NoWork

The reality of the coronavirus is setting in as we are finally seeing the hard data that portends a deep recession and a lack of work for the average American. The jobless claims over the last two weeks show 10mm people are out of work which implies a double-digit unemployment rate for April. Next up are earnings reports where we will finally get color from corporate America on how they are handling the stand-still in economic activity. We will learn of capital raising plans and layoffs but I doubt you’ll hear guidance that everything will go back to “normal” come summertime.

We have re-tested the December 2018 low in March and now we wait to see if it will hold or make a new low as the coronavirus hits an apex this month. In the meantime, Wall Street wrestles with a quick rebound of the economy verses a longer downturn. Keep in mind that earnings growth was flat in 2019 for the S&P 500 with a weakening trend meaning the overall fundamentals were on a decline before the coronavirus.

The equity market has also been buoyed by a multitude of stock buyback programs (in the trillions) which will go away as companies preserve capital and fortify their balance sheets. We also don’t know how consumer behavior will change as saving for a rainy day may be en vogue while working from home and re-locating to less populated areas could re-shuffle the economy. A lot to consider for the month of April.

I will be watching for signs of credit stress in the coming weeks as liquidity is challenged and leverage is high. The ripple effect of the coronavirus is unknown but it has the potential to change how people live their lives and how companies allocate their capital in the coming years.

Chart of the Week!

Economic & Central Banking Snippets 

• The US economy shed 701,000 jobs in March and the unemployment rate jumped to 4.4% from February’s 50-year–plus low of 3.5%, according to the labor department. However, the report fails to capture the full damage from the coronavirus as the reference period for this report was through March 12th. Many states were just beginning their shutdowns at that time which means the April jobs report will show deeper and more widespread industry losses. (FT/CNBC)

Among the hardest-hit areas of the economy was the accommodation and food services sector, which comprised more than half of the month’s net losses. Businesses that prepare meals, snacks and beverages for customers for either on-premise (sit-down restaurants and bars) or off-premise (delivery and take-out) consumption saw payrolls slide by 417,000.

• U.S. auto sales plunged last quarter as the health crisis escalated. March is usually a peak time for car buying, but Fiat Chrysler Automobiles saw a 10% drop and General Motors reported a 7% decrease as people saved their cash. Ford will release its results later today. Data analytics firm J.D. Power says April sales could fall 80%. (Investopedia)
• For the eurozone as a whole, the composite PMI index of services and manufacturing, compiled by IHS Markit, dropped from a reading of 51.6 in February to only 29.7 in March, the lowest reading since the survey began 22 years ago. Any level below 50 indicates that a majority of companies said activity in their businesses had declined over the past month. (FT)

Macro Snippets

• The Cheesecake Factory has told its landlords it will not be sending in rent checks for the month of April, as its eateries remain closed off to the public to try to help halt the spread of COVID-19. 
• Macy’s will furlough the majority of its employees beginning this week as sales have evaporated while its stores remain closed due to the coronavirus. The company, which employs roughly 130,000 people, told staff that it would continue to pay health benefits and cover 100% of premiums at least through May. It will keep on some staffers to support its e-commerce, distribution and call centers. (WSJ)
• Airbnb will pay out $250mm to cover some of the costs of hosts’ coronavirus cancellations. Brian Chesky, chief executive, wrote in a letter to hosts on Monday: “We have heard from you and we know we could have been better partners.” (FT)
• Fidelity said it would stop accepting new money into three money market funds that invest in US Treasuries, as it sought to protect existing investors from the dramatic decline in interest rates since the outbreak of coronavirus. Assets in the three funds have soared by more than $23bn to $85bn during this month’s clamour for safe assets, and new money has had to be invested in increasingly low-yielding securities. (FT)
• Simon Property Group has furloughed about 30% of its workforce at its malls and outlet centers across the United States.
• The credit ratings of about 140 issuers with loans held in US CLOs were either downgraded or put on notice for possible downgrades representing about 10% of all CLO assets under management. (FT)
• Mortgage lenders want regulators to discourage securities firms from making margin calls on mortgage hedging contracts, after the Federal Reserve’s decision to purchase an unlimited amount of mortgage-backed securities increased their value. Lenders say the Securities and Exchange Commission should issue guidance to relieve margin-call pressure, because letting firms enforce margin calls simultaneously could destabilize originators. (FT)
• European banks are shoring up capital by canceling or delaying dividend payments amid concern about their ability to absorb a potential rush of bad loans as households and companies are impacted by the coronavirus pandemic. Central banks and regulators started ordering curbs on dividends last week. (WSJ)

• Some of the most powerful groups on Wall Street are pressing the Trump administration to allow private equity-owned companies to access hundreds of billions of dollars in loan funds earmarked for US small businesses hit by the coronavirus pandemic. The Wall Street groups are taking aim at the so-called affiliation rule, under which small businesses can be barred from accessing the rescue funds if they are backed by a private equity firm whose portfolio companies collectively have a workforce that exceeds the 500-person limit. (FT)
• Whiting Petroleum once the largest oil producer in North Dakota’s Bakken Shale, says it filed for Chapter 11 bankruptcy protection. The company says it has more than $585M of cash on its balance sheet and will continue to operate its business. Under their restructuring plan, Whiting’s existing equity holders would receive 3% of the new equity of the reorganized company. (Seeking Alpha)
• Carnival Corporation is increasing the size of a rescue bond sale backed by its cruise ships to $4bn after drawing strong demand, even as the world’s largest cruise operator warned it might only have enough cash to stay afloat for eight months. The Panama-incorporated company launched a $6bn fundraising package on Tuesday, tapping debt and equity investors for liquidity after coronavirus killed passengers on several of its cruise ships and had a severe impact on future bookings. Having initially sought to raise $3bn in three-year bonds secured on the majority of its ships, Carnival announced on Wednesday that it was raising this to $4bn. Two investors said that the deal had already received more than $10bn of orders. The group will offer investors an annual coupon of 11.5%, equating to over $450m in interest costs a year, and will issue the bonds at a slight discount to face value. (FT)
• Zoom Video‘s daily U.S. user volumes hit a record 4.84M yesterday, according to Apptopia data, and the company’s active users were up 151% Y/Y in March. On the same day, Microsoft Teams had 1.56M users and Slack had less than 500K. (Seeking Alpha)
• The US Coast Guard said that cruise ships carrying more than 50 people, and sailing under foreign flags, would not be allowed to dock in the US.
• Many of the world’s poor and developing countries could begin defaulting on their bonds in the coming weeks as the coronavirus outbreak has led to massive outflows from emerging market assets and real-world dollars being yanked from their coffers. Why it matters: The wave of defaults is unlikely to be contained to EM assets and could exacerbate the global credit crisis forming in the world’s debt markets. (Axios)

That is all for now until next week’s Market Update and thank you for being a subscriber!  

Regards,

Paul J. McCarthy, III

President – Kisco Capital