Month: August 2020

• The Centers for Disease Control and Prevention (CDC) on Monday updated guidance to say that Americans who have recently been exposed to someone with COVID-19 for more than 15 minutes and do not have symptoms do not need to get tested. “You do not necessarily need a test unless you are a vulnerable individual or your health care provider or state or local public health officials recommend you take one,” the CDC said. This is a change from previous guidance that said people who had spent more than 15 minutes with an individual who has tested positive for the virus should also get tested, regardless of symptoms. The U.S. has conducted more than 73 million tests this year, and about 6 million of them have come back positive. The CDC’s decision has been criticized by some in the medical community. “Our work on the ‘silent’ spread underscores the importance of testing people who have been exposed to COVID-19 regardless of symptoms,” Alison Galvani, an epidemiologist and director of the Center for Infectious Disease Modeling and Analysis, tweeted. “This change in policy will kill.” It is estimated that up to 40% of people who have COVID-19 are asymptomatic, meaning they do not demonstrate common symptoms of an infection like coughing or muscle aches, according to one research letter published in May in JAMA Network.

Activity Data Show South Korea Drop as Europe Reverses

The economic rebound in major advanced economies is stalling or even reversing, according to Bloomberg Economics gauges that integrate high-frequency data such as credit-card use, travel and location information. South Korea stands out with the steepest apparent drop, and Italy, France and Spain also appear to have turned down while the recovery in Germany and Sweden remains sluggish. The U.K., U.S. and Canada are still very far below pre-crisis levels of activity, but have recently made up some lost ground.

Germany Boosts Already Hefty Coronavirus Stimulus Germany is beefing up its already formidable stimulus package to prop up its economy through the Covid-19 pandemic, brushing away concerns from some economists that the state is keeping insolvent businesses afloat artificially.

(…) Wage subsidies for furloughed workers, the flagship measure in the country’s new package, will be extended by 12 months to the end of 2021, in contrast with most other European countries whose schemes are set to expire in the coming months.

Furlough schemes, known in Europe as short-time work, allow companies to temporarily idle workers without resorting to payroll cuts. So far, the scheme has allowed Germany to avoid a spike in unemployment and it could help businesses adjust faster to rising demand when the economy normalizes. The 5.6 million workers currently enrolled can earn up to 87% of their pay from benefits while working reduced hours or not at all.

Other steps announced late Tuesday after more than eight hours of internal government negotiations, include extending until the year-end a provision allowing companies not to file for insolvency if they cannot service their debt. Grants to help companies cover their fixed costs will be extended by four months until Dec. 31. (…)

Since the start of the crisis, Berlin has pledged direct payments, tax relief, equity, loans and guarantees—not all of which have been tapped— 40.1% of Germany’s gross domestic product, compared with 23% for the U.K., 18.9% for France, and 14.8% for the U.S., according to the International Monetary Fund.

Germany’s economy is already among the continent’s better performers this year despite its reliance on international trade, which collapsed in the spring. That partly reflects the nation’s relatively short and mild lockdown, but economists also point to the fiscal stimulus.

The German economy contracted by 9.7% in the second quarter compared with the first, the federal statics office said Tuesday, roughly in line with the U.S. and far outperforming major European economies such as France and Italy whose economies shrank by around 20% during the same period. Recent economic data suggest Germany’s economy is now recovering more strongly than its neighbors.

After years of fiscal restraint and with historically low interest rates, Germany’s government can afford to spend more than its neighbors. (…)

A fresh increase in state spending could bring political benefits for Germany’s ruling parties, which face a national election late next year. (…)

EARNINGS WATCH

We now have 479 reports in, an 82% beat rate and a +22.5% surprise factor. Q2 earnings are now seen down 30.2% on revenues down 8.9%. Health Care, Utilities and Tech are expected to show positive earnings growth in Q2.

In Europe, 281 companies have reported. The beat rate is 60% and the surprise factor is +36.8% but the blended growth rate for Q2 earnings is a still bleak -51.9%. Revenues are seen cratering 20.1% in Q2. Only the Health Care sector is expected to post positive earnings growth (+1.1%)

While Industrials have posted a strong earnings beat this quarter, it appears that analysts continue to remain bearish on this sector, as they have downgraded next quarter estimates by -7.0% for those companies who have reported Q2 earnings and -14.0% for companies yet-to-report Q2 earnings. (Refinitiv)

U.S. Firms in China Say Trump’s WeChat Ban Will Hit Them Where It Hurts U.S. businesses in China are pushing back against a looming Trump administration ban on Tencent’s WeChat app, with a report shedding light on just how vital the tool is to companies doing business in the world’s second-largest economy.

The American Chamber of Commerce in Shanghai warned of an “enormous negative impact” on U.S. companies with international businesses if the order, whose scope has yet to be revealed, was enacted too broadly. (…)

Should the ban extend to China and U.S. companies and citizens there, almost nine in 10 companies said the ban would hurt operations in China by hindering their ability to effectively communicate with staff and local authorities. More than half of those polled said it would result in a loss of competitiveness in the market, and 42% of the respondents say extending the WeChat ban to China would result in revenue loss.

More than a dozen firms, including Apple Inc., Walmart Inc. and Ford Motor Co., have approached the White House in recent weeks to voice their concerns that the order, typically used in emergency situations to protect national security, could extend into China, where the app has become a vital business tool. (…)

Beyond interpersonal communication, consumers in China use the app to pay for goods and services, while companies including Starbucks Corp. and McDonald’s Corp. use WeChat as a key marketing tool and e-commerce platform. (…)

The AmCham Shanghai survey showed that the app is often used by U.S. businesses in China to communicate with staff, Chinese consumers and local government officials. Replies showed there was no good alternative to WeChat in China, should the platform be banned. Facebook Inc.’s eponymous messaging app, Instagram and Twitter are blocked in China and Facebook-owned WhatsApp chat messenger is sporadically unusable. There is no comparable Chinese alternative. (…)

• Hemorrhaging cash could be the pair’s biggest problem.  Analysts at Bloomberg Intelligence estimated Friday that Uber and Lyft will see $3.5 billion and $1 billion in cash burn, respectively, for full-year 2020, figures which exclude the potential effects of higher labor costs or a California shutdown related to the AB5 legislation. Bloomberg Intelligence’s Mandeep Singh and Matthew Martino further note that “even after laying off more than 20% of their workforce[s], the companies may have to continue cutting fixed costs.”  (Almost Daily Grant)

Wall Street analysts are not great at interpreting the early results coming from coronavirus vaccine trials—unsurprisingly, because in many cases even immunologists can’t yet reach conclusions based on those results. John Mascola, head of vaccine research at the National Institute of Allergies and Infectious Diseases: “There’s really no substitute for a Phase III trial.” Fortune

As Child Covid Cases Rise, Doctors Watch for Potential Long-Term Effects Most child cases of Covid are mild. But some kids have longer-term symptoms such as headaches, shortness of breath and gastrointestinal problems.

(…) Children now represent about 9% of all Covid-19 cases in the U.S., up from 2% in March, according to the most recent weekly report issued from Children’s Hospital Association and the American Academy of Pediatrics. The number of child Covid-19 cases has doubled since July 9, totaling 406,109 as of Aug. 13, according to cases reported from 49 states. (…)

So far the main complication in children with Covid is multisystem inflammatory syndrome (MIS-C), a serious inflammatory syndrome where different body parts—including the heart and brain—can become inflamed, causing a fever, stomach pain, rash and gastrointestinal symptoms. There have been at least 570 cases of MIS-C, according to the CDC. Children usually present with the syndrome two to four weeks after having Covid-19 and are often hospitalized. (…)

“That’s the severest form…but there seems to be a larger group of children who develop inflammatory illnesses less severe than what is seen in MIS-C,” says Dr. Kelly. (…)

“I think it’s becoming clearer as more kids are getting sick that there’s a cohort of children whose immune systems are going to react inappropriately and set off an escalating degree of inflammation,” says Dr. Dempsey. (…)

For Many Pandemic Victims, Lingering Effects Stress Insurance Coverage A number of Covid-19 patients, the exact size of which is unknown, develop long-term medical problems from the novel coronavirus that require extended and often expensive medical care, stressing families’ financial security and taxing an already strained health system.

• They Beat Covid, But Debilitating Effects and Economic Costs May Linger for Years

(…) It’s now known that SARS-CoV-2 will leave a portion of the more than 23 million people it’s infected with a litany of physical, cognitive and psychological impairments, like scarred lungs, post-viral fatigue and chronic heart damage. What’s still emerging is the extent to which the enduring disability will weigh on health systems and the labor force. That burden may continue the pandemic’s economic legacy for generations, adding to its unprecedented global cost — predicted by Australian National University scholars to reach as much $35.3 trillion through 2025 as countries try to stop the virus’s spread. (…)

“If you look at the intermediate-term consequences right now, we’re already seeing it” on the lungs, heart, neurological and psychological systems, said File, who is also chair of infectious diseases at Summa Health, a hospital system in Akron, Ohio. “This is going to have a significant burden on our health-care system for years to come.” (…)

Senior U.S., Chinese Officials Say They Are Committed to Phase-One Trade Deal Talks nod to rising tensions between the nations, as President Trump regularly criticizes Beijing

The videoconference [Monday] brought together U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He for a formal review of the trade deal signed in January. The trade representative’s office released a one-paragraph summary of the talks, which it said included discussions of “significant increases” in the purchases of U.S. products by China.

Talks also reviewed steps Beijing had taken to protect American intellectual property and liberalize China’s market for financial services, according to the statement. “Both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement,” it said. (…)

A statement published by China’s official Xinhua News Agency said the two sides had “a constructive dialogue on strengthening bilateral coordination of macroeconomic policies and the implementation of the phase-one trade agreement.” (…)

In the past few months, China has stepped up its buying of U.S. corn, soybeans and other farm products. However, the pace of the purchases, as measured in dollar terms, is falling short of what is needed to meet the targets, partly reflecting declining commodity prices amid the global pandemic.

As of June, China’s purchases of all products covered by the trade pact were $33.3 billion, only at around 47% of their year-to-date targets, according to Chad Bown, a senior fellow and trade expert at the Peterson Institute for International Economics. (…)

A recent U.S. business survey showed increasing pressure on U.S. business from China to hand over technology.

According to the survey, conducted by the U.S.-China Business Council in May and June, 13% of the more than 100 respondent companies said they had been asked to transfer technology this year, compared with only 5% last year. (…)

India moves to cut Huawei gear from telecoms network Industry executives say government is seeking to phase out Chinese equipment without a formal ban

(…) A telecoms industry executive told the FT: “It’s open now that the government is not going to allow Chinese equipment. There is now clarity…It’s really game over.” (…)

The Median S&P Stock Has Never Been More Expensive The S&P’s latest record has reignited a longstanding debate about how much attention investors should pay to valuations

(…) The price/earnings ratio on the S&P 500, measured against the past 12 months of earnings, stands at 25.26, according to FactSet. That is the highest level since 2002. The forward P/E, measured against earnings expectations for the next year, is at 25.98—a mark last hit in September 2000.

And the valuation of the median stock in the S&P 500, measured by forward P/E, is now in the 100th percentile of historical levels, according to Goldman Sachs Group Inc., going back four decades—the highest level possible. The index itself is trading at the 98th percentile. (…)

Stocks might look expensive against those concerns, but some market watchers say it is difficult to reliably predict when valuations are too rich for investors’ taste.

“Market rules are not written in stone,” said Robert Colby of Robert W. Colby Asset Management, which has $20 million in assets under management. “Sometimes there’s just no logic to market behavior.”

Still paying attention to valuations (just an old habit), I used the Morningstar/CPMS database and software to do the following charts:

• The S&P 500 is now selling at 3.9 times book value, only seen during the dot.com bubble when ROE (blue line) on projected earnings ranged between 16.5% and 18%. Projected ROE is currently 15.1%, down from 19% in 2019. It is not unusual for P/B to rise while expected ROE is falling rapidly but it rarely ends well. Actually, only the 1990-91 episode left investors unscathed.

• Price to Sales is at an all-time high of 2.6x from 2.3x pre-pandemic while projected profit margins are down from 12% to 10%. Paying 13% more for sales that are expected to be 17% less profitable.

Yes Virginia, interest rates are on the floor…but there are good reasons for that…and these reasons are likely to slow economic (sales) growth and impact margins (profits). How about reshoring, and less efficient supply chains, and the debt…?

WHATEVER IT TAKES

World Trade Organization Sides With Canada in Lumber Dispute With U.S. The World Trade Organization sided with Canada in the latest flare-up in a decades-old row with the U.S. over lumber imports, ruling the Trump administration incorrectly claimed in 2017 that its northern neighbor was improperly subsidizing production.

(…) Those calculations led the Trump administration to impose a 20% tariff on Canadian softwood lumber, typically used to build homes, at a cost of roughly $5 billion a year. (…)

Mr. Lighthizer said the USTR was evaluating its response to the report. He added the decision reinforces the Trump administration’s skepticism for the WTO.

The U.S. has blocked the appointment of judges to the WTO’s Appellate Body. As a result, the court has too few judges to rule on big trade disputes between countries. (…)

Bloomberg adds:

Keeping tariffs in place makes the U.S. lumber industry more competitive than its Canadian counterpart. But the U.S. does not produce enough lumber to meet domestic needs, meaning American home builders and other consumers must either pay the tariffs or import softwood from further-off countries. Russia, for instance, has seen a surge in softwood exports.

That’s what friends are for…Speaking of friends:

At Least One Company Is Cheering Renewed Aluminum Tariff on Canada Century Aluminum lobbied for duty that other producers opposed

The Trump administration’s decision to reinstate tariffs on Canadian aluminum is a victory for one small U.S. company that out-lobbied competitors wary of imposing new barriers on a key trading partner. (…) Glencore is Century’s largest shareholder, holding 42% of the shares with a subsidiary. (…)

The tariffs have been unpopular with U.S. manufacturers that consider the duties a windfall for the U.S. aluminum industry. The tariffs drove up costs for beverage cans, car parts, window frames and other products. (…)

Century has been at odds over the tariff with Alcoa and the Aluminum Association, the aluminum industry’s trade group that represents producers and manufacturers that have opposed the 10% tariff, especially for Canada.

“All of our efforts should be geared toward restarting the economy, not erecting new tariffs against a key ally that U.S. manufacturers have traded with successfully for decades,” said Tom Dobbins, the association’s president. (…)

Also from Bloomberg:

“The beneficiary of this tariff is a Swiss trading company and Rusal aluminum of Russia,” said Hillman. “Century Aluminum and Magnitude 7 Metals have been calling for this measure, and the rest of the industry, which represents 97% of American jobs in the aluminum sector, they oppose these taxes on their operations.”

Hillman alleged that commodity trading giant Glencore Plc directly or indirectly asserts a degree of control or influence over Century Aluminum Co. and Magnitude 7 Metals LLC, two U.S.-based companies that have been asking the Trump administration to reimpose tariffs. Glencore has about a 47% interest in Century, according to its 2019 annual report. Magnitude 7 was formed by a former Glencore trader, according to reports.

According to Hillman, Russian metals producer United Co. Rusal also stands to benefit from more-expensive Canadian aluminum imports, as Glencore has exclusive right to sell Rusal’s aluminum into the U.S. market. Rusal in April announced it planned to sign a $16 billion deal to sell aluminum to Glencore.

The Globe and Mail has the other angle:

(…) the idea that Canadian aluminum volumes have surged overall is contested by a different industry group, the Virginia-based Aluminum Association, which represents more than 120 companies in the aluminum supply chain. Its president, Tom Dobbins, wrote an open letter in June opposing new tariffs, saying that Canadian aluminum volumes flowing into the U.S. have barely budged during the past three decades. (…)

Although Glencore does not produce any aluminum itself, it is a major trader of the metal, and earlier this year struck a multi-billion dollar deal to buy from a Russian producer, one of the world’s largest, over the next few years.

“If you understand the aluminum market, then you can see how Glencore can benefit from (tariffs on Canadian aluminum)”, said Jean Simard, president and chief executive of the Aluminum Association of Canada, in a recent interview.

“They’re traders, so they’re moving metal, and so their incentive is to make the highest margins, so if the price goes up, they make … (more) money.” (…)