Latest Stimulus Talks

The government has been funding its agencies through continuing resolutions since September. The latest 1-week resolution lasts until December 18^th. This yearly spending bill is important because the stimulus could be added to it as well. Republicans are currently looking through the 400-page $1.4 trillion bill. Since the deadline is this week and the year is almost over, we will know if a stimulus will pass by the end of the week.

The latest news is the $908 billion stimulus will be separated. $748 billion is for funding for the parts they agree on like schools and healthcare. $160 billion is for the temporary liability shield and money for local governments (parts they disagree on). 

That sounds like we will get a $748 billion stimulus with no help for local governments nor liability shields. WE don’t see how there is a compromise on the most contentious issues. We can look more closely at the bill when it passes. Something is better than nothing, but we won’t get the best possible plan.

It’s usually tough to pass bills before elections. Now, we are back there again because of the Georgia Senates races. Usually, special elections don’t determine the balance of power of the government, but here we are. The latest polls have one race tied and Loeffler (GOP) up by 3 points. 

If these were in separate states, it’s unlikely the Dems win both which is what they need to tie the Senate. However, if one race has the polls too high for the GOP, the other one does too because it’s the same people voting.

The results will cause stocks to react either way because there are no clear leaders. The market expects there to be a divided government. 

Moderna Is Up Next

Potentially on Friday, the FDA will approve Moderna’s vaccine. America will ship 6 million doses once it is approved which is double Pfizer’s 2.9 million. Pfizer had a minor delay because of quality control issues. If Moderna doesn’t, both will be going out simultaneously by the end of the year. 

Moderna’s vaccine is slightly easier to transport because Pfizer’s needs to be kept at -70 degrees Celsius and Moderna’s needs to be kept at -20 degrees. Oxford’s is the easiest to distribute because it can be kept at normal refrigerator temperatures.

The other issue to follow is the potential shift of power from the Trump administration to the possible Biden administration which will occur at the most important juncture of the vaccine rollout. Some have been targeting the Super Bowl as a key date to measure the vaccine rollout, as there will be some fans at the game.

Spending Optimism

The NY Fed’s 2020 survey of consumer expectations from November showed consumers had flat income (2.1% below 2019 average of 2.8%) and earnings growth estimates, but spending growth estimates rose to 3.7%. The chart below shows estimates are above where they were before the recession. This is actually the highest estimates have been in over 4 years (since July 2016).

This is because consumers have a lot of savings and low debt servicing costs as mortgage rates are at a record low. Remember, this is the median, not the average, so rich people can’t disproportionately push it higher. In fact, this 0.6% growth increase was driven mostly by households making less than $50,000. 

They are hopeful about the possibility of a vaccine and a return to normalcy. Expectations are about 1 year in the future. The economy should be almost back to normal within 6 months, with the reopening starting early in the spring.

Small Business Revenue Growth

The chart below shows the 7 day average of small business sales growth by major city. NYC is towards the bottom. Within the city, Manhattan is doing the worst and Staten Island is doing the least bad. Since Manhattan is the 3^rd largest borough and Staten Island is the smallest, this composition effect hurts the average.

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In the week of November 28^th, there were 19,293 initial unemployment claims in NYC which is the lowest of the expansion. However, on Monday NYC shut down indoor dining. Furthermore, there are talks of a total shutdown like in the spring. The government has moved beyond focusing on the worst clusters now that the positivity rate is spiking everywhere. It seems like the shutdown will occur in January. 

A shutdown includes closing restaurants, gyms, salons, and manufacturing. It’s a closure of all non-essential services. Cuomo stated if any region in NY state reaches 90% hospital capacity within 21 days, he will impose a red zone shutdown.

Energy Shortage Coming

OPEC can’t supply the entire world with oil. Fracking is heavily criticized, but without it, we would have had above $100 oil up until this pandemic. Once the economy fully reopens next year, there will be a supply problem. That’s why energy stocks have had such a good run even though oil is only in the mid $40s. 

No energy firms do well with oil in the $40s. However, oil can’t rebound until demand rebounds; energy stocks are pricing in more optimism than the commodity is. Oil prices can easily fall this winter before ramping up in the summer. The intermediate term trend of weak supply will rear its ugly head quickly this summer if the vaccine rollout goes well.

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As you can see from the chart above, global energy capex is below depreciation for the first time ever. This combined with the pent-up demand from spending on travel and experiences will cause oil prices to skyrocket in mid-2021. The lack of capex in 2017 and the fact that banks are not willing to lend to energy companies also play a role. 

Even the super majors such as Exxon and Chevron have pulled back. It will take years of investments to get supply high enough to meet demand once prices start rising.