An Influx of Selling

Another wave of selling this week as we are in the early days of a bear market which can last up to two years. Uptrends end in a variety of situations but the one thing that is always true is that it ends as a surprise to many as optimism is highest at the top. The unexpected impact of the coronavirus is the pin that popped the bubble created by the Fed’s policies of low interest rates and easy money. As the global economy comes to a standstill, there will be an unparalleled stress put on corporations across the globe.

Earnings releases are just a couple of weeks away so we will have to wait on how revenues will be impacted as earnings for most companies may not exist this year. There will now be regret on the part of many companies that chose to issue debt to buy back their stock instead of fortifying their balance sheets or investing for their future. This means that the higher amounts of leverage leave less room for companies to survive a deep recession or an interruption to cash flows due to the coronavirus. There is no way of knowing how long global trade will be interrupted as each country is dealing with the virus in their own way.

Consumer spending drives the U.S. economy so everyone working from home means many industries will lose revenue dollars that will never come back. A prolonged change in consumer spending habits may kick-off a credit cycle that won’t stop once it gets started as lenders will get skittish and choose to preserve capital over additional lending activities. We will have to take this one step at a time but the earnings reports for Q1 will shed some light on the risk of a new debt default cycle.

The Fed will be back in the picture this week as they meet on Wednesday where they will make a drastic cut to interest rates. The current Fed Funds rate floats between 1-1.25%, however, T-Bills are yielding as low as 25bps which implies they will move greater than 50bps – some say a full 1%.

The Fed’s liquidity injections have added to the unrelenting rise of the stock market for a dozen years and it may be out of bullets. The rate cut this week won’t change anything for consumers that are impacted by the coronavirus. I could also make the argument that the Fed has hoarded liquidity and is now causing dislocations in the Treasury market where investors can’t find enough risk-free bonds in a time of uncertainty.

As you can see in the chart of the S&P 500 below, it looks like many investors could have made good use of these bonds last week. From what I see, we are still in the first leg down of this downtrend and that we are likely re-test the December 2018 low sometime this month. Looking at some of the intra-day volume trends over the last two weeks, I was surprised there was not more shares trading. This may be a sign that larger sellers are holding off as the market plummeted which means there is overhang from sellers at higher prices. But this is what you see in a bear market, everyone hitting the exit door at the same time.

Chart of the Week!

Economic & Central Banking Snippets 

  • Industrial production rebounded across much of Europe at the start of the year, although economists forecast that these green shoots of recovery have been wiped out by the subsequent disruption coronavirus is causing across the region. (FT)
  • The Bank of England‘s Monetary Policy Committee has unanimously approved an emergency 50 basis point cut in UK interest rates from 0.75% to 0.25%. The bank also announced it will lower banks’ counter-cyclical capital buffer to zero and enact a four-year loan scheme for small businesses. (GFMA)
  • The Fed will now provide at least $175bn in overnight loans, up from $150bn offered up earlier in the week, between March 12 and April 13. It will also provide at least $45bn in two-week loans twice per week over the same period. (FT)
  • The European Central Bank announced a wide-ranging package of bond purchases and cheap loans Thursday aimed at mitigating the economic shock of the coronavirus. In a surprise, the ECB didn’t cut its key interest rate, a move widely expected by investors after major central banks including announced large rate cuts in recent days. (WSJ)

Macro Snippets

  • The State Department advised U.S. citizens against all travel abroad, even to countries not yet experiencing an outbreak. The virus has spread to more than 100 countries, roiled markets and disrupted daily life across the country and around the world. (WSJ)
  • Credit ratings of oil-producing nations might be downgraded if oil prices remain persistently low, Fitch Ratings says. S&P Global Ratings says that it will review exploration, production and oilfield-services ratings and that action in the investment-grade category “could be more severe than during the last cycle”. (GFMA)
  • J.P. Morgan Chase now thinks the economy will contract in the first half of this year, ending the record-long expansion that began in 2009. But the bank also expects the economy to return to rebound in the second half, assuming a “fiscal response” of $500 billion from Congress. (WSJ)
  • The spread of the new coronavirus has reached a pandemic, spanning 112 countries and regions, the World Health Organization declared. The WHO generally defines a pandemic as a disease that has become widespread around the world, with an impact on society. The term has been applied to only a few diseases in history—a deadly flu in 1918, the H1N1 flu in 2009 and HIV/AIDS among them, Betsy McKay, Jennifer Calfas and Talal Ansari report. (WSJ)
  • Apple sold fewer than half a million smartphones in China in February, according to government data viewed by Reuters. This is down from 1.27 million in Feb. 2019. Overall mobile phone shipments in China halved last month. (Investopedia)
  • $18.2B in corporate debt in the oil and gas sector is due to mature in the next three months, according to Reuters calculations, and most of the issuers are ratings watch negative or on review for possible downgrade. (Reuters/Seeking Alpha)
  • Japan has announced a second coronavirus relief package worth $4.1 billion. Its focus will be to support small and mid-sized firms impacted by the outbreak, according to Reuters. Some of the money will also go toward medical facilities and subsidies for working parents who have to take time off. (Investopedia)
  • Occidental Petroleum is to cut its dividend by almost 90%, in one of the most drastic reactions yet seen in the energy sector to the collapse in oil prices and equity valuations this week. “Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt,” said Vicki Hollub, Occidental’s chief executive. (FT)
  • American Airlines is slashing international and domestic routes as coronavirus concerns squeeze bookings.  (Investopedia)
  • Nearly $110bn of bonds sold by energy companies in the US have fallen into distressed territory. Almost 12% of the $936B of bonds issued by US oil and gas companies are now trading with a yield more than 10 percentage points above Treasuries. “There is definitely a significant amount of default risk,” said Michael Anderson, a strategist at Citi, adding that a lot of bonds are in the “danger zone” where a default or restructuring looks likely. (FT)
  • Princess Cruises said it would suspend all of its sailings for the next two months after two of its ships suffered coronavirus outbreaks. (WSJ)
  • The chief executive of British Airways has warned the airline industry is facing a “crisis of global proportions like no other”, adding that the carrier will have to make job cuts, suspend routes and ground aircraft. In an internal message to staff seen by the Financial Times, Alex Cruz said that, while BA is more financially resilient than ever before and has a robust balance sheet, it is “under immense pressure”. (FT)
  • U.S. shale drillers are poised to be among the biggest losers in the oil-price war stoked by Russia and Saudi Arabia. Dozens of debt-addled companies were already facing financial difficulties even before U.S. benchmark prices plummeted 25% to $31.13 a barrel on Monday, the largest drop since 1991. Now many of the shale companies that led the U.S. to become the world’s top oil and gas producer are in a fight for survival. Companies facing debt defaults will likely have to cut back on drilling and slash jobs if low prices persist for any length of time, Collin Eaton and Rebecca Elliott report. (WSJ)
  • The good, the bad, the ugly: U.S. consumers will benefit from cheaper gasoline. Morgan Stanley estimates the decline in oil prices may add as much as $125 billion to disposable income. But don’t be surprised if energy-sector employment drops and investment in energy-related structures and equipment—already weak—falls even further. That will ripple through the economy: The oil price collapse of 2015 pushed manufacturing into a mini-recession. (WSJ)

That is all for now and thanks for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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