Edge and Odds

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THE DAILY EDGE: 18 MARCH 2020: Zombies Meet Black Swan

“IT’S BAD”! It will get worse…

Coronavirus Case Count The virus has reached all 50 U.S. states, sickened thousands and reached more than 100 countries

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Daily Increases in Number of Reported Coronavirus Cases

(…) South Africa, which had its first case 10 days ago, now has 61. According to Ramaphosa, the virus has begun spreading inside the country. And just yesterday, Rwanda, Equatorial Guinea, and Namibia all reported their first cases, bringing the number of affected countries to 23. Some scientists believe COVID-19 is circulating silently in other countries as well. (…)

Behind the Stimulus Frenzy: the Prospect of Billions of Unpaid Bills Washington is grappling with an increasingly urgent problem along with the novel coronavirus pandemic: the growing risk that millions of businesses and households won’t be able to pay their everyday bills

(…) “Americans need cash now, and the president wants to give cash now. And I mean now, in the next two weeks,” Treasury Secretary Steven Mnuchin said at a White House briefing, highlighting the urgency of the dilemma. Privately with lawmakers, however, he said checks might not be available until the end of April. (…)

Nearly four in 10 Americans don’t have the savings in hand to cover an unexpected, $400 expense with cash, according to Fed surveys.

Fed data show nonfinancial businesses had $1.53 in liquid assets like cash and securities on hand for every $1 in short-term liabilities in the fourth quarter. That is down from $1.80 when Lehman Brothers collapsed in 2008, but up from $1.34 during the September 11, 2001, terrorist attacks, according to Moody’s Analytics. The more liquid assets they hold, the better positioned they are to handle a cash crunch. (…)

The Fiscal Stimulus Panic $1,000 checks won’t help the economy, but a new Fed backstop will.

We will survive the coronavirus panic as Americans adapt, as they always do. We’re less confident of the Washington panic, as our politicians rush to throw money around without much thought or economic logic as they almost always do. At least the Federal Reserve stepped in Tuesday to address an immediate economic problem.

To take these one at a time, President Trump appeared to throw his support Tuesday for the Mitt Romney-Steven Mnuchin idea of giving every American a check for $1,000. This will help those who lose their jobs or income from government shutting down retail and other operations. But Congress is also addressing this with expanded jobless insurance, food-stamp and other income transfers, and mandated sick leave that is much better targeted at genuine hardship. Some people who will get the $1,000 won’t need it.

The politicians are again selling the Keynesian illusion that this is the best way to get cash into the pocket of consumers who will spend it. That claim has failed time and again—from the George W. Bush tax rebate of 2002, to the Nancy Pelosi-Bush rebate of 2008, to the Barack Obama-Pelosi spending spree of 2009. The cash outlay will be even less effective now with so many fewer ways to spend it as much of the economy shuts down.

The checks no doubt will be popular, which probably explains GOP support in the Senate and White House. They will also blunt Democratic criticism if businesses also receive aid. But the checks won’t come cheap, running at a cost of hundreds of billions of dollars for the first round. What happens if the pandemic lasts into summer? The clamor will be for another round, and then another.

The U.S. can borrow now at low rates to finance this, but even American resources aren’t infinite. A $2 trillion annual deficit implies a substantial future tax increase—maybe as soon as next year—that would retard the recovery. Americans should get a greater economic return for that amount of money.

Mr. Trump has also agreed to the request of U.S. airlines for a $50 billion rescue. At least this appears to be structured in the Treasury request as secured loans, rather than grants. Solvent companies need financing to get through the virus economic shutdown, and once healthy they should be able to pay it back.

One problem with industry-specific rescues is that the requests turn into political free-for-alls on Capitol Hill. The better way to do this is a new Fed facility we wrote about Tuesday that would allow all business comers that were solvent before the virus to apply for loans against good collateral. Mr. Mnuchin should lean on Fed Chairman Jerome Powell to do it. (…)

By Narayana Kocherlakota, professor of economics at the University of Rochester. He was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

(…) I see this drag lasting well into next year. This recent analysis from a team of researchers in the U.K. suggests that, until a vaccine is developed, governments will have to choose between two unpalatable options:

— exponential growth in the number of Covid-19 patients, which will crush health-care systems in a matter of weeks

— or stringent social-distancing policies to keep disease transmission under control (…)

Responding to this kind of protracted slowdown will require a bigger stimulus than the 6% of gross domestic product proposed by the administration. Instead, policy makers should be planning for two years in which, in the absence of a fiscal intervention, the output gap will be significantly negative — possibly as much as 6% of GDP, or on the same scale as the recession caused by the 2008-09 financial crisis. It’s going to take a much larger fiscal infusion to make up for that shortfall — something more on the order of $2.5 trillion rather than $1.2 trillion. (…)

First, the government should pay $10,000 to every adult and child younger than 40. They are more likely to go out and spend this money, partly because Covid-19 presents much less of a health risk to them. Second, the government should pay a bonus to each person who gets tested for the coronavirus (as long as they haven’t been tested in the prior week). Finally, as was done in the Great Recession, the government should both increase and extend unemployment-insurance benefits beyond the normal 26 weeks.

We know there is going to be a downturn and, unfortunately, there are good reasons to believe that it will be both long and deep. The Federal Reserve has done what it can using monetary policy. Now we need a strong and well-designed fiscal policy response from the U.S. government.

We are clearly in a “whatever it takes” situation. This is a cashflow crisis that needs to be addressed right away. The sooner, the better and, with politicians and partisanship, seven months before the elections, the simpler the better.

AIRLINES IN FREEFALL

A $50B rescue for airlines. Yes, we need to keep them flying, but make them, and many others, pay for their careless management:

And these guys’ totally scandalous behavior, prioritizing $ before lives, with the FAA’s help!

(…) The U.S. planemaker has told lawmakers it needs significant government support to meet liquidity needs and it cannot raise that in current market conditions, the people said.

Boeing confirmed Monday it was in talks with the administration about short-term support, while U.S. President Donald Trump said Tuesday the U.S. government would provide support. Boeing has noted that typically 70% of its revenue flows to its 17,000 suppliers and has told lawmakers that without significant assistance the entire U.S. aviation manufacturing sector could collapse. (…)

Boeing confirmed on Tuesday that it had completed the drawdown of the rest of a $13.8 billion line of credit it had secured last month.

Boeing’s total debt nearly doubled to $27.3 billion in 2019, as it compensated airlines and grappled with additional production costs for the 737 MAX even as the grounding prevented it from delivering the aircraft to buyers.

Reuters on Tuesday reported Airbus has about 16 billion euros ($17.60 billion) in cash and needs some 5.5 billion euros a month, a person familiar with Monday’s discussions said. (…)

China lacks appetite to save world economy, analysts warn Beijing adopts more conservative approach in tackling latest crisis compared with 2009

(…) China’s total debt load amounts to about 310 per cent of GDP, one of the highest levels among emerging markets, according to the International Institute of Finance. (…)

ECB Seeks to Mend Rifts as Economic Clouds Gather For the second time in a week, the European Central Bank scrambled to clarify remarks from one of its top officials that suggested it is unlikely to do more to support the region’s struggling economy.

The move highlights divisions among top ECB officials that could hurt efforts to overcome a fast-moving global crisis whose epicenter has shifted to Europe.

In a statement early Wednesday, the ECB said its 25 rate-setting officials were united in their commitment to step up stimulus policies if needed to combat the spreading coronavirus. (…)

But so far, they are still openly quarreling about what’s needed and how to do it…

Source: @financialtimes; Read full article
Ottawa to unveil nearly $30-billion economic aid package for struggling Canadians, businesses
Fed to Relaunch Primary Dealer Credit Facility Crisis-era facility allows large financial institutions access to short-term loans

The Primary Dealer Credit Facility, originally established in 2008, will seek to tamp down strains in funding markets by expanding loans to the 24 large financial institutions. Known as primary dealers, they function as the Fed’s exclusive counterparties when trading in financial markets.

The program will essentially function as an overnight loan facility for primary dealers, similar to how the Fed’s discount window provides a round-the-clock backup source of funding to banks.

The facility will offer terms as generous as those made available in late 2008. (…) Earlier Tuesday, the central bank said it would establish a facility to make loans to U.S. corporations in an effort to ease dysfunction in the $1.1 trillion market for short-term corporate IOUs called commercial paper. (…)

During the depths of the 2008 financial crisis, companies served by U.S. banks bolstered themselves by drawing about 30% of their available credit, with some sectors going much further. If five industries now getting hammered by the coronavirus and oil-price slump were to, say, draw as much as 70%, all corporate clients together would extract a total of about $700 billion from the six biggest banks’ liquidity pools. That’s close to 16% of lenders’ cash-like holdings at the end of last year. (…)

A team at Goldman Sachs Group Inc. concluded last week that a 100% drawdown in several embattled sectors would bring seven of the biggest banks to the brink of breaching their regulatory minimums for liquidity ratios.

“If other industries begin to see larger draws, this will put further pressure” on the ratios, the Goldman analysts led by Richard Ramsden wrote in a March 12 report. The analysis excluded Goldman. (…)

Regulators are considering changes to leverage limits and accounting rules to free up bank capital, according to people familiar with the talks. The Fed on Sunday urged banks to use their excess capital to expand lending. That evening, eight of the nation’s largest banks promised to suspend share buybacks, stockpiling capital for loans. (…)

Surging U.S. Dollar Is Next Big Headache for World Economy Emerging markets are especially vulnerable as they try to cope with collapsing currencies and plunging demand.
Saudis to Hike Oil Export to Record 10 Million Barrels a Day

Saudi Arabia plans to boost oil exports even further from April to May, reaching a record of more than 10 million barrels a day as the kingdom taps a new field.

The increase in shipments of about 250,000 barrels a day shows the kingdom is determined to carry on with its policy of pumping flat out after its alliance with Russia collapsed. (…)

Before the price war broke out, Saudi oil exports averaged just under 7 million barrels a day from December to February, according to tanker-tracking data. (…)

(…) what started as a price war may turn out to be a much more important strategic rethinking of Saudi oil production policy, as the kingdom seeks to monetize its giant petroleum reserves as fast as possible rather than shepherding that store of wealth through the generations. Such a shift would fundamentally change the economics of the industry, using Saudi Arabia’s ultralow cost advantages to win a race to the bottom. For Prince Abdulaziz’ younger half-brother, Crown Prince Mohammed bin Salman, it would represent a massive gamble: the world’s preeminent oil exporter choosing to live with lower long-term oil prices. (…)

Riyadh has kept mum on its motivations, but if the suspicions of many in the oil market prove true, this oil war will be a Darwinian survival of the fittest. As the world steps up the fight against climate change, the demand for oil will peak in a few decades. Saudi Arabia and Russia will likely emerge bruised but standing. Many others, including U.S. shale producers, will be in dire straits.

In the kingdom, the current thinking is to let free markets work. If officials are worried about low oil prices, they aren’t showing it. Saudi Arabia is hunkering down for one to two years of cheap oil, adjusting government spending and drafting measures to protect the vulnerable among its citizenry. “We are very comfortable with $30,” Khalid Al-Dabbagh, finance director of state-owned Saudi Arabian Oil Co., told investors on March 16, an opinion widely repeated in the ministries and royal palaces in Riyadh. “In a nutshell, Saudi Aramco can sustain very low oil prices and can sustain it for a long time, and that is especially the case compared to others in the sector.” (…)

The shock waves are still being felt. By the estimate of some traders and consultants, global oil demand is in free fall, down about 10% from the previous year—the largest drop ever. (…)

Unknown to anyone but a few royals and senior officials in Riyadh, the kingdom had been preparing precisely for that moment for several weeks. For the Saudis, Novak’s pump-at-will comment was a green light to ramp up the country’s own production. (…)

Russian President Vladimir Putin used the last few years to build a war chest of petrodollar reserves. At $577 billion, the cash pot is up 60% since 2015. Over the same period, Saudi petrodollar savings have declined 28%, to $502 billion. Moreover, Russia benefits from a floating exchange rate, which absorbs part of the blow of low oil prices. Perhaps more important, Russian society has already endured a few tough years of U.S. sanctions: It can absorb more pain.

So far, the tactics aren’t prompting the Russians to seek talks. The Kremlin has said it isn’t surprised by the fall in prices and doesn’t see a need to meet with OPEC. That’s partly because the price war is giving Moscow something it wanted: It’s prompting U.S. shale companies to announce big spending cuts. Rather than wait and see, as U.S. shale executives did when the Saudis tried to bankrupt them in 2014-16, this time spending cuts “have been swifter than expected,” says Brian Singer, a managing director at Goldman Sachs Group Inc. (…)

Riyadh is obsessed with an energy market that is being shaped by the fight against climate change. Aramco, on the prospectus for its 2019 initial public offering, warned that oil demand might peak within 20 years. The Saudis may be choosing a completely new strategy. As owners of a huge geological petroleum endowment, they could be moving to monetize their reserves more quickly to avoid being stuck with a rapidly depreciating asset. Energy scholars call it a “fast monetization strategy,” and Saudi advisers have been discussing it in private for some time.

The approach has advantages. It would secure a growing share for Saudi crude, as higher cost producers are pushed out of the market. Not just shale drillers, but even Big Oil, which is already under pressure from shareholders to boost profits, will have to cut spending on the development of new wells and, therefore, supply. Lower oil prices could also slow down the adoption of green technologies, particularly the electric cars that Tesla Inc. and others are building. And if Saudi Arabia and Russia can drive enough rivals out of business, perhaps the oil market would tighten again. ​

But the monetization strategy also carries enormous risk. Higher production, alongside weaker demand, is a certain recipe for low prices. If the kingdom follows it, others in OPEC will join, too, pushing even more crude into the market, further depressing prices. Saudi Arabia can barely afford that. According to the International Monetary Fund, Riyadh needs an oil price of about $80 a barrel to balance its budget. More important, its balance of payments only breaks even at about $50 a barrel. Without higher prices, Saudi Arabia will start to run large and sustained balance of payments deficits, putting the peg between its currency, the riyal, and the U.S. dollar at risk. Since he became de facto ruler of Saudi Arabia, Mohammed bin Salman has made a number of risky economic and political moves—the change of oil policy is one of the riskiest yet.

  • An inevitable fall to cash costs

Goldman Sachs sees (hopes for) a V-shape…

We now forecast that 2020 oil demand will see the highest historical fall of 1.1mb/d yoy, with at its trough late March an expected demand hit of 8 mb/d, with refining margins set to fall further from current levels. (…) We now forecast a global surplus of 3.9 and 5.7 mb/d in 1Q and 2Q respectively, with a peak OECD inventory build of 560 mb. (…)

This is leading us to now base-case our prior downside scenario of a fall in oil prices to cash-costs. We are therefore lowering our 2Q Brent forecast to $20/bbl from $30/bbl previously. Ultimately, such a fall to cash-costs would be consistent with the prior large bear markets of 1999, 2009 and 2016, when total storage capacity was never reached but local logistical saturation proved binding. (…)

We expect lower prices and a fall to cash costs to precipitate further supply cuts, with shale production now expected down 0.75 mb/d yoy by 4Q20 and high-cost producers outside of core-OPEC/Russia/Shale also down 0.6 mb/d yoy by 4Q20. While we attempt to allocate these production declines to high-cost producers, it is important to emphasize that when local logistical capacities are reached, forced production cuts no longer line-up with production costs, as was the case in 1999/2009/2016, with inland production in particular most at risk.

9. We now base case that oil prices will fall to cash costs. Data available on request.

We continue to expect that lower supply and normalizing demand later this year will bring the oil market back into a deficit of -1.5 mb/d by 4Q20 (vs. a seasonal deficit of 0.6 mb/d) and push prices higher. As a result, our 3Q and 4Q Brent forecast of $30 and $40/bbl remain unchanged. Even as prices recover, lower capex, higher costs of capital, curtailed service capacity and entrenched higher decline rates will all leave supply lagging the recovery in oil demand through 2021, driving spot prices even higher. (…)

SENTIMENT WATCH

The current selloff is one of the sharpest declines in history.

Peak-to-Trough Declines in Historical Bear Markets Since 1929

After The Panic Comes Resignation

The FT’s Cameron Crise draws an analogy with the Kubler-Ross stages of grief:

  • Denial: the classic initial refusal to believe that anything is different from the last 20 times you successfully bought a little dip
  • Anger: As losses intensify, phrases like “this market is so stupid” are heard more and more often
  • Panic: liquidity evaporates, risk premia and volatility soar, and even favorite trades are sacrificed in the name of risk reduction
  • Response: Policymakers offer up a response to solve the underlying issues, and despite initial hopes markets keep falling…BUT WITH LOWER VOLATILITY
  • Resignation: When it feels like the terrible trend will go on forever, at last a reversal is in sight [and when all hope is lost, the smallest bit of good news can make people money]

We seem to be at the response level…

Companies Mull Suspending, Ramping Up Share Buyback Plans Amid Coronavirus Gap, DSV Panalpina and major banks said they would halt their repurchase programs

(…) Twenty-three companies in the S&P 500 announced they would suspend their programs so far this year, up from none in 2019, according to equity research firm Birinyi Associates. Companies’ authorization of future buybacks through March 17, totaling about $153 billion, marked a 39% drop from the same period a year ago, according to data from Birinyi Associates. (…)

Buybacks - Quarterly Share Repurchases During Bull and Bear Markets

WHEN ZOMBIES MEET A BLACK SWAN

A notice sent to WeWork shareholders Tuesday said that SoftBank believes regulatory probes into the startup’s business, including from the Securities and Exchange Commission and Justice Department, give it an out under the deal struck last fall to purchase $3 billion of WeWork shares from existing investors. (…)

The development won’t affect the $5 billion lifeline SoftBank agreed to give WeWork directly—cash the startup badly needed then as it ran out of runway, and which it is likely to continue to need as the worsening coronavirus outbreak empties out its desks. (…)

Falling share prices, which lower the value of SoftBank’s massive investment holdings, are combining with WeWork’s pricey bailout and a recently announced $4.8 billion share buyback plan to weigh on SoftBank’s balance sheet. Credit-rating firm S&P Global Inc. cited all those factors when it announced Tuesday that it was cutting SoftBank’s credit outlook to negative. S&P noted that unveiling a share buyback in the midst of a stock-market plunge raised questions about SoftBank’s commitment to financial soundness. (…)

WeWork’s basic business model—signing long-term leases with landlords and subleasing short-term to companies—leaves it vulnerable to big drops in office demand, as it is still on the hook for its own payments to landlords. It previously has said it could withstand a recession because companies would turn to shorter-term office space.

THE DAILY EDGE: 10 MARCH 2020

Trump to Propose Steps to Ease Economic Fallout From Coronavirus President Trump said the administration would discuss with Congress several measures to ease the economic pain inflicted by the coronavirus, including a possible payroll-tax cut and help for hourly wage earners.
Virus Update

Cases surpass 113,000 worldwide; deaths exceed 3,900

South Korea’s health ministry confirmed 131 more coronavirus cases in the nation, raising the total to 7,513, according to a statement. The number continues a declining trend since March 6. Total deaths in the country rose to 54 from 51 previously.

Italy became the first country to attempt a nationwide lockdown as cases topped 9,000 overnight.

Iran, the epicenter of the outbreak in the Middle East, on Monday reported 595 infections and 43 deaths. Overall, 7,161 cases have been reported so far in the country and 237 people have died.

Only 4,384 people in the U.S. have been tested for the new coronavirus, nearly two weeks after the disease was found to be spreading across America, according to the Atlantic. “The lack of testing means that it is almost impossible to know how many Americans are infected with the coronavirus and suffering from Covid-19, the disease it causes,” the Atlantic wrote.

Vietnam confirms 33rd coronavirus patient, a 58-year-old British man who was on board Vietnam Airlines Flight 0054 that landed March 2 in Hanoi from London, Ministry of Health says on its website.

The Philippines, with a population of more than 100 million, had only 2,000 coronavirus test kits available earlier this week as the number of infections jumped. Its government once had 4,500 kits in stock, but the number dwindled to 2,000 by Monday as the number of people who wanted to be diagnosed surged. Confirmed cases in the Southeast Asian nation had increased to 33 on Tuesday.

China reported 19 additional coronavirus cases as of March 9, according to a statement from the National Health Commission, bringing the total number of infections to 80,754. The new cases are the lowest since Jan. 18.

The head of DHL owner Deutsche Post AG played down the impact of the coronavirus, saying he’s optimistic about the outlook and that China appears to be staging a recovery from the outbreak. “When I talk to our colleagues in China they say it is getting better every day,” Chief Executive Officer Frank Appel told Bloomberg TV in an interview on Tuesday. “There are encouraging signs, even if it’s not over.”

Source: Oxford Economics (via The Daily Shot)

The Virus is a Time Machine

This next chart suggests that the initial phases of the coronavirus outbreaks appear to be relatively similar in China, Italy, South Korea and Iran. By Day 40 in China, the worst of the outbreak is behind them. If so, we are looking at end of March-early April for the U.S..

Daily Increases in Number of Reported Coronavirus Cases

The man who would become Patient Zero for the new coronavirus outbreak in the U.S. appeared to do everything right. He arrived Jan. 19 at an urgent-care clinic in a suburb north of Seattle with a slightly elevated temperature and a cough he’d developed soon after returning four days earlier from a visit with family in Wuhan, China.

The 35-year-old had seen a U.S. Centers for Disease Control and Prevention alert about the virus and decided to get checked. He put on a mask in the waiting room. After learning about his travel, the clinic drew blood and called state and county health officials, who hustled the sample onto an overnight flight to the CDC lab in Atlanta. The patient was told to stay in isolation at home, and health officials checked on him the next morning. 

The test came back positive that afternoon, Jan. 20, the first confirmed case in the U.S. By 11 p.m., the patient was in a plastic-enclosed isolation gurney on his way to a biocontainment ward at Providence Regional Medical Center in Everett, Washington, a two-bed unit developed for the Ebola virus. As his condition worsened, then improved over the next several days, staff wore protective garb that included helmets and face masks. Few even entered the room; a robot equipped with a stethoscope took vitals and had a video screen for doctors to talk to him from afar.

County health officials located more than 60 people who’d come in contact with him, and none developed the virus in the following weeks. By Feb. 21, he was deemed fully recovered. Somehow, someone was missed. (…)

On Jan. 15, when the traveler to Wuhan who became the first known U.S. case returned to Seattle-Tacoma International Airport, he took group transportation from the airport with other passengers, county officials have said. (…)

Some researchers who’ve traced the viral genomes of patients around the world now believe someone else in the area picked it up between Jan. 15 and Jan. 19, before the traveler went to the hospital. He might have sneezed in the airport shuttle or on some surface—all but impossible for health workers to trace.

“This virus is more contagious than the flu, so any sort of exposures before he got to the hospital would be certainly of high concern,” said George Diaz, who leads the infectious disease department at Providence, where the patient was treated. (…)

So far, Bedford [a genome expert] has reported, sequencing still suggests the transmission is related to the original patient—and the number of active infections could reach 1,100 by March 10 and 2,000 by March 15.

What’s more, the state’s early cases may have seeded infections  now exploding on the cruise ship Grand Princess off California’s coast, he tweeted this week. Researchers from the University of California at San Francisco have said the viral strain from a patient infected on the ship is similar to the cluster circulating in Washington state.

The incoming White House chief of staff, Rep. Mark Meadows of North Carolina, was among three Republican congressmen who said Monday that they were quarantining themselves because of suspected contact with a confirmed carrier of the novel coronavirus.

A spokesman, Ben Williamson, said Meadows learned this weekend he “may have come in contact” with the individual who attended the annual Conservative Political Action Conference in suburban Washington late last month. Meadows tested negative for the virus and is not displaying symptoms but is remaining home in self-quarantine until Wednesday, Williamson said in a statement.

Williamson’s statement did not address whether Meadows physically interacted with Trump since the conference last month.

Two other lawmakers also said Monday they had contact with the same individual at CPAC — both of whom later interacted with the president.

Rep. Matt Gaetz (R-Fla.) rode with Trump on Air Force One as he flew from Florida to Washington on Monday. He said he had no symptoms but was awaiting the results of tests.

In an interview, Gaetz said he was put into a “closed-up room” on Air Force One after he found out about his exposure to the virus. After the plane landed, Trump “coaxed” him up front before leaving the aircraft. “He was not hyper-cautious about being in the same space that I was in,” Gaetz said. “I refused to go into his office; I stood outside the door. I told him he could talk from that distance.”

Rep. Douglas A. Collins (R-Ga.), who came in contact with the same carrier of the virus at CPAC, joined Trump during a visit Friday to the Georgia-based Centers for Disease Control and Prevention. Photos from that day show Collins shaking the president’s hand on the tarmac in Georgia. (…)

A seventh lawmaker, Rep. Louie Gohmert (R-Tex.), said he possibly had been exposed to the carrier at CPAC, but after discussing his situation with a CDC physician, he decided to return to work. (…)

Note: The study at the centre of this article on the transmission of the coronavirus was retracted on Tuesday by the journal Practical Preventive Medicine without giving a reason. The South China Morning Post has reached out to the paper’s authors and will update the article.

The coronavirus that causes Covid-19 can linger in the air for at least 30 minutes and travel up to 4.5 metres – further than the “safe distance” advised by health authorities around the world, according to a study by a team of Chinese government epidemiologists.

The researchers also found that it can last for days on a surface where respiratory droplets land, raising the risk of transmission if unsuspecting people touch it and then rub their face.

The length of time it lasts on the surface depends on factors such as temperature and the type of surface, for example at around 37C (98F), it can survive for two to three days on glass, fabric, metal, plastic or paper. (…)

Coronavirus Hurts Broadway Box Office More than 15 productions posted lower grosses for the week that ended this past Sunday, compared with the previous week, according to the Broadway.
Global Fear of Flying Spawns Crisis for Airlines

Bookings around the world are falling sharply. U.S. carriers are following Asian and European airlines in cutting flights, grounding planes and enacting draconian cost reductions, such as hiring freezes and unpaid leave. Foreign airlines are looking for help from governments, banks and investors. Major airlines are trying to reassure passengers with promises of scrubbed cabins, filtered air and free-flowing hand sanitizer. (…)

The International Air Transport Association, a trade body, estimates the virus could reduce passenger revenue world-wide this year by between $63 billion and $113 billion, or as much as 20%. (…) The coronavirus has grounded 2,000 aircraft around the world, analysts at Jefferies estimate.

By comparison, the Sept. 11, 2001, terrorist attacks cut airline revenues by 7%, or $23 billion, according to IATA. (…) Bookings for April travel made over the past week are estimated by analysts to have fallen 25% from last year’s levels. (…)

“Numerous insolvencies are expected to occur in our industry,” Deutsche Lufthansa AG ’s Chief Executive Carsten Spohr told employees in a video message on Friday.

The German flag carrier arranged new bank financing in recent days to help weather the next few months, he said, and was asking for further industrywide support from the German government and the European Union. Lufthansa said cancellations on Thursday of last week reached the same level as new bookings, forcing it to consider capacity reductions of as much as 50%. It is considering indefinitely grounding its entire fleet of Airbus SE A380 super jumbo jets.

Airlines are accustomed to adjusting capacity to reflect demand, and the big slide in fuel prices has lowered the break-even level for each flight. Nevertheless, a dearth of passengers has forced carriers to consider grounding more jets, starting with larger planes that are tougher to fill, and focusing on aircraft that are already paid for or not being used as collateral for loans and bond issues. (…)

More than two dozen carriers went out of business last year. The bankruptcies freed up more than 400 planes, according to IBA Group Ltd., a consulting firm. They were snapped up by other carriers, just as travel growth started to stall.

Global traffic growth peaked at 8% in 2018 and slowed to 3.4% last year, according to IATA. It is now forecast by analysts to fall by 5% or more in 2020. (…)

Average fares per mile flown were down 15% for the cheapest tickets last week, compared with the prior week, and down 11% from a year earlier across 278 domestic routes, said consultant Harrell Associates LLC. (…)

SAUDI’S IRRESPONSIBLE WAR
Saudi Arabia escalates oil price war with extra supplies State oil producer plans to ramp up production to 12.3m barrels of crude a day in April
Now Comes the Oil Shock Putin shows again he’s not Trump’s friend. What about MBS?

(…) The immediate cause for this chaos is a game of chicken between Riyadh and Moscow. The Saudis were keen to orchestrate production cuts among fellow OPEC members and other major producers to sustain prices as oil demand falls due to Covid-19. Vladimir Putin refused, and in retaliation the Saudis slashed prices on Sunday and promised more production to steal market share from Russia. (…)

The market worry is that the oil-price plunge will hurt the U.S. economy—the main support for global growth these days—by damaging U.S. shale oil production. (…) Analysts peg energy companies’ bond issuance at anywhere between 10% and 16% of the U.S. high-yield debt market. Widespread defaults on that debt could have systemic financial consequences for banks and other lenders. (…)

Mr. Putin is willing to endure lower prices because he wants to break the U.S. shale industry. U.S. exports to Europe threaten Russia’s energy hold on Western Europe. He’s also sore at U.S. opposition to his Nord Stream 2 gas pipeline linking Siberia to Germany. This oil action is another example, among dozens already, that Mr. Putin isn’t Mr. Trump’s friend. (…)

The Saudis last tried a stunt like this in 2014-15. Their target then was U.S. shale and they nearly tipped America into a recession as lower global prices pushed numerous U.S. oil-and-gas companies into bankruptcy. (…)

Even the resilient U.S. economy, which had been gaining steam as trade tensions eased, may be hard-pressed to power through the dual shocks of a pandemic and suddenly collapsing oil prices.

Crown Prince bin Salman, widely known as MBS, is famous for actions that seem rash and ill-considered. In this case he’s hurting Saudi interests by hurting his main geopolitical benefactor, the United States. President Trump may need to use the phone to remind the crown prince which country has stuck by him during his war with Yemen, his standoff with Qatar, and missile attacks from Iran.

MBS may think he’s blessed with the lowest lifting costs, he misses the point not considering his country’s huge budget deficit. Like a manufacturer making widgets at very low direct costs but in an extravagantly large and lavish plant. If you don’t consider the cost of servicing the plant when pricing your widget, you may end up needing to sell a lot more widgets than the world needs or wants.

(…) Stocks in the S&P 500 energy sector fell 20% Monday in their worst day on record in data going back to 1994. Bonds traded as if the companies that issued the debt were already out of money. (…)

The main U.S. oil price, West Texas Intermediate, fell 25% to $31.13 a barrel Monday. Brent crude, the international benchmark, lost 24% to close at $34.36. It was oil’s biggest decline since the Persian Gulf War in 1991. (…)

North American oil-and-gas companies have more than $200 billion of debt maturing over the next four years, according to Moody’s Investors Service. Some companies were able to push out due dates earlier this year by refinancing debt. But the ability of others to follow suit looks doubtful now that oil prices have dropped to their lowest level since shortly after OPEC initiated the price war with shale producers in late 2014.

Though oil producers are generally better prepared than they were then for crude prices in the $30s, the latest decline will “stress-test the creditworthiness of companies,” said Jefferies analyst Sean Darby. “The impact on companies is less about earnings and more about solvency.” (…)

Low oil prices pose risk to banks, which have more than $100 billion on loan to energy producers through lines of credit that are based on the value of companies’ oil and gas reserves. Those credit lines are typically recalibrated twice a year to reflect market prices for the still-in-the-ground fossil fuels that serve as collateral.

These loans were last evaluated in autumn, when crude prices were north of $50 a barrel. If prices remain in the $30s, a lot of oil won’t be economical to extract, meaning companies can no longer borrow against it and must promptly repay banks. (…)

U.S. crude-oil production hit a fresh record of 13.1 million barrels a day during the week ended Feb. 28, according to the U.S. Energy Information Administration.

MBS may also be missing the point that when an oil producer goes bankrupt, the debt disappears but the oil remains and eventually gets pumped out. American producers have demonstrated their ability at cutting costs when needed. The technology also never disappears.

Finally, going to war with Russia, three times S.A’s population and 2.5x its GDP, does not strike me as a great idea. Even more so if, at the same time, you antagonize the U.S., now a net oil exporter, and President Trump who is so focused on the trade deficit.

Let’s rewind back to 2014, when OPEC initially declared war on U.S. shale oil producers. Oil prices had begun to weaken as shale oil production continued to expand, so OPEC decided it needed to act to protect market share. A price war ensued that dropped oil prices all the way into the $20s. At that time I noted that the decision would probably cost OPEC a trillion dollars or more (and it likely did).

While some shale producers were forced into bankruptcy, most were far more resilient than OPEC had imagined. Thus, two years later OPEC waved the white flag and returned to the strategy of making production cuts in order to support prices. (Forbes)

Many experts have been predicting an imminent peak for U.S. shale oil that has yet to materialize.

The US saw record-breaking growth in liquids production in 2018 at c.2.2 mn b/d. This level of growth surpassed our expectations, with almost all of the beat driven by shale where production growth (which was higher than anticipated) was geographically broad-based with all the major shale basins contributing. This was driven by a vast shale resource base, a well-equipped US services sector, a fragmented network of operators, and relatively low base decline rates. (Goldman Sachs)

Maybe it will happen. GS says that “US shale oil could decline almost 3 mn blsd within a year, if all investment stopped”. Maybe MBS will prove successful, bankrupting a large swat of the oil industry and killing investments. But his timing could prove atrocious if he drives the world in a recession and hurts oil demand in the process.

Lower Oil Prices: A Net Negative
for the US Economy Today

From Morgan Stanley:

The decline in oil prices may add as much as $125bn in extra
disposable income to consumer wallets. Discretionary consumer
spending is typically the key beneficiary when retail gas prices
decline, so a more cautious consumer in the current environment is
likely to pare down the upside effect from lower oil prices in the
near-term.

With consumers more cautious, the downside from lower energy
investment may dominate in the near-term, leading to a net negative
effect on overall GDP growth. Putting it all together, we believe the
cumulative decline in oil prices since the beginning of the year, if
sustained, is enough to reduce real GDP growth by about 15 to 35bp.

While the near-term impact may be net negative, it is important to
note that the consumer savings from lower oil prices does not just
evaporate. If consumers hold on to all of their savings from lower oil
prices, we estimate the consumer savings rate would rise to about
8.25%, all else equal. That’s a meaningful medium-term cushion for
the consumer and would act to strengthen the rebound on the other
side of the slowdown.

In 2015-16, the sharp drop in U.S. industrial production had but a tiny effect on GDP growth, unlike in previous episodes.

fredgraph (66)

Lower oil prices quickly fed through the CPI, boosting real expenditures:

fredgraph (67)

Cumberland Advisors calculates that

every penny per gallon that the gas price declines will be equivalent to a $1.4 billion consumption tax cut for the American economy. Estimates of the likely gasoline price change now range from a 30–40 cents per gallon cut to a 70–80 cents per gallon cut.

EARNINGS WATCH

Q1’20 earnings are now seen up 1.7% but this will come down further in coming weeks. So will Q2, now +4.8% when the oil price collapse will impact energy profits. Keep in mind, however, that Energy is only 3% of the S&P 500 Index and 4% of earnings. A large part of the other 96% will benefit from lower oil prices.

In the 2015-16 episode, S&P 500 trailing earnings peaked in November 2015 and declined 4.5% until July 2016, this while core inflation was also edging higher which explains the decline in the Rule of 20 Fair Value (yellow line below). Energy earnings collapsed 133% into negative numbers in 2015 and 2016 when energy stocks accounted for 7.5% of the Index.

image
New York Fed Repo Totals $112.93 Billion All repos outstanding rise to $202.9 billion; Fed increases amount of very short-term loans it has been offering to money markets

(…) Earlier Monday, the New York Fed said that it was increasing the maximum size of its temporary market interventions. With the top size of the overnights rising to $150 billion, longer term repos increased from a $20 billion cap to $45 billion.

The New York Fed’s operation Monday came amid heavy market pressures, as stocks sold off, Treasury yields dove through historic lows and oil prices plunged. The New York Fed said in a statement that its bigger repos “should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus.” (…)

Fed repo operations take in U.S. Treasury, agency and mortgage bonds from primary dealers in a de facto short-term loan of central-bank cash, collateralized by those securities. Primary dealers have individual limits in the amount of liquidity they can take in exchange for their securities, and they pay interest to the central bank to get the funds. (…)

Stock-Buyback Plans Shrink The new coronavirus may threaten companies’ buyback plans—though a down market could also create a buying opportunity

Companies authorized around $122 billion in future buybacks through February, according to data compiled by equity research firm Birinyi Associates, marking a nearly 50% drop from the same period a year ago and representing the slowest pace in three years. Meanwhile, S&P Dow Jones Indices projects that the total amount of buybacks in the final three months of 2019 was down 18% compared with a year earlier, totaling around $183 billion.

Companies repurchased around $730 billion of their own stock during 2019—one of the biggest sources of money flowing into the stock market. Analysts are still projecting around $800 billion in buybacks this year, according to S&P Dow Jones Indices, but that figure may be threatened by the uncertainty surrounding the new coronavirus’s effect on the global economy. (…)

So far this year, the biggest buyers of their own stocks are underperforming. The Invesco BuyBack Achievers ETF is down 16%, compared with an 8% drop in the S&P 500 during that same period. The SPDR S&P 500 Buyback ETF is down 15%. (…)

SENTIMENT WATCH

Source: CNN Business (via The Daily Shot)

  • Another contrarian indicator is the NAAIM exposure index (investment managers’ allocation to stocks), which declined by the highest amount since 2008. It looks like capitulation. (The Daily Shot)
  • 78% of S&P 500 stocks now have a dividend yield that is above the 10yr Treasury.

Source: @StrategasRP (via The Daily Shot)

Contact: edgeandodds [at] gmail.com