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: 13 MARCH 2020

America’s Self-Shutdown The public has made ‘social distancing’ de facto national policy.

For all the foreboding about the novel coronavirus—foreboding that is justified—it is heartening to see the American people responding in ways reminiscent of the frontier spirit. Most people are doing what they have to do to survive a clear and immediate threat to their lives and communities.

The new watchword is “social distancing.” That means minimizing the transmission of an infectious virus for which no personal immunity exists by minimizing the chance that any one carrier will pass the virus to others. The speed with which the American people and their institutions are executing that sound strategy is breathtaking. (…)

The possibility that the virus will tip the U.S. into a recession is real, though unlike 2008 the economy was healthy when the virus struck.

Here at the Journal, we regard the stock market as a sensitive barometer of expectations. The historic decline of the market this week is posing an obvious question: Where is the nation headed with the coronavirus? (…)

Science may not fully understand this virus yet, but it knows a lot about the reasons for dislocating a nation’s social and economic life. It’s time for leaders to explain this to a worried but resilient American public.

It is also time for the hand-shaker-in-chief to use whatever talents he has to lead and help people go through this real crisis. He could take another 10 minutes to read the whole piece from The Lancet which extracts here (my emphasis).

Governments will not be able to minimise both deaths from coronavirus disease 2019 (COVID-19) and the economic impact of viral spread. Keeping mortality as low as possible will be the highest priority for individuals; hence governments must put in place measures to ameliorate the inevitable economic downturn.  (…)

First, we think that the epidemic in any given country will initially spread more slowly than is typical for a new influenza A strain. (…) Second, the COVID-19 epidemic could be more drawn out than seasonal influenza A, which has relevance for its potential economic impact. Third, the effect of seasons on transmission of COVID-19 is unknown; however, with an R0 of 2–3, the warm months of summer in the northern hemisphere might not necessarily reduce transmission below the value of unity as they do for influenza A, which typically has an R0 of around 1·1–1·5. Closely linked to these factors and their epidemiological determinants is the impact of different mitigation policies on the course of the COVID-19 epidemic. 

A key issue for epidemiologists is helping policy makers decide the main objectives of mitigation—eg, minimising morbidity and associated mortality, avoiding an epidemic peak that overwhelms health-care services, keeping the effects on the economy within manageable levels, and flattening the epidemic curve to wait for vaccine development and manufacture on scale and antiviral drug therapies. (…)

No vaccine or effective antiviral drug is likely to be available soon. (…) This process will take time and we are probably a least 1 year to 18 months away from substantial vaccine production.

So what is left at present for mitigation is voluntary plus mandated quarantine, stopping mass gatherings, closure of educational institutes or places of work where infection has been identified, and isolation of households, towns, or cities. Some of the lessons from analyses of influenza A apply for COVID-19, but there are also differences. Social distancing measures reduce the value of the effective reproduction number R. With an early epidemic value of R0 of 2·5, social distancing would have to reduce transmission by about 60% or less, if the intrinsic transmission potential declines in the warm summer months in the northern hemisphere. This reduction is a big ask, but it did happen in China.

School closure, a major pillar of the response to pandemic influenza A, is unlikely to be effective given the apparent low rate of infection among children, although data are scarce. Avoiding large gatherings of people will reduce the number of super-spreading events; however, if prolonged contact is required for transmission, this measure might only reduce a small proportion of transmissions. Therefore, broader-scale social distancing is likely to be needed, as was put in place in China. This measure prevents transmission from symptomatic and non-symptomatic cases, hence flattening the epidemic and pushing the peak further into the future.

Broader-scale social distancing provides time for the health services to treat cases and increase capacity, and, in the longer term, for vaccines and treat­ments to be developed. Containment could be targeted to particular areas, schools, or mass gatherings. (…) The greater the reduction in transmission, the longer and flatter the epidemic curve (figure), with the risk of resurgence when interventions are lifted perhaps to mitigate economic impact. (…)

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Individual behaviour will be crucial to control the spread of COVID-19. Personal, rather than government action, in western democracies might be the most important issue. Early self-isolation, seeking medical advice remotely unless symptoms are severe, and social distancing are key. Government actions to ban mass gatherings are important, as are good diagnostic facilities and remotely accessed health advice, together with specialised treatment for people with severe disease. (…) If measures are relaxed after a few months to avoid severe economic impact, a further peak is likely to occur in the autumn (figure). (…)

The known epidemiological characteristics of COVID-19 point to urgent priorities. Shortening the time from symptom onset to isolation is vital as it will reduce transmission and is likely to slow the epidemic. However, strategies are also needed for reducing household transmission, supporting home treatment and diagnosis, and dealing with the economic consequences of absence from work. Peak demand for health services could still be high and the extent and duration of presymptomatic or asymptomatic transmission—if this turns out to be a feature of COVID-19 infection—will determine the success of this strategy.

Contact tracing is of high importance in the early stages to contain spread, and model-based estimates suggest, with an R0 value of 2·5, that about 70% of contacts will have to be successfully traced to control early spread. (…) the logistics of timely tracing on average 36 contacts per case will be challenging. Super-spreading events are inevitable, and could overwhelm the contact tracing system, leading to the need for broader-scale social distancing interventions.

(…) During the outbreak of Ebola virus disease in west Africa in 2014–16, deaths from other causes increased because of a saturated health-care system and deaths of health-care workers. These events underline the importance of enhanced support for health-care infrastructure and effective procedures for protecting staff from infection.

In northern countries, there is speculation that changing contact patterns and warmer weather might slow the spread of the virus in the summer. With an R0 of 2·5 or higher, reductions in transmission by social distancing would have to be large; and much of the changes in transmission of pandemic influenza in the summer of 2009 within Europe were thought to be due to school closures, but children are not thought to be driving transmission of COVID-19. Data from the southern hemisphere will assist in evaluating how much seasonality will influence COVID-19 transmission.

(…) Ongoing data collection and epidemiological analysis are therefore essential parts of assessing the impacts of mitigation strategies, alongside clinical research on how to best manage seriously ill patients with COVID-19.

There are difficult decisions ahead for governments. How individuals respond to advice on how best to prevent transmission will be as important as govern­ment actions, if not more important. Government communication strategies to keep the public informed of how best to avoid infection are vital, as is extra support to manage the economic downturn.

(…) The report comes after Brazilian President Jair Bolsonaro’s communications secretary, Fabio Wajngarten, tested positive for the virus this week, just days after having traveled to Florida to meet with President Trump at Mar-a-Lago. Trump told reporters Thursday that he was not concerned about Wajngarten’s diagnosis. (…)

So, who among these leaders led by example going into self-isolation? Recall The Lancet above:

Individual behaviour will be crucial to control the spread of COVID-19. Personal, rather than government action, in western democracies might be the most important issue. Early self-isolation and social distancing are key.

(…) The president of the European Parliament, David Sassoli, is also self-isolating for two weeks as a precaution, after going to Italy over the last weekend. On Tuesday, he chaired a European Union meeting in Brussels by video-conference.

Brazilian president Jair Bolsonaro is currently waiting for the results of a coronavirus test, his son Eduardo Bolsonaro tweeted Thursday, after his press secretary Fabio Wajngarten tested positive for it. (…)

Separately, nine US lawmakers — some of whom had recent contact with Trump — are now taking steps to self-quarantine as a precaution after coming into contact with another infected person. (…)

UK Prime Minister Boris Johnson was at a meeting with Dorries not long before she tested positive, but he has said he will not get tested, as he is showing no symptoms. (…)

(…) “We’re going to end up with a very big federal bailout package here for stricken businesses, individuals, cities and states. We’re better off doing it upfront and giving assistance to get them to do the right things than do it on the back end after we’ve had a very big epidemic.” [Scott Gottlieb, who was Mr. Trump’s first commissioner of the Food and Drug Administration]

(…) another potential obstacle to the crisis response: tense relations with political leaders whose cooperation is now necessary.

Relations are at a nadir with the House, which impeached him for trying to pressure Ukraine into investigating rival Joe Biden. Relations with Democratic governors of hard-hit states, including California, Washington and New York, aren’t much better. After Vice President Mike Pence met with Washington Gov. Jay Inslee on that state’s epidemic, Mr. Trump said: “I told Mike not to be complimentary to the governor because that governor is a snake.” (…)

Globally, the economic fallout of the virus has been amplified by international friction over the trade war, rising populism and sanctions. Mr. Trump has sought to cultivate Russian President Vladimir Putin. Yet Mr. Putin, still angry over American sanctions, last week rebuffed a plea by OPEC to jointly cut oil production to prop up prices, reportedly because he hopes to undercut American shale producers. Saudi Arabia responded by slashing its selling prices and promising to boost production. Oil cratered, stock markets followed suit and alarming new stresses appeared in corporate borrowing markets.

Mr. Putin [and MBS] wasn’t the only leader to misread the gravity of his actions. President Trump, who came of age when the U.S. was a net importer of petroleum fuels, on Monday celebrated the prospect of cheaper gasoline. But the shale boom means the U.S. is no longer a net importer and the Russia-Saudi price war likely increases the risk of recession by discouraging drilling, investment and hiring in the oil patch and its suppliers. [and totally upend the credit market]. (…)

Pelosi Says Near Agreement on Virus Bill

House Speaker Nancy Pelosi said she’s near an agreement with the Trump administration on a plan to mitigate some of the economic blows from the coronavirus outbreak. Pelosi put off a vote on a package of measures proposed by Democrats after day-long talks with Treasury Secretary Steven Mnuchin. She said she hopes to announce on Friday whether a deal has been struck.

Let’s see what happens. Trump was supposed to announce something Tuesday afternoon, the Wednesday night. We know what happened…

Fed to Inject $1.5 Trillion in Bid to Prevent ‘Unusual Disruptions’ in Markets The Federal Reserve said it would make vast sums of short-term loans available on Wall Street and purchase Treasury securities in a coronavirus-related response aimed at preventing ominous trading conditions from creating a sharper economic contraction

The Fed’s promise to intervene substantially in short-term money markets, together with a move that opens the door to a resumption of bond-buying stimulus known as quantitative easing, followed two days of trading in which market functioning appeared to have degraded. (…)

“This is a full-blown crisis response operation, intended to make it abundantly clear that the Fed will not allow liquidity to dry up,” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “Now it’s up to Congress to fire the fiscal bazooka, the bigger and quicker the better.” (…)

The central bank said that beginning Friday it would shift purchases of $60 billion in short-term Treasury bills, which have maturities of one year or less, toward a broader range of maturities that reflect overall issuance by the Treasury Department.

The Fed didn’t say how long those purchases will last, likely kicking that decision to next week’s two-day rate-setting meeting. Analysts on Wall Street are increasingly expecting the Fed to cut interest rates to zero. (…)

Some investors said the Fed’s actions wouldn’t be successful until markets had confidence that Washington was taking a more aggressive response to the public-health emergency.

“The U.S. policy response to the virus has been an utter shambles that is quickly getting even worse,” said Mark Bathgate, an investment strategist at Tweeddale Advisors in London. As an example, he cited the Trump administration’s early efforts to play down the virus before installing a ban on travel from most of Europe after the virus was already spreading in the U.S. (…)

The Fed said it would offer another $1 trillion on a weekly basis.

The total size of the overnight repo market is about $1.3 trillion and the Fed’s total asset portfolio stood at $4.2 trillion last week, “so the Fed has unloaded some real fire power to alleviate one source of strain,” said Jim Vogel, interest-rate strategist at FHN Financial. (…)

At a news conference, Ms. Lagarde emphasized the limits of what the ECB can do to mitigate the economic damage of the virus, remarks that suggested she might be less willing to use the sort of extraordinary measures that her predecessor, Mario Draghi, rolled out.

Analysts immediately compared her performance unfavorably to that of Mr. Draghi, whose promise to do “whatever it takes” to preserve the euro helped end the region’s debt crisis during his tenure. (…)

Ms. Lagarde called repeatedly on the region’s governments to take on more of the burden of supporting growth. She noted that, so far, additional fiscal measures at a eurozone level amounted to just 0.25% of gross domestic product, a sum she suggested was inadequate.

Surprised smile Crucially, she indicated that the ECB wouldn’t step in to support Southern European governments if they came under pressure from investors.

“We are not here to close spreads. There are other tools and other actors to deal with these issues,” Ms. Lagarde said. (…)

In a subsequent TV interview, Ms. Lagarde sought to redirect her remarks, saying the ECB would seek to avoid the fragmentation of the eurozone and that its tools were available to Italy.

But the mixed messages underscored to investors the limitations of an ECB steered by Ms. Lagarde, an attorney and former French finance minister who is the only ECB president without prior central-bank experience. Investors grew to count on wave after wave of monetary stimulus from Frankfurt during Mr. Draghi’s eight-year term, which ended in October. (…)

Virus Update

New infections of the coronavirus in China dropped to single digits for the first time since the country began reporting daily numbers in mid-January.

As of March 12, China had eight new cases and seven additional deaths, said the National Health Commission on Friday. The dramatic plunge to a single-digit increase — from the height of nearly 15,000 cases added in one day on Feb. 13 — is another sign that viral outbreak has come under control at its epicenter for now, despite accelerating its spread in Europe and the U.S.

China now has 80,813 total confirmed cases. Total deaths rose by seven to 3,176.

Cumulative Confirmed Coronavirus Cases: The second derivative is key for markets, while Italy’s coronavirus cases rising fast. (Deutsche Bank)

Cumulative Confirmed Coronavirus Cases

  • Moody’s:

The assumption in the baseline about COVID-19 is that there are 1 million global infections and that
new infections peak in March or early April. This would imply an average increase in the number of new
infections, on average, of 20% per day through the end of this month. This appears to be a reasonable
assumption, since growth in the number of new infections globally excluding China has been rising at
around that clip since the beginning of March.

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Fingers crossed New Coronavirus Test 10 Times Faster Is FDA Approved The new test can assess 4,128 patients a day.

The U.S. Food and Drug Administration granted an “emergency use authorization” to the test, which runs on Roche’s cobas 6800/8800 systems. The tool also is available in Europe and countries that accept its CE marking for medical devices, Roche said. (…)

“We definitely extended the capacity of the testing significantly throughout the U.S,” Schinecker said. (…)

The cobas 6800/8800 instruments provide test results within four hours. Roche can provide millions of tests every month for the systems and is “going to the limits of its production capacity,” the company said. (…)

About Half of Cruise Virus Cases Asymptomatic, Study Suggests About half the people who tested positive for the coronavirus on the Diamond Princess cruise ship appeared to show no symptoms, according to an estimate published Friday.

The study, published in peer-reviewed open-access medical journal Eurosurveillance, adds to the growing body of research suggesting that a significant portion of people infected with Covid-19 show no symptoms. Determining how often that occurs is crucial to better realizing its transmission potential, the authors said.

Health Experts Slam “Wooden” UK Coronavirus Response: “Playing Roulette With People’s Lives”

Biz as usual, so far:

U.S. Initial Claims for Unemployment Insurance Decline

Initial jobless claims for unemployment insurance declined 4,000 to 211,000 (-5.8% year-on-year) during the week ending March 7th. The previous week was revised slightly lower to 215,000 (was 216,000). The Action Economics Forecast Survey expected 220,000 claims. This data suggest that layoffs did not increase as concern about the coronavirus’ impact on the U.S. economy took hold. The four-week moving average of initial claims, which smooths out week-to-week volatility though which is less important at the moment since its spans pre- and post-coronavirus concerns, edged up to 214,000. (…)

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US producers Apache, Devon, Murphy Oil slash budgets by 30% or more

Crude production could initially surge by as much as 4.5 million barrels a day, if announcements from Saudi Arabia, the United Arab Emirates, Iraq, Nigeria and Russia are taken at face value. But lower oil prices will almost inevitably lead to a slowdown in some production elsewhere as the year progresses.

Outbreak Could Lead to Millions of Tourism Job Losses

The coronavirus outbreak that has left hundreds of flights grounded and dozens of cruises docked could result in 50 million jobs lost in the tourism industry globally, according to an estimate from the World Travel and Tourism Council, an organization that represents the tourism private sector. The figure was calculated estimating that the outbreak will impact the sector for 3 months, said WTTC director Virginia Messina.

David Rosenberg says that 40 million American workers, nearly one-third of workers in energy, retail, restaurants, leisure/hospitality and entertainment are nervous about their job.

SENTIMENT WATCH
Once A Generation

Pure, unbridled panic. There are really no other words for what markets witnessed on Thursday. The price action, market disruptions, and cross-asset volatility have been matched by few times in history.

It started as a run-of-the-mill, once-a-decade panic. And as long as that’s where it ended, things were looking positive over a medium-term time frame, even if we were in the midst of a protracted bear market. The only caveat was if we were instead in the midst of a once-a-generation event, and that’s where we seem to be.

The only comparison is post 9/11, and even that doesn’t do it justice. While some of the social reactions are similar, the breadth and depth of the selling pressure now exceeds what we saw even then. The opening price gaps this week exceed anything we’ve seen before when coming on the heels of already-high pessimism and price extremes. This is some kind of hybrid monster mashup of 1987 and 9/11 and October 2008.

So, all historical precedents must be taken with a grain of salt. While the assumption that investors behave more or less consistently over time is a defensible one, so far this go around has been violating formerly reliable patterns. It’s hard to not be concerned when markets just suffered one of the worst declines ever.

SentimenTrader’s Jason Goepfert could have been more respectful for people like me who were in the market in 1974 and 1987. I personally do not consider myself two generations in one. Winking smile

But Jason goes on listing all the firsts we all went through, yesterday, on top of all the firsts we went through this cycle.

Thursday was the worst loss ever when the S&P had already been sitting at a 52-week low.

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Every time this figure exceeded 60%, the S&P 500 rallied over the next 1-2 months. A year later, it averaged a return of more than 32%.

The wholesale selling pressure has been devastating. For one of the very few times in history, more than 95% of NYSE volume flowed into stocks that declined on the day on consecutive sessions. This only happened 3 other times, each coinciding with a final selling climax.

The fear was palpable, and options traders were pricing in a historic level of volatility going forward. For one of the few days in 35 years, the VXO (the old VIX calculation) skyrocketed above 90.

The only comparisons were during the worst of the 1987 and 2008 panics.

Dumb Money Confidence is at a record low. That’s saying something, since we started compiling the data more than 20 years ago.

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There is very little we monitor that suggests markedly lower prices in the months ahead, even within the context of a potential bear market. The main concern is that we’ve already violated some historical precedents, and we may be amid a true Black Swan, for which no historical precedent is useful.

Rosenberg: A significant bear market is just starting

(…) The pundits telling you not to worry because the U.S. banks are in good shape aren’t telling you that the holders of the dubious debt from hedge funds to pension funds to mutual funds to insurance companies are in far less good shape. (…)

This is otherwise known as a meltdown and, as I’ve been saying for a while now, this has a 1987 feel to it. There are falling knives everywhere and now recession reality bumps up against a complete lack of earnings visibility and the most leveraged corporate balance sheet ever witnessed.

RULE OF 20 STRATEGY CHANGE

Yesterday’s action resulted in the Rule of 20 P/E falling below 17.5, triggering a change in the R20 Strategy to 5% cash from 20%. Recall that the R20 Strategy was 100% cash last December and 50% in January.

Please, understand this is a mechanical strategy based exclusively on the Rule of 20 valuation and earnings trends.

We close yesterday at 17.4 on the R20 P/E. We touched 16.8 in December 2018.

Hopefully, you saw my March 10 post BOTTOM FISHING?

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PANICKED CAPITULATION?

Much like in 1987, this market rout started with economic/financial concerns but unraveled with investors losing confidence in authorities, machine selling and now Joe Public, totally in the dark, trying to preserve what’s left.

Fundamentally, we need confidence to be restored, first and foremost health-wise, then economically and financially.

Back in early 2009, when the world seemed about to end, one could get more confident seeing apparent green shoots amid exceptionally cheap equity markets.

I do not think we are quite there yet.

Remember some of Bob Farrell’s rules:

  • Excesses in one direction will lead to an opposite excess in the other direction.
  • The public buys the most at the top and the least at the bottom
  • Fear and greed are stronger than long-term resolve
  • Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
  • Bull markets are more fun than bear markets
Investors Are Bailing on Stock Funds at Near-Record Pace The only periods to ever see larger outflows were the swoon in 2018 when investors fretted about the pace of the Federal Reserve’s interest-rate increases and a stretch in 2008 in the midst of the financial crisis.

They pulled $47.4 billion out of global stock-focused mutual funds and exchange-traded funds in the three weeks ended Wednesday, according to an analysis prepared for The Wall Street Journal by Bank of America Global Research, which began tracking fund movements in 2002.

The only periods to ever see larger outflows were the late swoon in 2018 when investors fretted about the pace of the Federal Reserve’s interest-rate increases and a stretch in 2008 in the midst of the financial crisis, according to the Bank of America analysis, which is based on EPFR Global data. (…)

“That suggests that investors have changed from thinking this is a simple equity selloff into something more financial-stability related.”

“It also confirms that investors do not yet think that central-bank and government actions are sufficient to buy the dip.” (…)

S&P 500 Current Sell-off vs. October Stock Market Crashes of 1929, 1987, and 2008

The chart suggests that the current sell-off is consistent with the historic crashes of 1929, 1987, and 2008.

S&P 500 Current Sell-off vs. October Stock Market Crashes of 1929, 1987, and 2008

High-Yield’s Default Risk Metrics Still Trail Worst Stretch of Great Recession

(…)  The unknown costs of COVID-19 may continue to lower the value of earnings-sensitive securities. Calling a bottom is a fools game until the spread of COVID-19 halts. For now, policies to limit the spread of
COVID-19 are probably much more important to financial markets than are fiscal and monetary stimulus
programs.

(…) a self-inflicted near-term shrinkage of U.S. business activity may be preferable to an eventually deeper and involuntary, long-term contraction of activity if COVID-19 risks are not quickly encountered head on. Several weeks of downtime today may be the more attractive choice compared to possibly many months of downtime in the future. (…)

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The recent average high-yield EDF of 8.25% and its nearly four percentage point increase over the last three months favor an 879-basis point midpoint for a composite high-yield bond spread. Nevertheless, the high-yield bond spread was recently a narrower 700 bp, which nearly doubled the 362 bp of January 17. However, March 11’s composite high-yield bond spread was well under February 11, 2016’s 899 bp high of the last profits recession.

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Nerd smile David Frum, who was a speechwriter for President George W. Bush, seems to be scripting for Joe Biden now:

(…) More people will get sick because of his presidency than if somebody else were in charge. More people will suffer the financial hardship of sickness because of his presidency than if somebody else were in charge. The medical crisis will arrive faster and last longer than if somebody else were in charge. So, too, the economic crisis. More people will lose their jobs than if somebody else were in charge. More businesses will be pushed into bankruptcy than if somebody else were in charge. More savers will lose more savings than if somebody else were in charge. The damage to America’s global leadership will be greater than if somebody else were in charge. (…) (The Atlantic)

THE DAILY EDGE: 12 MARCH 2020: Leadership!

Did you miss BOTTOM FISHING?
The Virus and Leadership Trump’s main opponent isn’t Joe Biden. It’s the coronavirus.

The WSJ editorial board, generally Trump supportive:

When President Trump sees a political threat, his instinct is to deny, double down and hit back. That has often been politically effective, but in the case of the novel coronavirus it has undermined his ability to lead. (…)

White House advisers last week said the virus is being “contained” despite contrary evidence. On Monday, after suggesting “fake news” was driving the stock-market rout, the President tweeted: “So last year 37,000 Americans died from the common Flu. It averages between 27,000 and 70,000 per year. Nothing is shut down, life & the economy go on. At this moment there are 546 confirmed cases of CoronaVirus, with 22 deaths. Think about that!”

Like the common flu, except the death rate from the virus may be ten times higher. Like the common flu, except the U.S. population has no built-up immunity, so the virus left unchecked could infect a significantly higher share of the population at a faster rate, overwhelming the medical system. (…)

The biggest failure so far has been on testing when the Centers for Disease Control and Prevention produced contaminated test kits and the Food and Drug Administration was slow to approve private alternatives. The best response to that is to acknowledge the delay, explain what happened, and relate when and how the problem will be addressed. The mistake is to claim there was no problem. (…)

The best reply is cool and realistic leadership that marshals the strengths of the government a President leads. This means letting the experts speak, not putting himself in the front of every briefing and speculating about things he doesn’t know much about. (…)

Leadership means putting together a response to economic weakness and what can be done to help those who lose their jobs, not promising something he can’t deliver on Capitol Hill or blasting the Federal Reserve for the 100th time. Above all, leadership in a crisis means telling the public the truth, lest people begin to tune him out or, worse, make him a figure of mockery. (…)

Travel bans are less important than mitigation efforts at home with thousands of likely cases already here. Comparing the U.S. favorably to Europe won’t reassure anyone if the U.S. catches up. (…)

Trump’s Error-Laden ‘Foreign Virus’ Speech Has Investors Spooked

(…) And even in a 10-minute address, Trump couldn’t stick to the facts.

He overstated the European travel restrictions, saying he was “suspending all travel” from the continent, and suggested they would also apply to trade. He tweeted later that trade wouldn’t be affected, and the Department of Homeland Security clarified that the restriction applies generally to foreigners who’ve been in Europe within 14 days.

He said U.S. health insurers had agreed to waive co-payments for coronavirus treatment. A spokeswoman for America’s Health Insurance Plans, a trade group, said its members had agreed only to waive co-payments for testing. (…)

The crisis has gone to the heart of core, unresolved questions about Trump’s presidency: whether his streak of economic growth could be maintained through Election Day, if he could suppress his penchant for bold proclamations and political warfare as experts issued dire warnings about the disease, and how a West Wing staffed by novices and defiant outsiders would navigate the complexities of a true crisis. (…)

The FT:

    Donald Trump’s troubling coronavirus address President’s travel ban will not calm markets or address the threat facing America

    (…) Moreover, his action contradicted expert guidelines. The WHO clearly advises against international travel bans because they stifle the flow of medicines and aid, and “may divert resources from other interventions”. (…) Mr Trump has elevated the uncertainty risk. To put it bluntly, no one has much clue what he will do next. (…)

    Perhaps the biggest fallout of Mr Trump’s address was what he did not say. His most glaring omission was any plan to increase America’s capacity to test for infections. Epidemiologists say accurate testing is the single most effective method to counter the disease’s spread. It allows the authorities to isolate clusters, trace the movement of the virus and make critical decisions on where the biggest risks lie. (…)

    The US has tested fewer than 6,000 people out of a population of 327m. By contrast, the Netherlands, with 17m people, is testing that many every day. South Korea, with 51m people, is testing 10,000 a day. The shortage of US kits stems from federal bureaucratic delays. One simple fix would be to import them from Germany, which are WHO-approved.

    Mr Trump could have tackled the problem at a stroke by saying the US would import as many kits as necessary. But that would have undercut the spirit of his message: the epidemic comes from a “foreign virus”, he said; America must therefore narrow its access to the world. (…)

    In an ideal situation, America’s president would have acknowledged that the pathogen knows no borders and has no political loyalties. It poses a common threat that requires a co-ordinated global response.

    • EU Hits Out at Trump Travel Ban

    “The coronavirus is a global crisis, not limited to any continent and it requires cooperation rather than unilateral action,” the heads of the European Union’s main institutions said in a statement. “The European Union disapproves of the fact that the U.S. decision to improve a travel ban was taken unilaterally and without consultation,” Ursula von der Leyen and Charles Michel said in a joint statement.

    (…) Monday’s stock market plunge convinced Mr. Trump that he needed to act, people familiar with the matter said.

    (…) The administration is working on broader measures, including assistance for workers and industries hit by the virus, such as airlines, Mr. Mnuchin said. The Treasury also is planning to extend the April 15 tax payment deadline “for virtually all Americans, other than the super-rich,” he said. He estimated the extension would provide about $200 billion of stimulus for the U.S. economy. (…)

    At a weekly Senate lunch Tuesday, Mr. Trump and his advisers briefed Republicans but not Democrats, and Mr. Trump attacked Democratic lawmakers on Twitter.

    “It’s not encouraging for getting a bipartisan deal,” said [Andy Laperriere, a policy analyst at Cornerstone Macro who was previously a GOP policy adviser on Capitol Hill.] (…)

    The efforts so far present a contrast to the last economic crisis, in 2008. President George W. Bush unveiled a $145 billion package of tax rebates after consulting congressional leaders from both parties. The House passed its own version of the package less than two weeks later, and the House and Senate agreed on a deal one week after that. (…)

    Any disagreements between the Fed and the White House never spilled into public view.

    By contrast, Mr. Trump on Tuesday renewed his criticism of the Fed, calling it “pathetic” and “slow moving”—even after last week’s half-point emergency interest-rate cut. (…)

    Mr. Mnuchin said he and Mr. Powell have been in daily contact during recent financial-market gyrations. Their relationship could grow more important as the coronavirus crisis deepens. (…)

    U.S. Budget Deficit Grew 15% in First Five Months of Fiscal Year The U.S. budget deficit totaled $625 billion in the period as government revenue rose 7%.

    (…) Spending is also up this fiscal year, climbing 9% to $1.99 trillion. (…) The government expects the deficit to hit $1.08 trillion this fiscal year, up from $984 billion during the 2019 fiscal year.

    Pointing up The other major leadership problem:

    Saudi Arabia’s Crown Prince Tanked Oil Markets. Here’s the Back Story. Mohammed bin Salman, one of the most powerful men in the Middle East, chose a weekend when the world was preoccupied with the novel coronavirus to assert his standing at home and abroad, clamping down on political rivals while throwing down the gauntlet with Russia over oil prices.

    (…) As he was preparing to squeeze his royal rivals at home, the crown prince tried to turn the screws on Russia, demanding bigger production cuts, say some of people familiar with the meeting. (…) “The message the Saudis wanted delivered to the Russians was you are either agreeing on a cut,” says a Saudi official familiar with the matter, “or we won’t cut at all.”

    Again, the Russians didn’t budge. “I have no idea how did the Saudis think that this kind of pressure would have worked on Putin,” says an OPEC delegate familiar with the matter. “This was utterly suicidal and we all knew the outcome would be disastrous.”

    On Saturday, Saudi officials said instead of cutting production, they would boost it, driving down the price of oil. “It was the Saudi declaration of war against Putin,” says a senior Saudi official.

    Within hours, the Royal Court told finance-ministry officials to prepare a budget scenario with benchmark Brent crude prices dropping into a $12-to-$20-a-barrel range, say people familiar with the directive. They feared spending cuts would wreck the Saudi economy, already battered by the cancellation of religious pilgrimages to the Muslim holy cities of Mecca and Medina. (…)

    Will the coronavirus trigger a corporate debt crisis?

    This is the other scary thing now, seriously compounded by the collapse in oil. From the FT and others

    • Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, estimates that one in six US companies does not earn enough cash flow to cover interest payments on its debt. Such “zombie” borrowers could keep putting off the crunch as long as debt markets kept letting them refinance. But now a reckoning is coming.
    • At 282 companies in December, S&P’s “weakest links” list of low-rated junk bonds on which it has a negative outlook was at its longest since the crisis era of July 2009.
    • More than $320bn of US debt sitting on the lowest rung of the investment grade ladder.
    • Almost $840bn of bonds rated triple B or below in the US are set to come due this year and roughly $270bn of US bonds now trade below 90 cents on the dollar. Many companies have already been locked out of refinancing or selling new debt.
    • $110bn of US energy company bonds into distressed territory.
    • A $100 Billion Debt Wave to Crash Over Europe’s Riskiest Firms Hundreds of high-risk companies in Europe need to repay or refinance nearly $100 billion in the coming months, a prospect that becomes more daunting by the day amid the relentless collapse in credit markets.
    • A stress test analysis from CreditSights finds that with WTI crude at $35 a barrel, 5 of the 12 investment-grade E&P names that it covers will see net leverage rise above 3 turns on a hedged basis and 8 of 12 will be levered above 4 times on an unhedged basis. For context, a fall 2017 analysis from Moody’s found that the average triple-B-rated (the last stop before junk) company sported a leverage ratio of 2.7 times.  As for the junk-rated E&P contingent, CreditSights writes that “most. . . would see leverage north of 15 times.” That compares to a leverage ratio of 7.2 times for triple-C-rated corporates (the bottom rung of high yield) in that 2017 Moody’s study. (Almost Daily Grant’s)
    • Bloomberg reports today that Boeing Co. will draw down the remainder of its $13.8 billion credit facility, while Wynn Resorts Ltd. is planning to draw “a portion” of its $850 million revolver to burnish its own balance sheet.  Bloomberg also relays this afternoon that private equity giant Blackstone Group, Inc. “is asking companies it controls to draw down their bank credit lines to help prevent any liquidity shortfalls amid signs of mounting stress in markets.” (ADG)
    • We now expect the Fed to deliver two additional 50bp cuts in March and April on top of the recent 50bp emergency cut owing to growing coronavirus-related concerns (GS)
    Hope on the oil front?
    Russian ministry, oil firms to meet after OPEC talks collapse and prices plunge

    Russia’s Energy Ministry will meet with the country’s oil companies on Wednesday (11 March) to discuss future cooperation with the Organization of the Petroleum Exporting Countries, among other issues, two sources familiar with the plan told Reuters.

    The meeting was convened following the collapse of talks with OPEC and other oil producers last week which spelled the end of three years of coordinated output cuts aimed at supporting prices and reducing stockpiles. (…)

    Russia’s largest oil producer, Rosneft, has been the most vociferous opponent of the deal, arguing that the production cuts have allowed the United States, which is not part of OPEC+, to boost its market share. (…)

    Other producers, notably Russia’s second-largest oil producer Lukoil, have been positive towards cooperation with OPEC.

    “We plan to discuss whether to return to (cooperation with) OPEC or not,” one of the sources said. Novak said on Tuesday that Russia had not ruled out further joint action with OPEC to stabilise the oil market, a stance later repeated by the Kremlin.

    At the same time, Saudi Arabia said it would increase its crude oil supply to a record high, raising the stakes in its standoff with Russia and effectively rejecting Moscow’s overtures for new talks.

    This a.m.:

    (…) “We are not in a price war with anyone… We are competitive. We watch the market and understand that such a situation will help the market to recover. High-cost projects will disappear,” Pavel Sorokin, Russia’s deputy energy minister said. (…)

    A fresh cut last week would have boosted prices and in turn brought on new projects that would flood the market in three-to-four years’ time, he said. “Sooner or later, we would have faced an oil price fall to $40 and lower, with the exit (from the deal) in six months or a year,” Sorokin said.

    The deputy minister sees oil market equilibrium at $45-55 per barrel, which is comfortable for producers and low enough for the global economy to recover from the coronavirus impact. Provided there are no further shocks, Sorokin said he saw prices rising to $40-45 per barrel in the second half of this year and to $45-50 – in 2021.

    Very informative piece from Geopolitical Futures:

    The Implications of an Oil Price Crash for Russia

    (…) In January, oil and natural gas accounted for nearly 40 percent of the federal government’s revenue.

    Under this scenario [$20-$25 oil], it was anticipated [by Russia’s central bank] that the Russian economy would face recession, gross domestic product would fall by 1.5-2 percent and, for 2020, annual inflation would grow to 6.5-8 percent (in 2019, it was 3.2-3.7 percent). The Ministry of Finance also said this week that if oil prices drop to $25-$30 prices for a year, oil and gas revenue for the budget will decline by 1.6-2.4 percent. The decline would be 5-7.6 percent if that price were sustained for three years. (…)

    According to the central bank’s projections, however, the economic slowdown would be short-lived; even under these circumstances, the economy can be expected to move toward recovery and grow by 1-2 percent in 2021, and by 3.5-4.5 percent in 2022. (…)

    The Ministry of Finance said on Monday that Russia has sufficient reserves to sustain the country’s finances for six to 10 years if oil prices fall to $25-$30 per barrel. (…)

    Furthermore, maintaining the level of production for Russia is no less important than oil prices. Today, taxes on mineral extraction make up a growing share of the federal budget. In January 2020, revenues from oil production accounted for 25 percent of total revenues, while export duties from oil exports formed only 5 percent. And since the tax rate is constant – it is set in rubles per 1 ton and later multiplied by a coefficient reflecting world oil prices – the important thing for Russia’s budget is that production volumes increase. Because of the collapse of the OPEC+ agreement, all restrictions on production will be lifted beginning in April, meaning Russia can increase production. For Russia, this means developing oil fields where commercial production has not even begun. (…)

    Rosneft contends that the OPEC+ deal was “meaningless” for Russia, forcing the company not to develop its own projects and clearing space for American shale oil, because all the volumes of oil that were not produced because of the agreement were quickly and completely replaced on the world market with American production. (…)

    But in recent years, the improvement in living standards has stalled, particularly because of falling oil prices. Rising inflation will also put pressure on Russian citizens. The government’s plan to reduce poverty to 10.8 percent will be impossible to fulfill with falling oil prices, and in fact the situation of almost half of Russians may worsen. About 14 million Russians live below the poverty line, about 20 million have incomes below the subsistence level, and small business does not develop effectively due to the lack of domestic demand. Further impoverishment of the population may also reduce the birth rate, which the government is so desperately trying to raise. If oil is already below the budgeted price, the Putin government simply will not be able to fulfill its political promises, and the real incomes of people will continue to fade.

    The Russian government has prepared for the most severe scenario. Russia will be able to cope with oil below $30 per barrel, but only by sacrificing its budget surplus, its rainy day funds and its political promises to raise living standards. This sacrifice will mean the government cannot solve long-standing social problems and will lose the trust of the people. There is only one price that the Kremlin considers acceptable, and that is above $42.40 per barrel.

    Leadership needed here too. Watch for a call between Putin and the Saudi King, MBS’s father.

    T-Bills Are Scarce and the Shortage Is About to Get Even Worse Strategists at JPMorgan say demand could outstrip supply by over $1 trillion next quarter.

    (…) Money market funds in particular are rushing to lock in rates before they reach 0%, prompting strategists at JPMorgan Chase & Co. to say demand could outstrip supply by over $1 trillion next quarter.

    Virus Update

    Gleaned here and there:

    Chinese government medical adviser Zhong Nanshan said the global outbreak could continue beyond his initial estimate of June if some countries don’t adopt strong control measures. Speaking at a briefing, Zhong urged other affected nations to adopt national-level controls.

    China reported just 15 new cases of infection and 11 additional deaths for Mar. 11, a dramatic fall from the thousands of new cases it was seeing daily last month. In total, China now has 80,793 cases of infection and 3,169 deaths.

    Pointing up Coronavirus Can Live in Patients for Five Weeks After Contagion

    Patients keep the pathogen in their respiratory tract for as long as 37 days, a new study found, suggesting they could remain infectious for many weeks. In yet another sign of how difficult the pandemic may be to contain, doctors in China detected the virus’s RNA in respiratory samples from survivors for a median of 20 days after they became infected, they wrote in an article published in the Lancet medical journal.

    Iran earlier said the virus had probably passed its peak in two of its worst-hit provinces, Qom — where the country’s outbreak started — and Gilan in the northern Caspian Sea region. (…) With 9,000 cases, Iran is the worst-hit country in the Middle East.

    Scandinavian governments are imposing emergency measures as the number of people to have contracted the virus in the region tops 1,500. Denmark is telling all citizens to do what they can to isolate themselves to prevent the virus from bringing down the country’s health-care system.

    Schools in Madrid and other parts of Spain have closed down and people are being encouraged to work from home as the country attempts to contain the spread of the virus, which has now affected more than 2,000 people and killed 50.

    India, with 60 cases so far and no deaths, has seen a spike in infection over the past few days.

    The United Arab Emirates, which includes Dubai and Abu Dhabi, already closed schools and nurseries. The country has 74 confirmed cases of the virus.

    Meanwhile, where it all started:

    Coronavirus-Closed Factories in China Face Delays in Restarting as Authorities Flip-Flop

    Most factories in Hubei province won’t be allowed to resume operations through March 20, the provincial government said Wednesday, dealing a delay to businesses in the region at the center of China’s coronavirus epidemic struggling to return to normal.

    However, companies that perform essential tasks such as producing food can resume work immediately if they haven’t already done so, the authorities said, as can firms “that have a significant impact on supporting the national and global industrial chain,” provided they have the necessary approvals. That may include some of the numerous auto plants in and around Wuhan, the provincial capital, which play a critical role in the regional economy. (…)

    But most car plants and other factories in Hubei, which stopped operations for the Lunar New Year holiday in late January, continued to sit idle on Wednesday. (…) while 70% of auto companies had restarted by the end of February, they were operating at 20% of production capacity. (…) Honda said Wednesday that it had started to allow some employees to return to its plants in Wuhan, and that it had begun small-scale production while conducting equipment checks. (…)

    But other obstacles remain, he said—thousands of workers remain stranded outside Hubei, and with Wuhan’s mass-transit networks still closed, many workers who are in the city can’t travel to the factories, he said.

    Moreover, people are prohibited from traveling between city districts unless they have special permits, making it impossible for workers who live in a different district from their factory to clock in. The authorities haven’t said when the restrictions might be lifted. (…)

    BOTTOM FISHING?

    At today’s pre-opening of 2585, the Rule of 20 P/E is 18.1. The December 2018 low was 16.85 which would be 2380 at current trailing EPS (likely to decline in coming months) and inflation (also likely to decline).

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