Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 29 JUNE 2020

  • Deaths from the coronavirus surpassed 500,000 worldwide and confirmed cases exceeded 10 million as the World Health Organization reported the most infections for a single day. New clusters around the world indicate that the pandemic is far from over.
  • The WHO reported another scary data point this weekend: the most global infections in a single day. It’s the nature of pandemics to speed up and march from town to town, city to city. And we’re seeing that with COVID. It took roughly three months to go from zero to 1 million infections. Now, we’re seeing roughly 1 million new cases per week. By the end of the summer, we’re on pace for the case load to double again. (Fortune)
  • U.S. Coronavirus Cases Surge Amid Strains on Hospitals. As the rise in U.S. coronavirus cases continued over the weekend, parts of the country pulled back reopenings, some areas faced strains on hospital and testing capacity and President Trump came under bipartisan pressure to wear a face mask. Coronavirus cases in the U.S. increased by 42,735 from the same time Saturday to 2.53 million, according to data collected by Johns Hopkins University and Bloomberg News. The 1.7% increase was above the average daily rise of 1.5% over the past week. The total was less than the 45,450 reported on Saturday but above 40,000 for a third straight day. Fatalities rose 0.3% to 125,709.
  • Texas’s Covid-19 positive-test rate surged to 14.31%, the highest for the second-most populous U.S. state since the pandemic emerged, underscoring the magnitude of the growing crisis facing America’s Sunbelt. The number has almost tripled since May 31, when Texas posted a 5.44% positive-test rate.
  • Florida reported a total of 141,075 Covid-19 cases as of Sunday, up 6.4% from a day earlier, compared with an average increase of 5.1% in the previous seven days. The total number of new cases was 8,530 compared with the record 9,585 set Saturday.
  • California cases rose by 2.5% to surpass 200,000, according to the state’s website. Deaths climbed 1.4% to 5,812.
  • Arizona’s new cases increased by 3,858 to 73,908, a 5.5% increase that exceeded the prior week’s average of 4.4%, the state reported Sunday. Daily infections have exceeded the weekly average for four straight days.
  • From NBF:

image image

  • Some 72% judged the administration “unprepared” against 28% who said it was “prepared,” according to the June 23-26 survey. Almost half, 49%, said the outbreak would get worse this summer. The remainder split between those who think it will get better and those who expect it to stay about the same. The CBS poll said assessments of how President Donald Trump has handled the outbreak continue to slip, to 41% now from 47% in mid-April and 53% in late March.
  • ‘Window is closing’ to halt virus in US, says health secretary
  • China put 400,000 residents of a northern county under lockdown at the weekend after at least a dozen coronavirus cases associated with the Beijing outbreak were reported there. In a sign that the resurgence of cases in the capital is proving difficult to stamp out even as officials say they’ve been largely contained, Hebei province’s Anxin county has been sealed off and each household can assign only one person to go out for necessities daily, state media reported. Vehicles cannot enter the county and only those with special passes can leave. The containment measures in Anxin, 140 kilometers (87 miles) from Beijing, are more severe than in the capital itself, where the cluster has grown to 311 people since it was first detected June 12.
  • Covid-19 Exposes Russia’s Soviet-Era Regional Health System
  • In Tokyo, cases surged to a seven-week high, with public broadcaster NHK reporting 57 new infections and the Australian state of Victoria reported another spike in new cases.
  • Brazil reported 46,860 new cases, a 3.8% increase, for a total of 1.27 million, according to Health Ministry’s website. Fatalities rose by 990, to 55,961.
The Coronavirus Surge in Florida, Arizona, Texas Isn’t the Same as New York’s Crisis. Younger people are getting sick in states like Texas and Arizona, where some took the end of stay-home orders as permission to live their lives again

(…) Hospitals are filling with medically-vulnerable elderly—but also 20-somethings and patients in their 30s and 40s. (…) “I’m a young, active, healthy person with no previous conditions,” he said. “I didn’t take it seriously for myself. I was not practicing the social-distancing guidelines. I didn’t wear a mask. I thought I was invincible.” Mr. Flores said he went from not knowing anyone with Covid-19 to knowing 15 victims. After eight days’ hospitalization, he is recovering at home. (…) But younger people in Texas and Arizona are taking hospital beds and straining the health-care system, (…)

Arizona’s Covid-19 hospitalizations since it reopened May 15 have grown from 789 to 2,110, according to state data Thursday. Nine of 10 hospital ICU beds were full this week, state data show.In Texas, nearly 6,000 tested positive for Covid-19 Thursday, versus just over 600 new diagnoses on Memorial Day, state data show; hospitalizations rose to more than 4,700 from just over 1,500 in that period. (…)

The percentage of tests coming back positive is rising around America, which epidemiologists said indicates the disease is spreading. And the percentage of positive tests is now higher in the 18-to-49 age group than among older brackets, CDC data show—a departure from earlier patterns. (…)

Because younger people are more likely to have better Covid-19 outcomes, the new surge in cases might not result in as many deaths as before. Still, “there’s a bit of a false narrative out there that because you’re young, you’re OK if you get infected,” Dr. McDeavitt said. “We see people in their 20s and 30s in our ICUs gasping for air because they have Covid-19.”

The more the virus spreads, he said, the harder it is to keep from vulnerable populations. (…)

  • “You have an individual responsibility to yourself but you have a societal responsibility, because if we want to end this outbreak, we’ve got to realize that we are part of the process,” Fauci said.

(CalculatedRisk)

  • Prevalence of symptoms, daily new cases, and the positive test rate are still increasing nationally. 4 states representing 8% of the population– including Arizona, South Carolina, and Georgia—are meeting none of the federal criteria for reopening, and only 5 states representing 5% of the population are meeting all 4 criteria. Available hospital capacity has diminished further in Arizona to just over 20%. Texas and Florida have slightly more than 30% of hospital capacity available but fall short of the other three benchmarks. 15% of the population are now in a state that has begun to reimpose stricter policies and 11% are in a state that has explicitly placed reopening on hold. (…) Recent trends could be pressuring other state governors to slow down the pace of their state’s reopening even if they have not stated so explicitly.(GS)

This is a note from Patrick, long time Irish friend and reader:

CDC data here https://www.cdc.gov/coronavirus/2019-ncov/covid-data/forecasting-us.html Eyeballing the chart, there were 110,000 cumulative deaths on June 15 and consensus of 20 forecasts predicting 133,000 by July 15. The difference of 23,000 over 30 days averages 767 deaths a day.

(…) VP Pence (Irish parents from the west of Ireland) is claiming that the virus has become less lethal, with deaths falling despite more testing, a Trump self serving argument. (…)

This should be a good source from the EU https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases. Scroll down to deaths and click to enlarge. US deaths have revisited higher levels of early June in late June, with the peak opposite an unexplained number of about 5,000.

Looks like Americans are getting careless about social distancing. Brits and Irish are too. Brits were jampacked in Bournemouth beach on a recent sunny day while Dubliners thronged canals.

A tip for the end of lockdowns-avoid restaurants and pubs. An analysis mentioned on Bloomberg of use of 20 million credit cards showed that restaurant patrons were the most vulnerable to Coronavirus. I assume mobile phone tracking linked traffic in restaurants to hospitalisations but Bloomberg didn’t say so.

PANDENOMICS
May Consumer Spending Rebounded Americans increased spending at a record pace in May, helping the economy dig out of a severe recession, but a new rise in virus infections threatens the nascent recovery.

Household spending on goods and services rose a record 8.2% in May, the government said Friday. That was more than double the prior all-time high on records dating from 1959. Americans spent big on long-lasting items like cars, refrigerators and sofas. (…) Consumer spending remained down 12% from February, when state and city officials ordered businesses to shut to prevent the virus’s spread. (…)

Last month’s spending increase was fueled by stimulus money—one-time checks of up to $1,200 for individuals and $2,400 for couples—along with enhanced unemployment benefits, set to expire this summer. Research shows that low-income families were among the quickest to spend that money. (…)

Fresher data suggest consumer spending has lost momentum. Credit-card spending rose in May but slipped in the first half of June compared with a year ago, according to Earnest Research. (…)

Disposable income, boosted by stimulus money, is up 5.3% from February and 8.8% YoY in May.

The important stats are actual labor income (wages and salaries) and consumption.

  • May’s labor income (BEA, blue line) declined 8.6% from February and 5.7% YoY.
  • That stat fits perfectly with the Index of weekly payrolls (employment x hours x wages) (BLS, black line)
  • Note that the number of employed persons declined 12.8% from February and 13.7% YoY.
  • Income declined less than employment because more lower income people lost their jobs.
  • Consumption expenditures declined 11.7% from February and 9.3% YoY.

fredgraph (94)

In effect, Americans cut their spending more than their labor income declined. This is unusual, even in recessions when people normally dip into their savings to sustain consumption. This certainly reflects the widespread lockdowns but it also likely results from the high level of anxiety on future income.

The savings rate shot up from 8.4% in February to 23.2% in May. But savings dropped $1.9B from April to May so the apparent $2.7 billion in remaining spending ammo will disappear by the end of July unless Congress enacts another stimulus program.

Given recent difficult trends in unemployment claims, labor income is highly unlikely to recover enough to sustain spending at a level sufficient to keep the economy solidly afloat. Twenty million Americans remained unemployed as of June 13, 13.5 million more than at the worst point in 2009., not counting the large number of small businesses unable to open fully.

image

About 85.5% of respondents to the U.S. Census Bureau’s experimental Household Pulse Survey said they had received or expected someone in the household to receive an Economic Impact Payment or stimulus check.

The majority of adults in households that received a stimulus check from the federal government say they used it or planned to use most of it on household expenses.

The responses were collected June 11-16, week 7 of the survey sent to 1,172,900 households by email and SMS text messages; 73,472 households responded.

According to the latest survey results released today, 15.7% used their stimulus check to pay off debt and 14.1% planned to mostly save it.

That is 29.8% in effect “saving” their stimulus check, roughly corresponding to the 30.8% of respondents expecting a loss of employment income in the next 4 weeks.

The following chart displays U.S. retail sales and U.S. retail sales excluding restaurants and bars. The 3.2% drop in sales ex-restaurants and bars, the latters being mostly closed during the period between February and May, looks surprisingly low and may be interpreted as rather strong spending during such a tough environment.

But recall that many other retailers were also closed in March/April and their reopening in May likely made many consumers take care of pent-up demand/needs. The average of April and May (stand-alone dots) may be a more realistic number, in which case, the decline in sales ex-restaurants and bars becomes -10.2%, more in line with the decline in total consumption (-11.7%) and in labor income (-8.6%).

image

Delta Warns Pilots of Possible Furloughs Delta Air Lines said it would send notices next week to over 2,500 pilots warning of potential furloughs as travel demand is still languishing due to the coronavirus pandemic.

American Airlines CEO sees up to 20 percent extra staff in July, 2021, ‘hard’ to avoid furloughs

WestJet cuts 3,333 jobs with goal of survival

Airbus sees output down 40% for two years as job cuts loom

More Renters Becoming Second-Home Owners

Some Businesses Slowly Reopen, While Many Permanently Close

(…) As of June 15, there were nearly 140,000 total business closures on Yelp since March 1. In April we reported more than 175,000 business closures, indicating that more than 20% of businesses closed in April have reopened. (…) Of all business closures on Yelp since March 1, 41% are permanent closures. Our data shows the largest spikes of permanent closures occurred in March, followed by May and June, indicating that the businesses that were already struggling had to permanently close right away and the businesses that were trying to hold on, but unable to weather the COVID-19 storm, were forced to shutter in recent months. (…)

In early June, we’ve seen diners seated come back substantially – now down 57% compared to pre-pandemic levels. (…)

The earliest that US hotels return to pre-COVID-19 revenues might be 2022 And that’s in the more optimistic of the two crisis-recovery scenarios that global executives view as most likely (A3), after revenue per available hotel room falls by 53 percent in 2020. In the more dire scenario (A1), recovery doesn’t happen until beyond 2023.

  • In China, hotel occupancy remains very low well into reopening (McKinsey):

image

Australians say they’ll continue the digital habits they’ve picked up during the crisis The country’s consumers—who have lagged their US, European, and Indo-Pacific peers—intend to continue using digital technologies for services like fitness, groceries, and telemedicine.

Banks Have No Idea Who’s Creditworthy Anymore Lenders have pulled back sharply on lending to U.S. consumers during the coronavirus crisis. One reason: They can’t tell who is creditworthy anymore.

ECB’s Schnabel Warns Euro-Area Inflation Could Dip Below Zero

EARNINGS WATCH

The Q2’20 earnings season is about to begin and the number of surprises is likely to be higher than normal, one way or the other. At today’s pre-opening of 3025, the Rule of 20 P/E is 20.3, almost neutral or fairly valued. However, we know that trailing EPS will soon take a dive from their current $158.59. Based on current estimates, trailing EPS will decline to $140 by the end of the season around mid-August. With this number, the R20 P/E rises to 22.8 with inflation at 1.2%.

Coronavirus Erases Guidance From 40% of S&P 500 Companies that have pulled their outlook have collectively underperformed the broader market; ‘there are still many unknown factors’

(…) Many companies that have pulled their guidance represent the industries most affected by the coronavirus pandemic and most damaged in the stock market. On average, shares for the companies that have withdrawn or withheld guidance are down 18.2% year to date. By comparison, the S&P 500 is down 6.9%. (…) The list also includes stocks, like Kroger’s, that are seen as benefiting from the effects of the pandemic. Those companies frequently cited uncertainty about how long their tailwinds may last for not providing an outlook. (…)

Between Jan. 15 and June 25, at least 154 S&P 500 companies lowered at least parts of their guidance as a result of the pandemic, while at least 28 companies raised expectations, according to the Dow Jones data. (…)

As of today, more than one third of S&P 500 companies (183) have withdrawn EPS guidance for CY 2020. Most of these companies cited uncertainty around the impact of COVID-19 as the reason for not providing annual EPS guidance. (…) To date, 49 S&P 500 companies have issued EPS guidance for Q2 2020, which is 53.8% below the five-year average of 106. (…) Of the 49 companies that have issued EPS guidance for Q2 2020, 22 have issued positive EPS guidance and 27 have issued negative EPS guidance. The number of companies issuing positive EPS guidance for Q2 2020 (22) is 33.3% below the five-year average of 33.0, while the number of companies issuing negative EPS guidance for Q2 2020 (27) is 63.1% below the five-year average of 73. (…)

S&P 500 Sector Level Negative EPS Guidance

SENTIMENT WATCH
Markets Bombed, Investors Carried On It’s going to take a lot more than a single market meltdown for small investors to chicken out of stocks

(…) The popular belief that stocks will always bounce back has acquired the force of religious faith. Only a bear market lasting for years is likely to be powerful enough to prod investors into questioning that faith.

Almost 95% of the 5 million investors in 401(k) and similar retirement plans run by Vanguard Group didn’t make a single trade in the first four months of 2020. Fewer than 1% moved their money entirely out of stocks.

All told, including 8 million households with individual accounts, only 12% of Vanguard’s investors traded between late February and early May, says Karin Risi, managing director of Vanguard’s retail investor group. Among those who did trade, two-thirds bought stocks rather than selling.

From late February through the end of March, fewer than 3% of the 2.2 million participants in retirement plans run by T. Rowe Price Group Inc. made any changes to their portfolios. (…)

“Now, when the market goes up, I’m grateful for every penny I still have in. And when it goes down, I’m glad I took some out.” (…)

Hedge Funds Are Rushing to Get Out of Bearish U.S. Stock Bets

(…) Short interest as a percentage of shares outstanding in the $266 billion SPDR S&P 500 ETF Trust had fallen to 4.9% Friday from 6.7% at the end of May, according to data from IHS Markit.

Meanwhile, the beta of the Hedge Fund Research Macro/CTA Index — which tracks funds synonymous with trend-following quant strategies — to the S&P 500, is back above zero for the first time since March. That suggests CTA funds have been boosting their exposure to U.S. equities and closing short positions. (…)

Hedge funds have slashed net short positions in U.S. stocks

Confused smile From Barron’s

Insider Transactions Ratio

US banks’ credit losses from COVID-19 could exceed those from the global financial crisis Most of the losses will come from commercial and industrial loans to the sectors most affected by lockdowns. The extent of estimated losses depends on whether the virus recurs later in the year (scenario A1) or is contained (scenario A3).

What’s remarkable is there are more human beings being affected by the disease today than on March 21 when markets were 40% lower” – (BLK) CEO Larry Fink

Big-Tech Investors Need to Start Watching Brussels More Closely Proposals for new powers could arm enforcers to push through more fundamental changes to how the likes of Apple and Google operate in Europe

(…) Two mooted changes in particular have the potential to upend the European operations and profitability of U.S. tech companies, including Google, Apple and Amazon, that operate so-called gatekeeper platforms.

The first is a new tool for antitrust enforcers designed to “address certain structural competition problems that the existing competition framework cannot tackle.” With it the EU will be able to investigate any market it thinks might be tipping in favor of one company and force changes without having to prove anyone behaved illegally. Britain has a similar tool and is using it to scrutinize online platforms and digital advertising. (…) Veteran antitrust lawyers worry the new powers are too broad and leave big companies with few options to fight back.

The second change is a new regulation called the Digital Services Act that is separate from the antitrust division. It would create an EU-level regulator to police the gatekeepers and outright ban some common behaviors, such as companies giving preferential treatment to their own services. (…)

Europe is an important region for Silicon Valley, accounting for roughly 23% of Apple’s revenues last year and 31% of Google-owner Alphabet’s, for example. Moreover, since European antitrust authorities have been a trendsetter for many other national enforcers, its new approach could have an impact globally. (…)

PANDEMONIUM

China Message to U.S.: Crossing ‘Red Lines’ Could Put Trade Deal at Risk Beijing has begun quietly delivering a message to Washington: U.S. pressure over matters China considers off limits could jeopardize Chinese purchases of farm goods and other U.S. exports under the “Phase One” trade deal

(…) On Wednesday, national security adviser Robert O’Brien excoriated Mr. Xi, the Chinese leader, calling him an heir to Joseph Stalin whose Communist party seeks “total control” over its people’s lives and tries to spread its influence globally. (…) Mr. O’Brien said in his Arizona speech that others in the administration will shortly be making the case why China should be opposed. (…)

U.S. Is Vulnerable to China’s Dominance in Rare Earths, Report Finds China sees its dominance in strategic rare-earth minerals as leverage that can be used against the West—including in trade disputes with the U.S., according to a new report by U.S.-based researchers.

U.S. Presses Europe to Uproot Chinese Security-Screening Company Amid a global anti-Huawei effort that has seen mixed results, the U.S. sets another Chinese tech company in its crosshairs: Nuctech, a state-controlled firm that is quietly dominating Europe’s cargo and airport screening market.

Russian Spy Unit Paid Taliban to Attack U.S. Troops, Intelligence Assessment Finds Bounties were paid by Russia’s military intelligence agency, the GRU, but it couldn’t be determined whether the actions resulted in any American combat deaths in Afghanistan.

Squeezed on All Sides, Trudeau Won’t Bend on China Prisoner Swap

Alien “MAKE NOISE!!!” Green with envy

Doing video calls these days? This might interest you (H/T Danny): https://www.youtube.com/watch?v=1q61B8zdSV0&feature=youtu.be

THE DAILY EDGE: 26 JUNE 2020

  • Texas paused reopening plans Thursday, as new coronavirus cases and hospitalizations increased in many U.S. states, and a government estimate showed more than 20 million Americans may have contracted the virus, far exceeding diagnosed infections. The Centers for Disease Control and Prevention estimates that only about 1 in every 10 Covid-19 cases in the U.S. has been identified, Director Robert Redfield said during a briefing with reporters Thursday. He also noted that most Americans are still susceptible to the virus. “This outbreak is not over. This pandemic is not over,” Dr. Redfield said. “Greater than 90% of the American public hasn’t experienced this virus yet.”
  • California Gov. Gavin Newsom warned a potential influx of coronavirus-related hospitalizations could impact reopening plans. Coronavirus-related hospitalizations in the state increased by 32% in the last 14 days, with more than 4,200 people in hospitals, he said Thursday. As testing expands across the state, the rate of positive tests has increased to 5.6% in the last seven days, the Democratic governor said.
  • In South Carolina, 16.9% of people tested for the new coronavirus Wednesday had positive results—up from 7% on May 28, according to the state’s Department of Health and Environmental Control.

unnamed (17)

From NBF:image

image

This chart from Jefferies will need follow ups in coming weeks. Will the lower death rates spike as recent cases get worse or will death rates stay low suggesting diminishing virulence?

unnamed (18)

Here’s the trend in death rates across the world courtesy of Fathom Consulting. It is still high and rising except in Asia and Germany.

Once the Center of the Virus Crisis, Europe Now Looks Ahead With Hope When the coronavirus first hit Europe, the continent was ill-equipped to detect or contain it. Now, many governments and health experts believe so much has changed that a crisis on the scale of this spring probably won’t be repeated.

(…) Much of Europe has used the lockdown period to build up new systems for testing, tracking down and isolating virus carriers. Millions of Europeans have made social distancing and mask wearing part of their daily routine. (…) “Testing, tracing, isolating—that’s going to be the most important thing.” (…)

The older cases “very probably are no longer able to transmit the virus,” Vittorio Demicheli, an epidemiologist and scientific adviser to Italy’s government, told reporters recently. “The weakly positive cases have a viral load that probably can’t cause a new infection.” (…)

U.S. Initial Unemployment Benefits Steady at 1.5 Million in June The number of workers seeking jobless benefits has held steady at about 1.5 million each week so far in June, signaling a slow recovery for the job market as states face new infections that could impede getting people back to work.

(…) Meanwhile, the number of people receiving benefits, an indicator for overall layoffs, totaled 19.5 million in the week ended June 13, down slightly from previous weeks. (…)

  • The total continuing claims are stuck near 30 million, which is almost 15% of the nation’s working-age population. (The Daily Shot)

Source: EPI, @hshierholz

Since March, 47.3 million workers in the United States have now filed for unemployment benefits.

The U.S. Census Bureau is now conducting a weekly survey of small businesses. Consisting of 16 questions, this 5-minute survey reaches close to 1 million businesses split across a 9-week rotation to reduce burden and lessen survey fatigue. You can access the web site using the link in the RESOURCES section on the sidebar.

The survey shows that there are still more businesses reducing head counts and employee hours than there are increasing them.

The Philly Fed is also doing a weekly survey of businesses in its district on COVID-19 impacts on aspects of firm demand, production, and employment (also in RESOURCES tab).

image

During the second and third weeks of May, ING conducted a short survey of 5,000 people across five European countries (Germany, Romania, Poland, Spain, and Turkey) to learn more about this.

We asked consumers in the five countries whether they were already seeing or anticipating any change in their savings in the next three months. Clearly, the pandemic has not impacted everyone equally. We found:

  • Almost a third of consumers (31%) seem to be unaffected
  • 43% of people say the amount of money saved is falling
  • Remarkably, 25% of consumers are still growing their nest egg.

If we calculate the net impact, that is the percentage of respondents seeing a decrease in their savings minus the percentage of respondents seeing an increase, we arrive at a discouraging result (-25%) suggesting that for the majority of people the amount of savings is decreasing due to the pandemic. (…)

As incomes have declined and mobility is still far from what it used to be, most categories across countries still show net reduced expenditures. However, as expected, the industries with the sharpest declines are those related to travel and eating out. Consumers aren’t showing a lot of optimism just yet about returning to restaurants, travelling or vacations. (…)

In our survey, we find a striking 48% of consumers reporting to be shopping online more than before the pandemic, especially in Poland, Turkey and Spain. Unsurprisingly, 51% say they spend less in-store (…).

The results of our survey suggest that most people are still feeling quite pessimistic about travelling abroad. They are either cancelling plans made before Covid-19 or are simply not making any new plans due to the uncertainty.

Durable Goods Orders Rebounded in May though Remain Depressed

fredgraph (93)

Credit Suisse says that retail auto/truck sales are

tracking down high single digits y/y for June, and assuming fleet sales down ~70% y/y (vs. down ~80% in May), it would imply June SAAR in the high 13mn / low 14mn range, and total industry unit sales down high teen / low 20% y/y. While still quite negative, this would be a significant improvement from May, which saw SAAR of 12.2mn and unit sales -30% y/y.

We believe June US SAAR is on track to be in the high 13mn/low 14mn range, down high teen / low 20% y/y.

Wholesale auction sales were +9% vs. JDP’s pre-virus forecast for the week ending June 21. Wholesale auction prices have recovered 20 pts over the past nine weeks and are now 5% higher than at the beginning of March (pre-virus).

(…) it remains to be seen how quickly Hertz will need to dispose its vehicles. With a glut of off-lease vehicles that have yet to hit the market, Hertz will need to be careful with its disposals to avoid overloading the market with supply.

U.S. GDP Decline in Q1’20 Is Unrevised; Corporate Profits Plunge

U.S. GDP declined an unrevised 5.0% (SAAR) during Q1’20, as expected in the Action Economics Forecast Survey. It followed a 2.1% Q4’19 rise. The Q1 decline remained the first since Q1’14 and the largest since an 8.4% drop in Q4’08. Forecasters are calling for a much larger decline in Q2’20 due to business shutdowns.

After-tax corporate profits without IVA & CCA declined a slightly lessened 14.1% (-9.1% y/y) with the decline in business activity. Profits with IVA & CCA fell 12.3% (-6.9% y/y). Nonfinancial sector profits fell 15.4% (-9.0% y/y), which was more than estimated last month. Financial profits declined sharply, but the 8.0% fall in foreign sector profits (-0.2% y/y) was less than estimated last month. (…)

 image image

Surging Number of Americans Looking to Move to Smaller Cities, Report Finds 27% of Redfin users searched for homes outside their metro area in April and May, according to the online property portal

(…) “The pandemic and the work-from-home opportunities that come with it [are] accelerating migration patterns that were already in place toward relatively affordable parts of the country.” (…)

ECB’s Lagarde warns on ‘restrained’ recovery

Fed Sets Caps on Bank Payouts Amid $700 Billion Loss Threat The Federal Reserve said a prolonged economic downturn could saddle the nation’s biggest banks with up to $700 billion in losses on soured loans and ordered them to cap dividends and suspend share buybacks to conserve funds.

In a worst-case scenario, where unemployment remains high and the economy doesn’t bounce back for a few quarters, the 33 largest U.S. banks would suffer heavy loan losses that would erode the capital buffers meant to keep them on stable financial footing, the Fed said when it announced the results of its annual stress tests. (…)

Banks, which will announce their dividend plans for next quarter as soon as Monday, won’t be able to make payouts that are greater than their average quarterly profit from the four most recent quarters.

The Fed also barred them from buying back shares in the third quarter. Most of the largest banks had previously agreed to halt buybacks during the second quarter. (…)

(…) With respect to the stress tests themselves, most major banks performed as expected, with the possible exception of Goldman Sachs. GS 4.59% In the Fed’s severely adverse scenario, the Wall Street firm saw its common equity Tier 1 capital ratio—the key measure of how much loss-absorbing capital a bank holds—fall rather sharply to 6.9% from 13.3%. (…)

Yet the Fed’s new formula would automatically put pressure on dividends, if the economy fails to recover. The longer the Covid-19 crisis drags on, the more quarters there will be with low or even negative earnings for banks. Such a scenario would drag their 4-quarter average ever lower, limiting what they can pay out in the form of dividends to shareholders. (…)

J.P. Morgan:

High yield bonds LTM default rate jumped to the highest level since 2009 at
6.02%, and leveraged loans default rate also rose to 3.58%. YTD defaults have been led by energy and retail sectors, plus two large TMT companies – some of these were in trouble prior to the pandemic. Defaults are low thus far in other sectors hit hard by the pandemic. A further rise in defaults is likely – JPM High Yield and Leveraged Loan Research projects default rates of 8% and 5% on high yield bonds and leveraged loans for FY20. Not surprisingly, default rates vary materially depending on rating. High yield spreads rose with the pandemic but have retraced about 65% of the peak widening – spreads currently up most in transportation sector.

About 18% of BBB- bonds downgraded to junk YTD. And a larger proportion,
about 28%, of existing high yield bonds and leveraged loans have been downgraded. In total, about $960 bil of corporate bonds and leveraged loans have been downgraded YTD, which is about 17% of the total $5.7 tril in outstandings. Leveraged loan downgrades are much higher in leisure sector, with over 11% of issuers downgraded, versus 4-6% in some other hard hit sectors.

Moody’s:

Net high-yield downgrades equal the difference between the number of high-yield downgrades and upgrades. An unofficial tally of U.S. company credit rating revisions showed 29 net high-yield downgrades for the first 23 days of June. A rough estimate suggests that net high-yield downgrades may approximate 50 in June.

The second quarter’s declining trend for net high-yield downgrades complements the change in the direction of high-yield credit spreads. In terms of still preliminary estimates, the number of U.S. high-yield net downgrades had previously dropped from April’s 216 to May’s 90. (Because of an extraordinarily large number of COVID-19-driven downgrades, net downgrades will probably be revised higher.)

During 2020’s first quarter, U.S. high-yield net downgrades rose from January’s -1 to February’s very manageable 19 and then soared to March’s 176 largely in response to the destructive force of COVID-19. (…) The average number of net high yield downgrades per month were 17 for calendar-year 2019, 1 for 2018, and 2 for 2017.

(…) The path taken by the high-yield bond spread during the COVID-19 recession more closely resemble its behavior during 2015-2016’s profits recession compared to the broad economic recessions of 2008-2009 and 2001.

Moreover, the high-yield bond issuance recession lasted just one month, for now. After plunging by 84% from a year earlier in March (to $6 billion), second-quarter 2020’s worldwide offerings of US$- denominated high-yield bonds posted a year-over-year advance of at least 36%, to $147 billion. The latter is very close to 2014’s second-quarter record high of $154 billion. By contrast, such high-yield bond issuance incurred a year-over-year plunge of 57% during 2008’s Great Recession year.

The high-yield bond market has performed remarkably well given the record-high incidence of net high yield downgrades. For 2008-2009’s Great Recession, after averaging 10 per month in 2017, the average number of net high-yield downgrades per month jumped up to 42 in 2008 and 37 in 2009.

During the Great Recession, the average number of net high-yield downgrades per month peaked at the 76 of 2009’s first quarter. For 2020’s second quarter, net high-yield downgrades may average a record high 119 per month.

However, as a percent of the number of U.S. high-yield issuers, the prospective net high-yield downgrades of the two quarters ended June falls short of the 32.9% record high of the two quarters ended March 2009. More specifically, net high-yield downgrades are likely to approximate 30.2% of the number of high-yield issuers during 2020’s first half. In view of how a composite high-yield bond spread averaged a record-high 1,678 in 2008’s final quarter and 1,604 bp in 2009’s first quarter, the spread’s 744 bp average of the second quarter to date (never mind the recent 629 bp) seems unsustainably thin.

However, the high-yield bond market may be assuming a stabilization of net high-yield downgrades, while also recognizing the degree to which high-yield downgrades have been skewed toward high-yield issuers having only loan debt outstanding. Nevertheless, a recent leveraged loan spread of 620 bp was well under its 1,527-bp average of October 2008 through March 2009.

image