***EARNINGS WATCH

Virus Update

• New York to Ease Coronavirus Rules by Region to Reopen State Economy Businesses in different parts of New York state will reopen on separate schedules, Gov. Andrew Cuomo said Tuesday, as upstate elected officials and employers made the case for a regional approach to easing coronavirus restrictions
• Almost all major U.S. metropolitan areas are seeing improvements in their outbreaks, said Deborah Birx, a top health official on the Trump administration’s coronavirus task force. She spoke after data showed that the nationwide infection tally had accelerated. Cases appear to be flattening in areas including Chicago and Boston, while New Orleans is back to its baseline for infections, Birx said at the daily White House briefing. Philadelphia, Houston, Atlanta and Nashville are also among cities improving, she said. The Washington, D.C., region is one where “we don’t see a decline yet,” Birx said.
• Sydney’s famous Bondi Beach will reopen next week for swimming and surfing. That’s after Australia’s government said Tuesday that lockdown measures have led to a “sustained and consolidated” slowdown in new coronavirus cases.
• France’s testing weakness shows challenges of lifting lockdowns Macron wants to loosen curbs in mid-May but scientists first want capacity trebled
• David Rosenberg calculates that when/if a vaccine is found, we would need 300 million doses (600M for 2 shots). He says That American vaccine plants produce between 5 to 10 million doses a year. Then, there are syringes. Better get in line now…2 meters apart.
• The U.K. only has half the testing capacity of other European countries such as Switzerland when it comes to running Roche Holding AG’s most efficient equipment for Covid-19 tests, Chief Executive Officer Severin Schwan said on a call with reporters. Countries struggling to scale up pandemic screening failed to invest enough in health-care infrastructure for decades, he said. “They are just not able to ramp up because they don’t have the know-how, they don’t have the personnel, because they simply don’t have the capabilities,” Schwan said. “Which is not surprising, because you cannot just start up a lab on a green field out of nothing.” Among those who did invest, he cited Germany, South Korea and Singapore.
• In developing its antibody test, Schwan said, Roche scrutinised some existing products for reliability before rejecting them. “It’s a disaster. These tests are not worth anything, or have very little use,” Schwan told reporters on a conference call. “Some of these companies, I tell you, this is ethically very questionable to get out with this stuff.” Schwan said there were about 100 such tests on offer, including finger-prick assays that offer a quick result. The Basel-based company declined to specify which rival tests it had studied, but said it was not referring to tests from established testing companies.
• US health agency warns against drugs touted by Trump Covid-19 patients alerted mix of antimalarial medicine and antibiotic poses serious risks
• U.S. Adversaries Are Accelerating, Coordinating Coronavirus Disinformation, Report Says The State Department has assessed that Russia, China and Iran are mounting increasingly intense and coordinated disinformation campaigns against the U.S. relating to the outbreak of the new coronavirus, according to an internal report.
• Chinese Ambassador to U.S. Urges ‘Serious Rethinking’ of Ties

(…) “I think I should be hoping for more than just a pause in tensions, but really a serious rethinking of the very foundations of this important relationship,” Cui Tiankai said in response to a question on U.S.-China ties during a Bloomberg New Economy webcast on Tuesday. (…) Missouri this week sued the Chinese government for what it alleged was covering up the extent of the coronavirus epidemic. (…)

“Hopefully this pandemic will teach all of us a good lesson,” he said, adding that the relationship should “be based on a more realistic, forward-looking foundation.” (…)

Cui added that China’s development has not come at the expense of the U.S., saying China wants “nothing to do with U.S. domestic politics, we can’t even make sense of it,” in response to a question on who China would prefer to win the presidential election in November. (…)

PANDENOMICS

Goldman Sachs

Global CEOs see U-shaped recession due to coronavirus: survey

Global business leaders are preparing for a drawn-out U-shaped recession due to the impact of coronavirus and many fear their companies won’t survive the pandemic, a survey of thousands of chief executives showed on Wednesday. (…)

Around 60% of chief executives are preparing for a U-shaped recovery – a long period between recession and an upturn – compared with 22% who predict a double-dip recession, according to an April 15-19 poll of 3,534 chief executives from 109 countries conducted by YPO, a business leadership network.

The survey found that 11% of chief executives see coronavirus as a risk to the survival of their firm, while a further 40% say the pandemic poses a severe threat. (…)

Business leaders in the hospitality and restaurant sectors were the most vulnerable with 41% of executives saying their firms were at risk of not surviving, while 30% in aviation and 19% in wholesale and retail sales feared they may go under, the survey found. (…)

Almost two-thirds of business leaders forecast a negative impact on earnings to continue for more than a year, while a quarter expect their workforce to be down by more than 20% a year from now. (…)

So, 60% U-shapers and 22% double-dippers. Not much space left for V-shapers.

What are the current lockdown restrictions and when will they be lifted or re-evaluated?

ING Research

‘Scary Time’ for American Middle Class as Office Jobs Disappear A tsunami of job losses, which began in restaurants, hotels and factories, is now reaching white-collar America.

Bundesliga set to become first big league to restart in pandemic German football to resume in May offering blueprint for rivals

Trump Administration Weighs Aid for Oil Companies Possible conditions include producers offering ownership stakes or oil reserves to the government

The Trump administration is considering offering federal stimulus funds to embattled oil-and-gas producers in exchange for government ownership stakes in the companies or their crude reserves, according to people familiar with the matter. (…)

But it faces long odds given likely opposition from congressional Democrats to using stimulus funding for the oil industry.

Separately, Texas regulators declined to act Tuesday on a proposal to limit state oil production, even as the U.S. shale industry scales back anyway. The Railroad Commission of Texas, which regulates the oil-and-gas industry in America’s largest oil-producing state, deferred until May 5 a decision on whether to make operators curtail production for the first time since the 1970s. (…) We need to make darn sure when we make the motion that it fits legal requirements,” said commissioner Wayne Christian. (…)

“We will never let the great U.S. Oil & Gas Industry down,” the president wrote. He said he wants the plan “so that these very important companies and jobs will be secured long into the future!” (…)

“Obviously the energy business is very important to the U.S.,” Mr. Mnuchin said, adding, “this has national security issues, but different.” (…)

Critics of the oil industry say it doesn’t deserve a government bailout. Many consider the oil industry a contributor to climate change, and say producers ran up irresponsible debt and paid gaudy executive salaries even while returning scant profits. (…)

EARNINGS WATCH

We now have 68 reports in. Surprise! 65% beat rate with 7 of 8 sectors having reported showing positive surprise. Only Financials negatively surprised (-19.9%)

Still, the 68 companies having reported had aggregate earnings down 25.6% on a 2.6% revenue gain. The current blended growth rate for Q1 is –13.6%, from –4.7% on Apr. 1. Q2 estimates are for –29.9%, Q3 –15.8% and Q4 –7.2%.

Trailing EPS are $158.65. Full year EPS estimates: $140.05, down 14%. Here’s the V-shaped EPS pattern unseen by two-thirds of the executives in the above mentioned survey.

The Rule of 20 P/E is now 19.5 at today’s pre-opening of 2765.

• BEAR ESSENTIALS

Virus Update

• Global deaths surpass 2,800, with more than 82,300 cases
• China death toll at 2,744, up 29; cases climb to 78,497, up 433
• First U.S. case of unknown origin; Pence in charge of response
• South Korea cases rise, U.S. urges travelers to reconsider trips

Gleaned here and there:

Saudi Arabia halted religious visits that draw millions to cities including Mecca and Medina, while Japan asked for all schools to shut from March 2. More new cases were reported outside China than within the country for the first time, highlighting the spread of the epidemic.

Kuwait reported a jump in coronavirus cases to 43, from 26 previously, with all the cases linked to Iran, the hub of the outbreak in the Middle East. Iran has reported 158 cases, including 19 deaths. The United Arab Emirates, which has 13 cases and hasn’t given an update since Saturday, said it’s setting up a medical facility to quarantine patients.

Britain added two cases, Switzerland three and South Korea reported 505 new infections. The U.S. identified the first coronavirus case that doesn’t have ties to a known outbreak, as President Donald Trump assured Americans they face little risk.

The U.S. Centers for Disease Control and Prevention said the patient doesn’t appear to have traveled to China or been exposed to another known case of the coronavirus. Health authorities have been increasingly concerned about what’s known as community spread, where the virus begins circulating freely among people outside of quarantines or known contacts with other patients.

The CDC said the case was picked up by doctors in California, and that the patient may have been infected by a traveler who brought the disease in.

China plans to suspend retail government bond sales and Malaysia unveiled a stimulus package valued at about $4.8 billion.

The Israeli government has asked citizens to reconsider plans to travel abroad, as the coronavirus spreads to more countries. The ministry added Italy to the list of destinations from which Israelis are required to enter into quarantine upon return. It’s the first non-Asian country on the list.

Emirates, which gets 60% of its Middle East revenue from Saudi Arabia, will stop flying tourists from more than 20 countries to the kingdom to prevent the spread of the coronavirus.

China’s top container ports unclog backlog as virus curbs ease

(…) “The turning point has arrived… We are seeing that port congestion has eased and logistics start to revive,” said Xu Kai, director of the Shipping Information Research Institute at SISI. (…)

Some ports have even managed to surpass year-ago processing rates in an effort to clear the backlog. (…)

• But TomTom’s live traffic index for Shangai shows congestion levels 22% less than average.
• Using migration data from map-and-search company Baidu Inc., Nomura estimates that a little more than a third of the people who left cities such as Beijing, Shanghai and Shenzhen for the Chinese Lunar New Year in late January and early February have returned. By this time last year, nearly all had. Migrant laborers make up about 40% of China’s workforce and are needed for manufacturers to resume production. (WSJ)

The German Economy Was Faltering, Then Came the Coronavirus Companies in Europe’s largest economy are rushing to limit the impact of the spreading coronavirus epidemic, which hits a weakened German economy in a painful spot: the supply chains of its export-oriented manufacturers.

European companies face coronavirus hit to supply chains Italian auto supplier warns car groups’ production lines may be brought to a standstill

Coronavirus disruption at Samsung could threaten S Korea economy

Virus Creates Dilemma for Europe’s Public Gatherings, Open Borders The threat of the coronavirus spreading across Europe’s open borders has put authorities and others in a bind over whether to call off fashion shows, soccer games and other major gatherings.

• Staying In Worked During the Stock-Market Rout. Dining Out Didn’t. This past week investors found havens in a peanut butter and bleach, but rebuffed restaurants and concert venues.

• Pilgrims to Muslim Holy Sites Risk Spreading Coronavirus

• Tokyo Olympics Could Be a Victim of the Coronavirus, IOC Official Says

Homegrown problems make Canada’s economy more prone to rising coronavirus fears

(…) On Wednesday, Bank of America slashed its 2020 growth forecast for Canadian gross domestic product to 1 per cent from 1.5 per cent, citing the spreading impact of China’s coronavirus outbreak as the primary, but not the only, reason for its considerable leap in pessimism. The widespread protests that have disrupted rail service have further clouded Canada’s economic outlook – which, coming out of a final quarter of 2019 with near-zero growth, was murky enough to begin with. (…)

• Rail service will take ‘many, many weeks’ to get back on track, Garneau says

African growth dampened as South Africa slumps, Chinese demand falters amid virus outbreak

Google, Microsoft shift production from China faster due to virus ‘Made in Vietnam’ Pixel phones and Surface laptops expected in 2020

U.S. New Home Sales Jump to 2007 High; Prices Reach Record

Sales of new single-family homes increased 7.9% (18.6% y/y) during January to 764,000 units (SAAR), the highest level since July 2007. Sales increased from 708,000 in December, revised from 694,000. Figures for 2019 were revised. The Action Economics survey expected sales of 710,000.

The median price of a new home rose 7.4% (14.0% y/y) last month to a record $348,200. The average price of a new home also increased to a record of $402,300 (11.4% y/y).

Sales activity was mixed across the country in January. In the Midwest, sales rose 30.3% (47.8% y/y) to 99,000. Sales in the West rose 23.5% (49.1% y/y) to 252,000 units. Sales in the Northeast gained 4.8% (46.7% y/y) to 44,000. Working 4.4% lower to 369,000 (-2.4% y/y) were new home sales in the South.

The Fed Can’t Wait to Respond to the Coronavirus The pandemic is a threat to the global economy. U.S. central bankers should lead a global response.

By Kevin Warsh, a former member of the Federal Reserve Board, and a distinguished visiting fellow in economics at Stanford University’s Hoover Institution, in the WSJ:

A central bank’s primary job is to offset major disturbances to the economy. Today, the novel coronavirus is a material risk to the economy. It represents an unexpected shock, and the Federal Reserve should lead the world’s central banks in taking immediate action.

In a coordinated move alongside the People’s Bank of China, the European Central Bank, the Bank of England, the Bank of Japan and others so willing, the Fed should announce a 0.25-percentage-point interest-rate cut and make clear it’s open-minded about further action. The Fed should also encourage other central banks to take appropriate simultaneous action to loosen monetary policy in their jurisdictions. Global action would help make the most of scarce policy ammunition. (…)

China’s first-quarter growth is likely to be negative. Aggregate demand is falling fast. Chinese consumers are paring consumption markedly. The inventories of key Chinese exports, including consumer products and intermediate industrial goods, are declining rapidly. High levels of indebtedness, especially at smaller firms, are leading to an increase in insolvencies. Many employees have stayed home in February, which is constraining the production side of China’s economy. It isn’t clear when people will be returning to work or how bad the contagion risks will be when they do. (…)

Even if the virus is more contained than people think, or dissipates in the spring, economic activity in unlikely to spring back to life. The disruption to global supply chains will take several months to reset. Business confidence in the U.S., which has turned decidedly more negative in recent weeks, will also take to time to reassert itself, especially in an election year. (…)

Fed leaders call the current, ostensibly low level of inflation the greatest challenge for this generation of monetary policy makers. I disagree. An exogenous, uncertain, global economic shock is a far bigger and more pressing challenge. And a far more compelling rationale for policy action.

A coronavirus pandemic would be the biggest threat to the global economy since the financial crisis. We simply don’t know what will happen. The Fed should be in the business of responding to “tail risks”—unlikely events that would have highly damaging effects on output and inflation—not fine-tuning around the base economic outlook.

EARNINGS WATCH

We now have 452 Q4’19 reports in, a 71% beat rate and a +4.7% surprise factor. Q4 earnings are now seen up 3.1%, much better than the –0.3% forecast of Jan. 1. Revenues are also much better than expected: +5.9% vs +4.1% expected on Jan. 1.

As good as it is, investors currently don’t care about the past, trying to assess the immediate future.

Official corporate pre-announcements, while still looking good, have become less upbeat in the past 10 days as companies are getting more info nearly two-thirds into the first quarter. By Feb. 11, negative guidance for Q1’20 was 1.8x higher than positives. Since then, the N/P ratio has shot up to 2.5x.

Not included in the above total:

• Anheuser-Busch InBev NV, the world’s largest brewer, slumped after forecasting the steepest decline in quarterly profit in at least a decade due to the coronavirus.
• Microsoft became joined Apple and HP in cutting outlook, while Standard Chartered said it may take longer to hit a key target.

Q1’20 estimates still call for earnings to rise 2.9% but this is coming down fast as more corporations feel a need to update their guidance and analysts become increasingly worried. Expected Q1 growth was +6.3% on Jan. 1.

Trailing EPS are now $164.64 and the Rule of 20 P/E has retreated from its recent 22.87 (@ 3386) high to 20.91 at today’s pre-opening of 3070. The Rule of 20 P/E has a habit of always at least cycling back to its 20 mean or Fair Value, currently 2920.

Goldman, Citi Strategists Say S&P 500 Rout Is Bound to Worsen The biggest sell-off in U.S. stocks in two years is just getting started, they say.

While the S&P 500’s average correction has lasted for four months, this pullback is likely to be longer because of the lingering uncertainty over the coronavirus and the constraint facing Federal Reserve policy makers, according to Christian Mueller-Glissmann and Alessio Rizzi at Goldman Sachs Group Inc. That means the retreat that started last Thursday might not find a bottom until at least July.

At Citigroup Inc., strategists led by Jeremy Hale are also leery, citing a lack of clarity on both the virus outbreak and Fed monetary policy. To illustrate where risky assets may become attractive, they pointed to the S&P 500 falling to 2,730, 10% below its 200-day moving average. Reaching that level would require the index to drop an additional 12% from its current level. That would put it on the edge of a 20% bear market decline when measured from the Feb. 19 record. (…)

GS’s David Kostin:

(…) US companies will generate no earnings growth in 2020. We have updated our earnings model to incorporate the likelihood that the virus becomes widespread. Our revised baseline EPS estimates are $165 in 2020 (previously $174) and $175 in 2021 (previously $183), representing 0% and 6% growth. Our reduced forecasts reflect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, supply chain disruption, a slowdown in US economic activity, and elevated uncertainty. Consensus forecasts imply EPS will climb 7% in 2020 and 11% in 2021.

Our top-down base case assumes S&P 500 firms will report a decline in EPS during 1H 2020. (…) The trajectory of the US and global economy is highly uncertain at this time. For modeling purposes, we assume economic growth slows sharply during 1H 2020, but rebounds in 2H 2020 and 2021. A more severe pandemic could lead to a more prolonged disruption and a US recession. Under a recessionary scenario, S&P 500 EPS would fall by 13% to $143 in 2020 before rebounding by 10% to $158 in 2021. In an upside scenario where COVID-19 spread is more contained, EPS would equal $170 (+3%) in 2020 and $180 (+5%) in 2021.

Path of S&P 500: 2900 near-term (-7%) but rebound to 3400 by year-end (+9%). (…)

In its recession scenario, GS sees the S&P 500 at 2450 which, on $158 EPS, would mean a R20 P/E of 17.8. At the low of the growth scare in December 2018, the market troughed at a R20 P/E of 16.85 which would be 2300.

In truth, nobody knows anything, from how bad the virus will get, to how much economic impact it will have, to how serious the disruptions to the global supply chains will get, to the effects on corporate profit margins and, eventually, to global inflation.

Goldman’s “path of the S&P 500” cited above, the risk reward ratio is –7% to +9%, but that omits its recession scenario which calls for –21% to 2450  (-26% to 2300). However you weigh the recession scenario, the risk/reward balance is unfavorable.

European Companies in China See ‘Severe’ Impact From Outbreak

Hundreds of European companies with operations in China say the coronavirus outbreak is forcing them to lower annual business targets, according to a survey.

Almost 90% of a total of 577 respondents said they were seeing medium to high impact, with half planning to revise their financial goals. (…)

The chambers added that nearly half of the respondents predict a double-digit drop in revenues for the first half of 2020, and a quarter expect a drop of over 20%.

CFOs, Ratings Firms Keep Close Eye on Liquidity, Cash Flow as Coronavirus Spreads Companies could face ratings downgrades and funding problems amid continued outbreak

(…) Businesses whose operations could be affected by the outbreak could see a downgrade to their credit ratings as a result, ratings firms said.

A drop in revenue can impact companies’ overall financial situation and force them to rely on liquidity reserves, raise additional capital or reduce spending to make up for the shortfall. Adding to the challenge is the lack of clarity about how wide the outbreak will spread and how long it will last, which means that companies have to draw short-, medium- and long-term contingency plans. (…)

S&P is asking CFOs and other executives about contingency plans, cash flow and how long they expect their factories to be offline, said Gregg Lemos-Stein, the head of analytics and research for corporate ratings at S&P. “We will act and get as much information from CFOs as possible,” he said. (…)