***CHINA WATCH

U.S. Coronavirus Deaths Near 80,000 as Mysterious New Symptoms Appear With the U.S. death toll from the coronavirus pandemic approaching 80,000 and states trying to reopen, scientists and physicians continued to grapple with mysteries of how the pathogen attacks the human body, and how to fight back.

(…) While efforts to ease restrictions move forward, much about the coronavirus remains unexplained.

In New York over the weekend, Gov. Andrew Cuomo said that at least three children had died from a baffling condition that may be related to the coronavirus. Health officials are investigating the phenomenon that appears to inflame the circulatory system and has sickened dozens of children.

In another medical mystery of Covid-19, some patients are arriving at hospital emergency rooms with so little oxygen in their blood that they should be on the brink of organ failure. Instead, these patients are not only conscious but also talkative and in decent spirits. (…)

This Is the Future of the Pandemic Covid-19 isn’t going away soon. Two recent studies mapped out the possible shapes of its trajectory.

By now we know — contrary to false predictions — that the novel coronavirus will be with us for a rather long time.

“Exactly how long remains to be seen,” said Marc Lipsitch, an infectious disease epidemiologist at Harvard’s T.H. Chan School of Public Health. “It’s going to be a matter of managing it over months to a couple of years. It’s not a matter of getting past the peak, as some people seem to believe.” (…)

The authors conclude that whichever reality materializes (assuming ongoing mitigation measures, as we await a vaccine), “we must be prepared for at least another 18 to 24 months of significant Covid-19 activity, with hot spots popping up periodically in diverse geographic areas.” (…)

What is clear overall is that a one-time social distancing effort will not be sufficient to control the epidemic in the long term, and that it will take a long time to reach herd immunity. (..)

So, lacking a vaccine, our pandemic state of mind may persist well into 2021 or 2022 — which surprised even the experts. (…)

• South Korea’s Early Coronavirus Wins Dim After Rash of New Cases South Korea, which largely succeeded in quelling the initial spread of the coronavirus, is back on the defensive, with Seoul’s bars and clubs ordered closed, as the country reported its biggest one-day increase in new infections in a month. Following an outbreak linked to gay clubs in central Seoul, health officials are trying to track more than 5,500 people who visited the bars between April 24 and May 6. But more than half remain out of reach, while the infections tied to the bars continue to rise.
• Wuhan reports first new coronavirus cases since end of lockdown Cluster of infections prompts fear of second wave in Chinese city where disease started
• Brazilian President Jair Bolsonaro criticized lockdown measures by governors even as the nation turned into a global epicenter of the coronavirus outbreak. The Health Ministry on Sunday reported 162,699 total cases of Covid-19 and 11,123 deaths, among the world’s highest.
• To properly track the outbreak’s spread, the United States needs to triple its testing rate to 900,000 per day by May 15, according to a Harvard University estimate. But President Trump said “testing isn’t necessary” and continued to flout his own administration’s guidelines even after two White House aides were found to have the virus this week. (WaPo)
• Russia said the number of new infections rose by 10,817 to 198,676, the seventh straight day cases have risen by more than 10,000.
• The number of new cases in Germany fell for the first time in four days as the country prepares to ease its containment measures. There were 1,158 infections in the 24 hours through Saturday morning, according to data from Johns Hopkins University.
• Denmark has cut in half the physical distance at which citizens can stand apart, as the country takes a key step toward ending restrictions on movement. The social distancing requirement has been reset to 1 meter (3 feet) from 2 meters, according to a statement from the Danish Health Authority. Denmark is now in the second phase of a return to something resembling pre-Covid life, with all shops opening on Monday. Restaurants and cafes will follow next week while cinemas, museums and amusement parks will open in June.
• Shanghai Disneyland opened to visitors for the first time since January. Authorities gave permission for the theme park to reopen at 30% capacity, or roughly 24,000 people a day. Some attractions remained closed and the day featured none of the hallmarks for the Disney parks are known: parades, fireworks shows and meet-and-greets with familiar characters.
• Scientists Create Antibody That Defeats Coronavirus in Lab

PANDENOMICS

• U.S. U.S. Nonfarm Payroll Declines Record 20.5 Million; Unemployment Rate Sets Post-War High
• The official unemployment rate of 14.7 percent accounts for only a fraction of Americans who have lost work during the outbreak. Millions more have been forced to work part time or aren’t even looking for a new job after being laid off, The Washington Post’s business desk reported. In actuality, 1 in 4 U.S. workers — 44 million people — are now unemployed or underemployed.
• Adjusting for misclassifications, Pantheon Macroeconomics estimates that the unemployment rate is closer to 20% vs. the 14.7% official figure.
• All-in, 34 million jobs have been impacted, according to Oxford Economics.
• In a working paper released this week by the University of Chicago’s Becker Friedman Institute for Economics, a trio of economists concluded that “42 percent of recent layoffs will result in permanent job loss.” That would mean nearly 12 million permanent vacancies, according to the study by a pair of economists from Stanford University and one from the University of Chicago.

Good as Pandemic Cuts Demand Factory furloughs across the U.S. are becoming permanent closings, a sign of the heavy damage the coronavirus pandemic and shutdowns are exerting on the industrial economy.

Makers of dishware in North Carolina, furniture foam in Oregon and cutting boards in Michigan are among the companies closing factories in recent weeks. Caterpillar Inc. CAT 4.49% said it is considering closing plants in Germany, boat-and-motorcycle-maker Polaris Inc. PII 6.87% plans to close a plant in Syracuse, Ind., and tire maker Goodyear Tire & Rubber Co. GT 7.44% plans to close a plant in Gadsden, Ala. (…)

The WSJ article goes on with numerous examples of various manufacturers across the U.S. having just recently to closed or slimmed down permanently.

The closures suggest that a growing share of the record job losses in recent weeks won’t be temporary, said Gabriel Ehrlich, an economic forecaster at the University of Michigan. (…)

During the same weekend:

• Fed’s Kashkari Says Worst Is Yet to Come, Congress Must Step Up
• Trump in ‘No Rush’ on New Relief Bill After 20 Million Jobs Lost
• White House considers more coronavirus aid as jobs picture worsens The White House has begun informal talks with Republicans and Democrats in Congress about what to include in another round of coronavirus relief legislation, officials said on Sunday, while predicting further U.S. jobs losses in the coming months.
• White House economic adviser Larry Kudlow said there won’t be formal talks with Congress on additional coronavirus relief measures until late-May or June. (ABC News)

In a recent survey of thousands of small- and medium-sized businesses about the impact of the virus shock, 31% said that they saw a greater than 50% chance of bankruptcy over the next six months. As for larger businesses, our credit strategists have noted that ratings continue to migrate lower among investment grade companies, building a pipeline that would add to the already sizeable wave of “fallen angel” downgrades this year, and among high-yield companies. Ratings downgrades often happen both before and after corporate actions involving bankruptcies and liquidations and are sometimes but not always a leading indicator.

Small Firms Join Rush to Return Bailouts After Rules Revisions Companies and their advisers are grappling with rules that seem to run counter to the law they’re based on.

The Mortgage Market Never Got Fixed After 2008. Now It’s Breaking Again. The coronavirus pandemic has delivered a gut punch to the economy, and the mortgage market is particularly exposed.

(…) many mortgage companies aren’t built to handle an economic collapse or help their customers through it. Many of them are nonbanks that don’t have deposits or other business lines to cushion them, and they have raised concerns that fronting payments for struggling borrowers such as Ms. Winn will quickly drain them of capital. (…)

What regulators didn’t focus on was the strength of the mortgage companies themselves. Though the loans are sturdier, the infrastructure largely didn’t change. (…)

Nonbanks made 59% of U.S. mortgages last year, the highest level on record, according to industry-research group Inside Mortgage Finance. (…)

As big banks have refocused their mortgage operations on wealthier borrowers, nonbanks have stepped into the void, often representing the only path to a mortgage for buyers of lesser means. Their retreat could lock many would-be borrowers out of homeownership and make it harder for the economy to bounce back.

Nonbanks also have expanded in the crucial business of servicing mortgages. They now service roughly half of them, five times their share from a decade ago, according to the Urban Institute. (…)

When a borrower stops paying, servicers are caught in the middle, forced to front payments to the investor, even though they aren’t receiving money from the borrower. The servicer will eventually get reimbursed if the mortgage is one of the roughly two-thirds guaranteed by Fannie Mae, FNMA 0.60% Freddie Mac FMCC 1.90% or Ginnie Mae. But that is a slow process and in some cases can take years. (…)

Mortgage servicers, both banks and nonbanks, were on the hook for about $4.5 billion a month in servicing advances on government-backed loans because of forbearances as of Thursday. That is roughly 25 times more than they were on the hook for at the end of February, according to Black Knight Inc., BKI -0.10% a mortgage-data and technology firm. (…)

The borrowers the nonbanks serve are often the ones that most need help. Last year, nonbanks made 86% of FHA mortgages. As of Thursday, roughly 13% of FHA loans had forbearances, according to Black Knight. (…)

Lenders are cutting back in particular for borrowers with lower credit scores, according to the Urban Institute. But the contraction in credit is spreading to all types of loans—from jumbo mortgages to cash-out refinances. (…)

Chris Whalen at The Institutional Risk Analyst warned on April 24…

(…) Reading the body language of the commercial banks and non-bank lending markets, we anticipate a wave of defaults across a range of asset classes that will be far larger than 2008. Whereas the great financial crisis saw severe credit default events across a range of residential mortgages and related securities, this time the picture looks more like the 1930s. We anticipate that net loss rates will rise quickly from the historic lows seen over the past several years to and even exceeding 100% loss in many asset classes. Prepare accordingly.

…and again on May 4:

(…) What the COVID19 event proves in housing is that in times of stress, no amount of private capital can support $11 trillion in single family housing assets or another $1.5 trillion in multifamily properties.

Banks own a quarter of the 1-4 family housing market, the FHA/VA/USDA about 18% and the rest – about $6 trillion in loans — is supported by the GSEs. Without financing support, we expect residential home prices will start to fall in many markets around the US before the end of 2020. (…)

And finally, the damage inflicted on the speculative classes in the past 90 days is just the appetizer. The unwind of leverage in real estate and many parts of the world of secured finance is just starting. (…)

Tighter Supply of Bank Credit to Businesses Widens Spreads and Warns of More Defaults (Moody’s)

The willingness of banks to supply credit to businesses deteriorated considerably at the start of 2020’ second quarter. According to a Federal Reserve survey of bank loan officers, the net percent of responding banks tightening standards on commercial and industrial loans jumped up from the 0.0 percentage points of 2020’s first quarter to the 41.5 points of the second quarter. (…)

The same survey of loan officers also measures the net percent of banks that widen spreads of business loan rates over the cost of bank funds. The net percent widening business loan spreads widened dramatically from first quarter 2020’s -20.8 points to the +40.9 points of the second quarter. However, the latter still falls considerably short of both fourth-quarter 2008’s record high of +98.2 points as well as its +95.4-point average of October 2008 through March 2009. (…)

The simple unweighted average of the net percent of banks tightening C&I loan standards and the net percent widening C&I loan spreads shows a high correlation with a composite high-yield bond spread. This indicator of the tightness of the supply of bank credit to businesses jumped up from first-quarter 2020’s -10.4 points to the second-quarter’s +41.2 points. The tightness of the bank supply of business credit previously climbed to 41.2 points during 2008’s first half, 2000’s second half, and 1990’s third quarter.

Like the current situation, each of the three previous episodes either overlapped a recession or
was just prior to recession’s arrival. Moreover, each of the three previous episodes was followed by a substantially wider high-yield bond and a higher speculative-grade default rate.

The index of the tightness of the bank supply of business credit also serves as a very meaningful leading indicator of the U.S. high-yield default rate. For example, the default rate generates very high correlations of 0.90 and 0.89 with the tightness of the bank supply of business credit from three and four quarters earlier. The median high-yield default rate was 10.5% a year after the tightness of the supply of business credit previously reached second-quarter 2020’s 41.2 points. (…)

Pandemic Sparks Slump in Electricity Prices Wall Street trading floors have emptied. Spring has arrived north of the equator. Oil and gas markets have cratered. The result is a precipitous decline in electricity prices.

Deflationary pressures continue to build.

Source: Pantheon Macroeconomics

Saudi Arabia ordered government spending cuts and austerity measures for about $26.6 billion and a tripling of the value-added tax to alleviate the impact of the pandemic. Finance minister Mohammed Al-Jadaan said VAT will be increased to 15% from July 1, according to the official Saudi Press Agency.  

Under the EU’s new recapitalization rules, companies that receive aid will be subject to bans on dividends and share buybacks. Management remuneration will be subject to strict limitations, including a ban on bonus payments, until at least 75% of the recapitalization aid is recovered by the government.

Honda Plans to Start Reopening U.S. and Canada Plants on May 11

CONSUMER WATCH

Young people graduating this spring into a gale of joblessness are likely to see their lifetime earnings depressed as a result of the poor labor market. That’s what happened to their predecessors who graduated into the double-dip recession of the early 1980s. (WaPo)

Males between 25 and 54 years old, the “prime age” workers, have lost ground in every recession since the 1960s.

CHINA WATCH

Fathom Consulting have built the China Momentum Indicator (CMI) proprietary index which combines twelve measures of economic activity, including retail sales, unoccupied housing and net trade – among many others. According to the CMI, China’s economy continues to slowdown more drastically that the Chinese government has led to believe. Now with the coronavirus outbreak, this is becoming a big drag on the economy. Many retailers have closed down manufacturing in China, and its affected exports to the U.S., and earnings guidance for the upcoming quarter. (Refinitiv)

Fathom China Momentum Indicator: 2006 – 2020

“In China, we now have over 85% of our system back open and we are seeing gradual signs of recovery with recent occupancy levels running in the mid-20s up from low single digits back in March. In Southeast Asia, we are running occupancy in the low-30s and Europe, the Middle East and Canada are all running occupancy in the low-20s, while Latin America is running in the mid-teens.” – (WH) CFO Michele Allen

“As observed in China and other parts of Asia that are several weeks ahead of the United States. The recovery thus far has been like – been led by domestic leisure stay and drive to destinations.” – (HST) CEO James F Risoleo

The People’s Bank of China said it will resort to “more powerful” policies to counter the hit to its economic growth from the COVID-19 pandemic. (Bloomberg)

China’s auto market ended a 21-month losing streak in April as sales rose 4.4% from a year earlier, overcoming an early-year collapse triggered by the coronavirus shutdown. The government-backed China Association of Automobile Manufacturers said Monday that 2.07 million vehicles were sold in the world’s biggest auto market last month. The rise in April follows a 43% drop in March and a 79% plunge in February, and makes China a bright spot for the auto industry as pandemic-struck markets elsewhere in the world stagnated. The numbers got a boost from commercial vehicles, whose sales were up 32% in April, data from CAAM showed.

PANDEMONIUM

• As Pandemic Spreads, Regard for China Recedes in West The coronavirus pandemic is exacting an expanding toll on China’s standing in the West, with U.S. and European views on cooperation with Beijing dimming, officials and analysts say.
• U.S. Puts New Limits on Visas for Chinese Journalists The White House plans to dramatically tighten rules governing Chinese journalists working in the U.S., the latest move in a tit-for-tat media feud that comes at a time of deteriorating relations between the two nations.

EARNINGS WATCH

All numbers from Refinitiv/IBES:

The Q120 earnings season is almost over as 430 companies have reported. The beat rate on sharply revised estimates is 67% with a +3.2% surprise factor. Seven sectors surprised positively. The reporters so far showed an aggregate -11.1% earnings decline and the blended hit for the quarter is -12.0% (-11.3% ex-Energy) with revenues up 0.3% (+1.4% ex-E).

Thirty-two of the remaining companies to report are consumer-centric including 25 consumer-discretionary. Here’s how Refinitiv sees the quarter for retail earnings:

The Refinitiv Retail Earnings Growth Rate – Q1 2020

Overall, trailing EPS are now $158.62 but Q2 earnings are expected to crater 40.8% (-35.3% ex-E) when revenues could drop 12.1% (-8.5% ex-E), followed by -23.2% and -11.8% in Q3 and Q4 respectively. For the full year, the bottom up estimate is now $128, down 21.4% YoY.

The Rule of 20 P/E is 20.5 at 2924 but that number rises to almost 22.0 if we extrapolate the expected Q2 EPS decline.

The 12-m forward EPS is $131.19 per Refinitiv/IBES for a forward P/E of 22.3. One has to use 2021 guesstimates ($166) to bring the forward P/E to 17.6 where the red line is.

Keep in mind that the 2021 estimate generally assumes a V-shape recovery and no new taxes, two low probability assumptions in my book. Goldman Sachs calculates that a complete reversal of the 2017 tax reform act would cut 2021 EPS by $19.

GS notes that “bank loan loss reserves in 1Q totaled $46 billion vs. $49 billion for full-year 2019. All of the banks “marked to market” their provision estimates assuming a 9.5-10% unemployment rate.” It reached 14.7% Friday, on its way to 20% per Mnuchin. GS analysts now forecast $115 billion in provisions in the next four quarters (assuming a sharp recovery in the second half) and that buybacks will fall by 50% in 2020. “This step delights credit investors but equity investors should be concerned because buybacks have been the only source of net demand for shares in the past decade.”

Looking at S&P 600 small caps, 222 companies had reported on May 4. The beat rate is 57% and the surprise factor –3.3%. Q1 earnings are now expected to collapse 50.9% (-52.1% ex-E) on revenues down 5.6% (-6.4%). Q2e: –73.8%!!

S&P 600 Y/Y Growth Rates

Digging deeper, 584 Russell 2000 companies had reported on May 4. Their beat rate is 52% but aggregate Q2 earnings are down 49.3% (-51.2% ex-E) on revenues down 2.8% (-3.9%). Q2e: –85.4%!!

Russell 2000 Y/Y Growth Rates

• This chart shows the earnings decimation of Russell 2000 sectors vs. the S&P 500 this year. (The Daily Shot)

Source: Pavilion Global Markets

Financial companies represent 16% of the S&P 500 companies and 21% of the Russell 2000. More that 25 years ago, RBC’s Gerald Cassidy created the Texas Ratio based on his experience with
the Texas banks during the oil price rout of the early 1980s.

Following the Texas banking collapse of the 1980s, we discovered that when nonperforming assets (nonaccrual loans, 90 days past due and still accruing, OREO [other real estate owned] and TDRs [troubled debt restructuring]) exceeded tangible common equity plus loan loss reserves, the banks generally failed. (…)

Today, the Texas Ratio is widely used around the globe by investors, regulators, and bank
management teams. The Texas Ratio also was included in the book Guide to the 50 Economic
Indicators That Really Matter. (…)

Although the Texas Ratio is extremely low today for all of the top 20 U.S. banks, we anticipate that it will increase throughout the year. We do not expect any of the top 20 banks to break through the 100% level in this cycle. However, we believe that smaller banks with an excessive concentration of high risk loans will pierce through the 100% level at some point in this credit cycle and be vulnerable to failure.

In Canada, 83 on 229 companies have reported. The beat rate is 54% and the surprise factor +7.3%. But the blended growth for Q1 is –12.8% (-16.8% ex-E) on flat revenues (+2.0% ex-E). Q2e: –33.2%.

TSX Composite Y/Y Growth Rates

In Europe, where lockdowns began earlier, as of May 5, 150 companies had reported. The beat rate is 50% and the surprise factor –6.9%. Q1 earnings are seen down 30.6% (-27.8% ex-E) on a –5.0% decline in revenues (-2.6% ex-E). Q2e: –44.9%.

STOXX 600: Y/Y Earnings & Revenue Growth Rate Estimates

I/B/E/S data from Refinitiv

From GS:

• In an effort to preserve liquidity, more than 40 stocks have suspended or reduced their dividends YTD. We forecast dividends will fall by 23% this year. Growth plans are frozen and capex spending will drop by 27%.
• market concentration is the highest in recent history with the five largest stocks accounting for 21% of the S&P 500 equity capitalization. While the S&P 500 index trades 13% below its February 19th all-time high, the median stocks trades at a more substantial 23% below its high. FB (+3%), AAPL (+6%), AMZN (+29%), MSFT (+17%), and GOOGL (+3%) have each posted positive YTD returns while the index has returned -9%.
• investors uniformly cite the same three drivers of the rally.The slowdown in the rate of new virus infections, the series of dramatic Fed policy actions, and the CARES Act. Investors expect a fourth round of fiscal stimulus (“Cares 2.0”) will be enacted.
• Our S&P 500 forecast shows 2% upside to a year-end 2020 target of 3000 but 18% downside to our three-month target of 2400. A single catalyst may not spark a pullback, but concerns exist that we believe, and our client discussions confirm, investors are dismissing including $103 billion in expected bank loan losses in the next four quarters, lack of buybacks, dividend cuts, and domestic and global political uncertainty.

Source: Compustat, FactSet, I/B/E/S, and Goldman Sachs Global Investment Research.

From Ed Yardeni via The Daily Shot:

SENTIMENT WATCH

• In a late April survey of 908 U.S.-based investors with at least $1 million of assets, UBS found that 53% said they planned to vote for Biden.
• But 52% think Trump will win. (Axios)

IF YOU CARE

HEALTHY RETURNS VIRTUAL SUMMIT Investing in health care innovation

• May 12, 2020

CNBC’s Healthy Returns Summit is being relaunched as a complimentary, full-scale digital event, enabling remote participation from anywhere in the world.

CNBC presents a virtual event featuring top health care CEOs, technologists and investors, exploring the ways the most innovative companies are addressing the coronavirus crisis, and the lasting effects the crisis will have on the industry.

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Led by CNBC’s anchors and reporters, Healthy Returns will hone in on the groundbreaking ideas that will help mitigate the global pandemic, and will transform the health care industry for years to come.

WHO SHOULD ATTEND: Health care investors, VCs, C-Suite executives from the biotech, pharma, health care and life sciences industries, health care IT BDMs.