It Doesn’t Make Sense

361 Capital Market Commentary | May 11th, 2020

The market’s continued rise is confusing many stock market participants and observers, equally. The biggest surge in non-farm payrolls and unemployment in 80 years does not seem to correlate with a stock market that just rose 25% in seven weeks. But the difficult economic data is backward looking, while the stock market is forward looking. Don’t forget that stocks fell by one-third before the U.S. economy completely shut down. The market’s rebound has been a function of scientists, doctors and nurses making meaningful advances in the labs and hospitals and the Fed and Treasury pumping trillions of dollars into the economy, while many Americans wear their masks and flatten the new COVID case curves. The market’s move suggests that even a new spike in COVID cases will be manageable and isolated. Until we have a vaccine, we are all at risk of getting the virus. But if a $5, five minute test at your pharmacy or office building could identify carriers so that we could isolate them, then getting through this period will be a whole lot simpler.

So, Shanghai Disney opened today. The Bundesliga and NASCAR will restart this weekend. Wynn Resorts would like to open their Vegas properties on May 26th. The English Premier league will play on June 1st. And Major League Baseball will return in July. A few big things to look forward to as long as we wear our masks in public, don’t infect the entire office or factory, and keep those middle seats empty. (We are all looking at you United Airlines.) Five-minute COVID-19 testing will become very welcome in all assisted living homes, meat factories and even the White House this week. And, at only $5 a pop, both Starbucks and Dunkin’ should offer it while you pick up your coffee each morning!

If you know anyone who needs proof that wearing a mask stops the virus, show them this simple chart…

@NateSilver538: New York’s serology studies have actually found slightly *lower* rates of COVID-19 among healthcare workers than in the general population. Suggests that PPE and masks help a lot!
State of New York Hospital Antibody Testing Results

The big science news over the weekend was the FDA approval for this rapid, cheap and effective COVID-19 test…

U.S. approval of a new antigen test to rapidly screen people for the coronavirus “is a real game-changer,” said the former head of the U.S. Food and Drug Administration.The emergency use authorization — the first ever by the FDA for a Covid-19 antigen test — was granted to San Diego-based Quidel Corp. late Friday, according to a notice from the agency.

The move could mark a breakthrough in screening for the virus and comes as state and local governments ease lockdown orders and businesses begin reopening across the nation — and as health professionals argue that swift screening is essential to temper new outbreaks.

“It’s a very rapid test that could be used in a doctor’s office,” former FDA Commissioner Scott Gottlieb said Sunday on CBS’s “Face the Nation.” “Doctors now have about 40,000 of these Sophia machines already installed in their offices” where they are used to test for strep throat and flu, he said.

Each test will probably cost about $5, with results available within minutes, said Gottlieb, now a special partner at New Enterprise Associates, a venture capital firm that invests in the health-care and biotech sectors.

(Bloomberg)

SARS Antigen
(Quidel)

As expected, the U.S. jobs data last week was terrible…

But the silver lining is that so many workers expect this layoff to be temporary and they expect to return to work at some point.
US job losers on...

If there’s one silver lining, it’s that almost all of last month’s layoffs were classified as temporary. That suggests companies are planning a comeback, and they should be able to hit the ground running with workers who don’t require interviews, training and other onboarding. “The 78% share of unemployed classified as ‘temporarily laid off’ at least gives some grounds for hope that a lot of jobs will come back, provided the lockdown does not last too long,” said Brian Coulton, chief economist at Fitch Ratings.(WSJ)

The sectors with the most job losses are the ones that you are no longer participating in…

So, when you return, those jobs will return.
Slumping Sectors
(WSJ)

One big pickle to re-opening is the generous unemployment paychecks…

But at some point, the wages being offered and the desire to re-enter the workforce will be too great for many. Also, expect the seasonal immigrant workforce to not return to America this summer which means there could be millions of open positions available at much higher wages then the employer paid last summer.

Ilona Luce-Fina, who was laid off from her job as a bartender at the airport in Ithaca, N.Y., said she hopes her boss doesn’t call her back too soon.“I was crying at work to leave, but then as time went on and I did receive benefits, it was like, wow, I’m getting more than when I worked there,” Ms. Luce-Fina said.

The pressure for businesses to staff back up is especially intense as many have tapped federal loans contingent on paying employees. The government’s Paycheck Protection Program forgives the loans if companies bring back all workers within eight weeks of receiving funds that can be used to pay operational expenses such as payroll and rent.

For Julie Crowley, Ms. Luce-Fina’s employer, the clock is ticking. Ms. Crowley, who owns Triphammer Wines & Spirits and co-owns Ithaca Coffee Co., received a federal loan. She said that over the next seven weeks she needs to hire back 12 workers still laid off from both businesses.

Congress passed a coronavirus stimulus package in March that boosted unemployment benefits by $600 a week. About half of all U.S. workers stand to earn more if laid off than they did at jobs before the pandemic, until that increase expires at the end of July.

Ms. Crowley paid Ms. Luce-Fina $12.50 an hour. By itself, the $600 weekly bonus equates to working full time at $15 an hour…

“Do you call your employees back and expect them to take a pay cut and be a happy camper?” said Ms. Crowley. “People are all going to do what’s in their best interest. It’s in my best interest to get them back on my payroll.”

(WSJ)

Given all the money that the Fed and Treasury has thrown at the U.S. economy, we had better have a “V” shaped recovery if COVID-19 doesn’t re-accelerate…

@carlquintanilla: MORGAN STANLEY: “If history is a guide, ‘U’ may actually stand for ‘Unicorn’ because U-shaped recoveries coming out of a recession really never happen. Therefore, we continue to bet on the ‘V’ and employ our recession playbook.” (Wilson)
History suggests it's always a V-shaped recovery

Increased driving causes increased gasoline prices…

And yes, Denver’s roads have become much busier in the last week.
Tweet from @bespokeinvest

Even airport travelers exceeded 200,000 for the second time since March…

TSA checkpoint travel numbers

(TSA)

The longer-term TSA pax graph needs plenty of work to recover, but at least the worst is behind us…

TSA checkpoint travel numbers for 2020 and 2019

(CalculatedRiskBlog)

Speaking of travel, good luck keeping cruising addicts away from their ships…

While I have been on many ships during my days as an equity analyst, I have never actually been on an overnight cruise. But I know people of all ages that need their cruise ship fix annually. I completely understand that a moving hotel is appealing for many and it makes total sense. See cities during the day and the hotel moves at night. Others just like the Vegas similarity of the shows, the food, the pools and the casinos. Unfortunately, the virus just killed future food buffets. But while the industry has become the scapegoat of COVID-19, you can bet that the companies will need to be the leaders of virus avoidance in the future. There will be a 5-minute virus test at the entrance of every ship within weeks. The ships will never be cleaner going forward, and if I were Clorox, I’d be working on a sponsorship deal right now. Imagine an entire ship painted yellow like a magical container of wipes. Given the medical advances the last two months, combined with the flattening of the new case curves, I think it’s a safe bet that the ships will begin sailing again this year.

Belinda Shawn, a 41-year-old mom in Florida, has a family cruise booked with Royal Caribbean next year: It departs in late May 2021 out of Barcelona with stops in Italy and France. With the cruise industry on pause due to the coronavirus, and a resulting change in cancellation and rebooking policies, Shawn and her family could easily postpone to the following year or get a refund. But they’re sticking to their plans. “We feel pretty confident about cruising by next spring,” she says. “I know [Royal Caribbean] takes the health of its customers and employees seriously. Given that it’s 12 months away, we do not feel the need to make any adjustments to our planned trip.”She’s not alone. Across the industry, cruise lines from large to small, ocean-going to river-cruising, are seeing strong demand for next year—and bookings for 2021 cruises are going fast. “We are booking everything from river cruises to expedition cruising—even our world cruise business is back, completely full,” says Condé Nast Traveler travel specialist Mary Jean Tully of Tully Luxury Travel, adding that interest is from new business as well as clients who postponed trips this year….

“Two weeks ago, I would have said that everyone was sticking close to home, but no. Nobody’s booking close in [this year] because they don’t know what’s going to happen,” Tully says. “But for next year? They’re booking everything, as if it’s any normal year.”…

Cruisers are one of the most loyal segments of the travel industry. There’s a reason that cruising is known for repeat guests who sail with certain lines for decades. “[My clients] aren’t worried about cruise ships, because they can spread out; they’re more worried about being on a plane, sitting shoulder to shoulder,” Tully says. “A lot of people think cruises are so confined, but it depends on the cruise, what area you’re going to, and how confined you want to be.”

(CNTraveler)

And for those who have given up on air travel, Camping World (RVs) said they just had “the biggest weekend in the company’s history”…

Marcus A. Lemonis

(@1MainCapital)

Over in fast food, a large Burger King and Popeye’s franchisee just noted their sizeable comp recovery in April…

Recent Weekly Comparable Restaurant Sales Trends

(Carrols)

The April upturn in Papa John Pizza’s comps were even more positive…

Papa John Pizza's Sales Results

(@1MainCapital)

Casual dining restaurants might be able to survive the next 12 months if more cities begin to reclaim their streets for outdoor dining…

In cities across the world, residents—and some public officials—want to open streets quieted by stay-at-home orders to people on foot and bicycle to social distance. In cities like Denver, Oakland, San Francisco, Berlin, Milan, and Vilnius, Lithuania, officials have blocked lanes and in some cases entire streets to car traffic. After public pressure, even New York is getting in on the act and beginning to open select roads to just people.Now some cities have taken the next step, throwing tables and chairs on roadways. Vilnius has become a big open-air cafe, with well-spaced places to eat in the city’s public square. In a two-week experiment in Tampa, Florida, businesses in some neighborhoods are allowed to put tables at 6-foot intervals and operate in what were once street parking spaces, even without a permit. It’s gaining support in San Francisco, which already has a program doling out parking spaces for small street-side cafés.

Those sorts of experiments could be lifelines for struggling businesses. For restaurants barely hanging on, “that could be the difference between boarding up your shop forever or saying, ‘We can stick around for another month because we know we’re a priority,’” says Jennifer Keesmaat, a former chief city planner of Toronto who now runs her own planning consultancy.

(Wired)

A top auto dealer had positive things to say about their April performance…

AutoNation experienced strengthening sales in April, with same store New and Used retail unit sales down 19% during the final 10 days compared to down 52% during the first 10 days, resulting in the full month down 37%. As of May 8, 2020, states from which we derive approximately 51% of our total revenue were largely still under “shelter in place” or “stay at home” orders.

A top U.S. homebuilder also experienced improvements through their April numbers…

After an initial significant contraction in housing demand, recent sales trends have been more encouraging as weekly net new orders went from approximately 140 homes in the last week of March to almost 400 homes in the final full week of April that ended May 3,” added Marshall. “While order rates have improved, our net new orders for the month of April were still down approximately 50% from the prior year, so we have taken steps to reduce our targeted overhead expense through a combination of layoffs, furloughs and other cost cutting initiatives. The steps we have taken are expected to reduce overhead expenses by approximately $100 million on an annualized basis, of which approximately $65 million will be realized over the remainder of 2020.(Pulte Group)

A top utility detailed how its energy use shifted in April…

In April, most of the eight states where Xcel does business were under stay-at-home orders to stem the spread of the Covid-19 disease.The company’s electricity sales dropped 9.6% overall as offices and factories closed or otherwise reduced operations, the company said on its first-quarter earnings call Thursday.

The utility’s commercial and industrial customers used 13.7% less power for the month, though people working from home offset some of that with a 3.2% increase in residential energy use, company said.

(DenverBusinessJournal)

The top fertilizer company, Scotts Miracle Gro, just had its best week ever…

Scotts Miracle Gro

(@bluff_capital)

One of the largest semiconductor chip makers in the world did just fine in April…

@firstadopter: Taiwan Semiconductor sales up 28.5% y/y in April $TSM

2020 Monthly Revenue

COVID-19 has accelerated the end of cash transactions. Just ask PayPal…

2020 NNA, TPV and Revenue Trends

Sports betting returned with a vengeance this weekend…

The first live U.S. sporting event in two months gave gamblers something to cheer for. Now how big do you think the action will be on Mickelson/Brady vs. Woods/Manning in two weeks?

Tweet from @darrenrovell

So, 4.5% of the world population has a Fortnite registration. Welcome to ‘Ready Player One’…

Epic’s Fortnite has more than 350 million registered players, the game developer announced on Wednesday. That makes the free-to-play battle royale game one of the most popular titles ever made, ranking up there with the ubiquity of Minecraft and some of the most downloaded mobile and free-to-play PC games of the last 15 years. While we have no indication as to how many players log in every day or month, as Epic doesn’t release those stats, the studio did say that in April alone, players logged 3.2 billion hours of Fortnite.The last player count stat we heard from Epic was about 250 million in March 2019, indicating that the game is still growing a year later and more than two and a half years after its initial release. That’s partly due to the game being so readily available on all platforms — PC, console, and mobile — and because Epic continues to update it constantly.

Most recently, the developer added party royale, a gun-free social space within the game that allows players to log in and hang out with friends, watch concerts from big-name music acts, and engage in a variety of theme park-style activities. It’s all part of Epic’s quest to build a metaverse-style social network that lives entirely within its 3D world. After a massive and surreal Travis Scott concert last month and last Friday’s Diplo show, Epic says it’s going to host a mini music festival featuring DJs Dillon Francis, Steve Aoki, and deadmau5 starting at 9PM ET this Friday, May 8th.

(TheVerge)

A good listing of which REITs received their April rents…

Healthcare, Apartments and Public Storage look fine. Office and Industrial okay. Retail no comment.

REIT April Rent Collections
(@judgebushwood)

The convertible bond market is seeing a flood of issuance as companies look to raise lots of more aggressive capital…

Struggling companies desperate for cash during the coronavirus crisis are raising money in a way that hasn’t been this widely used since the 2008 recession: selling bonds that can convert into stocks.Nearly 60% of all money raised in equity capital markets in April through Tuesday—totaling more than $12.5 billion—has been through convertible-bond sales, according to Dealogic. That is the highest percentage since early 2008, and bankers say they expect to see many more convertible deals in the coming weeks.

Since Dealogic began tracking data in 1995, convertible bonds have accounted for roughly 18% a month of total equity-capital-market volume. The number typically hovered around 15% during the market’s recent decadelong bull run.

(WSJ)

Convertible-bond issuance

The BofA Bull & Bear indicator needs a ventilator…

The BofA Bull & Bear indicator is at 0.0 and suggests an extreme bear level. It is an indicative metric only, used as contrarian indicators to identify market extremes (for informational purpose only, not investment advice).

BofA Bull & Bear Indicator History
(@ISABELNET_SA)

Also, individual investors remain very skeptical…

The AAII Bulls index moved to new recent lows while the Bears index moved to highs.

AAII Bulls Index
(AAII)

So, guess what?

Tweet from @WalterDeemer

With all the talk of FAAMG stocks, here is a list of the new highs…

No FAAMG but lots of Tech and Healthcare.

US Stocks Hitting 52-Week Highs
(@bespokeinvest)

Now here is your FAAMG highly represented…

@VrntPerception: Small-cap value vs large-cap growth shows the incredible polarity of the US stock market

Nasdaq 100 Market Cap

I completely agree with Morningstar’s long term view on U.S. bank stocks…

Today’s debate is not about earnings per share; it is about capital adequacy and the solvency of the U.S. financial system. After a deep re-evaluation of what we are up against, we believe it is still appropriate to view the U.S. banks as undervalued. The risks are real, but the banks are ready for almost any hit to capital. Our base case is that the U.S. economy and financial system will be intact after COVID-19.The banks did not look cheap to us at the start of 2020 but have since dramatically sold off. Multiple banks trade below their tangible book values, and many trade at a mid-single-digit EPS multiple compared with 2019 earnings–earnings that did not seem that unsustainable a month ago. The traditional U.S. banks we cover have sold off more than the Morningstar US Market Index and more than the Morningstar US Financial Services Sector Index. They are already pricing in a severe recession.

If the financial system and, most important, the banks have enough liquidity and capital to survive COVID-19, then investors should be rewarded at today’s prices. It will not matter if earnings decline 10%, 20%, or even 50% in the next quarter or for the entire year. Any valuation framework that directly links transitory changes in EPS with permanent changes in the intrinsic value of a firm is flawed. A decline in earnings of 40% over a finite period does not necessarily justify a 40% drop in the stock price.

(Morningstar)

Good luck to the public universities without flush state budgets…

Some universities offset budget cuts by aggressively recruiting foreign and out-of-state students, who pay much higher tuition rates. Alabama cut funding by nearly 40 percent after the Great Recession. Most of those dollars were never restored. In response, the flagship University of Alabama sent recruiters fanning out across the nation. Today, the majority of undergraduates in Tuscaloosa are from out of state.If Alabama makes similar cuts next year and tuition rises once again, the state’s ratio of student tuition to public funding will have gone from 2:3 in 2008 — two dollars of student tuition for every three dollars of public funding — to 7:1, or seven dollars of student tuition for every one dollar of public funding. In other words, the privatization of a public university system in a single generation.

Alabama would not be alone. If 2008-level cuts to state public higher education funding are repeated and replaced with tuition, 23 states will have a tuition-to-public-funding ratio greater than 2:1.

And that assumes they can actually increase tuition dollars. The flow of lucrative full-tuition-paying international students has been choked off by travel restrictions tied to the coronavirus pandemic. Domestic students who were planning to matriculate out of state may want to stay closer to home. Public universities are often a bulwark against the economic hollowing-out of many rural and nonurban communities. If the universities go under, more social devastation could follow.

(NYTimes)

A massive demographic shift just accelerated away from the big cities…

Guessing this move will increase even more dramatically with Google and Facebook allowing their employees to work wherever they want for the rest of 2020. Guessing that every empty home in McMinnville, Bend or Hood River, Oregon just found a renter from the Bay Area.

Redfin also predicts a “seismic demographic shift” toward smaller cities. The company saw a 71% increase in searches for homes in towns with populations under 500,000 – nearly twice the 38% search growth rate for homes in cities with over 1M people. De-urbanization was a trend that was already underway pre-pandemic, owing to increasing Millennial household formation and affordability problems in large cities. This demographically-driven trend (see “30 Something Sneaker Wave”) is now going viral. The open question is how far will the reversal of urbanization go? Will it sufficiently extend to support my theory of the middle-America renaissance? Based just on demographics, the shift could encompass a few million households. Or, it could be too early to know one way or the other, so we’ll be good Bayesians and keep looking for confirming or disconfirming evidence.(NZSCapital)

Catch up on past Weekly Research Briefings >