with the new state assuming you know how to drive; how to do plumbing or electrical work, and so on.

In many industries reciprocity is logical between states, but not smart between countries. Where it's not wise; might be in certain (not all) areas of medicine; certainly in law where state laws must be grasped; even perhaps aspects of teaching (care not to compel teachers to embrace what sometimes passes for teaching; but often is indoctrination somewhat closer to lopsided educations). And of course varying construction or governance, which definitely have local ordnance and code requirements.

Just a word on the ongoing inflation debate; it may be more bark than bite for the near-term, due to Covid's resurgence and probably some slowing as peak travel and tourism wraps-up over the next 5 weeks or so. It won't ease wages; so that aspect of pressure endures.

Choose your poison on whether the risk is Covid, earnings, or interest rates. Or a trifecta of all three even. That's important; because yields at historic lows or not; if you don't grow most businesses in this kind of monetary environment with low rates, you can't achieve top-line / bottom-line targets many demand.

My point is that Delta Variant is a big deal; and matters to economic growth. I know some will try to 'frame' this as a defense for the Fed to maintain dovish monetary policies; but I don't believe that's key; even if they indeed do so. I'm thinking this is a real concern.

Also be alert to a crypto-break over the weekend. There's chatter about Fitch (a legitimate major ratings agency) warning how many (like Tether) will be forced to sell 'commercial paper' they've shuffled money into; if they are compelled to refund 'digital currency' with actual Dollars. This might relate to the pattern we see (and forecast to be) breaking down in Bitcoin; and China's crackdown. In this example, we don't have much insight; but both the prior buying and now liquidations, and Tether is not the only one, that is a weak link facing players in a controversial field that basically topped this year, way back as outlined.