Turning the Corner

361 Capital Market Commentary | April 13th, 2020

Social distancing has led to lower than-expected new case growth and hospitalizations in some of the nation’s and world’s hardest hit cities. Great news. As the hospitals, nurses and doctors move away from a peak that is beyond their capacity, and toward one that is manageable, there will be much pressure to allow people to return to work and restart their daily lives. The Fed and Treasury have thrown trillions of dollars at the economy to keep it afloat but at some point, we need to try and rebuild the 15 million plus jobs that were just lost. The world will be looking at its leaders to see when and how the biggest cities, states and regions will reopen. But it will be a soft re-opening given the virus still wants to infect and hurt our elderly and those with underlying conditions. Until there is a vaccine, or abundant virus or antibody testing for COVID-19, life will not be normal.

We got another reminder last week that the Federal Reserve has our back. The Fed released a plan on Thursday to put $2.7 trillion to work across a variety of programs that included the buying of riskier assets including junk bonds and consumer loans. So, if you needed proof that you shouldn’t ‘fight the Fed’, last week Jerome Powell used a longblade to chop off the left tail of the risk/return curve. The Fed made it completely clear that they are going to do everything possible to keep companies in business, employees in their jobs and consumers in their homes, cars and credit cards. They are even reaching into the Muni market to keep broken cities and states floating. This is big and it will come with a cost, but right now, we need to save Captain America. Payback will come later.

With the Fed backstopping risk assets, COVID-19 new cases and hospitalizations turning the corner, and OPEC working to assemble a cut in global oil production, it would appear that revisiting the March equity lows could prove difficult. I am not suggesting that the February highs are in sight, but at least the downside risk seems to be better accounted for, assuming that another COVID-19 uncertainty does not arise. The markets will remain volatile as we move through these uncertain times and deal with COVID data, earnings uncertainty and high rates of unemployment. The focus for investors should be on the 2021 and 2022 earnings recoveries and how much one wants to pay for those earnings streams and business models in the future. With the Fed at our back and a future recovery ahead, it makes perfect sense that value, small cap performed so well last week. Both areas of the market had been bottom performing and at risk of a continued economic slowdown. While the mega cap growth names will also enjoy a post COVID-19 recovery, their stocks will not see the upside potential that will be available in other areas of the market.

Be safe and keep using your nose for the easiest and cheapest COVID-19 test available.

A lower low in NY State hospitalizations is a very good thing…

Now that the State is past its first peak, many will be looking to see when and how Governor Cuomo will begin to open it to increased business and consumer activities?

New COVID Hospitalizations Per Day


And nationwide hospital resource allocation looks to be much better than a week ago…

If current trends continue to hold, expect a wide calling for local economies to open in May and June.

Hospital Resource Use


This timeline would be most helpful to the majority of small businesses in the U.S….

How Long Can Small Businesses Survive

“We are now in an era of the most massive MP3/helicopter money monetary stimulation since WWII.”
(Ray Dalio, Bridgewater)

The Fed to the rescue again!

The Federal Reserve is going farther than ever to shore up the U.S. economy, unveiling programs to lend directly to states, cities and mid-size businesses that have seen revenues evaporate amid efforts to combat the novel coronavirus.

The central bank also said Thursday it would expand previously announced plans to backstop lending to large companies by supporting riskier bonds issued by corporations that had recently lost their investment-grade status.

Altogether, the Fed said nine lending programs it is creating or expanding would provide up to $2.3 trillion in loans, and officials signaled they were prepared to expand those programs as needed to stem long-lasting damage to the U.S. economy…

In leading the Fed beyond past efforts to support lending during the Great Depression or after the 2008 financial crisis, Chairman Jerome Powell is pushing deeper into areas of credit and fiscal policy that the central bank has traditionally deferred to elected officials.


The left tail has been chopped off…

If the stock market during the worst economic contraction in 90 years can be smoothed out by government spending and Fed actions, does this change the risk-return framework in the stock market going forward?

Said another way — if stocks don’t have the risk of a Great Depression-like crash on the table, does that mean expected returns should be lower going forward?


Even J.P. Morgan is warning others not to ‘fight the Fed’…

When it comes to market developments, we believe that the Fed’s action last Thursday represents a pivotal moment in this crisis. Powell’s statement included that “we will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery” and probably the most important, historic statement, “We should make them whole. They did not cause this.” This crisis is different from any other in recent history in that it was not caused in any way by businesses or investors. Unhindered by moral hazard, the response of fiscal and monetary authorities is and will continue to be unprecedented, with the goal of essentially making everyone ‘whole.’ We believe the significance of this development is underestimated by markets, and this reinforces our view of a full asset price recovery, and equity markets reaching all-time highs next year, likely by H1. Investors with focus on negative upcoming earnings and economic developments are effectively ‘fighting the Fed,’ which was historically a losing proposition.

(J.P. Morgan)

If you bought riskier credit in the last month, send some roses to Jerome Powell…

Here is a chart of junk bonds and leveraged loans both of which were bailed out by the Federal Reserve’s actions.

Junk Bond Returns

Investors have been taking advantage of Fed actions the last two weeks by pouring enormous amounts into credit ETFs…

Tweet from @Eric Balchunas

The Fed’s many actions have kept the credit markets open, but borrowing now occurs at a much higher cost…

Texas billionaire Tilman Fertitta is looking to raise more debt to keep his casino and restaurant empire afloat through year-end if the Covid-19 shutdown persists. The offering is ending a near one-month drought in the market for risky corporate loans.

The businessman is offering potential lenders an interest rate of at least 15% to participate in a new $250 million loan for his Golden Nugget casinos and hundreds of restaurants under the Landry’s Inc. umbrella that have been ravaged by the coronavirus, according to people with knowledge of the matter.

The loan, which matures in October 2023 and is being arranged by Jefferies Financial Group Inc., is one of many levers Fertitta is pulling to shore up liquidity. The pandemic has brought the travel and leisure industry to a near standstill, leaving Fertitta’s businesses shuttered and burning cash while tens of thousands of his employees have been furloughed.


Speaking of borrowing, bank loan growth is off the charts given all of the credit line takedowns by businesses…

Lending Surges As Firms Shore Up Liquidity

The Fed’s move on Thursday caused a surge in the performance of weak balance sheet stocks…

@LJKawa: Strong balance sheets underperform weak balance sheets by the most since May 2009 this week

Balance Sheets

The Fed actions also provided a launch pad for bank stocks…

Not only a steeper yield curve from which to borrow short and lend long, but also support for weaker performing loans and clients.

Yield Curve

J.P. Morgan sees falling new COVID-19 cases helping both the economy and stock prices…

Tweet from @carlquintanilla

Howard Marks also sees a more balanced environment in order to increase risk taking…

Message from Howard Marks

Last week’s best S&P 500 performers were among the worst YTD. Another good sign for risk taking…

@AndrewThrasher: The best performing S&P 500 stocks last week were the worst performers over the prior 3 months.

Best S&P 500 performers

Looking throughout the week, it was the U.S., the small cap and the value strategies which outperformed…

Small Cap and Value

A helpful visual for what value investors have been through in 2020…

Value Investors

Goldman Sachs shows us that the small cap and value strategies typically outperform out of large drawdowns…

Factor performance during bear market rebounds

The one investment which should continue to shine under the fleet of Federal Reserve helicopters dropping bags of U.S. dollar bills…


OPEC+ came to an agreement, but the tanks will still fill until demand returns…

Maybe the fact that they reached any agreement will chop off the left side of the downside price tail for oil prices.

“The proposed 10 million barrel a day cut by OPEC+ for May and June will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss, but it will still not restore the desired market balance,” wrote analysts at Rystad Energy.

It would take more expansive cuts to balance the market, however. Demand is likely to fall by well over 20 million barrels a day in April—at least one-fifth of the 100 million the world uses in normal times. And oil producers were still pumping out nearly 100 million barrels a day in recent weeks, so the extra oil is being sent to storage tanks. With so much oil being produced, it’s now piling up in storage tanks. S&P Global Platts expects between 500 million and 1 billion barrels to be sent into storage in the coming months, nearly filling all global capacity. Once capacity is filled, oil producers will be forced to stop pumping because there’s nowhere for their crude to go.

“At the current rate of stock build, storage will be full at some point in May and crude production will need to be curtailed by 15-20 million barrels a day,” Chris Midgley, global head of analytics at S&P Global Platts Analytics, said. “The current proposed 10 million b/d may be too little too late as it will have limited impact on April production and only if sustained from May for the balance of the year might we avoid hitting tank tops.”


Here come the earnings for the week…

Most Anticipated Earnings Releases

Earnings expectations are low for Q1 and going lower for Q2. But we want to watch for the 2021 bounce most of all…

@EarningsScout: The 1Q21 $SPY EPS growth estimate continues to rise as the 1Q20 numbers come down sharply. Just math but markets will re-adjust to potentially explosive 2021 growth if they have not started to already.

Actual and Estimated Quarterly S&P 500 EPS Growth

A key list of the three things that it takes to get economies open and businesses running again…

Masks for All: This is the easiest one as it turns out that reasonably effective masks can be homemade. Kudos to the team behind #Masks4All for popularizing this straightforward solution. You can also find tons of masks on Etsy.

Tests for All: Masks will not prevent all infections, so we need massive testing. Thankfully there are a lot of new ways to test for the SARS-CoV-2 virus at scale. For instance there is a new assay to use existing sequencing capacity to ramp to 1 million tests per day and another proposal for using “barcoding” to pool samples which can get us to the 10s of millions of tests per day. The cost here is low enough that these can all be privately or state level funded.

Tracing for All: Then of course once someone tests positive we need to notify everyone they may have infected. That requires tracing. The solution for that are mobile apps because our phones are always with us and know where we have been. There are several credible teams working on centralized approaches such as Coronatrace, as well as the emerging TCN coalition for a decentralized system. Both Apple and Google should put their considerable resources behind these efforts immediately. Update: Apple and Google have announced a tracing approach.

I believe we can have all three of these firmly in place some time in May at which point many of our regular activities can resume. To be clear, people will still get infected and some people will die from those infections. But with hospitals not overwhelmed treatment will be significantly better and mortality rates lower (also new treatment options are emerging).


How Morgan Stanley’s biotech team is looking at the potential for a recovery…

@RobinWigg: This is from Matthew Harrison, head of biotech research at Morgan Stanley.


BofA considers the recovery…


Barron’s thinks about how life after the virus will change…

The pandemic has jolted people out of their routines and created new habits, as people were forced to shop online for groceries. Older people, not just teenagers, have taken to socializing online. People are working from home, and dealing with customers, business partners, and clients virtually, potentially revolutionizing the workplace—and reassessing the ubiquity of business travel.

That creates more demand for the companies whose technology infrastructure helps create faster and more secure digital networks, says Laura Kane, head of Americas thematic investing for UBS Global Wealth Management. While UBS wealth management is underweight technology over the next six to 12 months, she sees longer-term opportunities in infrastructure related to fifth-generation, or 5G, wireless technology and cloud computing, like network equipment and tower companies—where valuations are compelling. She is also keen on cybersecurity, which should be more resistant to spending cuts.

Commercial real estate and the travel industry, however, could be hurt, as companies reassess how much physical square footage they need and swap business travel for videoconferencing. Further hurting the travel industry is a likely shift in leisure travel, as people—including the Chinese who have made up the largest set of international travelers—choose to stay more local to avoid the hassles of travel restrictions or a possible backlash toward foreigners.


Boston Consulting Group put out a template for more future WFM…

Potential Implications of Spending More Time at Home

Most CEOs and business owners are thinking about their real estate footprint right now…

Tweet from @pitdesi

If we can learn something from the Wuhan re-opening, it is that car sales recovered quickly…

Vehicle Sales in China

But apparel retail sales took longer to recover as consumers avoided shopping malls…

@carlquintanilla: “Looking at H&M’s results in China, sales were down 79% in week 10 — despite 89% of its stores in the country being open, raising the question whether this is a financially viable strategy in other affected markets due to the burden on operating costs.”

H&M Weekly Sales in China

Disney theme parks will take a while to open and recover…

@carlquintanilla: WELLS: “We’ve been big $DIS bulls .. but we don’t think Parks can get back to anything close to full capacity until testing and/or vaccines are far more ubiquitous. We forecast zero park attendance for F2H20E and ~50% capacity in FY21 ..

Domestic and International Parks Attendance

Surprisingly, travelers can’t wait to get back to their cruise ships…

In the last 45 days, CruiseCompete.com, an online cruise marketplace, has seen a 40% increase in bookings for 2021 compared with 2019, said Heidi M. Allison, president of the company. Only 11% of the bookings are from people whose 2020 trips were canceled, she said.

“People are still booking cruises and are anxious to sail again when this is all over,” she said.
In an analysis of the cruise industry, Swiss banking giant UBS wrote that cruise booking volume for 2021 was up 9% in the last 30 days compared with the same time last year.

The UBS report, issued March 31, said the bookings for 2021 cruise trips included people using their credit for canceled sailings but added that volume “still shows a surprising resilience in desire to book a cruise.”…

AAA has also noticed an increase in cruise bookings beyond the numbers attributed to people rebooking canceled trips, said Paula Twidale, a senior vice president at AAA Travel.

“We are optimistic that once this crisis is behind us, travel will rebound quickly, which bodes well for 2021,” she said.

An online poll of more than 4,600 cruise passengers found that about 75% plan to resume taking cruises either at the same frequency as before or more often once the coronavirus crisis subsides, according to CruiseCritic.com, a cruise review site.


Every crisis is an opportunity…

And hopefully this crisis can bring meaningful changes to the U.S. Post Office to keep it running. I don’t need a mailbox full of white mail and catalogs to arrive at my house daily. One day a week would be just fine.

Tweet from @JohnArnoldFndtn

Mark Cuban says don’t expect a sports ticket sale until there is a vaccine…

Mark Cuban said crowding back into sports stadiums and arenas won’t happen until the “science” is in place to make people feel safe from the coronavirus, and that federal small business relief has been engineered in the wrong way.

“I think initially we’ll play just for the TV cameras, with essential personnel and players,” Cuban, the owner of the NBA’s Dallas Mavericks, said on “Fox News Sunday.”

“That’s a great thing, because I think we need things to cheer for. We need things to get excited about,” he said. As the league restarts, “we won’t do anything to jeopardize the safety of our players or employees.”


A large ESPN survey also suggests fans aren’t looking to run back to the stadiums…

The sports world has been at a standstill due to the coronavirus pandemic for roughly a month, and despite the widespread eagerness to restart games, a majority of Americans said in a recent poll they would not attend sporting events in person just yet.

Some 72% of Americans polled said they would not attend if sporting events resumed without a vaccine for the coronavirus. The poll, which had a fairly small sample size of 762 respondents, was released Thursday by Seton Hall University’s Stillman School of Business.

When polling respondents who identified as sports fans, 61% said they would not go to a game without a vaccine. The margin of error is plus-or-minus 3.6%.


Speaking of sports, by far the best financial move of the year…

Tweet from @darrenrovell

Liquor stores are the clear retail winner of COVID-19…

Tweet from @moved_average

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