On Deck: Earnings

Earnings reports began this week with the banks (see more below) that dramatically increased loan loss reserves as defaults will spike in the coming weeks. The rest of the S&P 500 will kick-off earnings reports next week where we should get more insight unto how companies are dealing with a global economy at a standstill.

Ben Franklin and the COVID Crisis that will affect earnings. @kiscocap

The stimulus programs by the Fed and the U.S. Treasury are running at full tilt to fight the collapse of securities prices. However, these programs will only go so far as already I am hearing pundits complain the Fed has overstepped its mandate while the SBA PPP program has already used up all of its $350B in capital. The overwhelming demand for the PPP program illustrates the fallout from shuttering the economy as operating under a pandemic is not in anyone’s risk management playbook.

As you can see the bounce from the March low is very steep and brings hopes of a “V” recovery. The slope of this bounce is higher than any other bounce since the 2009 low (I checked). In other words, don’t bet on it continuing – at least not past the 61.8% FIB (blue line) in the chart below without a major pullback.

SPX: S&P 500 Index. Earnings will affect the direction of this index in the coming weeks.

The Q1 earnings reports will be rough but only the month of March was affected by the coronavirus which means Q2 will be that much worse. We don’t know the timeline for returning to work but we do know consumer behavior will be changing and that there are many risks to a portfolio when an economy shuts down.

Chart of the Week!

COVID-19 Items bought online which helps the earnings of Amazon.

Economic & Central Banking Snippets 

  • The global economy will this year likely suffer the worst financial crisis since the Great Depression, the International Monetary Fund said Tuesday, as governments worldwide grapple with the Covid-19 pandemic. The Washington-based organization now expects the global economy to contract by 3% in 2020. For comparison, the world economy shrank by 0.1% in 2009 during the Great Recession.
Mortgage payments are due and people are skipping due to the coronavirus. @kiscocap
  • About 2 million homeowners are skipping their monthly mortgage payments, according to industry data, a number that is forecast to rise further as more Americans lose their jobs as a result of the coronavirus pandemic. Approximately 3.74% of home loans are in forbearance as of April 5, according to Mortgage Bankers Association data, up from about 2.73% the prior week. (WSJ)
  • Debt held by the public is on track to exceed the size of the entire U.S. economy this year for the first time since World War II, according to a new analysis by the Committee for a Responsible Federal Budget (CRFB). According to projections from the group, which advocates for lowering the federal debt, the deficit for fiscal 2020 will exceed $3.8 trillion, more than 2.5 times the record set during the 2008 financial crisis. Since gross domestic product (GDP) last year was $21.4 trillion and expected to shrink this year, U.S. debt is projected to exceed about $20 trillion, according to the watchdog. (The Hill)
  • American shoppers sharply reduced spending in March as the coronavirus pandemic prompted widespread business closures, causing sales of vehicles, clothing and dining out to plunge. Retail sales, a measure of purchases at stores, at restaurants and online, decreased a seasonally adjusted 8.7% in March from a month earlier, the Commerce Department said. There was a 51% plunge in clothing sales, a 27% drop in restaurant/bars (and will fall obviously much more in April as everything is closed), a 27% drop in furniture sales, a 15% fall in electronics and 20% decline in department stores. Outside the core figure, auto sales/parts fell 26%, gasoline station sales fell 17% while building materials eked out a gain of 1.3% m/o/m. (WSJ/Boock Report)
Retail sales by category for March 2020.
  • Total industrial production fell 5.4% in March, as the COVID-19 pandemic led many factories to suspend operations late in the month. Manufacturing output fell 6.3% with the largest decline registered by motor vehicles and parts. The decreases for total industrial production and for manufacturing were their largest since January 1946 and February 1946, respectively. Capacity utilization for the industrial sector decreased 4.3 percentage points to 72.7% in March, a rate that is 7.1 percentage points below its long-run (1972–2019) average. (Federal Reserve)
  • More than 5.2m Americans filed unemployment claims last week, taking the number that have sought benefits for the first time since last month’s start of widespread US lockdowns to more than 22m. (FT)
  • France’s Emmanuel Macron has warned of the collapse of the EU as a “political project” unless it supports stricken economies such as Italy and helps them recover from the coronavirus pandemic. The French president said there was “no choice” but to set up a fund that “could issue common debt with a common guarantee” to finance member states according to their needs rather than the size of their economies. This is an idea that Germany and the Netherlands have opposed. (FT)

Macro Snippets

  • SoftBank has warned that it expects to report its biggest ever annual operating loss of $12.5bn after its $100bn investment fund sustained a heavy hit from the market turmoil caused by the coronavirus outbreak. In a statement late on Monday, the Japanese technology group said its Saudi-backed Vision Fund had suffered a ¥1.8tn ($16.7bn) investment loss because of “the deteriorating market environment”.
  • Johnson and Johnson reported earnings of $2.30 per share for the first three months of 2020 and sales of $20.7 billion. Both were better than analysts’ forecasts. While the company lowered its forecasts for 2020 earnings, it did increase its dividend from 95 cents a share to $1.01, or 6.3% increase. (Investopedia)
  • Baker Hughes said it is pursuing a restructuring plan that will result in about $1.8 billion in charges and expects to book a roughly $15 billion goodwill impairment charge for the first quarter as the company faces the coronavirus pandemic and declines in oil and gas prices. The oil-field services company said Monday it will book $1.5 billion of those charges for the first quarter. Future cash expenditures related to those charges are projected to be about $500 million with an expected payback within a year, it said. (WSJ)
  • Wells Fargo’s net income fell almost 90% as the economic impact of the coronavirus drove “unprecedented” increases in loan loss reserves as well as writedowns in the bank’s securities portfolio. The bank noted that in the month of March alone commercial customers had drawn $80bn from their lines of credit. (FT)
A gift for KKR because of Longview Power. @kiscocap
  • Longview Power LLC, a private-equity-backed power generator, filed for bankruptcy Tuesday with a prepacked restructuring proposal that includes help from the government stimulus package passed in the wake of the coronavirus pandemic. Longview, in which private-equity giant KKR & Co. owns a stake, was approved for a loan from the taxpayer-funded Small Business Administration’s paycheck protection program Friday and it expects to use the proceeds to fund payroll, according to papers filed in U.S. Bankruptcy Court. (WSJ)
  • J.C. Penney Co Inc is exploring filing for bankruptcy protection after the coronavirus pandemic forced the U.S. retailer to temporarily shut its 850 department stores, upending its turnaround plans. (Reuters)
  • India on Tuesday extended its nationwide lockdown for an additional three weeks, keeping many of the nation’s 1.3 billion people largely restricted to their home until May 3. Pakistan and Bangladesh also extended their lockdowns, though for a shorter period of time.
  • Procter & Gamble has raised its quarterly dividend by 6% to $0.7907 per share. The company said it marks the 64th consecutive year that it has increased its dividend and the 130th consecutive year that it has paid a dividend since its incorporation in 1890. (Investopedia)
  • Bank of America, Citigroup and Goldman Sachs took a total $12.8bn of charges in the first quarter for loan losses, and warned there could be more to come. The sobering figures from three of the biggest US banks came the day after JPMorgan Chase and Wells Fargo reported a combined $12.3bn of credit charges for the first three months of the year, as they ramped up reserves to deal with corporate and consumer loan problems. Banks are bracing for a particularly sharp rise in credit card losses. (FT)
  • Abbott Laboratories announced its third COVID-19 test, which will detect antibodies and identify if a person has had the infection. It will ship a total of 4 million tests for April. (Investopedia)
  • US crude oil prices dipped below $18 a barrel on Friday, the lowest level since 2002, as energy markets struggled to absorb a record glut created by the coronavirus pandemic. Prices have dropped this week despite a landmark US-backed deal by the Opec+ group of producers to cut output by almost a tenth. But traders have judged that the collapse in demand is far greater — with up to a third of global consumption lost to measures to restrict the virus’s spread. That has stoked volatility, as traders bet oil storage will rapidly fill up, including at the US crude benchmark’s delivery hub of Cushing, Oklahoma. (FT)

That is all for now and thank you for being a subscriber! Stay safe out there!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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