THE DAILY EDGE: 6 MARCH 2020: The Meaning of Cashflow

Virus Update

• Global cases top 99,000; death toll 3,386
• Iran, the worst affected country in the Middle East, reported 1,234 new cases, taking the total to 4,747. The country reported 17 more deaths, taking total fatalities to 124.
• In the United States, at least 57 new cases of coronavirus were confirmed as the virus struck for the first time in Colorado, Maryland, Tennessee and Texas, as well as San Francisco in California. Some 230 people have been infected in total, and 12 have died.
• A ship with 125 people on board was blocked in the port of Naples after nine staff members showed symptoms that could be potentially linked to coronavirus, Ansa reported, citing unidentified officials from the port authority.
• The number of confirmed cases in Germany rose to 534 from 400, while those in Spain jumped to 345 from 261. Belgium reported 59 new cases.
• France’s Haut-Rhin department has 81 confirmed cases of coronavirus from 10 two days ago, and the number is expected to increase.
• Three UBS employees in Switzerland have tested positive for the coronavirus, according to the bank. An employee at a UBS Geneva office tested positive for the coronavirus, following which the bank sent home the employee’s team members and employees working in the surroundings. Two employees in Ticino in southern Switzerland also tested positive.
• The Norwegian military quarantined 1,300 personnel in a base in the northern part of the country after a case of coronavirus was confirmed among them.
• Singapore has confirmed 13 new cases, its largest daily increase yet.
• Cameroon’s government confirmed the country’s first coronavirus case after a 58-year-old French citizen tested positive. Slovakia and Serbia also reported their first infections.
• The Vatican temporarily closed its clinic after one patient tested positive for coronavirus. Vatican City is home to about 600 people, including Pope Francis.
• Samsung Electronics Co. is suspending production at its key Gumi smartphone factory for the third time after discovering another coronavirus infection among its employees, prompting the shift of some of that plant’s output to Vietnam.
• Note this is an incomplete list…

An increasing number of people faced a new reality as many were asked to stay home from work, schools were closed, large gatherings and events canceled, stores emptied of staples like toiletries and water, and face masks a common sight.

South Korea has conducted 140,000 tests in a short time that have uncovered about 5,700 infections.

Japan, meantime, had tested fewer than 3,000 people as of March 3, finding 317 infections.

Most countries follow WHO guidelines, which limit the scope of tests by establishing criteria for suspected cases. (…) When Italy strayed from the agency’s testing recommendations, its case load swelled, rising to more than 3,000 as of Thursday — the most outside Asia. Health authorities there counted hundreds of people who had the virus with hardly any symptoms.

China may have ‘no new virus cases’ outside Hubei epicentre by mid-March

A senior researcher involved in efforts to contain the coronavirus epidemic is predicting there may be no more new cases in mainland China, except for the Hubei province epicentre, by mid-March, but the death of a patient after being discharged from hospital has added a worrying new aspect to the spread of Covid-19. (…)

“We have analysed the infections trend. So far, the daily infections in places other than Hubei have almost gone down to zero since late February,” Zhang told the official People’s Daily.

“According to our analysis of the statistics, we expect cities other than Wuhan in Hubei province will be basically free of [new] coronavirus patients in the middle of March. The hope is that Wuhan won’t have daily new cases in late March.”

Zhang, who is also director of the Tianjin University of Traditional Chinese Medicine, said people in other parts of China might be able to remove their masks in April, but that did not mean the coronavirus would be completely gone and there could still be cases, including among people arriving from overseas.

China’s National Health Commission reported 139 new cases on Thursday, up from 119 a day earlier, and 31 new deaths. Of the new infections, 134 were in Hubei and 131 in Wuhan. (…)

Shanghai-based news portal Thepaper.cn reported that another of the temporary facilities for coronavirus patients, Jiangan Fangcang Hospital, had issued an emergency notice on Wednesday saying more discharged patients had been readmitted after they fell ill again. The hospital said it would conduct antibody tests on all patients before they were discharged from Thursday to make sure they had fully recovered.

On Monday, Wuhan closed the first of its makeshift hospitals after discharging the last 34 of its patients. (…)

Is this true? This next piece suggests it could be (my emphasis):

• The WHO sent 25 international experts to China and here are their main findings after 9 days

The WHO has sent a team of international experts to China to investigate the situation, including Clifford Lane, Clinical Director at the US National Institutes of Health. (…)

China can now produce 1.6 million test kits for the novel coronavirus per week. The test delivers a result on the same day. Across the country, anyone who goes to the doctor with a fever is screened for the virus: In Guangdong province, far from Wuhan, 320,000 people have been tested, and 0.14% of those were positive for the virus. (…)

The vast majority of those infected sooner or later develop symptoms. Cases of people in whom the virus has been detected and who do not have symptoms at that time are rare – and most of them fall ill in the next few days. (…)

Since the end of January, the number of new coronavirus diagnoses in China has been steadily declining (shown here as a graph) with now only 329 new diagnoses within the last day – one month ago it was around 3,000 a day. “This decline in COVID-19 cases across China is real,” the report says. The authors conclude this from their own experience on site, declining hospital visits in the affected regions, the increasing number of unoccupied hospital beds, and the problems of Chinese scientists to recruit enough newly infected for the clinical studies of the numerous drug trials. (…)

One of the important reasons for containing the outbreak is that China is interviewing all infected people nationwide about their contact persons and then tests those. There are 1,800 teams in Wuhan to do this, each with at least 5 people. But the effort outside of Wuhan is also big. In Shenzhen, for example, the infected named 2,842 contact persons, all of whom were found, testing is now completed for 2,240, and 2.8% of those had contracted the virus. In Sichuan province, 25,493 contact persons were named, 25,347 (99%) were found, 23,178 have already been examined and 0.9% of them were infected. In the province of Guangdong, 9,939 contacts were named, all found, 7,765 are already examined and 4.8% of them were infected. That means: If you have direct personal contact with an infected person, the probability of infection is between 1% and 5%. (…)

“China’s bold approach to contain the rapid spread of this new respiratory pathogen has changed the course of a rapidly escalating and deadly epidemic. In the face of a previously unknown virus, China has rolled out perhaps the most ambitious, agile and aggressive disease containment effort in history. China’s uncompromising and rigorous use of non-pharmaceutical measures to contain transmission of the COVID-19 virus in multiple settings provides vital lessons for the global response. This rather unique and unprecedented public health response in China reversed the escalating cases in both Hubei, where there has been widespread community transmission, and in the importation provinces, where family clusters appear to have driven the outbreak.”

“Much of the global community is not yet ready, in mindset and materially, to implement the measures that have been employed to contain COVID-19 in China. These are the only measures that are currently proven to interrupt or minimize transmission chains in humans. Fundamental to these measures is extremely proactive surveillance to immediately detect cases, very rapid diagnosis and immediate case isolation, rigorous tracking and quarantine of close contacts, and an exceptionally high degree of population understanding and acceptance of these measures.”

“COVID-19 is spreading with astonishing speed; COVID-19 outbreaks in any setting have very serious consequences; and there is now strong evidence that non-pharmaceutical interventions can reduce and even interrupt transmission. Concerningly, global and national preparedness planning is often ambivalent about such interventions. However, to reduce COVID-19 illness and death, near-term readiness planning must embrace the large-scale implementation of high-quality, non-pharmaceutical public health measures. These measures must fully incorporate immediate case detection and isolation, rigorous close contact tracing and monitoring/quarantine, and direct population/community engagement.”

Coronavirus Snarls Trans-Pacific Shipping and Ripples Through U.S. Business Congestion at Chinese ports and interrupted sailings have squeezed space on China-bound vessels and left an imbalance in shipping containers, especially the refrigerated ones used for farm products; “Everyone is fighting for containers. It’s cutthroat.”

(…) Containership operators have canceled nearly 60 trans-Pacific sailings to the ports of Los Angeles and Long Beach, Calif., in the first quarter and more than 110 to all of North America. Normally there are about 200 sailings of container ships across the Pacific a month.

That means fewer ships are available to make the return journey east, and the normal turnover of containers has stalled. (…)

A record two million containers of seaborne shipping capacity was idled in late February, according to Alphaliner, a Paris-based marine data provider. That is more than the 1.5 million containers of capacity idled in 2009 at the height of the financial crisis. (…)

The number of idled container ships in the Pacific region has reached 370, compared with about 230 at the beginning of the year, according to Jonathan Roach, an analyst at Braemar ACM Shipbroking. He said that, in addition to canceled sailings due to trade disruptions, about 100 of the ships have been pulled out of service to retrofit their exhaust systems to comply with new regulations.

Some shipping lines have levied surcharges as high as $2,000 per refrigerated container on voyages to China and other Asian destinations, roughly doubling the cost to ship a container of oranges. Other lines have warned exporters they will be saddled with costs if congestion at Chinese ports forces ocean carriers to divert cargo to other countries. (…)

There are signs that broader trade flows could start to pick up: Chinese factories are resuming production as the spread of the virus abates in that country, and port congestion is easing as China’s dockworkers, cargo handlers and truck drivers return to work. Meat and citrus groups say Chinese demand for their products remains strong, especially as trade tensions ease between the U.S. and China. But it will be weeks before the full impact on U.S. factories and farms is clear. (…)

Since it takes most manufactured goods 25 to 30 days to come from Asia by sea, he said the company didn’t expect to see the full impact of the disruption on U.S. rail volumes until later in March or April. The most immediate impact is on trucking companies that ferry goods to and from ports to warehouses and rail connections. (…)

Coronavirus Piles More Pressure on the Struggling Car Industry This year is shaping up to be the toughest for manufacturers since 2009 as the epidemic hits auto sales while they’re down

(…) Goldman Sachs on Thursday downgraded its forecast for 2020 global auto sales to a decline of 3.5%, from 0.3%. That would make the total effect of 2019 and 2020 similar to that experienced by the industry during the financial crisis in 2008 and 2009, which tipped some players into bankruptcy. (…)

On the brink: China’s bakers, bars and beauty spas struggle to survive coronavirus The coronavirus outbreak in China is pushing many small businesses to the brink, as efforts to stem its spread left usually bustling streets deserted and malls shut or empty.

Didi Chuxing was already struggling. Then came coronavirus Disruption yet another obstacle on Chinese ride-hailing app’s long road to profitability

Costco says coronavirus sparking surge in buying, can’t keep up with some demand

(…) Some of the frequently purchased items include bleach, bottled water, dry grocery items, sanitizing wipes, sanitizers and water filtration products.

“We’re getting deliveries daily, but still not enough given the increased levels of demand on certain key items,” Chief Financial Officer Richard Galanti told analysts, and added that shopping frequency has been off the charts.

Costco said its February comparable sales, on an adjusted basis, rose 11.7%, adding that concerns related to the virus outbreak had boosted comparable sales by about 3%. The company added the rise in traffic has been continuing into March. (…)

 Reservations for domestic flights and hotels in China are recovering from the virus-induced slump as people return to work across the nation, online travel company Tongcheng-Elong Holdings Ltd. said. Hotel bookings in the week to March 1 surged 40% from the previous week, while peak daily bookings for domestic flights soared 230% from the lowest level recorded in February, the company said.

Meanwhile in Europe:

From STR, we know that U.S. industrywide hotel RevPAR decreased 0.2% YoY during the week ended February 29, compared with flat over the last 4 weeks. However, Raymond James notes that hotel occupancy was down 1-2% industrywide in the U.S. and that group cancellations “increased rapidly towards the end of last week”. STR reports that occupancy in NYC fell 0.8% last week and is down 2.4% over the past 4 weeks.

U.S. GOING VIRAL?

Goldman Sachs designed a Coronavirus Consumer Activity Tracker and a Coronavirus Consumer Price Tracker to try to track the impact of the virus in the USA using data such as movie ticket sales, hotel occupancy rates and sporting event attendance. Through Feb. 29, the data suggests that “at least for now, consumers aren’t avoiding mass gatherings in response to the coronavirus news” and are not cutting back on spending if price activity is a decent guide.

EARNINGS WATCH

We now have 489 reports in and Q4’19 earnings are seen up 3.1%. Q1’20 estimates keep falling, however, and are now expected at +2.0% but don’t bet too much on that number.

THE MEANING OF CASHFLOW

The FOMC cut its benchmark rate 50 bps this week and many discount its impact. But the Fed is very much aware of corporate America’s high indebtedness, partly due to its interest rate policy. The Fed realized the strangling effect its tightening had in 2018 and wants to avoid that during this crisis.

The truth is that if you are even remotely sensitive to tourism, traveling and hospitality, you now understand what cashflow means. When nobody is buying your services and wares, there is actually no cash coming in, zero revenue, zero cash in the tilt, while you still have to pay labor, rent and interest.

At the end of 2019, S&P 500 companies had a debt/equity ratio of 0.9, a record outside of the Financial crisis. Smaller companies are even more indebted. Some 37% of the Russell 2000 companies are losing money before interest expense. Many of these are now, or soon will be experiencing empty cash registers. All this credit is owed to debtors and the Fed must be worried of a cascading effect in a long crisis.

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