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ADP, Fitbit Charge, and more +3

09:06 02-Apr-20

Jobless claims just came in at 6.648M, more than doubling last week's record and reinforcing both the outlook provided then, and my commentary from yesterday.  Futures have retreated in response, but I expect my 2.250 S&P guess made on March 16th to remain accurate for the time being.  My outlook is also unchanged for Schlumberger after another 10K OMIB at $13.77 from its CEO on Tuesday.

Ultimately, COVID-19 is going to be a test of how well various businesses and societies can adapt, as well as cope.  The Koreans are once again doing extraordinarily well in that regard, as Samsung Display uses the disruption to join LG Display in terminating its LCD production not only domestically, but in China as well.  It will be very interesting to see what effect that winds up having on UDC.

Almost two weeks ago, I linked to this article, in this note, and now we're starting to see the advantage that the Fed has created for big business play out in this morning's ADP report:

# of Employees	Change
<50	-90K
50-499	+7K
>500	+56K

This is almost certainly only the tip of the iceberg, and the segment breakdown is also interesting:

Sector	Change
Education & Health	+48K
Manufacturing	+6K
Natural Resources & Mining	+1K
Financial	0
Professional	-3K
Information	-7K
Other Services	-8K
Leisure & Hospitality	-11K
Construction	-16K
Trade, Transport & Utilities	-37K

What we're seeing here is not only the effect of COVID-19, which has forced a dose of the grim reality that I forecast from the White House.  It's also a snapshot of which industries are most reactive, and of the importance of both manufacturing and debt.  In a note published exactly one year ago, I noted that manufacturing would be more resilient than services and wrote:

I see the U.K. as something of a microcosm and precursor to the U.S.

Readers who are interested in currencies would do well to revisit the table correlating manufacturing, debt, and GDP figures in that note for a picture of the investment prospects by nation.  The note concluded as follows:

The size of the American economy will act as a buffer, especially as long it maintains good trade relations with its neighbors and hydrocarbon exports are another mitigating factor.  Both of those are looking increasingly tenuous, though, and as I've noted repeatedly, the debt situation is worse.  These underlying policy problems are exposed, not created, by situations like Brexit, as shown by the likelihood of the U.K. heading for its third election in four years.  I wish ridiculous possibilities like the prime minister backing a no-confidence vote in her own government were an April Fool's joke, but they aren't.  Hopefully we're nearing the end in the U.K.  Over the long term, though, I'm not the only one worrying about such governance-related problems popping up in other, larger economies.

The same goes for COVID-19.  You'll see the bankruptcies that I've predicted ripple through the shale industry in the coming months, followed by retail services.  The Brent/WTI spread that I shifted attention to this year has jumped back to almost $5.  As ever, the impact to Finance will be patchy and won't really be sorted out until at least year-end, as the Fed moves to protect that industry once again, at the expense of meaningful societal change. 

For those in equities, the investment options are unchanged from what I've been saying since the beginning of this situation.  Simple arbitrages may be best for most individual investors as highlighted by the performance of FIT since I called out the opportunity.  The introduction of the latest Charge has some telling features, GPS in particular.  This shows the influence of Google already, as does the further emphasis on services.  By contrast, MicroVision's handover of manufacturing illustrates my recurrent point about how hard it is for GRoDT companies to do that at scale and how fiscal policy has hamstrung innovation in America over the long term.  In that environment, I'm interested in technology updates from Vuzix but inclined to ignore it as an investment.

By contrast, it's no surprise that the market-maker opportunity that I added for the market collapse is up 15% since being added at the beginning of the month.  That opportunity is far from being played out, and should really hit its stride with the next dividend.  We're now entering the phase where the smart money is arbitraging bonds against stocks.  That's particularly relevant to CenturyLink and the bond trades that I highlighted in the opening link.  Whether one chooses the stocks or bonds at this point should be mostly dependent on one's horizon and trading capabilities as there are no options on the bonds, and no guarantees on dividends.  That is not to say that I think the payout on CTL is at much risk, but this morning's announcement shows that CapEx is going to ramp without corresponding income, and the stock has routinely been subject to misinformation as well as suspect management motives.  Over the long term, cash flow is king, and CenturyLink's internet services business stands to benefit.  Ignore the noise, and enjoy this recommendation from one of the pioneers of the internet as alternative.

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