The coronavirus is shaping up to be a game changer for the capital markets of the United States. Not only has the Fed unleashed the Kraken with unlimited amounts of quantitative easing but Congress has passed a multi-trillion sized stimulus package to keep consumers and corporations afloat through the government mandated shut-down of the economy. The government and/or the Fed is now going to be in charge of funneling money towards Treasuries, mortgage-backed securities, commercial paper, municipal bonds, corporate debt and small business lending.
Consumers will get a lifeline with added unemployment benefits and helicopter money which is the most valuable piece of the legislation as it keeps food on the table and a lid on social unrest. But why all this other stuff? Can’t companies find their own liquidity by selling ownership stakes in their companies or their banking relationships? Warren Buffet has $128B in cash ready to go for this sort of scenario. On the flip-side, is it fair to ask them to do this in a government mandated shut-down? And what terms are fair on this type of deal and does it really preserve labor if we fall into a prolonged recession?
Unfortunately, many publicly traded companies have spent the last 10 years issuing debt to buy-back their stock so there is a dearth of fortress balance sheets to withstand a sharp recession. And that is why the new law has a $500B corporate slush fund that will be deployed wherever it is necessary. In fact, the Fed will be using this money in a new lending facility that will be leveraged to potentially unleash several trillion dollars of loans into the private sector. Would you take this money?
I suppose if you were desperate you would have to and if you had a fortress balance sheet you wouldn’t want to touch it. In the financial crisis, banks were more or less forced to take the money as an industry in a show of solidarity but that will not be the case in 2020. What company wants the stigma of taking this capital and risk being raked over the coals by Congress two years from now? Any takers? Airlines? Car manufacturers?
Perhaps this lending facility will be oversubscribed in a feeding frenzy or maybe only the weakest companies will show-up. In either case, the market will not show deference to the companies now holding tax-payer money despite the circumstances of the coronavirus. The politicians issuing this capital may not be the same people after the November election so the stakes on who runs the show after the next election are now more elevated than ever for the bailout companies. I can see a new regulatory regime developing on the heels of these facilities so this will be a new topic of debate in the upcoming election.
So, the Fed’s wealth generator has a problem and their latest stimulus programs are more triage than fuel for the perpetual motion machine that we call the stock market. The S&P has made a major top in 2020 and now there is a struggle to rebound despite the bailout news. The media has embraced the latest bounce as the “greatest 3 day rally since 1931” but what they fail to tell you is that the stock market dropped 60% afterwards before bottoming in 1932.
In the chart below, the S&P needs to rally above 2,800 before considering a recovery to new all-time highs – the “all-clear” level. Currently, the risk is that we see additional downside and new lows as the bounce this week looked corrective. The Fibonacci retracement levels below are logical places for the next stop (2022/1700).
Chart of the Week!
Economic & Central Banking Snippets
- The Federal Reserve has committed to unlimited purchases of US Treasuries and agency mortgage-backed securities and set up additional lending tools to shore up struggling companies and financial markets. The new moves, announced on Monday, add monetary firepower to America’s efforts to support its economy through the coronavirus pandemic. (FT)
- The Federal Reserve has tapped BlackRock, the largest asset manager in the U.S., to steer tens of billions of dollars in bond purchases as part of its new policy move to shore up the credit market. BlackRock will purchase agency commercial mortgage-backed securities secured by multifamily-home mortgages on behalf of the New York Federal Reserve. (Investopedia)
- South Africa’s central bank began to buy government bonds on Wednesday in a bid to unblock strained local money markets as Africa’s most industrial economy braces for a three-week national lockdown to stem the spread of coronavirus. The South African Reserve Bank (SARB) said in a statement that its aim in launching the bond purchases was “providing liquidity and promoting the smooth functioning of domestic financial markets”. (FT)
- Nearly 3.3 million people filed for unemployment benefits last week. The numbers, released by the Labor Department on Thursday, are some of the first hard data on the economic toll of the coronavirus pandemic, which has shut down whole swaths of American life faster than government statistics can keep track. In the half-century that the government has tracked applications, the most applications filed in a single week had been fewer than 700,000. (NY Times)
- The outlook for the Q2 unemployment rate has jumped dramatically because of the coronavirus.
- The European Central Bank has ordered eurozone banks to freeze dividend payments and share buybacks this year in an escalation of its efforts to avoid coronavirus triggering a credit crunch in Europe. The ECB said banks “should not pay dividends for the financial years 2019 and 2020 until at least 1 October 2020”.
- President Trump invoked the Defense Production Act and directed his administration to order General Motors to start making ventilators.
- AMC Entertainment, the world’s largest theater operator, placed its CEO and all of its corporate employees on furlough to preserve cash during the coronavirus outbreak. (Reuters)
- The US Transportation Security Administration published figures that showed passenger traffic at US airports has fallen almost 90% compared to a year ago. The agency processed 279,018 passengers through checkpoints on Tuesday compared to 2.2 million on March 24, 2019.
- Airbus announced it has withdrawn its 2020 guidance and secured a new 15 billion euro credit facility. Europe’s biggest plane maker has also canceled their 2019 dividend of 1.4 billion euros and suspended pension funding. (Investopedia)
- SoftBank said it would sell up to $41 billion in assets in order to buy back shares and redeem debt, an unprecedented move to combat its tumbling stock and bond prices. (Investopedia)
- Top executives at U.S.-traded companies sold a total of roughly $9.2 billion in shares of their own companies between the start of February and the end of last week, according to The Wall Street Journal. The selling saved the executives potential losses totaling $1.9B as the S&P 500 plunged about 30%. (Investopedia)
- Target is delaying its remodeling program to focus on dealing with “unusually strong traffic and sales.” The company has withdrawn its guidance for first quarter and full year 2020 sales, operating income and earnings per share. Comparable sales in March are over 20% above last year. Essentials and food & beverage sales are up more than 50% and apparel & accessories are down more than 20%. (Investopedia)
- Ford is now a fallen angel after S&P Global Ratings downgraded its nearly $36 billion debt pile to junk status. The credit rating agency said Ford was “borderline” for the investment-grade rating even before the coronavirus outbreak and the supply and demand shocks to light-vehicle demand. (Investopedia)
- General Motors told about 69,000 salaried employees globally on Thursday that it will temporarily cut 20% of their salaries as the automaker attempts to save cash. The deferment, which will begin April 1, will be repaid in a lump sum with interest no later than March 15, 2021, according to the company. (Investopedia)
- Investors in securitized products backed by commercial mortgages on hotels, casinos and malls are calling on the Federal Reserve to come to their aid, after a severe sell-off driven by the outbreak of coronavirus. The Fed has said it will purchase agency-backed CMBS, but that excludes vast swaths of “private-label” debt issued by hotel operators, casinos and other property owners that have come under pressure in recent weeks. (FT)
That is all for now and thank you for being a subscriber!
Paul J. McCarthy, III
President – Kisco Capital