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Wheels Up! Economic Recovery Could Be Faster Than Expected

Summary:
Sometimes it can be challenging to remain optimistic, to look past the never-ending raft of negative headlines and see the upside. This past week was no exception. The number of COVID-19 deaths in the U.S. exceeded 100,000, a significant toll, with cases continuing to climb in new hot spots. Meanwhile, political and racial tensions are running high. Violent protests erupted in Minneapolis in response to alleged police brutality. The incident also led to an escalation of the ongoing feud between Twitter and President Donald Trump, when Twitter blocked one of the president’s tweets for violating its rule about “glorifying violence.” And across the Pacific, protests resumed in Hong Kong following China’s passage of a national security law that, among other things, enables Chinese law

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Sometimes it can be challenging to remain optimistic, to look past the never-ending raft of negative headlines and see the upside.

This past week was no exception.

The number of COVID-19 deaths in the U.S. exceeded 100,000, a significant toll, with cases continuing to climb in new hot spots.

Meanwhile, political and racial tensions are running high. Violent protests erupted in Minneapolis in response to alleged police brutality. The incident also led to an escalation of the ongoing feud between Twitter and President Donald Trump, when Twitter blocked one of the president’s tweets for violating its rule about “glorifying violence.”

And across the Pacific, protests resumed in Hong Kong following China’s passage of a national security law that, among other things, enables Chinese law enforcement officials to operate within the special administrative region. The U.S. State Department announced that it no longer considers Hong Kong to have reasonable autonomy under Chinese rule.

You get the idea.

As troubling as these developments are, it’s important not to lose sight of the good that appears to be taking place right now. Investors that focus only on the negative tend to miss out on the opportunities.

Record Inflows into Airline Stocks

Consider airlines. Shares of commercial carriers flew up 10 percent on Tuesday on renewed hopes that a vaccine against the novel coronavirus can be developed as soon as year-end.

Dr. Anthony Fauci, the leading U.S. expert on infectious diseases, shared his outlook on Wednesday, telling CNN that “we have a good chance… that we might have a vaccine that would be deployable by the end of the year, by December and November.”

Airline stocks, as measured by the NYSE Arca Airline Index, are still down some 57 percent from their trading range soon before travel restrictions grounded flights. This, I believe, represents the greatest buying opportunity in airline stocks since at least 9/11.

Indeed, we’ve been seeing record daily inflows into airline equities in the two months since bookings began to make their recovery. As of May 29, positive inflows had found their way into airlines for a remarkable 62 straight days, according to Eric Balchunas, senior ETF analyst at Bloomberg.

The number of passengers screened daily in the U.S. by the Transportation Security Administration (TSA) has steadily been gaining momentum since carriers were first grounded in an effort to limit the spread of the pandemic. On May 22, as many as 348,673 people boarded commercial flights in the U.S., up nearly 300 percent from a low of 87,534 people on April 14, and well above the 10-day moving average.

Wheels Up! Economic Recovery Could Be Faster Than Expected

Some carriers have begun to announce plans to expand routes. In a press release dated May 28, Southwest Airlines said it would resume some flights to Mexico and the Caribbean on July 1, and by the fall would add “more frequencies and more nonstop flight options” for business travelers from Phoenix, Denver, Las Vegas and Nashville. Effective December 17, Southwest will introduce several new nonstop links, including Phoenix and Memphis, Denver and Birmingham, and Atlanta and Louisville.

Deutsche Bank recently gave Southwest a Buy rating as bookings for the Dallas-based carrier are once again outpacing cancellations—and much sooner than previously anticipated. What’s more, revenues look better-than-expected, with load factors running at between 25 percent and 30 percent, quite a bit higher than the forecast 5 percent to 10 percent, according to Deutsche.

Some airlines are so (cautiously) optimistic about a quick rebound in air travel that they’re leaving the Trump administration’s $29 billion in pandemic relief aid untapped—for now. Bloomberg reports that of the four big carriers, only American Airlines has so far said it would be borrowing from the pool of funds, which comes with strings attached. The other three are taking a wait-and-see approach, hoping the summer travel season will encourage travelers to return to the skies. Wheels up!

Trucking Rally Could Be Telegraphing a Faster-Than-Expected Recovery

It isn’t just airlines that are telegraphing a faster-than-expected recovery. Shares of domestic trucking companies have been on a tear, notching all-time highs in two of the past three trading days. Leaders have been Avis Budget (up 31.3 percent from a month ago), Saia Inc. (up 27.5 percent) and Old Dominion Freight Line (up 16.5 percent).

In the past, trucking stocks—and transport stocks in general—have been seen as an economic bellwether since they reflect changes in overall business activity.

According to Matt Maley, chief market strategist at Miller Tabank & Co., the rally in trucking stocks tells us that “the economy is going to bounce back in a much stronger way” than many are anticipating. For the 12-month period, the S&P Supercomposite Trucking Sub-Industry Index was up nearly 40 percent, far outperforming the broader Transportation Industry Index, down 6 percent through May 28. 

Wheels Up! Economic Recovery Could Be Faster Than Expected

China to Operate More Flights Than the U.S. for the First Time Ever

Improvements in economic conditions are also happening elsewhere. Countries are finally beginning to reopen, including China, where the novel coronavirus originated.

In fact, China’s economy appears to have reopened the most of any other major Asian country. A report by Brown Brothers Harriman (BBH) indicates that China is closest to returning to normal, considering a number of important factors. In the five-point graph below, you can see that China is ranked number one in school openings, removing penalties/fees and allowing non-essential businesses to open. The country also ranks highly in borders and social distancing.

Wheels Up! Economic Recovery Could Be Faster Than Expected

“A structure has been put into place for the tracing of the virus, and China seems well in control over the pandemic,” BBH analysts write.

Most surprising is that China’s domestic carriers are on track to operate more flights than American carriers for the first time ever this month, according to Bloomberg. Airlines in China are reportedly flying 65 percent of normal capacity, compared to around 26 percent in the U.S.

Wheels up!

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Gold Market

This week spot gold closed at $1,731.71, down $2.97 per ounce, or 0.17 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 3.31 percent. The S&P/TSX Venture Index came in up 3.05 percent. The U.S. Trade-Weighted Dollar fell 1.55 percent.

Date Event Survey Actual Prior
May-25 Hong Kong Exports YoY -4.50% -3.70% -5.80%
May-26 New Homes 480k 623k 619k
May-26 Conference Board Consumer Confidence 87 86.6 85.7
May-28 Germany CPI YoY 0.60% 0.60% 0.90%
May-28 Durable Goods Orders -19.00% -17.20% -16.60%
May-28 GDP Annualized QoQ -4.80% -5.00% -4.80%
May-28 Initial Jobless Claims 2100k 2123k 2446k
May-29 Eurozone CPI Core YoY 0.80% 0.90% 0.90%
May-31 Caixin China PMI Mfg 49.6 49.4
Jun-1 ISM Manufacturing 43.5 41.5
Jun-3 ADP Employment Change -9500k -20236k
Jun-3 Durable Goods Orders -17.20%
Jun-4 ECB Main Refinancing Rate 0.00% 0.00%
Jun-4 Initial Jobless Claims 2123k
Jun-5 Change in Nonfarm Payrolls -8000k -20537k

Strengths

  • The best performing precious metal for the week was silver, up 3.78 percent on stronger industrial demand. After a slow start to the week, gold and silver were moderately higher in midday U.S. trading Thursday as haven demand returned due to China’s security law imposition on Hong Kong. The move by China ratcheted up tensions with the U.S. Gold rose Friday morning as investors awaited President Trump’s news conference to announce his China response. Broader equity markets have been somewhat euphoric on the immediate fear-of-missing-out hope for a COVID-19 vaccine. However, with little mention in the news, American investors cannot get enough gold. Swiss gold exports to the U.S. surged to 111.7 tons in April – the most on record.
  • The annual “In Gold We Trust” report was published by Incrementum AG this week and it was filled with bullish expectations for gold. Fund managers and authors of the report Ronald-Peter Stoeferle and Mark Valek wrote that gold could approach $5,000 an ounce and possibly even push toward $9,000 an ounce by 2030. “The proprietary valuation model shows a gold price of $4,800 at the end of this decade, even with conservative calibration.” Kitco News notes that in the 2019 report, they accurately predicted that gold was in the early stages of a new bull market.
  • New data out of Russia shows that gold production rose by 9.26 percent in 2019 for a total of 343.54 metrics tons, compared to 314.42 in 2018. Russia is the third-largest gold producer in the world. In April, Russian banks asked the Russian central bank to restart its official gold purchases, citing concerns over gold exports. Silver production was down 11.1 percent on an annual basis in 2019, totaling 996.17 tons, reports Kitco News.

Weaknesses

  • The worst performing precious metal for the week was palladium, down 1.16 percent. Gold fell for a third straight day as of Wednesday as signs of improvement in some economies rolled back haven demand and offset concerns about growing U.S.-China tensions over Hong Kong. Gold fell toward $1,700 an ounce on strong economic data from China, but then finished the week around $1,731.
  • Sibanye-Stillwater, the world’s largest platinum producer, said that it tested 120 employees for COVID-19 and 51 tested positive for the virus. The company used contact-tracing to identify who needed to be tested after two employees at Rustenburg operations in South Africa contracted the virus. Coronavirus outbreaks at mining operations could halt production and result in reduced output.
  • The New York gold market is continuing to create headaches for traders. After the coronavirus pandemic grounded flights and created concern about physical delivery, gold futures rose to the highest premium to the spot price in four decades and attracted a flood of the metal to the U.S. Now contract holders are trying to avoid taking delivery from the massive inventory reports Bloomberg. This is like what happened with oil earlier this year, where demand plunged after stockpiles rose. The June gold contract is now below spot prices, just after seeing a $12 premium in mid-May and a $60 premium in March. New York exchange inventories stood at a record 26.3 million ounces as of Wednesday. Since the end of March, more than 17 million ounces have flowed into Comex.

Wheels Up! Economic Recovery Could Be Faster Than Expected

Opportunities

  • Gold miners in Australia are resuming a pandemic-disrupted exploration boom as metal prices surge amid a lack of new major discoveries. According to government estimates, spending on gold exploration in the country rose to a new record in the fourth quarter of 2019, while the annual total of more than $656 million was 20 percent higher than 2018. S&P Global Market Intelligence said in a report this month that there have been no major gold discoveries in the past three years. Rob Bills, CEO of Emmerson Resources Ltd., said “the cost of drilling hasn’t gone up, and there’s plenty of drill rigs out there, the market is quite responsive to discoveries, we’re quite positive.”
  • Shandong Gold Mining plans to set up Streamers Gold Mining Corp. in Toronto to complete the purchase of TMAC Resources, according to a statement on the Shanghai Stock Exchange. The gold miner could invest C$210 million to set up a unit in Canada. Bloomberg News reports that on May 8, TMAC Resources said Shandong agreed to acquire all outstanding shares.
  • Gold is known as a store of value and it has been providing a vital lifeline worldwide to those devastated by the economic impact of COVID-19. In Thailand, gold exports rose 830 percent from the same month a year earlier to 48 tonnes. This was also a 90 percent increase from March, as people sell their gold to get a hold of cash, reports Kitco News. Last month Thailand’s Prime Minister even asked people to sell gold gradually as shops could not handle the large volumes of sellers.

Threats

  • Gold has seen its rally losing steam over the past month potentially due to rising real yields. Bloomberg’s Sungwoo Park notes that real yields are increasing in large economies such as the U.S., China and Japan, as inflation fell while sovereign yields rose. “That reduces the opportunity cost of holding no-yielding gold.” Other headwinds include improving risk appetite as more and more economies globally re-open as coronavirus restrictions are lifted.
  • South Africa’s mines have been operating with half their workforce since a five-week shutdown ended at the beginning of May and starting on Monday all workers can return. However, there are questions surrounding how workers will be able to safely social distance in cramped mining conditions. The country has seen virus flare-ups temporarily closing individual operations, which could curb output and hurt profitability, reports Bloomberg. RMB Morgan Stanley analysts said in a note that “we could see a reset in South African mine production capacity lower, even once government mandated employment restrictions have been lifted.” Impala Platinum Holdings said that it takes between four and five hours to get tens of thousands of workers underground as screenings and health protocols slow the start of their morning shift.
  • Cleveland Federal Reserve Bank President Loretta Mester cautioned that the economic recovery from the COVID-19 pandemic could be slow on a Bloomberg TV interview this week. “When we have so many people out of work it’s hard to imagine that we see a quick V-shaped recovery.”

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 3.75 percent. The S&P 500 Stock Index rose 3.01 percent, while the Nasdaq Composite climbed 1.77 percent. The Russell 2000 small capitalization index gained 2.84 percent this week.
  • The Hang Seng Composite gained 1.21 percent this week; while Taiwan was up 1.21 percent and the KOSPI rose 3.02 percent.
  • The 10-year Treasury bond yield fell 1 basis point to 0.652 percent.

Read the rest of the article at http://www.usfunds.com/investor-library/investor-alert/wheels-up-economic-recovery-could-be-faster-than-expected/

May 29, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

 

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