Time to Venture Out

361 Capital Market Commentary | May 4th, 2020

Italy, Spain, Germany, Austria, Lebanon, Poland, Canada, India, Belgium, Greece, Iceland, Hungary, Monaco, Nigeria, Poland, Portugal, and many U.S. States are opening up this week. After weeks of flattening the new-case curves, combined with scientific advances in therapy drugs (remdesivir), improvements in physical treatments, and increased virus and antibody testing, it is time begin returning to normal. Of course, baby steps to normal means that you will be wearing a mask in public and only two people to an elevator. Bars, full-service dining rooms and movie theaters will still be closed because they can’t make any money until there is a safe COVID vaccine. As we return toward normal, the economic curves will bottom and some pent-up demand will be unleashed. You are already seeing it with the 100% full parking lots and lines at Home Depot and Lowe’s. And dentists, doctors and hair salons are about to see the doors blown open. COVID will still leave us with 20,000+ new cases and 2,000+ deaths daily which is terrible, but at least more manageable than what we feared two months ago. And, hopefully the outcomes will only get better as more testing, tracing and therapies lower the new cases and save lives.

Other developments away from COVID last week… March and April’s reported economic data continued to be exceptionally weak. New U.S. and China tensions flared as the world looks to place blame for COVID-19. Earnings remained difficult to analyze given the March economic shutdown, but for the big five tech companies (i.e., Apple, Google, Amazon, Microsoft and Facebook), the numbers weren’t that bad and all five stocks finished up on the week. Warren Buffett released earnings and held an online shareholder meeting where he disclosed that he sold his airline stocks and missed some great investment opportunities because Jerome Powell saved the financial world. And, J.Crew started the post-COVID retail bankruptcy party by going first.

Looking forward, we will be watching the economic data begin to slowly recover as the economies reopen and people leave their houses. The Federal Reserve will begin buying corporate credit this month which will help keep the markets liquid and should not hurt stock prices. Equity investors will be looking to dial up or dial down their equity risks by what data they see emerging from the recovery data. It will be a very busy May and summer for stock pickers and asset allocators. And, I will guess that your dog will start adding back the pounds toward its pre-COVID weight.

Remdesivir gets FDA approval after showing improvement in patients with low blood oxygenation…

The Food and Drug Administration announced Friday that it would permit emergency use of remdesivir, the antiviral medicine from Gilead Sciences, to treat patients with Covid-19.

The decision to issue an “emergency use authorization” was based on positive results from a government-conducted clinical trial, announced Wednesday, that showed remdesivir accelerated the recovery time of patients with Covid-19 compared to a placebo and from a study conducted by Gilead that studied two different treatment durations of the medicine. At the same time, the government’s top infectious disease expert cautioned that the drug was not a “knockout.”

The greenlighting of remdesivir is based on a study conducted by the National Institute of Allergy and Infectious Disease that enrolled more than 1,000 patients with Covid-19. Treatment with the drug demonstrated a 31% faster time to recovery compared to a placebo. The median time to recovery was 11 days for remdesivir; 15 days for placebo.

(StatNews)

And some interesting scientific work being done on the antibody side of therapies…

Scientists have discovered an antibody which prevents the coronavirus from infecting human cells in “groundbreaking research” which could lead to the development of new treatments.

Building on research into the SARS coronavirus, scientists from Utrecht University in the Netherlands, as well as the Erasmus Medical Centre and the company Harbour BioMed (HBM), have identified a potential method of neutralising COVID-19.

They discovered that an antibody which prevents the SARS virus from infecting human cells could also block the novel coronavirus from infecting human cells too, according a peer reviewed study published on Monday in the journal Nature Communications.

(SkyNews)

Antibody tests are becoming more widely available. And Roche says their test is near perfect…

The Food and Drug Administration has cleared for emergency use an antibody test from diagnostics giant Roche Holding AG, the company said Sunday, a move that could add significant capacity to efforts to determine the wider spread of Covid-19.

Roche’s test, which identifies antibodies made by the body to fight off the new coronavirus, is designed to tell people whether they have been infected in the past. For many diseases, antibodies remain in the blood for weeks, months or even years after infection. Antibody tests are performed on a blood sample and are different from the swab tests used to diagnose a current infection.

Antibody tests are seen by many governments around the world as key to better understanding the spread of mild and asymptomatic cases of Covid-19, although so far most commercially available tests—around 10 have so far received emergency clearance from the FDA—aren’t deemed accurate enough.

Roche says its test has proven 100% accurate at detecting Covid-19 antibodies in the blood, and 99.8% accurate at ruling out the presence of those antibodies. In other words, only two in every 1,000 samples lacking the antibodies would produce a “false positive” result.

(WSJ)

A very good question for our leaders…

Tweet from @mcuban

If you want to know why we should mass hire to track and trace, just look at the success in South Korea…

@AndyBiotech: #COVID19 South Korea reports 4 new cases today, another new low in over two months All 4 new cases from overseas arrivals, zero local cases! Again this is achieved without nationwide lockdown Test + Trace + Isolate + #Masks4All

COVID-19 Cases in South Korea

The saber rattling with China has intensified…

But with U.S. farmers now hurting even more than before COVID-19, I can’t think that we will do enough to stop the flow of grain from the world’s breadbasket to China.

Bloomberg Grains Subindex
(WSJ/DailyShot)

And the recession begins…

US GDP QoQ (Annualized)
(WSJ/DailyShot)

Air travel is still down 90%, but at least a bounce off the bottom…

@Mark_J_Perry: Update: @TSA Passenger Count. Air Travel Yesterday Increased to the Highest Level Since March 30. Signs of Life.

TSA Traveler Checkpoint Numbers

Mastercard spending data for the U.S. is also trying to bottom…

Business Update Through April 21
(@IntrinsicInv)

U.S. fuel demand is also seeing a bounce…

Starting to hit the road again
(@RenMacLLC)

I know where you were this weekend…

Buying gardening plants, a new lawnmower, and a gazebo for your backyard.

CV-19 Impact to Hardware Stores by Region

Foot traffic hardware stores like The Home Depot and Lowe’s have increased significantly in recent weeks, with visits up 56% as of April 24. While traffic is up across regions, hardware store visits are up most in the Midwest (71%) and Northeast (55%). Hardware store visits are up more in rural areas (67%) and less in rural areas (36%). While traffic to hardware stores has increased across age groups, younger people under 34 years old have caused particularly large upticks.

(Foursquare)

In fact, construction spending is recovering quickly…

US Construction Spending MoM
(WSJ/DailyShot)

United Rentals also confirming that their end markets have turned up…

@TraceyRyniec: Great chart from United Rentals showing COVID-19 impacts. This is the construction and manufacturing economy.
$URI

United Rentals

Low mortgage rates will remain enticing to those who can take advantage of the now-lower used home prices…

Average 30 Year Fixed Mortgage Rates
(MortgageNewsDaily)

One way to fertilize the green shoots = Interest free loans…

Zero the Hero

Zero-percent financing deals hit a record last month as carmakers kept the U.S. auto market from collapsing.

More than one in every four new vehicles sold in April did so with 0% loans, according to market researcher Edmunds. By opening up the lending spigots, the U.S. avoided a reprise of the almost 80% drop automakers experienced in China in February, the month the coronavirus hit the world’s largest car market hardest.

Both 0% offers and longer-term loans are buoying demand at a time when large swaths of the country are under stay-home orders and many dealerships are forced to keep showrooms shut. While the Federal Reserve’s interest-rate cuts are making it easier for automakers to dangle the deals, their lenders still are forgoing revenue they’d make in more normal times.

(Bloomberg)

Corporate America’s ability to borrow will also help the green shoots…

Fixed Income
(BofA)


Even highly levered companies are able to tap into today’s capital markets…

Flood of junk bonds hits market

Analysts said the market has been brought back to life by the US central bank, which has promised to use its powers “forcefully, proactively and aggressively” until the world’s largest economy recovers from the coronavirus shock.

High-yield corporate bonds have returned 3.8 per cent since Yum Brands, the owner of KFC and Taco Bell, broke a near month-long drought of new bond issuance on March 30. That is the best monthly performance since January 2019, figures from Ice Data Services showed…

After the US central bank announced it would buy exchange traded funds that own high-yield corporate bonds, investors responded by piling in, lifting assets at two popular ETFs known by their tickers HYG and JNK by more than $6bn collectively.

“Authorities across the world have acted in a fashion that was much more aggressive than was the case in 2008 and 2009 — and much faster,” said Andrzej Skiba, head of US credit at BlueBay Asset Management. “That has helped the market to take more of a constructive stance on asset valuations despite the fact the economy is deeply in recession.”

(FinancialTimes)

Warren Buffett elevated Fed Chairman Jay Powell to G.O.A.T. status on Saturday…

Warren Buffett Statement
(@NickTimiraos)

The Federal Reserve actions saved Boeing from having to pay double-digit rates on capital…

The Fed’s decision to use its near limitless balance sheet to purchase corporate bonds improved liquidity so much that it was a game changer for the company, according to people with knowledge of the matter who asked not to be identified because they weren’t authorized to speak publicly.Ultimately, it allowed Boeing to raise $25 billion from private investors and withdraw its request for a government rescue, avoiding the restrictions that would have certainly been imposed.

Boeing’s decision underscores the extent the Fed’s policies rebuilt confidence in credit markets even though the central bank has yet to spend a single dollar on its corporate debt program.

“Many companies that would’ve had to come to the Fed have now been able to finance themselves privately since we announced the initial term sheet on these facilities,” Fed Chairman Jerome Powell said during a press conference on April 29, before Boeing’s bond sale. “There’s a tremendous amount of financing going on, and that’s a good thing.”…

Boeing entered Thursday hoping to raise between $10 billion and $15 billion by selling bonds with maturities stretching as far out as 40 years, the people said. As demand for the offering peaked at over $70 billion, company officials realized they didn’t need to look any further for funds, and set the final size of the deal at $25 billion, turning it into the largest U.S. corporate bond sale of the year and the sixth largest on record.

(Bloomberg)

As reported last week, the big tech companies are doing just fine in China…

Tweet from @sharkbiotech

And as the Big Five Tech’s skated through Q1 earnings, so did their stock prices…

@RobinWigg: Big Tech stocks: “Crisis? What crisis?”

FAAMG has outperformed YTD

But with Amazon’s stock doing so well, Jeff Bezos tells his shareholders that it is time to invest more into employees and customers…

“From online shopping to AWS to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon’s business as never before, but it’s also the hardest time we’ve ever faced. We are inspired by all the essential workers we see doing their jobs — nurses and doctors, grocery store cashiers, police officers, and our own extraordinary frontline employees. The service we provide has never been more critical, and the people doing the frontline work — our employees and all the contractors throughout our supply chain — are counting on us to keep them safe as they do that work. We’re not going to let them down. Providing for customers and protecting employees as this crisis continues for more months is going to take skill, humility, invention, and money. If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small. Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe. This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities. There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees. I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less “(Amazon)

Goldman Sachs gets bullish on oil prices and thus some E&P companies…

GS bullish E&Ps
(@TheMarketEar)

While the commercial office space market outlook is getting more bearish…

Facing a sudden need to cut costs, chief executives have indicated in recent days that their property portfolios look like good places to start given the ease with which their companies have adapted to remote set-ups.“The notion of putting 7,000 people in a building may be a thing of the past,” said Jes Staley of Barclays. “Maybe we don’t need all the offices that we currently have around the world,” mused Mondelez’s Dirk van de Put, while Sergio Ermotti said UBS was already thinking about moving out of expensive city-centre offices…

Even Sir Martin Sorrell, the 75-year-old advertising boss who runs S4 Capital, said he had found working from home “energising”, and expected it to herald a “permanent change” to his working practices. The former WPP chief executive has already started ending leases at some sites.

“I spend around £35m on property in a year,” he said. “I’d much rather invest that in people than expensive offices.”

That is an alarming message for commercial property executives, who have been loudly casting doubt on the sustainability of remote working.

(FinancialTimes)

Blackstone thinks it will take a year until the better values in commercial real estate will be found…

He doesn’t expect buying opportunities in direct real estate to come up for at least a year.“It’s too early,” Gray said. “What we’ve done in real estate so far has basically been on the screen. We talked about it. We bought debt at a discount. We bought some public equities. That’s really the initial phase. Then the next thing you’ll see is some rescue capital needs, and we’ll start to address some of that. And then after some of the weight of this comes through the system, in some cases, there’ll be special servicers [from whom] you take over assets.

“People will run through their reserves, then you’ll begin to see assets trade. We saw that happen really, it took a year after the 2001 downturn. It took a year basically after 2008. That first year after the shock is generally pretty slow in terms of deployment. And then things start to pick up, and to our overall comment, the fact that we have so much capital, not only in real estate but across the firm, that is a great competitive advantage. We don’t need financing to get things done.”

(Bisnow)

Looking through the charts, I see more buying of small caps on up days than selling on down days…

@KoyfinCharts: Bullish that $IWM volume is greater on up days (green) than down days (red). That was not the case in March.

IWM Russell 2000 IShares ETF

And I still see the Cyclicals trying to beat Defensives…

Cyclicals vs. Defensive Stocks
(@HumbleStudent)

I would still prefer to own the RED boxes right now: small caps, value and dividend payors…

@LizAnnSonders: Momentum outpacing other popular factors this year & has historically done quite well as a strategy

Annual Style Quilt

First toilet paper and now…

USDA Boxed Beef Cutout
(@SoberLook)

Even Costco is going to cut you back…

Costco
(Costco)

The front “Talking Head’ has something important to tell you about Texas…

Q4 2019 Installed Wind Power Capacity

West Texas is oil country. But there is something else going on in West Texas: it is a world capital of wind energy. Last year, Texas got more of its energy from wind — 23.4 percent — than any other U.S. state. In fact, if Texas were a country (which some might argue it is) it would rank fifth in the world in wind power generation, just behind Germany and India.Wind in oil country may seem like a contradiction, but to Texans it makes perfect sense.

Texas uses a LOT of energy. Since 1960, it has consumed more energy annually than any other state — a hundred times more than Vermont, and 40 percent more than California, which has far more people. More than half of this energy usage is industrial — a lot of it goes to manufacturing and agriculture, and some into energy production itself — and folks sure like their air-con down there.

This insatiable appetite for energy has given Texas an incentive to look for new power sources. Over the past two decades, it’s found one on its western range, where gale-force winds sweep the plains. Twenty years ago, most of this wind was going to waste — Texas had less wind power than California, Minnesota, or even little Iowa. But in the early 2000s, wind turbines began sprouting all over the state, propelled in part by tax incentives that made wind a profitable enterprise.

Then, in 2007, the state approved a $7 billion investment in transmission lines from West Texas. Someone was thinking ahead — the new lines cleared up transmission congestion that was holding back the potential of wind power. With the transmission lines in place, large amounts of wind-generated electricity could be sold to the big cities — Dallas, Houston, Austin — in the eastern half of the state.

(ReasonsToBeCheerful)

Did some colorful Trolls just erase the movie theater industry?

Now let’s try releasing Red Notice, Dune and the new Bond movie.

Trolls

It seems the success of “Trolls World Tour” might have just changed the way movies are released. The film, which was meant to hit theaters on April 10, wound up skipping its theatrical run altogether and went to digital release as the coronavirus outbreak made it impossible for movie theaters to remain open.Now, only three weeks after its digital release, the movie has raked in over $100 million in rentals and studios are looking into the benefits of digitally releasing films. According to The Wall Street Journal, one big perk of digital releases is that studios get to retain a larger chunk of the earnings. While they would have to split box-office earnings 50-50 with movie theaters, digital releases allow for studios to retain 80 percent of the digital rental or purchase fee.

“Universal has made more than $77 million in revenue from ‘Trolls World Tour’ so far. That means ‘Trolls World Tour’ has generated about $95 million in rental fees from nearly five million customers since its release,” a source verified with the Journal. “The same amount of revenue during a theatrical run would have required a box-office gross of $154 million, or about the final tally of the original ‘Trolls’ movie. The sequel cost about $90 million to produce.”

(TheStreamable)

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