Made In China

Actually, the question is what can be made in China given the Coronavirus situation? Chinese authorities extended the Lunar holiday for their workers but that comes to an end on Monday. It is possible that factory workers will quit rather than risk contracting the virus. The only thing to analyze here is the number of “reported” cases and how quickly the virus is spreading to other countries. The Chinese authorities control the media and information flow on the ground so it is hard to believe they would be forthcoming if the news is very bad.

If the number of cases continue to escalate outside of China’s borders then we know they covered up a very big problem. For global trade, I think the answer will be forthcoming within the next fortnight. If global supply chains are disrupted then public companies will be forced to issue warnings that their earnings and revenue will be impacted by the virus. I suspect this type of announcement would come first from the auto industry as many have factories inside the country (more below).

The S&P 500 and stocks had a nice rebound in a heavy news week as the impeachment trial ended, State of the Union address was given and the jobs numbers were good on Friday. With the unknown potential downside of a Chinese shutdown, we will have to wait and see how it all unfolds starting on Monday.

SPX: Index of the S&P 500

Chart of the Week!

The Chinese city of Macau shuttered its 41 casinos amid the coronavirus outbreak.

Economic & Central Banking Snippets 

  • The Chinese government took measures on Monday to backstop its economy and financial markets. The central bank pumped 1.2 trillion yuan ($174 billion) worth of liquidity into markets via reverse repo operations and provided banks with 300 billion yuan for re-lending. Reuters says the country’s securities regulator verbally urged some mutual fund managers to avoid selling shares unless they face investor redemptions. Brokerages were told by their regulators to bar their clients from selling borrowed stocks and proprietary traders were prevented from being net sellers of equities this past week. Lastly, companies are now allowed to delay reporting their financial results. (Reuters/Bloomberg)
  • The market is now pricing in a a greater than 50% chance of another 25 bps rate cut by the Fed to 1.25-1.5% by September. (Bilello)
  • Not a great week for European industrial output with big falls in Germany (-3.5%) and France (-2.8%) for December.
  • The January ISM manufacturing index got back above 50 at 50.9, up from 47.8 in December and that was better than the estimate of 48.5. New orders also got back above 50 for the first time since July, rising to 52 from 47.6. (Boock Report)
  • The US labor market started 2020 in solid shape, adding more jobs than forecast in January as wage growth pushed back above 3%. Non-farm payrolls increased by 225,000 according to the US labor department. That was much stronger than December’s upwardly revised tally of 147,000 and compared to the median forecast of +160,000. Wages increased 3.1% in January from a year earlier. (FT)
  • One of the best signs in the latest report: rising labor-force participation. The share of the population working or looking for work reached a seven-year high. Among prime-age workers—25 to 54 years old, when school and retirement generally aren’t big factors—the share of the population with a job was the highest since 2001. “There still appears to be a pool of unutilized labor,” said AllianceBernstein economist Eric Winograd. (WSJ)

Macro Snippets

  • Many auto plants in China have shut down because of the virus, including factories run by Hyundai, Tesla, Ford and Nissan. Hyundai plants in South Korea would be the first to shut down lines outside China, and the move comes as Hyundai had ramped up production in in the country over the past two decades. (NYT)
  • The coronavirus epidemic in China could wipe $5.9B to $7.7B from Vietnam’s tourism earnings in the next three months as international travelers stay away from the region, state media said on Friday. (Reuters)
  • Macy’s Inc. plans to close 125 of its least productive department stores — almost a quarter of the total — over the next three years and cut 2,000 jobs, or 9% of its workforce as part of a large restructuring. (Bloomberg)
  • The institutional leveraged loan market is off to a busy start in 2020, with $58B of deals having priced and another $79B in the pipeline. (Debtwire)
  • The weakest of the below investment grade debt issuers rated B- or lower and on negative outlook (S&P) easily hit an all-time high in the fourth quarter. The biggest reason for the latest increase: Downgrades. (S&P)
  • Ford’s net income fell $3.6B in 2019, as sales in China remained down compared to a year earlier while coronavirus risks put the company’s operations and sales at risk. Revenue for the year declined 3% to $155.9B. (FT)
  • Disney has lured 26.5m subscribers to its new streaming service, eclipsing Wall Street expectations and putting the company in a position of strength amid an industry-wide battle for share in online entertainment. The world’s largest media group revealed the figures while reporting that its net income dropped by 23% from a year ago, even as revenues jumped by 36%, reflecting the heavy expenses that come along with its push into streaming. (FT)
  • Chinese energy executives are projecting that the country’s oil consumption will plunge by 25% this month as the deadly coronavirus outbreak paralyses travel and shuts down industrial activity in the world’s second-biggest economy. Executives at some of the country’s largest refineries expect that nationwide demand will fall by a staggering 3.2m barrels a day in February from last year — a drop equivalent to more than 3% of global consumption. (FT)
  • Tilray, the Canadian cannabis company, is laying off 10% of its workers as the company restructures in an attempt to achieve profitability. Shares of TLRY have fallen 91% since their highs of September 2018. (Investopedia)
  • Peloton shares fell as much as 12% Wednesday after the fitness company’s earnings report showed mounting losses and slowing revenue growth. (Investopedia)
  • Cathay Pacific is asking its 27,000 employees to take three weeks of unpaid leave in the coming months, the latest in a series of emergency measures forced on the embattled Hong Kong carrier by the coronavirus outbreak in China. (CNN)
  • One of Fiat Chrysler’s European facilities is as little as a fortnight away from halting production because of problems sourcing Chinese parts, the company warned. Chief executive Mike Manley said four suppliers in China had been affected by the coronavirus outbreak, with one “critical” maker of parts putting all of European production at risk. (FT)
  • Wynn Resorts, which operates high-end hotels and casinos around the world, said in its latest earnings call that it was losing as much as $2.6 million per day from closures in Macau due to the coronavirus.

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.