Although most media outlets this morning were zeroed in on the lack of stimulus and new cases of coronavirus beginning to ramp up in the US, a familiar theme swooped in at 8:30 AM to take the reins.
Initial jobless claims rose to 898,000 on the week, nearly 10% above the market’s expectations.
It was a large enough jump to bring new unemployment claims to their highest point since August and to dampen the declines in both regular and Pandemic Under Assistance (PUA) continuing claims.
It’s also a harbinger of concern to come, as October has traditionally been a hiring for seasonal workers, and yet job openings are still underperforming last year by -17%.
Against that backdrop, it remains difficult to see US consumer spending – which comprises around 75% of US GDP – returning anywhere near normal by the holiday season.
Moreover, recent trends in US COVID-19 cases have been moving to the upside. And if that is even close to similar to what the trend has looked like in Europe these past two months, we are in for a rough Thanksgiving.
COVID Gets Serious in UK and France, Bankruptcies Loom in Germany
As I predicted all the way back in June, Europe began to see increases in new cases around the end of July. Now, we saw at the beginning of the year that it takes about 1-2 months to hit the exponential part of the curve, so that meant a widespread outbreak would occur sometime in September.
Now it’s here.
The outbreak has become bad enough in the United Kingdom and France that both countries have issued curfews.
And although Germany’s rate of spread is only about half as bad as either of those countries – roughly 7,000 per day versus 20-22,000 – it does not bode well for economic conditions throughout the fall and winter.
In fact, Germany likely faces a wave of bankruptcies in January as European stimulus spending is set to wear off. And although the country’s leadership plans to relax insolvency rules to kick the can down the road, that won’t prevent those affected companies from some kind of self-imposed austerity over the next few months.
In turn, less spending means that there will be less consumption, fewer imports, and companies will seek a release valve in export markets – something we are already seeing in gasoline as available storage dwindles.
But despite the clear headwinds to US and European spending, something curious is happening in China.
China Goes Shopping
Despite the country’s COVID outbreak in late 2019, we didn’t see the typical seasonal decline in imports back in January/February. And although it took a bit to return to all time highs, they are now beginning to move even further upward… at a time of year when they typically decline.
Part of the reason is food-related – as the same flooding in the Yangtze Valley that threatened the Three Gorges Dam also decimated the region’s crops, leaving millions of people food insecure.
Since that time, China’s soybean imports – which typically decline this time of year – have held steady, pulling supply from both the US and Brazil.
But the really interesting part is what else they’re buying… namely integrated circuits and microchips.
Both of those components are essentially raw materials to make electronics. And because of that, they have a seasonal component to them – China will stockpile them in September to make gadgets for the US/Europe holiday season.
So, it’s incredibly strange to see them both run up to all-time highs at a time when consumer demand for their principal customers is likely to decline.
And if you remember what I discussed in late September, China’s crude steel production has surged to an all-time high this year while exports have dropped to a multi-year low.
And their gasoline imports – although they’re decreasing a little – remain at historically high levels.
Food. Electronics. Steel. Gasoline.
If this were a Jeopardy answer, the question would be… “What are four things that armies need?”
Conflict is coming. But until then, China is going to have to find someplace to put all this stuff.
And while the dry goods can be stacked up and distributed on land, the liquid stuff needs to be stored in a container. For oil and refined products, that means boats.
Floating storage for crude in Asia has declined a bit as Chinese teapot refiners pumped out product, but it’s likely to begin ramping up again as those refiners slow for the winter season.
Moreover, after a long, slow decline, oil tanker rates are beginning to creep up again.
And that means it’s time to say AHOY! our old friend DHT Holdings (NYSE: DHT) – picking up a ¼ stake here, and another ¼ stake if the stock price goes back to recent lows around $5 per share.
It has been trading in roughly a 40-cent range over the past month, so downside is limited, and near-term upside is in the $7-8 range if we get either a spike in rates or a plunge in crude.
But until then, batten down the hatches.
All the best,