Skepticism, Dispersion, And ‘Fanciful, Specious’ Theories

The rotation set in motion by Monday’s vaccine breakthrough extended into Tuesday, which ended up being another session characterized by outperformance for small-caps and pain for expensive tech.

A week that began with euphoria looks poised to be defined by dispersion, and that’s assuming the optimism around vaccines, therapeutics, and the US election holds. If it doesn’t, the week’s defining feature could be disappointment.

Brazil halted a late-stage trial of a Chinese vaccine due to a serious adverse event. In China, shots have already been rolled out, so any trial setbacks in other countries could both underscore the perils of moving too quickly and cast doubt on Beijing’s transparency vis-à-vis the safety of vaccines administered to the public. On the bright side, an antibody therapy from Eli Lilly was granted emergency-use authorization in the US, giving the whole narrative an extra bit of sheen.

13 countries have supply agreements with Pfizer for its vaccine and another four with Moderna, for its experimental shot.

“The outsized market reaction to the Pfizer/BioNTech news was illogical. The whiplash price-action across almost all assets has left behind a more fragile market to eventually digest what has actually changed over the past 24 hours. It wasn’t much,” Bloomberg’s Mark Cudmore, a Lehman veteran, wrote on Tuesday, before delivering a fairly trenchant critique of the vaccine euphoria. Here’s one passage from Cudmore:

Let’s be wildly optimistic and assume that approval will come by late November, and that 25 million doses will be prepared almost instantly, and distributed safely to a variety of centers by Dec 3. In this almost-impossible best-case scenario, we’d have 25 million people vaccinated by year-end. Meanwhile, about 3.9 million people contracted the virus last week. Even assuming that case-growth stops accelerating — a miracle in itself given the phenomenal pace of recent weeks — that means there will be ~29 million new coronavirus cases globally by the end of December. More people will be infected than would be vaccinated by year-end.

There’s much more, but that gives you a sense of Mark’s skepticism. In his view, the S&P has peaked for the year, and there’s scope for “a sizable downside correction.”

On the political front stateside, William Barr took his first steps into the fray late Monday, with a caveat-riddled memo authorizing federal prosecutors to investigate allegations of voter fraud. Richard Pilger, the official who presides over such investigations, immediately stepped down.  “Barr’s directive ignored the Justice Department’s longstanding policies intended to keep law enforcement from affecting the outcome of an election,” The New York Times noted. “And it followed a move weeks before the election in which the department lifted a prohibition on voter fraud investigations before an election.”

Barr’s memo was chock-full of what amounted to disclaimers, including guidance that investigations should not be pursued when allegations of fraud are “specious, speculative, fanciful, or far-fetched.” Needless to say, each one of those adjectives applies to Donald Trump’s claims, so Barr is paradoxically (and likely intentionally) doing precisely what his memo explicitly instructs prosecutors to avoid — that is, the mere act of his intervention serves to validate Trump’s claims.

Meanwhile, the GOP isn’t prepared to face reality yet either. Mitch McConnell, while being characteristically careful to avoid saying anything that could leave him with no off-ramp, said Trump should be allowed to pursue legal means of contesting the vote. But perhaps more importantly for markets, McConnell looked set to use the vaccine news as an excuse to argue for more limited stimulus.

There’s also a fight over millions in transition resources which the Trump administration is withholding from Biden. It’s possible (indeed, it’s probable) that Biden will need to take legal action to get the ball rolling. Mitigating this is Biden’s extensive network of former officials from virtually all parts of government. He’s already arranging calls with foreign leaders on his own, much to the chagrin of the White House, I’m sure.

Just four Republican Senators have acknowledged Biden as the President-elect. You can probably name them yourself. They are: Susan Collins, Mitt Romney, Lisa Murkowski, and Ben Sasse.

Whether any of this is enough to materially derail equities trading near (or at) record highs is up for debate, but you’re likely to hear a lot of questions over the next several days about who’s feeling the pain and where. The unwind in long secular growth/short cyclical value tied to the vaccine news was a painful experience, and it looks likely to continue.

Insult to injury for some of those placeholder longs is a new EU antitrust complaint against Amazon into the company’s use of seller data. That could add further pressure to the likes of Facebook, Apple, and Alphabet, which are all facing antitrust scrutiny of varying sorts and with varying degrees of regulatory vigor. For Alphabet, the danger is “clear and present,” so to speak.

Ultimately, it’s not difficult to conjure a number of scenarios in which equities take a breather, if only because the most widely-cited benchmarks that make all the headlines lean so heavily on mega-cap US tech, which appears poised for underperformance.

But at the end of the day, there’s always the Fed. “A COVID-19 vaccine that produced excellent results in tests is definitely heart-warming [and] for markets, it really is a game-changer, so [Monday’s] wild reaction doesn’t seem unreasonable,” SocGen’s Kit Juckes wrote Tuesday. “One thing that doesn’t change much however, is the outlook for Fed policy, at least in the short- and medium-term.”


 

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10 thoughts on “Skepticism, Dispersion, And ‘Fanciful, Specious’ Theories

  1. Thank you for adding the Trump update. I also heard that the Director of Personal just issued a memo stating that anyone in the administration is caught looking for a job will be terminated. So it looks like if your a 20-30 year old facing reality that Trump lost, you could get fired, which would mean no unemployment or reference. It really does show the pettiness of Trump. I know you have given many other ways he shows his pettiness but this really takes the cake!

    1. I work the Trump updates in almost every day. But I’ve found that what’s appreciated and most useful for readers is to put them in context of longer pieces. It’s not that I’m trying to “bury” them, it’s just that I think readers come here for comprehensive, yet concise takes on “everything” that’s going on. So that’s how I try to approach things. It’s not that I worry about turning readers off with posts dedicated to things like, say, Barr’s memo — it’s just that doing individual articles on those kinds of things without any additional color doesn’t play to my analytical strengths. There’s just not much to add on something like a memo other than the requisite sarcasm. I did make an exception during the impeachment proceedings. I dedicated quite a bit of individual coverage to testimony there, but that was necessary because if you didn’t keep up with the characters, it was impossible to know what was going on. In any event, I think readers appreciate the holistic approach. I want people to know that every piece I publish is worth reading and that no post is done simply for “the sake of it,” so to speak.

  2. Republican support for Trump’s legal challenges is likely simple pandering to the party’s base which at this point is wholly owned by Trump.

    Regardless of intent, if Trump feels that he has a groundswell of support among Republicans, he will be emboldened. That would be a dangerous development.

    1. I’m increasingly concerned this is not about simple pandering. As time passes with no evidence produced, I’m beginning to suspect trump et. al. have decided that if it’s evidence they need, then it’s evidence they’ll create. The pandering, the upcoming rallies, the abuse of Justice Dept power, the lining up of Congressmen – it may all be distraction and spade work in preparation for evidence constructed in background through bribery, fraud, coercion, tampering, etc – all of trump’s primary life skills. Rudy’s involvement looked optically foolish, but trump’s fixer may be just the guy for the actual job being carried out.

      Of course, the evidence for this whimsy on my part is no stronger than the Republican’s evidence for fraud. But I do worry that the market is underestimating trump’s capacity for malfeasance (I know; that’s tough to imagine at this point).
      The market’s presently benign political assessment could fade as rapidly as the blue wave receded if the new current question becomes “is this a legal challenge or a coup?”

  3. The fact that there is a rotation of sectors is actually a positive overall for the financial markets. Low cross correlations suggest we are getting back to some sort of normalcy in the stock market and economy. The question is whether this is a short term event which will burn out. The GOP will end up facing reality- they have no choice really. The question here is how much damage will this do to Biden’s transition and start (probably not too bad given his contacts and experience) and how much long term damage will this do in encouraging the far right base to deny the outcome of the election. Smart GOP Congressmen will quickly assume the role of loyal opposition. The quicker they do this the better chance of mounting an electoral comeback. Denial will only prolong their pain. Talk about painting yourself in a corner.

  4. The vaccine did not change the outlook on daily deaths through February. I hope Kushner has those ventilators maintained, we will need every one of them come January.

  5. Thanks for your response. I loved your article and I do look forward to your color. I appreciate the holistic approach I thought you might have missed the issue caused by the memo that’s all.

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