Weekly Market Comment: July 24, 2020
As the virus situation grew worse in many places, the EU and U.S. are contemplating more fiscal measures. Many assistance programs are set to run out by the end of July but many are expected to be extended. A few weeks ago House Democrats tabled a new $3 trillion stimulus package while Republicans are currently in the $1 trillion ballpark, a figure many expect to migrate higher.
The $600 per week worker assistance is set to expire at the end of July and talk is that it may be re-instated down to $300-$400/week level. Another round of business handouts is also being contemplated, though a smaller $150-$200 million range. Note that corporate earnings have been strong in part due to these subsidies. It’s not as if people receiving these handouts hoard the money under their mattress.
Stated another way, these handouts may go directly to workers but indirectly they go to companies of all sorts and sizes.
Are Tesla’s shares due for a “safety recall”?
Unless you’ve been self-quarantining on Mars you’ll know that Tesla shares have been on fire like few others. They are up seven fold since last year and this week the company tabled its first four quarters in a row of profitability. The good news is that makes them eligible for the S&P 500 but we doubt the folks at Standard & Poor’s are interested in adding what is quite clearly the most bubble-like high-profile stock around. What overzealous investors seem to be ignoring is that Tesla’s auto sales are down a few percent. Why is a no growth company up seven fold to a PE of as much as 833 times?
Their profitability were made possible by the selling of regulatory credits to traditional auto companies, which has nothing to do with selling cars. Tesla collected a better-than-expected $428 million for those, which is pure profit that resulted in a $104 million quarterly profit. Sure, revenue is revenue and Tesla earned those credits fair and square by virtue of building all-electric cars. But the proceeds from such credits are lumpy and are expected to decline over time.
Do you remember in May when Elon Musk tweeted that the shares were too high? They’ve doubled since then.
Coca-Cola makes you THINK!
Coca-Cola is considered the most recognizable brand across the world and we own it in our Legacy Income Growth, Select and US Select accounts. Their 2nd quarter earnings came in at 41 cents, down from 61 cents a year ago but better than the 40 cents expected. The stock, which still lags the Dow Jones Industrial Average pretty badly this year (-12.9% % vs the Dow’s -7.2%), went up over 4% on the news. That’s because less-worse news is good news these days.
The drinks maker said that unit volume sales for the quarter dropped 16%, including a 25% drop in the month April (when compared to the year-ago month). But, in June, the year-over-year decline was ‘only’ 10%. “We believe the second quarter will prove to be the most challenging of the year,” declared the CEO.
And there you have it: the world’s most iconic old brand thinks the worst hit to the economy is behind us.
Musings Beyond The Markets
Rep. John Lewis died last week. He was a key leader in the civil rights struggles after he wrote a letter to Dr. Martin Luther King. King responded with a two way bus ticket to meet him, helping thrust the young 23 year old as one of the key civil rights leaders fighting for desegregation and voting access. Lewis went on to govern in Congress from 1986 until his death. Below was his favourite poem.
Launch Audio in a New Window
By William Ernest Henley
Out of the night that covers me,
Black as the pit from pole to pole,
I thank whatever gods may be
For my unconquerable soul.
In the fell clutch of circumstance
I have not winced nor cried aloud.
Under the bludgeonings of chance
My head is bloody, but unbowed.
Beyond this place of wrath and tears
Looms but the Horror of the shade,
And yet the menace of the years
Finds and shall find me unafraid.
It matters not how strait the gate,
How charged with punishments the scroll,
I am the master of my fate,
I am the captain of my soul.
The TSX was down 0.78% and the S&P500 dropped 0.28%.