November 29, 2020

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The Finance 202: Investors are shrugging off post-election turmoil. That may not last.

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The effort represents a “wholesale assault on the integrity of the vote by spreading misinformation and trying to persuade loyal Republicans to manipulate the electoral system on his behalf,” my colleagues write. And on Thursday it drew the sharpest rebuke yet from President-elect Joe Biden, who said Trump’s refusal to concede amounted to “incredible irresponsibility.” He would not rule out legal action to force the administration to begin the official transfer of power.

The stakes in the meantime are grave. Trump’s intransigence is blocking the incoming Biden team from accessing critical information about the federal government’s response to the coronavirus as infections spike.

Yet stocks rallied Thursday, with the Dow Jones industrial average climbing back from a 200 point drop in the morning to close up 0.2 percent. Tech names that have over-performed amid pandemic shutdowns led the way, but stocks “also got a boost after Senate Minority Leader Charles E. Schumer [D-N.Y.], said Majority Leader Mitch McConnell [R-Ky.], had agreed to resume negotiations on new fiscal stimulus,” CNBC’s Fred Imbert and Jesse Pound report.

What investors were looking past was at least as notable. “The market is not focused” on Trump’s efforts to dispute the election outcome, Inverness Counsel chief investment strategist Timothy Ghriskey tells me. “I think the market assumes we have a new president-elect, and Trump contesting the election is sort of a sideshow.” 

Indeed, the S&P 500 has added more than 9 percent this month and the Dow has climbed more than 11 percent. But investors could reverse those gains if Trump’s bid to challenge the election results gains traction in what now appears to be an exceedingly remote possibility. 

“Markets might react negatively if the US as the world’s reserve currency nation is seen as sliding down a path toward electoral illegitimacy due to post-election maneuvers by political parties,” Michael Cembalest, chairman of market and investment strategy at JPMorgan Asset Management, wrote in a note this week.  

A stunning confrontation between the Treasury Department and the Federal Reserve is primed to test investors’ nerves.

The turbulence surrounding the handover of power took a new turn on Thursday evening after the market close. Treasury Secretary Steven Mnuchin said he would not extend the Fed’s emergency lending programs set up by the $2.2 trillion Cares Act when they expire at the end of the year. The Fed publicly objected, marking a rare split between the two institutions, which have worked hand in glove to manage the federal response to the economic crisis.

Mnuchin in a letter to Fed Chair Jerome H. Powell asked the central bank to return hundreds of billions of dollars in unspent funds. “However, the Treasury Department does not have the sole authority to reallocate the funds and would need to secure Fed agreement,” Rachel Siegel and Jeff Stein report.

Capital Alpha’s Ian Katz — in a note titled, “Mnuchin to Fed (& Vice Versa): Drop Dead” — called it “a remarkable series of events” that “may not instill investors with much confidence in how the U.S. government works.”

On Thursday evening, however, investors weren’t registering alarm, State Street global macro strategist Noel Dixon told me. “Every indication we have is they look at it as a wash,” he said, noting no major reactions in stock futures or the strength of the dollar in the foreign exchange market.

But Dixon said today could be pivotal. The risk, he said, is that if the Treasury recoups unspent funds from the Fed to spend them directly, investors will see that as effectively tightening monetary policy. That’s because the central bank could stretch the same dollars further through leverage. “It becomes a question of liquidity,” he said. “And this market has been driven by liquidity.”

Longtime Fed watchers noted just how unusual the Fed’s public break with Treasury is. From CNBC’s Steve Liesman:

Others called it disturbing. From Doug Holtz-Eakin, president of the conservative American Action Forum:

And Neil Bradley, chief policy officer for the U.S. Chamber of Commerce, basted Treasury’s move in a statement. He said it “prematurely and unnecessarily ties the hands of the incoming administration… American businesses and workers are weary of these political machinations when they are doing everything in their power to keep our economy going.”

Biden is doing what he can to broadcast a sense of calm and regularity.

He announced in a Thursday afternoon press conference he has settled on his own pick for Treasury Secretary and will be revealing it around Thanksgiving. He said the selection “is someone who I think will be accepted by all elements of the Democratic Party, progressives through the moderate coalition.”

The leading candidates, according to the AP’s Chris Rugaber, “are thought to be former Federal Reserve Chair Janet Yellen and Federal Reserve Governor Lael Brainard. Either would be the first woman to serve as treasury secretary. Yellen’s name has surfaced more frequently in recent days as the potential nominee. Yellen was also the first woman to chair the Fed, a position she held for four years.”

Rolling out key nominations could help Biden sustain the sense the transition is proceeding apace notwithstanding Trump’s unprecedented push to hobble it. Yet the president’s former top economic advisor, Gary Cohn, rebuked the administration he once served in a CNN interview on Thursday.

Biden officials “deserve to be getting the information they should get that a normal transition would have,” Cohn said in an interview on CNN. “They deserve to be getting the funding from the GAO that they should be getting. They deserve to have the support so they can hit the ground running on January 20th.”

PROGRAMMING NOTE: I’m off next week, which is already shortened by Thanksgiving. But I’m leaving in you the very capable hands of colleagues through Wednesday and will see you back here after the holiday. I hope yours is meaningful and safe. 

Coronavirus fallout

Unemployment claims rise as shutdowns increase.

Benefits for millions of Americans are set to expire next month: “The number of new unemployment claims rose last week to 742,000, an increase of 31,000 from the previous week, as rising coronavirus cases have spurred a new wave of restrictions and closures begin to weigh on parts of the economy,” Eli Rosenberg reports.

“Since Oct. 10, weekly jobless claims have been slowly trending downward or remaining flat, according to Labor Department data. An additional 320,000 claims were processed for Pandemic Unemployment Assistance, the program for gig and self-employed workers.An additional 320,000 claims were processed for Pandemic Unemployment Assistance, the program for gig and self-employed workers.”

From the U.S.:

  • Birx says rapid increase was due to the cold weather: “The dramatic surge in coronavirus cases nationwide was largely caused by unusually cold late September weather across the Midwest, White House coronavirus task force coordinator Deborah Birx said as the group held its first public briefing in months,” Antonia Farzan reports.
  • CDC recommends against Thanksgiving travel: “As the nation’s death toll since the start of the pandemic reached 250,000, officials spoke of the risks in stark terms, warning that as friends and relatives get together over the holidays, they could inadvertently bring the coronavirus with them. Tragedy could follow, they said,” Brittany Shammas reports.
  • California to impose limited curfew. California Gov. Gavin Newsom (D) “has announced a mandatory overnight stay-at-home order” for most of the state, the LA Times reports. “The order issued by the California Department of Public Health will prohibit most nonessential activity outside the home from 10 p.m. to 5 a.m. in counties in the strictest tier of the state’s reopening road map — the purple tier. The restriction goes into place on Saturday and lasts through Dec. 21, though it could be extended.”
  • Feds offer injury compensation to workers, as most retail workers see no hazard pay. The federal government “has agreed to pay injury compensation benefits to nearly 3,500 federal employees on grounds that they contracted the novel coronavirus while at work, and has granted death benefits to survivors of 14 employees for that reason,” Eric Yoder reports. But many retail workers who got temporary pay raises during the first wave of the pandemic are not seeing a similar bump for the winter spike, the New York Times reports. 

From the corporate front:

  • Airlines warn of weakening demand: “Surging coronavirus cases have caused a ‘weakening’ in bookings, American Airlines Group Inc. President Robert Isom said … Earlier in the day, United Airlines Holdings Inc. followed Southwest Airlines Co. in warning that more customers are scrapping their trips,” Bloomberg News’s Brendan Case reports.
  • Existing-home sales unexpectedly rise: “Sales rose in in October to the highest level in almost 15 years, extending a housing market boom fueled by record-low mortgage rates and buyers’ desire for properties in the suburbs,” Bloomberg News’s Henry Ren reports.
  • Macy’s CEO begs states not to shutdown again: “Jeff Gennette said in an interview that the company had demonstrated it could operate its stores—which are large and can accommodate social distancing—safely during the pandemic. The company, along with retail-trade groups, has been lobbying state and local officials to ensure its stores can remain open as cases rise,” the WSJ’s Suzanne Kapner reports.
  • Tyson suspends managers after lawsuit claims they bet on employees getting infected: “Dean Banks, Tyson’s chief executive, said Thursday that the company had hired law firm Covington & Burling LLP to investigate the allegations. The claims were made in a wrongful-death lawsuit brought by the family of a former employee of the Waterloo, Iowa, plant who died in April after contracting the coronavirus,” the WSJ’s Jacob Bunge reports.

The transition

  • U.S. Chamber CEO urges Trump not to delay transition: Tom Donohue pointedly called Biden the ‘president-elect’ in a statement to Axios that urged Trump to allow federal officials to begin the transition process …,” CNBC’s Dan Mangan reports.
  • A Biden stimulus deal could push bond yields higher: “If rates resume their climb, especially if we get more fiscal stimulus from a Biden White House and Congress, that has the potential to reward income-starved bond investors … But here’s the bad news: Higher yields also raise borrowing costs for companies and consumers,” CNN Business’s Paul R. La Monica reports.


Fannie, Freddie’s regulator steps up push to return them to private control. 

The effort faces long odds in a short period. “Mortgage giants Fannie Mae and Freddie Mac will have to hold hundreds of billions of dollars of capital to absorb possible losses, their federal regulator decided on Wednesday,” the Wall Street Journal’s Andrew Ackerman reports. 

“The decision by the Federal Housing Finance Agency is a key step in efforts to return the two companies to private ownership. They were taken over by the government during the 2008 financial crisis in a process known as conservatorship… But the decision sets a high hurdle for the companies. Based on their combined size earlier this year, Fannie and Freddie would have to hold about $283 billion. At present, they hold roughly $35 billion and would need to make up the difference through a combination of retained earnings and possible future stock sales.”

Trump tracker

Trump tax write-offs are under investigation.

Legal challenges will follow the president after he leaves office: “Two separate New York State fraud investigations into Trump and his businesses, one criminal and one civil, have expanded to include tax write-offs on millions of dollars in consulting fees, some of which appear to have gone to Ivanka Trump …,” the New York Times’s Danny Hakim, Mike McIntire, William K. Rashbaum and Ben Protess report.

“The inquiries — a criminal investigation by the Manhattan district attorney, Cyrus R. Vance Jr., and a civil one by the state attorney general, Letitia James — are being conducted independently. But both offices issued subpoenas to the Trump Organization in recent weeks for records related to the fees … There is no indication that his daughter is a focus of either inquiry, which the Trump Organization has derided as politically motivated.”

Pocket change

GM CEO says the automaker wants to dominate the EV marker.

Mary Barra stressed that one of the original Big 3 wants to go after Tesla: “Over time, GM plans to offer electric vehicles across its lineup, from below $30,000 to over $100,000, with a goal of ‘putting everyone in an electric vehicle,’ Barra told investors Thursday during a conference sponsored by Barclays,” Reuters’s Ben Klayman and Joseph White report.

“Barra said EVs could help GM expand sales in the United States by as much as 280,000 vehicles a year in coastal states where the company’s brands are weak … GM plans to increase spending on electric and autonomous vehicles to $27 billion by 2023, up 35% from previous disclosed plans, she said. The automaker also plans to speed the launch of a dozen new electric models.”

  • Tesla surges before being added to the S&P 500: “The company’s stock has been on a tear since the S&P Dow Jones Indices announced this week that it will include the carmaker to the benchmark index prior to trading on Dec. 21. Money managers with funds that track the S&P 500 will need to buy the stock for their portfolios,” CNBC’s Jessica Bursztynsky reports. The company’s stock hit an all-time at $508.61 per share before closing at $499.27.

Allstate shuns big banks in bond sale: “The insurer has solely hired banks owned by minorities, women or veterans for its bond sale, in the biggest corporate deal yet managed only by diverse firms,” Bloomberg News’s Molly Smith reports.

“The Allstate transaction marks the first of substantial size that diverse underwriters are leading without any bulge-bracket banks, according to data compiled by Bloomberg … It’s borrowing $1.2 billion to help fund the $4 billion acquisition of National General Holdings Corp., the auto insurer’s largest takeover ever.”

Entrepreneurs want to resurrect RadioShack: “Two entrepreneurs who have been collecting fallen retail brands during the pandemic are taking over the reins of RadioShack, acquiring the nearly century-old gadget seller’s brands and online business,” the WSJ’s Aisha Al-Muslim reports.

“Miami-based Retail Ecommerce Ventures LLC, led by Chief Executive Alex Mehr and Executive Chairman Tai Lopez, bought the rights to the RadioShack brand in the U.S., Canada, India, Australia, Europe and China, along with related websites, for an undisclosed price last week …  Earlier this year, the company bought the e-commerce business of Pier 1 Imports Inc. and the trademark assets of Modell’s Sporting Goods out of bankruptcy.”

Chart topper

Social mobility in the U.S. is nothing to brag about compared to that of European countries. From economist Adam Tooze: 

Meanwhile, the country’s political polarization along economic lines is getting more pronounced. From Economic Innovation Group founder John Lettieri: 


The funnies

Bull session

Tory Newmyer

2020-11-20 08:25:09

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