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.

• Coronavirus Puts Trump’s Economic Policy-Making to the Test Treasury Secretary Steven Mnuchin emerges as key player amid internal administration disputes

(…) 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.

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. (…)

• UAE ready to increase oil supply by one million barrels per day

• Oil Plunges Again After Trump Limits Travel From Europe to U.S.

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.

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).