A New Daily Routine

361 Capital Market Commentary | April 6th, 2020

Wake up. Take a deep breath. Smell the soap, coffee and oranges. If you have your sense of smell, then get dressed and proceed toward another day of home officing. Life slowly continues as we make progress on flattening the virus curve. While it looks like flattening progress was made over the weekend in Europe and here in New York City, we are not yet over the hump in America. We still have 15% of the States not sheltering in place and others allowing mass audience events to stay open. And somehow the airlines are still flying. At least the wearing of masks is now commonplace to stop the spread of the virus. Now let’s get these case numbers and hospitalizations down while the scientists work on a therapy and the engineers get rapid testing into mass production.

The markets will remain highly volatile as the uncertainty of the shutdown and size of the economic hit remain unknown. While the Fed continues to grow its balance sheet at a record pace to support the fixed income markets, the Treasury and banking system are working overtime to get checks into the hands of small businesses and individuals to keep many from hitting a financial wall. This is a time when people need their government’s assistance. And not just a handful of the nation’s population but maybe closer to a third of our citizens. There can’t be a delay in getting this assistance into the hands of the people that need it. No glitches in the PPP loan process or $1200 checks. Just get it done.

Once we get past this virus someday, there will be changes. Individuals will have more emergency reserves which will take from discretionary spending. Companies will have more reserves and there will be fewer stock buybacks. Governments will shift more essential healthcare manufacturing from overseas onto its domestic shores. And safety stocks of healthcare equipment will be required and built. I’d expect the U.S. Government to also create incentives for more kids to go into healthcare and study medicine and the health sciences. There will be many changes AV (After Virus).

But for now, until a vaccine, proven therapy or a quick test (virus or antibody) is widely available, our world will be different. No one over 60 is going to risk their life to go to a movie, sporting event, busy restaurant, airplane or church service. If the professional sports leagues want to compete in 2020, they will be doing it without attending fans. And there won’t be any college sports with college campuses unlikely to open until 2021. We first need to focus on getting people safely back to work. Having the quick tests will help. Until then, use your nose and make certain that you can smell because that seems to be the cheapest, best test that we have available right now.

The curves in hard-hit Italy and Spain flattened over the weekend…

Both countries have extreme shelter in place measures which is something the U.S. could learn from if we want to stop our ascent.

Italy and Spain Daily Death Tolls Plateauing


Scott Galloway thinks many colleges will just wait until 2021 to reopen…

All colleges and K-12 schools are closed for the current school year. It is difficult to imagine a large State university allowing a 500-person lecture hall to be filled in the fall semester if movie theaters aren’t even reopened.

“I doubt my class of 180 MBA students at NYU will be running in September. A lot of students packed together in a tight auditorium just in time for the second wave….no university will want to run the risk of being part of enabling the second wave”

(Prof Galloway on Pivot podcast)


Dr. Scott Gottleib agrees that it is going to take a new drug to return our world to normal…

Some imagine that the coronavirus will run its tragic course in the spring, with the direst results avoided by intense social-distancing and other mitigation efforts, and then our lives can more or less return to normal in the summer.

But that isn’t realistic. Even if new cases start to stall in the summer heat, the virus will return in the fall, and so will fresh risk of large outbreaks and even a new epidemic. People will still be reluctant to crowd into stores, restaurants or arenas. Schools may remain closed. The public’s fears won’t relent simply because there are fewer new cases. We’ll be running an 80% economy.

The only way out is with technology. Aggressive surveillance and screening can help warn of new infection clusters that could turn into outbreaks, but that won’t be enough. A vaccine could beat the virus, but there won’t be one this year. The best near-term hope: an effective therapeutic drug. That would be transformative, and it’s plausible as soon as this summer. But the process will have to move faster.

Americans would have the confidence to return to work, even if the virus is still circulating in the fall, if they knew that a robust screening system is in place to identify and arrest new outbreaks and medication can significantly reduce the chance of becoming severely ill. Kevin Warsh, a former Federal Reserve governor, estimates that such a drug could restore at least $1 trillion in economic activity.


Global health science collaboration has shifted into warp speed…

While political leaders have locked their borders, scientists have been shattering theirs, creating a global collaboration unlike any in history. Never before, researchers say, have so many experts in so many countries focused simultaneously on a single topic and with such urgency. Nearly all other research has ground to a halt.

Normal imperatives like academic credit have been set aside. Online repositories make studies available months ahead of journals. Researchers have identified and shared hundreds of viral genome sequences. More than 200 clinical trials have been launched, bringing together hospitals and laboratories around the globe.

“I never hear scientists — true scientists, good quality scientists — speak in terms of nationality,” said Dr. Francesco Perrone, who is leading a coronavirus clinical trial in Italy. “My nation, your nation. My language, your language. My geographic location, your geographic location. This is something that is really distant from true top-level scientists.”

On a recent morning, for example, scientists at the University of Pittsburgh discovered that a ferret exposed to Covid-19 particles had developed a high fever — a potential advance toward animal vaccine testing. Under ordinary circumstances, they would have started work on an academic journal article.

“But you know what? There is going to be plenty of time to get papers published,” said Paul Duprex, a virologist leading the university’s vaccine research. Within two hours, he said, he had shared the findings with scientists around the world on a World Health Organization conference call. “It is pretty cool, right? You cut the crap, for lack of a better word, and you get to be part of a global enterprise.”


And philanthropic dollars are helping to accelerate the race to a vaccination…

Here is Bill Gates throwing a few billion dollars of his foundation’s money into the chase…

Donation from Bill Gates

Here is the full video with one of the most knowledgeable vaccination experts…

The Daily Show with Trevor Noah: Trevor and Bill Gates discuss coronavirus testing, accelerating vaccine development and how the world will rebound. #DailyShow #TrevorNoah #BillGates

Bill Gates on The Daily Show


Seems like every company that is capable is pitching in to build healthcare protection equipment right now…

Apple is designing and producing face shields for medical workers, Apple CEO Tim Cook said in a video on Sunday.

The company is aiming to produce 1 million face shields per week.

“We’ve launched a company-wide effort, bringing together product designers, engineering, operations and packaging teams, and our suppliers to design, produce, and ship face shields for health workers,” Cook said.

“Our first shipment was delivered to Kaiser hospital facilities in the Santa Clara Valley this past week and the feedback from doctors was very positive.”

Cook said that Apple’s face shield design can be packed 100 to a box and can be assembled in two minutes.


Imagine a summer where only 50% of employees are working in the office…

Tweet from @RebeccaJarvis

We need those rapid testing kits ASAP…

Morgan Stanley expects a second virus wave to deal with in Dec/Jan if we return to work and school in August?

Actual/estimated new COVID-19 cases in the US

(Morgan Stanley)

Someone took the virus with them to Sun Valley, ID…

Vacation and tourist spots will continue to have a tough time if the country reopens for business and we don’t yet have a therapy drug or wide-spread testing. I can’t imagine that the local hospital has more than 20 ICU beds and ventilators to get through this week. They will have to send cases down to Boise.

Tweet from @Jake_W

Deutsche Bank has some ideas for what the COVID world may look like in the near term…

@carlquintanilla: DEUTSCHE: “.. behavioral changes are the reason why we will not get a V-shaped recovery, and there is not much fiscal policy can do about it.”

Behavioral changes slowing growth over the coming quarters

The consumer behavioral recovery in China is less than inspiring…

Whether or not U.S. consumers will follow the same recovery trend is unknown, but consumer discretionary companies should all be prepared for the worst.

Less encouraging are signals from consumers more broadly, who now drive the majority of China’s growth. A Morgan Stanley online survey of 2019 consumers in 19 provinces last week found that while most respondents—86%—were leaving the house for work, most were still reluctant to go out to shop, eat or socialize. And 69% said they would go out for essentials only, down from 75% in early March—still extremely high.

That level of caution may be hard to overcome as long as both citizens and the government remain worried about a secondary outbreak. Last Friday, Beijing ordered all of the nation’s movie theaters to close again after a handful reopened. And a small county in Henan province Tuesday found itself locked down again due to fears about a renewed outbreak.


Let’s all just hope that we won’t need to carry our own air in the future…

Tweet from @darrenrovell

The Governor of California is looking cautiously toward NFL football this fall…

@LindseyThiry: California Governor Gavin Newsom’s full response when asked if he anticipated the NFL to open in August or September with full stadiums:

Gov. Newsom's response

As for College Football, if there are no students on campus, there won’t be a season…

Tweet from @Ben_Jones88

The U.S. economy received some terrible jobless claims and payroll data last week. There will be more…

Due to the timing of surveys, Friday’s figures don’t fully reveal the millions of unemployment-insurance claims individuals filed in the last two weeks of March. Jobs lost in recent weeks and additional expected losses this spring could push the U.S. unemployment rate to record highs.

Forecasting firm Oxford Economics projects that by May, the U.S. will have lost 27.9 million jobs and have a 16% unemployment rate, erasing all the jobs gained since 2010 during the record-setting 113-month stretch, which ended in March. That job loss would be more than double the 8.7 million positions cut from payrolls during the 2007-09 recession and its aftermath. And those jobs were lost over 25 months.

The nonpartisan Congressional Budget Office said Thursday that the unemployment rate would exceed 10% in the second quarter. The highest monthly unemployment rate on record, going back to 1948, is 10.8%, set in late 1982 during the deep recession under President Reagan.

“There’s no comparison to this shock,” said Gregory Daco, Oxford’s chief U.S. economist. “The sudden drop in economic activity is like what you’d see in an area after a natural disaster or a terrorist attack, but it’s occurring across the entire country.”


Lost Decade

Where will the job losses be concentrated? in the retail and leisure industries…

We now project a nearly 12pp increase in the unemployment rate to a peak rate of 15%, though we repeat our earlier warning that we have more confidence that a large increase will be apparent in the U5 rate—which includes individuals who want a job but aren’t actively looking—than in the standard U3 rate.

(Goldman Sachs)

Our Bottom-Up Estimate Implies a Nearly 12pp Increase in the Unemployment Rate

What might the post spike unemployment rate look like?

Below is Morgan Stanley’s projection. Mid teen’s spike followed by an 18-month run back to 6%.

Our Bottom-Up Estimate Implies a Nearly 12pp Increase in the Unemployment Rate

Employees who have had the virus will be able to name their hourly rate until a vaccination is found…

Tweet from @conorsen

Junk bond new issuance market reopened last week, but it cost Yum Brands an extra 3% points in yield to borrow…

Yum’s bond offering represented a glimmer of investor demand in one of the riskiest corners of the corporate credit market, which seized up for much of March after the coronavirus outbreak morphed into an economically devastating pandemic.

While U.S. companies last week issued new investment-grade debt at a record clip, there had been no new issuance in the so-called high-yield market for junk-rated debt issuers since March 4.

Yum boosted its debt offering by 20%, after planning to raise $500 million. The deal was more than 10 times oversubscribed, according to a person familiar with the matter.

However, Yum was forced to accept a considerably higher borrowing cost than in its prior debt deals.

The company sold bonds maturing in 2025 at a 7.75% yield. By comparison, Yum raised $800 million in September through 10-year debt with a yield of 4.75%.


As corporate earnings continue to fall, U.S. stock dividends and buyback activity will likely follow…

@EarningsScout: As expected, $SPY EPS growth ests for all periods in 2020 keep falling. Here are the updated figures. Note: 2021 estimated growth rates are rising as 2020 numbers go lower.

S&P 500 EPS Growth Estimate Changes

Corporate stock buyback activity was the largest buyer of stocks the past 10 years…

@tracyalloway: Companies suspending buybacks could result in $300bn of lost inflows into U.S. stocks over the next two quarters, according to HSBC estimates.

Buybacks have been most consistent source of equity inflows

Consumers are freezing all economic decisions right now…

HPS-CS Economic Sentiment Index
(@HPSInsight, @CivicScience)

The sharp decline in the prices of the homebuilding stocks strongly suggests that home sales are about to follow lower…

This chart compares pending sales with the price of an exchange-traded fund that tracks homebuilders and other housing-related firms.
(Piper Sandler)

Homebuilders ETF

Lumber prices are already detecting a slowdown in future building activity…

@calculatedrisk: Update: Framing Lumber Future Prices Down 25% Year-over-year

Framing Lumber Prices

Speaking of housing, I am not certain that anyone would be happy with another Fannie and Freddie bailout right now…

Fannie Mae and Freddie Mac, the government-controlled companies that guarantee nearly half of US mortgages, could require their second bailout in just over a decade if the US economy remains in a lockdown for several months, their regulator has warned.

The two groups, which collectively underpin the $10tn US housing market, have sufficient resources to last through a lockdown of about 12 weeks, but would then need funds from Congress or the Federal Reserve, said Mark Calabria, director of the Federal Housing Finance Agency.

“If we start to go more than two or three months, then there is going to be real stress in the mortgage market, we’re talking in terms of what happened during the great recession,” he told the Financial Times.

“If we are talking about a drawn-out period where people are not in a position to pay their mortgages, if we are talking about 25 per cent of people having to ask for forbearance, the system doesn’t have that kind of liquidity. That would require Congress to step in, or the Fed.”


Some insight into consumer purchasing decisions…

J.P. Morgan’s analysis of the weekly data shows that grocery stores are picking up market share from Drug Stores and Mass Merchandisers as consumers stay at home.

The improvement in food retail stores has accelerated recently

Pantry’s and freezers are getting filled…

@carlquintanilla: EVERCORE: “We have never seen growth rates like these before and, hopefully, will never see them again. Food sales were up 70% YOY during both weeks compared to up just 3% in February.”

Sales Growth YOY

What changes are consumers making in their online buying right now?

This is a great chart unless you own a luggage manufacturing company right now. Click on it to enlarge it for your device. Go bread machines!

The Top 100 Fastest Growing

Gas prices are extremely low right now…

Unfortunately, all of our cars are in the garage. It would be a very good time for Phase 4 of the COVID aid package focused on infrastructure. Imagine how many roads and bridges could be built of repaired while there is no traffic.


Advertising is also being paused…

Not helping will be the massive pause in the fall network schedule. Nothing is being filmed right now. Everything is on pause. So, there won’t be new TV once the current libraries are depleted. Add to that, no new sports and how is a major advertiser supposed to be able to find their consumers? A big mess that won’t return to normal until 2021.

In an IAB survey of ~400 buy-side advertising decision-makers, 74% believe COVID-19 will have a bigger impact on advertising than the 2008-2009 financial crisis. 70% of respondents have already adjusted or paused their planned ad spend through 2Q. In terms of digital specifically, respondents indicated that their online spending is 33% off their original plan through June. We believe the categories impacted most online include travel, physical retail, automotive, media, & entertainment.


Buy-side Decision-makers

Well done N.Y. City…

Tweet from @AirlineFlyer

A difficult time for Hawaii…

@hawaii: Hawaii’s number one industry in the time of COVID-19, measured by the number of visitors arriving daily. Devastating. Data here:

Hawaii Total Passenger Count

Air travel has stopped…

@RenMacLLC: We’re avoiding the airports in a big way. According to the TSA, screenings are down over 90% against the same point last year. Like everything else these days, good news in terms of slowing the spread of the coronavirus is bad news for the US economy, at least for now.

TSA screenings going down big time

The raw daily numbers are incredible…

@SteveSaretsky: Air travel has collapsed. Official numbers from @TSA

Official numbers from TSA

It looks like Berkshire Hathaway won’t be a rescuer of U.S. airline companies…

Warren Buffett’s Berkshire Hathaway disclosed that it sold large blocks of stock in Delta Air Lines and Southwest Airlines.

Berkshire subsidiaries sold 13 million Delta shares over Wednesday and Thursday for a total of $314.2 million, a per-share average of $24.19 each. Berkshire now has overall ownership of 58.9 million Delta shares, according to a form it filed with the Securities and Exchange Commission.

Buffett’s firm also sold 2.3 million Southwest shares over the same two days for a total of $74.3 million, an average price of $32.22 each. Berkshire now owns 51.3 million Southwest shares, according to a second SEC filing.

Berkshire indicated in both forms that it now owns less than 10% of each airline.


As air travel suffers, so does Uber ridership…

Uber Ride Hailing Sales

Speaking of Uber…

Once the COVID dust settles, it would seem that Congress would make all gig economy become full-time employees.

Tweet from @carlquintanilla

With crude oil at $25, new energy drilling in the U.S. will decline significantly this year…

What WTI oil price does your firm need

Consumers have changed their spending plans but haven’t touched their investment plans…

I bet that I could find a few investments in some portfolios that are going to zero given the virus impact.

Majority of Americans have cut their spending
Most Americans haven't touched their investments

The virus will likely end all physical loyalty cards. Now what about those germ-covered dollar bills?

Tweet from @mdc

Colleges with high debt and no students this fall are going to have problems…

Imagine, for a moment, if August rolls around and the pandemic has abated but colleges and universities remain shuttered. This doesn’t mean, though, that they can’t operate: After all, professors across the country have spent the past few weeks putting classes online, teaching via Zoom, and otherwise adapting to the new normal. In theory, the nation’s institutions of higher education can simply do the same come fall. And therein lies a problem.

When students shell out $50,000 a year to attend a school that admits a majority of applicants, they’re paying for a lot more than professors. They’re paying for the experience of college: dating, dorm life, fraternities and sororities, Frisbee on the quad — all the stuff that has come to define college for the past century or so. This is one reason, perhaps, that colleges and universities have spent so much money on amenities and extracurricular diversions, rather than actual education, in recent years.

But when education moves online, all of that disappears. Instead, you’re left with a haggard-looking professor on Zoom. That’s worth something, sure, but it isn’t worth paying anything close to full freight. Parents who confront this reality come fall semester are going to quickly conclude that their children will need to settle for something more practical, like some online courses offered by a local branch of the state university.

This may be true even if schools reopen. As parents of high-school-age children recover from the pandemic and the job losses that have attended it, the logical choice for many — perhaps the only choice, given their financial circumstances — will be to hold off on the pricey residential college experience until things return to normal.


It’s not a vacation, it’s a pandemic…

Despite urging from public health experts, some states and counties haven’t shut down completely. In some states, beaches are still open; in others, restaurants still serve sit-down meals.

This is a recipe for disaster. Because people can travel freely across state lines, so can the virus. The country’s leaders need to be clear: Shutdown anywhere means shutdown everywhere. Until the case numbers start to go down across America—which could take 10 weeks or more—no one can continue business as usual or relax the shutdown. Any confusion about this point will only extend the economic pain, raise the odds that the virus will return, and cause more deaths.


Why you need to use your nose each morning…

The inability to smell was the first symptom many patients noticed; in some cases, it was the only symptom the patients noticed. “In the past it was once in a blue moon that we saw patients who had lost their sense of smell,” Kumar told me. “Now we are seeing it 10 times as often. It’s one of the things that happens with this virus.” The British doctors compared notes with doctors from other countries and gathered what data they could. They concluded that roughly 80% of the people who lost their sense of smell would test positive for the coronavirus, and that somewhere between 30% and 60% of those who had tested positive for the virus had also lost their sense of smell.

Those numbers might turn out to be a bit off — maybe even way off. They are a heroic guess, given how little testing has been done. But it’s precisely the scarcity of tests that makes the observation so intriguing, as it offers the possibility of a crude alternative to a test. Lose your sense of smell and you know to isolate yourself, even if you feel great.


I felt like a co-conspirator to a speeding ticket just reading this article…

I watched the Ferrari F8 Tributo roll off the transporter and onto my street last Monday, feeling the heat of temptation. This growling, diamond-eyed panther was arriving in the midst of social-distancing measures in North Carolina, but before a lockdown on unnecessary travel. Within a radius of 30 miles from my house, I knew, were hundreds of miles of suddenly empty freeways and back roads. I also guessed the highway patrol would have better things to do than reel in jackasses in Ferraris, who probably don’t have any friends to visit anyway.

Although it was a hell of a way for it to happen, Covid-19 had brought about a car-lover’s impossible dream, the “Forza Motorsport” videogame brought to life. Here I was being handed the (sanitized) key fob to a tanked-up, murdered-out Ferrari, and loosed in a consequence-free topography with no traffic and no limits beyond those my frail will could impose.

This is so wrong, I thought to myself. With everything that’s happening in the U.S., and with tragedy in Italy still unfolding, how could I even think about exploiting the situation for my own amusement? I was going about 170 mph at the time.


Picture of a Ferrari

If you need a great book for these uncertain times, look to this great read on Winston Churchill’s most difficult year…

On Winston Churchill’s first day as prime minister, Adolf Hitler invaded Holland and Belgium. Poland and Czechoslovakia had already fallen, and the Dunkirk evacuation was just two weeks away. For the next twelve months, Hitler would wage a relentless bombing campaign, killing 45,000 Britons. It was up to Churchill to hold his country together and persuade President Franklin Roosevelt that Britain was a worthy ally—and willing to fight to the end.

In The Splendid and the Vile, Erik Larson shows, in cinematic detail, how Churchill taught the British people “the art of being fearless.” It is a story of political brinkmanship, but it’s also an intimate domestic drama, set against the backdrop of Churchill’s prime-ministerial country home, Chequers; his wartime retreat, Ditchley, where he and his entourage go when the moon is brightest and the bombing threat is highest; and of course 10 Downing Street in London. Drawing on diaries, original archival documents, and once-secret intelligence reports—some released only recently—Larson provides a new lens on London’s darkest year through the day-to-day experience of Churchill and his family: his wife, Clementine; their youngest daughter, Mary, who chafes against her parents’ wartime protectiveness; their son, Randolph, and his beautiful, unhappy wife, Pamela; Pamela’s illicit lover, a dashing American emissary; and the advisers in Churchill’s “Secret Circle,” to whom he turns in the hardest moments.

The Splendid and the Vile takes readers out of today’s political dysfunction and back to a time of true leadership, when, in the face of unrelenting horror, Churchill’s eloquence, courage, and perseverance bound a country, and a family, together.


The Splendid and the Vile

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