Time to Break Some Test Tubes

361 Capital Market Commentary | March 30th, 2020

Nurses and doctors are saving lives on the front lines. Governors are shutting down their states to prevent community spread. Congress and the Federal Reserve have bought the U.S. economy a few months of life. Now it is time for the scientists and lab geeks to work some miracles. We need very quick virus and antibody tests, and we need a COVID-19 vaccine. We will get the science for all three pieces but how long will it take? We have some therapies and tests rolling out which is good, but how quickly can they ramp up and how accurate will they be? Only time will tell. The market will be following each and every press release and rumor and likely moving with each new datapoint, good or bad. No one has a clue if we have seen the bottom or if we will go lower. Just too much uncertainty right now.

Unfortunately, we do know that the U.S. and global economy has come to a standstill. Last week’s jobless claims spike was just a start. Even if the virus were to disappear completely tomorrow, the economy will have been damaged. Not only lost sales and profits for the last month, but also the reminder of risk which will discourage the amount of financial leverage which has built up into our system after the incredible 10-year run from the last slowdown. Investors will be more risk adverse, lenders will be less willing to lend and the capital markets will be more discriminating. It is just part of the normal cycle but unfortunately this one was caused by a virus that is going to drive the unemployment rate to double digits.

Also, everyone is now concerned about this new invisible enemy. Until we have a vaccination for it, masks will be the next fashion accessory. Social distancing will become more normal. Packed environments for sporting events, concerts, movie theaters and Broadway theaters will pause. 100% full airplanes for 5+ hour flights? No thanks. Until we have a vaccine, the comfort of all of those activities just stop.

So, let’s all pray for the scientists now. The biggest bragging rights in the world are within each labworker’s reach. Go grab it now.

In the words of Mark Watney…

Tweet from @neiltyson

Can someone add Scott Gottlieb to the White House COVID-19 team?

How do we crack the current outbreak, develop a plan to return to normal life, and ensure that the virus never poses the same threat again? That will require a system that can detect when the virus is spreading. The system would have three components:

First, a sentinel surveillance system, which collects high-quality data from specific locations and can test a statistically representative sample of patients to detect where and when the virus may be spreading. Such a system could help find small pockets of infection before they multiply into larger outbreaks.

Second, rapid and reliable diagnostic tools. Insurance coverage should be mandatory, and the Centers for Disease Control and Prevention should give flexible guidance that encourages doctors to test liberally. If you have any signs or symptoms of Covid-19, you get a test right away with no out-of-pocket payment.

Third, coronavirus serology tests, which screen blood for the antibodies that confer immunity after exposure to a pathogen. This is essential for tailoring interventions to stop local spread. If you know that a large percentage of people have been exposed and developed some immunity, it may allow for less-restrictive measures. These tests can be added to routine blood draws with no additional hassle for the patient.


Abbot Labs, Johnson & Johnson and Moderna are running fast to help stop the virus…

Two US healthcare companies have brought new hope in the fight against coronavirus, with Johnson & Johnson announcing a potential vaccine that could be available early next year and Abbott Laboratories launching a rapid test kit.

J&J said on Monday it had identified a vaccine candidate and was teaming up with the US government to invest $1bn in its development, expecting to start testing in humans by September.

Abbott said it was launching a test for the virus that could take as little as five minutes and could be run on a portable machine the size of a toaster…

But while J&J has landed on a vaccine candidate far more quickly than usual, it is still behind Boston-based biotech Moderna. Moderna’s candidate was ready more than a month ago and entered human testing in March, six months earlier than J&J planned for its potential vaccine.

Moderna broke records by coming up with a potential vaccine in just 42 days, using its platform that can be quickly adapted to the genetic sequence of the viruses.


The antibody test for the COVID-19 virus is important because those that pass can go back to work…

Germany will issue coronavirus antibody certificates

Maryland, Virginia, Tennessee and Louisiana all turned to yellow on Monday. The U.S. thanks you.

State Restrictions

The first economic datapoint to fully reflect COVID-19 took a massive digger…

3 million filings for unemployment is just the start. If all high-touch jobs are lost this Spring, the numbers could be in the 10-30 million range, according to the St. Louis Fed.

Tweet from @jsblokland

How many jobs that could be lost depends on the contact intensity of the job…

Another option is too look at those jobs that require a high degree of contact intensity such as barbers, physical therapists, home health aides, food service workers, parts of retail and flight attendants. According to the Federal Reserve Bank of St. Louis, some 27.3 million workers have occupations with “high contact intensity.” As we pursue social distancing to combat the spread of the coronavirus, occupations that require a highlevel of face to face contact or closer physical interaction will be hit especially hard. Let’s assume a draconian scenario where all of these workers are let go. If the labor force is flat, this would imply that the unemployment rate spikes to 20.1%.


Occupations with Contact Intensity

The second economic datapoint to reflect COVID-19 also has an oil price collapse input added…

Texas and other oil-centric economies are going to have a longer and rougher road ahead.

Tweet from @RenMacLLC

The average Dallas manager expects COVID-19 impact to last 3-6 months…

Texas Business Outlook Surveys: Data were collected March 17–25, and 400 Texas business executives responded to the survey.

Business Impact from COVID-19

Oil prices dipped below $20 today…

The price of oil is now so low that it is becoming unprofitable for many oil firms to remain active, analysts said, and higher cost producers will have no choice but to shut production, especially since storage capacities are almost full.

“Global oil demand is evaporating on the back of COVID-19-related travel restrictions and social distancing measures,” said UBS oil analyst Giovanni Staunovo.

“In the near term, oil prices may need to trade lower into the cash cost curve to trigger production shut-ins to start to prevent tank tops to be reached,” he added.


But while oil prices on your screen may say $20, one can find plenty of oil on a regional basis trading in the $10-12 range…

Bloomberg Spot Oil

Oil prices can go negative. Here is how…

This shock is extremely negative for oil prices and is sending landlocked crude prices into negative territory. Paradoxically, this will ultimately create an inflationary oil supply shock of historic proportions because so much oil production will be forced to be shut-in. The global economy is a complex physical system with physical frictions, and energy sits near the top of that complexity. It is impossible to shut down that much demand without large and persistent ramifications to supply. The one thing that separates energy from other commodities is that it must be contained within its production infrastructure, which for oil includes pipelines, ships, terminals, storage facilities, refineries, and distribution networks. All of which have relatively small and limited spare capacity. We estimate that the world has around a billion barrels of spare storage capacity, but much of that will never be accessed as the velocity of the current shock will breach crude transportation networks first, which we are already seeing evidence of around the world. Indeed, given the cost of shutting down a well, a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas.

(Goldman Sachs)

Oil prices below $20 has sent high yield energy bond spreads to new highs…

Energy was the highest risk in most bond and loan portfolios. Now it will be joined by many other industries.

Tweet from @lisaabramowicz1

Someday we will need to pay back this emergency rescue…

Overall: “When it comes to this lending, we’re not going to run out of ammunition, that doesn’t happen,” explained Jerome Powell, launching history’s most expansive monetary intervention. The Federal Reserve can now buy unlimited amounts of Treasury and mortgage bonds. It doesn’t end there. The $2trln Coronavirus Aid, Relief, and Economic Security Act (CARES) provides the Treasury with $425bln to backstop central bank lending. The Fed will leverage that 10x. Which means Powell now has $4.25trln to support anyone and everything in need of capital. If that proves insufficient, Treasury will most certainly double down. Without such extraordinary lending, much of corporate America would be bankrupt in weeks, drowning in the debt they issued to buy back their artificially inflated stock. But it’s not just big business that’s broke, half of America’s small firms have less than 15-days of cash on hand. They too will go bust, if they’re not already. Then there are the 40% of Americans, their poor families, their children, who had insufficient savings to cover an unexpected $400 expense. “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate,” explained the Fed Chairman, surely trying his hardest. “Wherever credit is not flowing, we have the ability in these unique circumstances to temporarily step in and provide those loans and we will keep doing that, aggressively and forthrightly,” he said. With the Fed and Treasury coordinating to do whatever it takes to ensure America’s companies can borrow freely, forestalling bankruptcy, the S&P 500 surged in relief (+10.3% WTD, -21.3% YTD). Offsetting massive operating losses using free-flowing government loans undoubtedly supports elevated corporate bond prices. But the question is, given that these loans must be repaid someday, does this extraordinary policy support a recovery in equities?

(Eric Peters/Wknd Notes)

The phase three financial aid package passed by Congress last week was twice as big as the one in 2008…

Comparing Stimulus Packages


Here is a good visual of where the $2 trillion will go…

Breakdown of Coronavirus Stimulus


But even with the lifeline from Congress, credit is going to get tight for all businesses looking for new borrowing…

Lenders are concerned that rising unemployment and a potential recession will send loan defaults soaring. The moves suggest at best a pause and at worst an end to six-plus years of a bull run in credit, where financial firms have been eager to lend and underwriting standards for credit cards, auto loans and personal loans have been relatively loose.

Lenders are scrutinizing applications for credit cards and personal loans in particular because consumers often turn to them when they are in a bind. They are usually unsecured, which means lenders have little recourse if a borrower defaults, and they can be the first loans people stop paying when money is tight.

Many lenders have said they would work with existing borrowers who ask for help. Some lenders, for example, are increasing card spending limits or delaying due dates on loans.

But lenders are reluctant to take on additional risk from new customers.


For the stock market, a recovery in prices will likely take a while…

A $2 trillion fiscal response from Washington in the Cares Act is unlikely to end the needed spending, as Matt Klein writes. And the Federal Reserve has gone to quantitative easing infinity and beyond with a stunning array of mechanisms to pump credit into the financial system, even exceeding those conjured up to fight the financial crisis in 2008-09.

The difference now is that the problems in the real economy from the shutdowns to halt the spread of Covid-19 were transmitted to the financial sector, while in the 2008-09 crisis, the financial sector’s woes brought down the real economy, write J.P. Morgan economists Michael Feroli and Jesse Edgerton in a research note.

Still, the eventual recovery from this public-health crisis is apt to be similar to that from the financial crisis—meaning gradual—instead of the sharp snapback seen after natural disasters, such as hurricanes or earthquakes, they suggest….

Louise Yamada, the doyenne of technical analysis who heads an advisory firm that bears her name, writes in an email that a test of the market’s low is still possible. The bounce could be “part and parcel of a bear market rally,” a common occurrence. But, she adds, “this market needs a lot of technical repair.” Even after the sharp, but short, bear market of 1987, it took a “year or more of stabilization” for equities to heal.

And while the thrust of government policies is directed to ameliorating the economic and financial damage from the pandemic, the virus makes the timeline, as Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, remarked this past week. And that also will probably determine the market’s recovery, as well.


As you would guess, corporate earnings have begun their free falling…

And no idea if we will have a normal corporate earnings season with all of the office closings.

Tweet from @EarningsScout

And the largest buyer of stocks is leaving the market…

Buyback suspension

For the stock market, this all adds up to continued violent moves just like we saw in 2008…

@carlquintanilla: GOLDMAN: “.. we believe it is likely that the market will turn lower in coming weeks, and caution short-term investors against chasing this rally.” History shows bear markets “are often punctuated by sharp bounces before resuming their downward trajectory.” (Kostin)

S&P 500 Bounced

Looking at the major airline industry, American Airlines is flying planes at only 15% capacity…

American Airlines is eligible to receive $12 billion of the $50 billion earmarked for the airline industry in the coronavirus aid package making its way through Congress, CEO Doug Parker told employees in a video posted on the company’s website.

The CEO said American, the biggest airline in the U.S., would be cutting its flight schedule 60% in April and reduce it by 80% in May in light of “record low demand” during the coronavirus pandemic, Parker said.
“We are confident those funds, along with our relatively high cash position, will allow us to ride through even the worst of potential future scenarios,” Parker said. “Today we’re flying less than half of our previously scheduled domestic flights, and those aircraft are flying with fewer than 15% of the seats full.”


Looking at the major hotel industry…

Tweet from @FCFYield

Looking at the major restaurant industry…

The Cheesecake Factory has 294 stores and 38,000 employees.

The Cheesecake Factory, one of the most popular sit-down restaurant chains in the country, says it will not be able to make upcoming rent payments for any of its storefronts on April 1 because of significant loss of income due to the coronavirus crisis.

The Calabasas Hills-based company informed all of its landlords in a letter dated March 18 that a severe decline in restaurant traffic has decreased its cash flow and “inflicted a tremendous financial blow” to business. Cheesecake Factory’s affiliated restaurants, such as Rock Sugar and North Italia, will also not make April 1 rent payments…

In telling landlords that it will not able to pay rent, the Cheesecake Factory essentially confirms that it is in the same position that many independent restaurateurs currently find themselves in. In a statement to investors on March 23 — five days after the letter to landlords — the Cheesecake Factory announced that it would curtail development of unopened restaurants and tap into a $90 million credit line to increase its available cash. Since the outbreak of the coronavirus, the Cheesecake Factory has closed 27 locations across the country, and pivoted other locations to a takeout and delivery-only model — which it said just days ago was enabling the company to “operate sustainably at present” — and its stock price has fallen by more than 50 percent in the past month.


Luckily the big banks are in good shape for this financial crisis…

Banks are in a better position

Could this be why Berkshire Hathaway has not yet done a big deal?

If the world’s governments and courts force the insurance industry to payout for COVID-19 business interruption, it would hit all insurance companies. Some of them fatally.

US state legislators and lawyers have threatened to force the payment of coronavirus-related insurance claims that the industry insists are excluded from its policies and could pose an “existential threat” to their business.

Members of Congress are also debating the need for legislation requiring insurers to pay for shutdowns caused by the virus, and bills that would have the same effect have been introduced in several states.

Insurers, which in the US are largely regulated at the state level, insist that their policies exclude pandemic coverage and that retroactive amendments would leave the industry insolvent.

“The losses involved would simply swamp the ability to pay,” said Joseph Wayland, general counsel for the US insurer Chubb. “It is an existential threat to the industry if it had to take responsibility for a risk it never underwrote and never charged for.” The chair of Lloyd’s of London, Bruce Carnegie-Brown, said that such a change would put the industry “in jeopardy”…

David Sampson, chief executive of the American Property Casualty Insurance Association, said the industry was taking measures such as temporary suspension of premium payments, to ease the burden on business, and would work with lawmakers in coming weeks as they weigh the need for another stimulus.

But, Mr Sampson said, the cost to cover small businesses with 100 or fewer employees across the US would run to $110bn-$290bn a month, rising to $900bn a month if the threshold was raised to 500 employees. Given that the industry only held $800bn in surplus capital, “you would be basically creating a solvency crisis”.


Just like in China, the movie theaters will be the last business to reopen…

It will be a very long time before people want to sit in a closed room with hundreds of other strangers. There will even be some hesitancy in 2021 after everyone has gotten a COVID-19 flu vaccine. Ditto for sporting events, musical events, crowded restaurants and airplanes. Think drive-in theaters, outdoor dining and only driving vacations. Island economies dependent upon tourism will have a difficult time for the next few years.

Tweet from @conorsen

True. Closing the parks has been a killer to families with kids…

Tweet from @NewRiverInvest

No, see Japan…

Tweet from @CNBCJou

Interesting polling result…

If this favorability is reflected nationwide, expect much pressure on Biden to pick Cuomo as his V.P. candidate (even though the Governor has said that he is not interested). Following in FDR’s shoes with a pit stop as Vice President?

Tweet from @nickgourevitch

Green shoots at independent bookstores…

Powell’s Books, which laid off nearly 400 people this month as it shut down its five stores, said Friday that it has brought an unspecified number back to ship books sold online.

“Thanks to your orders on Powells.com, we now have over 100 folks working at Powell’s again – all full time with benefits,” CEO Emily Powell wrote in a memo posted on the store’s website. “Most importantly, we’re working hard to keep everyone safe and healthy. Doing that work means we have to move a little slower as a company than usual.”

Powell’s is a Portland landmark and its March 16 closure was among the most profound early symbols of the effect the coronavirus outbreak is having on Oregon. Dozens of other stores, restaurants, malls and other businesses have shut down as Oregonians isolate themselves and the state strives to constrain the virus.


Green shoots in cloud services and remote employee services according to Microsoft…

What have you observed over the last week


Green shoots in jigsaw puzzles (if you can find them)…

As if things weren’t bad enough, now there’s a shortage of jigsaw puzzles just when we need them most. The coronavirus pandemic has forced millions of Americans to hunker down in their homes and find ways to entertain themselves. A lot of them are thinking the same thought: jigsaw puzzle.

Of the top 10 items that shoppers searched for on Amazon.com last Tuesday, nine were antivirus cleaning supplies or personal-hygiene products (read: toilet paper). No. 7 was “puzzles for adults.”

More people were hunting desperately for jigsaw puzzles that day than Clorox wipes.


Fake News: Chick-Fil-A Temporarily Changes Slogan To ‘Eat Fewer Bats’

ATLANTA, GA—In an effort to help curb the spread of Coronavirus, Chick-fil-a has announced that it will temporarily be changing its advertising slogan from “Eat Mor Chikin” to “Eat Fewer Bats.”

Chick fil A advertising


Finally, thanks to all the superheroes on the front lines…

Tweet from @CorneliaLG

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