Month: April 2020

Virus Update

• The total number of new cases around the world surged past 1.27 million and jumped by more than 100,000 in a single day for the first time, with a third of them coming from the U.S. The death toll surpassed 69,500. More than 9,600 people have died from Covid-19 in the U.S. New York state (123,000 cases), reported 594 new coronavirus deaths on Sunday, a reduction of 36 from Saturday. Governor Andrew Cuomo said in a daily briefing that the data may show the state is reaching a “plateau” — or could be “just a blip.”
• Germany saw the lowest number of new coronavirus cases in six days in a tentative sign that lockdown measures are easing the outbreak. As restrictions across Europe’s largest economy enter their fourth week, infections rose by 4,031 to 100,123, according to data from Johns Hopkins University. The death toll increased by 140 to 1,584 on Monday, the lowest daily increase in five days.
• The epidemic in France has “sort of” stabilized thanks to confinement measures, Martin Hirsch, head of Paris hospitals, said Monday on France Inter radio.
• China reported 78 new cases of people who tested positive but showed no symptoms of the coronavirus, according to the National Health Commission. The country reported 39 additional cases for April 5, with all but one imported. Of the confirmed cases, five of them were earlier classified as asymptomatic. China has a total of 81,708 confirmed virus cases.
• South Korea reported 47 new coronavirus cases over 24 hours, the lowest number since the start of a surge on Feb. 21 connected to a religious sect. The health ministry said there are a total of 10,284 cases in the country, with 186 total deaths. The nation has seen five consecutive days of less than 100 new cases within a 24 hour period, according to statements.
• Prime Minister Shinzo Abe said he will propose a state of emergency in prefectures including Tokyo and Osaka for about a month, after a renewed surge of coronavirus cases in some of Japan’s biggest metropolitan areas.
• Coronavirus may infect as many as 95,000 people in Indonesia by next month before easing, as authorities ordered people to wear face masks to contain the pandemic.
• Singapore ordered most workplaces to shut and schools to shift online starting next week, significantly ramping up restrictions as it faces a rise in coronavirus cases after it beat back the first wave of infections.
• Ecuador’s coastal city of Guayaquil has become the epicenter of a new coronavirus outbreak that may have already claimed hundreds of lives and is raising alarms about the spread of the deadly pathogen across Latin America.
• Dozens of promising antiviral drugs are in various stages of development and could be advanced quickly. The one furthest along is remdesivir, from Gilead Sciences. There’s evidence from clinical experience with Covid-19 patients that it could be effective. (…) Regeneron has an antibody drug that should enter human trials in June. Vir Biotechnology is also developing an antibody treatment for Covid-19 and says it could be ready for human trials this summer. Amgen recently started its own program with Adaptive Biotech and Eli Lilly has one as well. If these approaches work, the drugs can advance quickly, because much of the science and the safety is already well understood. (Scott Gottlieb, WSJ)
• “So I think there’s some evidence now that chloroquine might be an effective medication, maybe not in the most severely ill people, but at least in people who are moderately ill. There are also trials underway of a drug that people are optimistic about. Those trials are going on and enrolling patients in a number of countries, and that’s a drug produced by Gilead. And so we will know much more about whether that drug actually works in another four to six weeks.” (Professor Arthur Reingold, Head of Epidemiology and Biostatistics at the School of Public Health at the University of California Berkeley, via Matthews Asia)
• Since the coronavirus outbreak began at the end of last year, China has approved 10 drugs for the treatment of Covid-19, including remdesivir , an antiviral medication made by US firm Gilead Sciences. Besides those, more than 60 others are currently being trialled for uses other than their intended application, according to financial news website Yicai.com.
• Sanofi CEO: ‘We Might Be Vaccine-Ready in Q2 of 2021’
• Trump bans US companies from exporting needed supplies Trudeau noted Canada supplies the U.S. with many supplies, including pulp for surgical-grade N95 masks, test kits and gloves. Canadian nurses also work in the U.S.
• India Bans All Exports of Trump’s ‘Game Changer’ Virus Drug

• India banned all exports of hydroxychloroquine, a malaria drug that President Donald Trump has touted as a “game changer” in the fight against Covid-19.

  At a press conference on Saturday, Trump said he spoke to Indian Prime Minister Narendra Modi and appealed for the release of shipments U.S. has already ordered. India is giving his request “serious consideration,” he said.

  Exports of the drug and its formulations are prohibited “without any exceptions” and with immediate effect, India’s Directorate General of Foreign Trade said in an April 4 order on its website. The trade regulator had last month restricted overseas shipments of the drug, allowing only limited exceptions such as on humanitarian grounds and for meeting prior commitments.

  There’s no conclusive scientific evidence that hydroxychloroquine can treat the infection from the novel pathogen. (…)

• China promises not to restrict exports of medical supplies

• (…) “We will not forget that at the beginning of the fight against the epidemic, many countries gave us a helping hand,” Jiang Fan, from the department of foreign trade at the Ministry of Commerce, said on Sunday.

  “Therefore, when the situation in China is getting better and overseas epidemic conditions are accelerating, we are willing to make relevant efforts on the basis of epidemic prevention and control to provide support and assistance … China does not and will not restrict the export of medical supplies.” (…)

  According to Global Trade Alert, a Swiss-based trade watchdog, dozens of restrictions have been announced in recent weeks and 54 governments had announced restrictions by March 21.

  The watchdog said that Bulgaria, France, India, Indonesia, Saudi Arabia, South Korea, Thailand, Turkey and Britain had implemented “multiple export curbs” on medical supplies, while mainland China, Taiwan and Germany had relaxed their controls to a certain degree. (…)

• “Leaders are dealing with the crisis on a largely national basis, but the virus’s society-dissolving effects do not recognize borders. While the assault on human health will—hopefully—be temporary, the political and economic upheaval it has unleashed could last for generations. No country, not even the U.S., can in a purely national effort overcome the virus. Addressing the necessities of the moment must ultimately be coupled with a global collaborative vision and program. If we cannot do both in tandem, we will face the worst of each.” (Henry Kissinger in the WSJ (my emphasis))

PANDENOMICS

• Global economy in sharpest reversal since Great Depression IMF head warns downturn is steeper than financial crisis as data reveal job losses.
• At least one-quarter of the U.S. economy has suddenly gone idle, an analysis conducted for The Wall Street Journal showed, while other research showed economic output in emerging markets would fall 1.5% this year, the first decline since reliable records began in 1951.
• State Coronavirus Shutdowns Have Taken 29% of U.S. Economy Offline
• The employment report released Friday showed employers slashed 701,000 U.S. jobs last month. About two-thirds of the drop occurred in leisure and hospitality, mainly in food services and drinking places—which includes restaurants and bars. Those who can work remotely—typically in more high-skilled, higher-income jobs such as information and financial activities—saw little change in payrolls last month.
• It is estimated that 30% of people can work from home but only 7% in the service sectors which account for 70% of total employment.
• The Labor Department said 1.34 million Americans were employed but not at work during the jobs report survey week, March 8-15. That is 362,000 more people than in March 2019. This could suggest tens of thousands of Americans were sick enough to miss work with coronavirus-related illnesses, but not ill enough to report to a hospital, said University of Michigan economist Daniil Manaenkov. Centers for Disease Control figures counted just 3,487 confirmed cases in the U.S. as of March 17.
• Elvira Nabiullina, chairwoman of Russia’s central bank, estimated that the month-long shutdown could shave 1.5% to 2% from GDP this year. Economists surveyed by the Interfax news agency expect unemployment to rise to 5.9% by the end of the year, from 4.6% in February.
• Carmakers face more than $100bn hit to revenues New calculation highlights scale of losses should plants remain closed until end of April
• Reeling World Economy Slammed by Dangerous Disinflationary Shock

In China, Travel Resumes—Cautiously Three-day holiday weekend brings a jump in travel, hotel bookings; railway passenger flow Saturday was largest since January

(…) “Most travelers in China remain cautious,” said Jacques Penhirin, the head of Oliver Wyman’s retail and consumer goods practice in China: 60% of the people surveyed recently by the consulting firm said they wouldn’t travel anywhere until at least a month after China’s last Covid-19 patient had recovered. But in good news for the travel sector, most respondents said they expect to push ahead with vacations planned for later in the year, Mr. Penhirin said.

(…) domestic air travel did start to revive early in March, according to aviation data company OAG, with daily flights rising to 4,500—well short of the 8,000 that operated before the crisis, but a recover from the drop of about 80% in February. Still, around a fifth of domestic flights are being canceled daily as airlines respond to weak demand. (…)

• BMW Sees Signs of Recovery in China. (…) the trend began to reverse in March in China and South Korea. The company said in a statement that sales in China fell 30% in the first three months of the year, but that trend turned in March as factories resumed production. Around 95% of BMW’s retail outlets in China are currently open for business, the company said.

COMPOSITE PMIs

• USA: Business activity declines steeply amid COVID-19 pandemic

  

• China: Service sector activity falls at weaker pace in March

   

• Eurozone economy suffers record fall in activity during March

THE OIL SLICK

• OPEC+ Meeting to Be Delayed on New Saudi, Russia Rift

• Oil’s Stunning Demand Collapse Threatens Closures Everywhere

The survivors of oil’s last crash were the lowest-cost producers. But the crisis engulfing the industry now is so fast, the same rules don’t apply.

From the shale patch of Texas and the oil sands of Canada to the plains of Siberia, production of at least one in every 10 barrels around the world is likely to be shuttered as demand is shredded by the coronavirus pandemic. Cost won’t be the ultimate arbiter for producers this time, because as the International Energy Agency says, “there could soon be no place for their oil to go.”

Every imaginable space — from tanks and pipelines to rail cars — is filling to the brim. It’s a key reason that pressure is building for an output cut by OPEC and other producers at their meeting next week, though even the 10 million barrels a day of curbs that’s been touted may not be enough. Only those who can find a place to shelter their unwanted crude are likely to remain standing. (…)

“It’s going to be Russia, the U.S., Canada and parts of Latin America where you see the real damage.”

(…) some oil traders are estimating an unprecedented 35 million barrels a day destruction in oil use. Even if OPEC and other producers agree to a 10 million barrels a day of output cuts — in itself a mammoth undertaking — the IEA estimates 15 million a day of stockpile would still build up. (…)

Producers who are operating offshore, or have access to coastal terminals, possess the widest options to reroute their barrels and will be the most “immune,” Goldman’s Currie said. Those “sitting behind thousands of miles of pipe” are the most exposed.

Russia (…) could be incapable of selling about 1 million barrels a day of its output, according to Ed Morse, head of commodities research at Citi.

(…) At $25 a barrel crude, about 5% of global production is losing money, according to the IEA. (…)

• Trump aims to ease U.S. oil industry’s cash crunch, no plan to trim output

(…) U.S. Energy Secretary Dan Brouillette told a broad industry conference call following Trump’s meeting with the oil executives that Trump had directed him to work with Treasury Secretary Steven Mnuchin to look for ways to immediately fix the energy industry’s “liquidity shock”, according to sources who listened in on the call.

The measures could include easing banking regulations to expand the oil industry’s access to credit, which has shrunk rapidly alongside the decline in oil prices, Brouillette said, according to the sources.

Brouillette also pointed out that the administration was helping the industry cope with a rapidly worsening storage glut in the United States by leasing out space in the nation’s emergency oil reserve, the sources said. Interior Secretary David Bernhardt, who was also on the call, said he was making federal lands available to drillers and considering a series of other options to help oil companies, but provided no details. (…)

• U.S. Steps Up Oil Tariff Threat Amid Saudi-Russia Rift

(…) Trump said on Saturday: “I don’t care about OPEC,” a “cartel” he’s opposed all his life. (…) “If I have to do tariffs on oil coming from outside, or if I have to do something to protect thousands and tens of thousands of energy workers, and our great companies that produce all these jobs, I’ll do whatever I have to do,” Trump said Saturday. Low oil prices are “going to hurt a lot of jobs,” he said.

That was a change in tone from Friday, when he suggested he wasn’t inclined to target Russia or Saudi Arabia with oil tariffs.

Hundreds of thousands of U.S. oil industry jobs are hanging in the balance, with about $15 billion of investments wiped out from the budgets of shale explorers and many of them on the brink of bankruptcy. (…)

In the latest maneuver in the price war, Saudi Arabia postponed on Sunday its monthly price-setting event for exported oil. Saudi Aramco’s official selling prices for May could be pushed to Tuesday or Thursday, according to a person familiar with the situation. The OPEC meeting has been tentatively rescheduled for Thursday.

The United States imported more 1 million barrels per day of oil from Russia and Saudi Arabia combined in 2019, according to the U.S. Energy Information Administration.

• Canada in discussions with OPEC and Americans to find resolution to oil price war

(…) Canadian oil producers have already reduced output by as much as 700,000 barrels a day for economic reasons, and that number may surpass one million this month as available storage fills up, analysts have said. (…)

The dynamics between the major players such as Russia, the United States, Saudi Arabia will make the negotiations complicated, Mr. Masson said. But he added that the prospect of selling oil at negative prices is a big motivator and “self-interest” might force the countries to reach a deal. (…)

• Norway May Join Oil Output Cuts for First Time Since 2002

Norway, the biggest oil producer in western Europe, said it would consider cutting its output if there was a broad international agreement to curb supply.

The Nordic nation, whose oil output is set to grow over the next few years, hasn’t been a part of coordinated international cuts to support prices since 2002. (…)

“If a broad group of producers agree to cut production significantly, Norway will consider a unilateral cut if it supports our resource management and our economy.” Norway produced 1.75 million barrels a day of crude in February, less than 2% of global supplies. (…)

• Biggest Arab Economies Hit by Virus With Record Declines in Gulf

Business conditions in the United Arab Emirates worsened at a record pace and dropped at the fastest in over a decade in Saudi Arabia after emergency steps were taken. Egypt’s non-oil private sector recorded its deepest contraction in over three years, according to reports released on Sunday.

IHS Markit’s gauge tracking operating conditions in Saudi Arabia’s non-oil private sector dropped below the threshold of 50 that separates growth from contraction for the first time since the survey began in August 2009, to 42.4. Its U.A.E. Purchasing Managers’ Index fell to 45.2, the lowest ever. Egypt’s PMI slipped to 44.2 from 47.1 in February, retreating for an eighth month.

The non-oil economies of the energy-rich Gulf states are likely going in reverse this year, shrinking in the case of Saudi Arabia for the first time in more than three decades, after the one-two punch of collapsing crude prices and the health emergency. (…)

This a.m.:

Saudi Arabia, Russia ‘very, very close’ to oil output cut deal

Saudi Arabia and Russia are “very, very close” to a deal on oil production cuts, Russia’s sovereign wealth fund chief told CNBC on Monday.

“I think the whole market understands that this deal is important and it will bring lots of stability, so much important stability to the market, and we are very close,” Kirill Dmitriev, CEO of the Russian Direct Investment Fund, told CNBC. (…)

G20 energy ministers and members of some other international organizations will hold a video conference to be hosted by Saudi Arabia on April 10, a senior Russian source told Reuters on Monday, as part of the efforts to get the US involved in a new deal on production cuts.

EARNINGS WATCH

Amid the coro chaos, the Q1’20 earnings season has begun. The numbers will be a lot less meaningful than management comments although we can expect most companies will be shy of providing much guidance.

We already have results from 21 early reporters with their quarter ending in February. Their combined earnings were down 10.3%.

Sharply declining trailing earnings will quickly reduce the Rule of 20 Fair Value in April and even more so in Q2. In BEAR ESSENTIALS, I showed that bear markets can end even while profits and fair value keep falling. At the past 7 bear market troughs, Fair Value was rising 3 times, flat twice and declining, strongly, in 2 episodes.

At today’s pre-opening level of 2580, the S&P 500 is at 18.3 on the R20 P/E scale, up from 15.9 at its March 23 low close.

Given all the uncertainties, timing the low point in this bear market is impossible. Don’t short volatility just yet.

Bear markets have three phases they go through: The first is that investors view it as temporary, the second is that it’s worse than anyone could’ve expected, and finally, that it will never end. The fact that investors are still searching for a bottom suggests that we are still in the first phase. (Richard Bernstein)

Walmart Gears Up for ‘Restricted Living’ Phase as U.S. Store Sales Jump

Walmart sales from its over 4,700 U.S. stores increased nearly 20% over the past four weeks compared with the same period last year, according to documents viewed by The Wall Street Journal. Sales on Walmart.com rose over 30% over the past eight weeks. Downloads of Walmart’s online grocery mobile app skyrocketed. (…)

Fed Unlikely to Order Big U.S. Banks to Suspend Dividends

(…) Cleveland Fed President Loretta Mester said she prefers to await the results of the next set of the banks’ “stress tests” in June before deciding whether to limit dividend payments. The tests are used to assess banks’ ability to continue lending in a crisis.

U.S. central bankers may fear that halting dividends now would send a signal that they are worried about the solvency of the banking system. And because dividends are paid quarterly in the U.S. instead of annually as in Europe, the Fed has the ability to reassess the situation in the coming weeks and months.

Meanwhile, banks have signaled they have no intention of cutting dividends. “From our perspective, our dividend is sound, and we plan on continuing to pay it,” Citigroup Michael Corbat said Wednesday. (…)

Soaring unemployment increases odds U.S. banks will cut dividends

(…) Banks that have heavy exposure to credit cards are most at risk, they said.

Those lenders, including Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N) and Capital One Financial Corp (COF.N), may breach Federal Reserve limits on using capital for dividends when loan losses escalate and erode profits.

“One of the most important variables that will determine whether banks have adequate capital to maintain dividends is the extent to which consumers draw down on outstanding credit-card lines,” Goldman Sachs bank analyst Richard Ramsden said in a report on Thursday.

Credit cards have an “outsized impact,” Ramsden said, because lenders have extended some $2 trillion in those loans to consumers, and performance is so closely tied to unemployment. (…)

On balance, however, “all of the banks should be in a position to maintain dividends at, or close to, the current run rate,” he said. (…)

The industry may have no choice if banks get too close to the Fed’s limits on capital use for dividends, analysts said. That could happen as soon as the second half of this year, particularly for major card lenders, as delinquencies and loan-loss provisions increase, Ramsden said.

If unemployment reaches 10%, banks might report less in quarterly profits than they planned to pay out in dividends, Oppenheimer & Co analyst Chris Kotowski said.