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‘Diffusion Disease,’ ‘Bizarre’ PEs And South Korean Canaries

"Wink, wink".

According to pretty much everyone other than the good folks working at 1600 Penn., the US won’t likely get a “V-shaped” recovery.

I’ve mentioned this before, and I assume it’s obvious to most people, but anything is going to look “V-shaped” after the second quarter, when GDP will contract somewhere between 25% and 40% QoQ annualized. So, there is a sense in which the bounce from that unthinkable plunge will appear as a “V” on charts.

The question is more about YoY comps and what the trajectory looks like going forward. Even more important are questions around how things will shape up if (or maybe “when” is better) there’s a second wave of the virus.

And yet, even as the debate about the shape of the recovery rages, there is one place where a “V” has already materialized: Big-cap US tech.

“[The] Nasdaq is even back in green territory year-to-date, which is pretty remarkable during the biggest economic crisis in many decades”, Nordea’s Andreas Steno Larsen and Mikael Sarwe write, in a note.

“In fact, the Nasdaq looks like the exact V that a lot of commentators have been on the lookout for [and] if equities tell the truth, this crisis will prove economically ‘harmless’ compared to the 2008/2009 crisis”, they go on to say, before expressing more than a little skepticism. “We are not so sure yet”.

The bank’s incredulity notwithstanding, they write that “if we assume interest rates will be kept low(er) for even longer than prior to the coronavirus crisis, it may even be that the discounting effect of future flows will overshadow the very weak 2020” when it comes to profits. They also concede that if there’s real progress on a vaccine, it would “be fair to price in a decent profit recovery as early as 2021”.

In addition to those fundamentally positive potential developments, it’s possible market participants will succumb to what Nordea calls “diffusion index disease”.

“If activity was close to 0 in April, the natural consequence is that expectations start to rise in diffusion indices such as PMIs, since you are simply asked whether things improve or worsen versus last month”, the bank writes, adding that “it may be that markets are (much) smarter than those who predict PMIs in polls, but usually markets are fairly tightly correlated to surprise indices, which is why (wink, wink) equities may continue to perform alongside positive data ‘surprises'”.


Clearly, those excerpts are dripping with delicious sarcasm (one might even call it derision), but there’s nothing sarcastic about the subsequent warning from Steno Larsen and Sarwe, who remind you that, over time, earnings both in the US and globally are tethered to the signal from bellwether South Korea. 

In that regard, it’s worth noting that first-20 days exports were down 20%, suggesting a dubious encore after April’s 24% plunge, the worst since 2009.

The bright spot in the early read on May’s numbers was a much shallower decline in shipments to China (-1.7%) versus double-digit drops in the figures for exports to the US and the EU. But this is all extremely tenuous, especially considering renewed tensions between Washington and Beijing.

“South Korean companies mostly sell parts and components that China uses to produce final goods to either consume at home, or export [so] as China’s factories churn out steel and mobile phones again, it will need more and more input from South Korea”, Bloomberg wrote Thursday, before striking a cautious tone. “But with China’s rebound ultimately dependent on the revival of global demand, any optimism it offers may be temporary”.

Commenting further, Nordea writes that “South Korean trade data… warned of much weaker profits than priced in the rest of the year [and] EPS may drop as much as 45-50% versus 2019 if the South Korean bellwether is to be trusted”.

Oh, and on valuations, Steno Larsen and Sarwe don’t mince words. In the event earnings deteriorate further, the read-through is that for equities to remain supported, “ratios such as 12m fwd PEs and the PEG ratio will have to reach bizarre new all-time highs”.



6 comments on “‘Diffusion Disease,’ ‘Bizarre’ PEs And South Korean Canaries

  1. A real question at this point is do we get any recovery. We’re going back to 50% normal in some places but there is no expectation that is sustainable. By November it is not unlikely that many states will be in full blown crisis mode. Unemployment benefits end in July I believe. I have already seen many businesses permanently close or extend reduced schedules indefinitely. We need long term options in policy. We’re using a band-aid when we desperately need stitches and a cast. It’s still a challenge to just get disinfectant, surgical masks and rubber gloves…

    • Anonymous

      Nasdaq data says everything is fine. Especially Facebook stock. Mind you I bought puts on Facebook Friday before the close. I say bullchit SELL IT ALL

  2. If US pulls back on global trade, due to political reasons as well as due to changes in personal spending habits of US population, China will have a very hard time finding “consumers” that can replace the spending habits of the US- as they were through 2019. Especially younger people, who want to go out to eat/drink and travel- not spend more time at Walmart.

    • Or,,, I notice that the whole premise of ride sharing and car sharing is now being questioned. Maybe people, including young people, will want to ride in their own sanitary bubble rather than in an Uber or on public transit.

      Perhaps that will spill over into domicile choices. Will the young couple want to risk bringing their baby into an urban environment? Maybe they will start to think about the dreaded single family house!!

      And furnish it with merchandise from Walmart & Home Depot!

      With limited budgets, only the most die-hard right-wing millennials will continue to boycott “made in China” if the product is half the cost of a US-made offering.

  3. There is a little more optimism out there than would seem warranted so I expect the spin and hype will find ideologically aligned takers…
    That Fed backstop has proven invincible and will appear that way right to the day this whole thing turns South….That coincidentally is exactly how this bubble was inflated and generally every other bubble as I recall….

  4. What is the correlation between financial markets and the economy. It is close to 0!

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