We are on week 5 of going sideways in the S&P 500 with the possibility of moving higher next week. As you will see in the bullet points below, there is plenty of bad news out there as corporations suffer a reduction to revenues and possible solvency issues. Let’s look at a short-term chart that I posted for my clients this week that show equities continue to hold up despite rising bankruptcies and historic job losses. The range of 2970/2715 points where a breakout (up or down) is likely to happen in the coming sessions.
Zooming out to the longer-term chart we see resistance just overhead which the market has to clear to confirm that the March low was THE bottom. Of course, moving through this price zone makes little sense from a fundamental perspective as the effects of shuttering the global economy won’t be fully understood for many months.
SO, why have we re-traced this much and what would be the rationale for a rebound to new highs? Well, the federal government has pumped in $4.5T in stimulus while the Fed is adding at least as much in just a matter of weeks so that creates a sugar-high that elevates risk assets (stocks/high-yield bonds). Equities will likely run out of gas when the stimulus comes to halt which begs the question of how far will they go?
In this last chart, I plotted an index of total debt verses the M2 money supply. This chart highlights the rate of debt growth and to show that there may be a whole lot of money printing in the future as the spread between the two has is likely to converge to the upside. The M2 has already kinked higher in the very right side of the chart so this money creation may just be going back into the stock market resulting in a further disconnect from the reality of weakening fundamentals. We did see Fed stimulus from the 1998 Russian default crisis cause the NASDAQ to double in 1999 so you have to respect that governments and central banks can manipulate the stock market beyond a rational valuation metric. So, that is the case for stocks moving higher, like it or not.
Chart of the Week!
The United States is now at 116% of debt to GDP which enters a territory where economists begin to warn of rising interest rates, inflation and currency devaluation. However, as other countries follow the United States some of these metrics become relative and harder to detect but they eventually emerge in one form or another (think equity prices).
Economic & Central Banking Snippets
- Hong Kong’s economy shrank 8.9% in the first quarter which also marks the third consecutive quarter of negative growth for the region.
- The U.S. government is set to borrow a record $2.99 trillion in the second quarter, more than five times as much as it borrowed at the height of the 2008 financial crisis. The Treasury Department also said it expects to issue $3.7 trillion in net marketable debt in the second half of the fiscal year that ends Sept. 30, bringing total estimated debt issuance to nearly $4.5 trillion in fiscal 2020. (WSJ)
- California has become the first state to borrow money from the federal government so it can continue paying out rising claims for unemployment benefits during the coronavirus pandemic. The Golden State borrowed $348 million in federal funds after receiving approval to tap up to $10 billion for this purpose through the end of July, a Treasury Department spokesman said. (WSJ)
- More than 3 million Americans filed for first time unemployment benefits last week, taking the number of applications since the coronavirus lockdowns began seven weeks ago to 33.5 million. The sum of people actually receiving benefits rose to 23 million for the week ending April 25, and those receiving unemployment insurance comprised 15% of all workers that week. (FT)
- The April unemployment rate rose to a record 14.7% and payrolls dropped by an unprecedented 20.5 million as the coronavirus pandemic hit the economy.
- The U.S. government spent $976 billion and recorded a budget deficit of $737 billion, according to a CBO estimate released Friday. The deficit stemmed from the deteriorating economy, delays in tax deadlines, and the government’s efforts to fill the holes in household and corporate budgets. Tax revenue in April was $239 billion, a 55% drop from last year, as individuals and companies deferred payments. (Investopedia)
Macro Snippets
- US and European banks are on track to book more than $50bn of charges on bad loans in the first quarter, the most since the 2008-09 financial crisis. Australian companies, meanwhile, raised more money on the stock market in April than at any point in the last decade. (FT)
- J. Crew has filed for bankruptcy protection, making it the first big retailer to do so amid the outbreak. The clothing company’s lenders will convert approximately $1.65 billion of its debt into equity, according to a press release. (Investopedia)
- Gilead has donated its entire supply of remdesivir to the U.S. government. The company says it will be available to coronavirus patients this week after the FDA granted emergency use authorization for the drug. (Investopedia)
- Virgin Atlantic is preparing to cut almost a third of its 10,000 workforce and close its London Gatwick operations as the airline scales back to survive the coronavirus crisis. The British airline on Tuesday warned it would take up to three years to return to 2019 traffic levels and announced plans to cut up to 3,150 jobs. (FT)
- United Airlines is cutting staff by 30% in October, according to Reuters. “Travel demand is essentially zero for the foreseeable future and, even with federal assistance that covers a portion of our payroll expense through September 30, we anticipate spending billions of dollars more than we take in for the next several months, while continuing to employ 100% of our workforce. That’s not sustainable for any company,” said United in a statement. (Investopedia)
- Gold’s Gym International, which like other gym operators has temporarily closed locations across the globe in response to the coronavirus pandemic, filed for chapter 11 bankruptcy to restructure its debt to withstand the economic fallout. (WSJ)
- Hertz Global Holdings has hired an additional adviser to help prepare for a planned bankruptcy filing, according to people familiar with the matter, as the coronavirus pandemic squeezes the car-rental business. (WSJ)
- Occidental Petroleum is examining ways to lessen its roughly $40 billion debt load following a historic plunge in oil prices and an ill-timed acquisition. Occidental recently tapped boutique investment bank Moelis & Co. for advice on how to ease the burden of its liabilities at a time when the company’s revenue is under severe pressure, according to people familiar with the matter. (WSJ)
- Airbnb is cutting 1,900 employees, or 25% of its workforce, co-founder and Chief Executive Brian Chesky told employees in a memo, adding that the company’s revenue forecast for this year is “less than half” of last year’s level. (WSJ)
- Wendy’s said on Tuesday its fast-food restaurants could face a shortage of hamburgers as meat processing plants around the nation have closed because of the pandemic. The shutdowns have cut pork production by 25% and beef production by 10%, according to Bloomberg News.
- Retailers are asking landlords to waive some of their rent in return for a share of future revenues. Some firms sign deals that include a few years of revenue sharing upfront, followed by a period of fixed rent payments. Others want a low monthly rent, topped off by a share of revenue — or even all revenue sharing and no rent at all. That has some property owners predicting a possible seachange for the business. (WSJ)
- Neiman Marcus filed for chapter 11 bankruptcy protection in Texas, becoming the latest large retailer to seek a court restructuring during the pandemic that has closed much of the U.S. economy. (WSJ)
- Roku says streaming hours rose 80% in April from last year. New accounts jumped 70% and active accounts grew roughly 38%. It had 39.8 million active accounts at the end of Q1. “The pandemic associated stay-at-home orders and increased unemployment appear to have accelerated the shift from linear TV viewing to streaming during the past few weeks,” it said. (Investopedia)
- The world’s largest brewer Anheuser-Busch InBev has warned it sold almost a third less beer and other drinks in April as the coronavirus crisis closed bars and restaurants across much of the world. Global volumes dropped 32% year on year in April, marking the pandemic’s impact on global drinking habits. Some countries, such as Mexico and South Africa, have also restricted production of alcoholic drinks. (FT)
That is all for now and thank you for being a subscriber!
Regards,
Paul J. McCarthy, III
President – Kisco Capital