Virus Update
Gleaned here and there:
Confirmed cases globally rose to 118,475 after a surge in Italy, where the government will spend $28.3 billion to help combat the outbreak.
The U.S. has 1,001 confirmed cases of coronavirus, according to a Johns Hopkins University tally, which also shows 28 deaths in the country. The list includes cruise ship cases, with 46 from the Diamond Princess and 21 from the Grand Princess. Massachusetts reported 51 new cases Tuesday tied to a drugmaker’s business conference. New York added 31. And in Washington state, where the infection has ripped through one nursing home and spread to several more, 105 more people were diagnosed. NYC Mayor says outbreak “evolving very rapidly”. De Blasio urged New Yorkers to do whatever they could to avoid crowds – take the subway during off-hours, telecommute, if you can. If you’re sick, stay home. “Take it seriously,” de Blasio said. First case reported in Philly
The U.S. has shifted into a new phase of its coronavirus response after efforts to stamp out sparks of an outbreak have failed. Authorities now are focusing on limiting damage. The reality is that a troubled rollout of diagnostic kits consumed weeks and meant that local health labs had little ability to conduct wide surveillance of patients. That made the number of infections look far smaller than it likely was.
Washington Governor Jay Inslee gave a dire warning. He cited statistical models that estimated there could be anywhere from 500 to 2,000 unidentified cases in the state. “If there are 1,000 people infected today,” Inslee said, “in seven or eight weeks there could be 64,000 people infected in the state of Washington if we don’t somehow slow down this epidemic.”
Less than three weeks ago, on Feb. 21, Italy had only 17 known cases. Now there are more than 10,000, at least 631 people have died. Health workers in Milan have said that the number of severely ill patients is beginning to overcome the ability of hospitals and doctors to treat them. Mortality rate in Lombardy hits 8% – higher than Wuhan
Seoul cluster dashes hopes South Korea outbreak is under control Surge in new cases from call centre reverses 4 consecutive days of declines
Germany has recorded 1,565 coronavirus cases and two deaths so far. Austria total cases hits 182
Three Canadians test positive in Calgary
Turkey earlier confirmed the first case of coronavirus had been identified in the country. The person contracted the virus from Europe and his family has been placed under monitoring.
Poland’s government shut schools for the next two weeks as part of its campaign to contain the spread of the coronavirus, Prime Minister Mateusz Morawiecki said. About 6 million school and preschool children, along with 1.2 million university students will be affected. The government will also close museums, cinemas and cultural centers. Poland has confirmed 25 cases.
Prime Minister Shinzo Abe extended cancellations of large events for another 10 days as Japan battles the spread of coronavirus.
Beijing will quarantine all inbound visitors from overseas for 14 days, Zhang Qiang, an official of the city’s party committee, said. Beijing earlier quarantined inbound travelers from South Korea, Italy, Iran and Japan.
London Heathrow airport has introduced regular deep cleaning across all terminals, it said after two British Airways baggage handlers last week tested positive for coronavirus.
Three Transportation Security Administration agents at Mineta San Jose International Airport in California have tested positive for coronavirus, the agency said. All TSA employees they came in contact with in the past 14 days have been quarantined at home. Santa Clara County, which has reported 45 cases, has banned large gatherings of more than 1,000 people effective midnight Wednesday.
Hubei, the Chinese province at the center of the coronavirus outbreak, will allow some work resumption after the region was locked down in January. Companies in sectors including utilities, daily necessities and agriculture necessities in Wuhan city and Hubei province can restart production, the provincial government said in a statement.
This chart is a few days behind but the curves are similar:
Coronavirus Confronts Global Economy With Tough Recovery Businesses are bracing for a longer and steeper coronavirus-triggered downturn than the single-quarter event initially anticipated, as companies face both a shock to supply chains and weaker demand from rattled consumers.
Business operations across Asia, Europe and the U.S. are being disrupted by factory closures, quarantined workers and shortages of components, crimping the availability of goods and services—a so-called supply shock. Meanwhile, postponed public events and mounting fear are causing consumers and businesses to hold back, avoiding travel, restaurants and lavish purchases, even where restrictions haven’t been imposed—a demand shock.
The combined effects risk pushing the global economy into a self-reinforcing, downward spiral—a possibility fueling market turmoil and prompting many executives around the world to prepare for darker scenarios than before. (…)
Lawmakers Rebuff Trump on Payroll-Tax Suspension for Outbreak President Trump’s push to suspend the payroll tax to boost the economy during the coronavirus outbreak fell flat on Capitol Hill, as lawmakers of both parties said they preferred targeted measures to assist hourly workers and the battered travel industry
(…) The House is aiming to vote on something before it leaves Washington on Thursday, likely a measure aimed at helping workers, a congressional aide said. (…)
Morgan Stanley assesses consumers’ reaction (via The Daily Shot):
But I would not annualize the oil windfall. Somebody will come to their senses. Given the impact on world economies and financial markets, and the terrible timing, the pressure on SA will be immense.
Saudi Arabia to Boost Oil Output Even Further Saudi Arabia fired another salvo in its oil-market war with Russia on Wednesday, unveiling plans to boost its oil-production capacity to a record 13 million barrels a day.
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Inside Saudi Arabia’s Decision to Launch an Oil-Price War Riyadh prepares emergency budget for oil at $12 to $20 a barrel; ‘It’s all about egos now’
State-run Saudi Arabian Oil Co. said it would boost production to 12.3 million barrels a day in April, some 300,000 barrels a day over the company’s previous maximum sustained capacity.
Russian Energy Minister Alexander Novak, meanwhile, said his country could rapidly open its own taps.
Even as the price war escalated with fresh salvos from both sides, former Saudi energy minister Khalid al-Falih was in talks with Mr. Novak in an attempt to reverse the production hikes and revive the collective OPEC-Russia output curbs, according to Saudi government advisers and officials.
Mr. Falih, who negotiated the initial production cuts in 2016, is now Saudi Arabia’s minister of investments. His outreach to Mr. Novak is done with the approval of Saudi authorities, the advisers said. If Mr. Falih’s mediation succeeds, the advisers and officials said, OPEC and its allies including Russia will convene an emergency meeting in April.
Mr. Novak said Moscow isn’t ruling out further cooperation with OPEC, adding that the next scheduled meeting is planned for May or June.
“The doors are not closed,” he said. (…)
Russia’s failure to find common ground with Saudi Arabia and OPEC on oil cuts was preceded by talks in early February between Riyadh and Moscow that focused on the possibility of forging a broader, long-term alliance. Under one scenario, Saudi Arabia would have sped up its investments inside sanctions-hit Russia and backed the Kremlin’s military efforts in Syria, according to people familiar with the matter.
Ultimately, the crown prince didn’t commit to a deal, say the people familiar with the matter, because he didn’t want to alienate the U.S. Weeks later, roughly at the same time that Russia was refusing to endorse the Saudi-backed plan to cut oil output, Mr. Putin was initiating a rapprochement with Turkey, a Saudi foe, the people said.
“It’s all about egos now, not about the oil market,” said a Saudi-government adviser.
Meanwhile, Prince Mohammed saw the OPEC debate as a way to assert his broad influence over the kingdom’s oil policies and to prove to his older brother, Saudi energy minister Prince Abdulaziz bin Salman, that he could force Russia’s hand, according to people familiar with his thinking.
In a terse phone call to Prince Abdulaziz late Thursday, the crown prince overruled his brother, who had agreed to a three-month production cut with OPEC, and extended the proposed cuts through the end of the year, these people said.
The crown prince ordered the minister to force OPEC to adopt the decision—even if that meant risking any hope that Russia would join in, they said. (…)
“It was the Saudi declaration of war against Putin,” said a senior Saudi official. (…)
Russia is better prepared to weather low oil prices than in the past. Oil is now accounts for less than a third of budget revenue. The country has also accumulated massive reserves. The Russian finance ministry said Monday that it could withstand 10 years of prices at $25 to $30 a barrel. (…)
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A constitutional ploy may keep Vladimir Putin in power until 2036
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Oil price war puts $110bn of US energy bonds on the brink
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Occidental slashes dividend as oil price rout bites
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Marathon Oil Cuts 2020 Capital Budget By At Least $500 Million
ECB’s Lagarde Warns of 2008-Style Crisis Unless Europe Acts
EARNINGS WATCH
The Rule of 20 Strategy also changed Monday, taking cash down from 20% to 10% as the R20 P/E declined below 19.0 at 2750. Remember, this is an automatic move exclusively based on the Rule of 20 P/E and earnings trends.
Yesterday I posted BOTTOM FISHING? to share my thinking and reasoning.
This morning, Goldman’s David Kostin capitulates:
After 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end. On February 27th we lowered our 2020 S&P 500 EPS estimate to $165. We are now reducing our profit forecast again. Our revised 2020 EPS estimate equals $157, representing a decline of 5% vs. 2019. On a quarterly basis, EPS will likely collapse by roughly 15% in 2Q (consensus expects +3%) and 12% in 3Q (consensus expects +8%) before rising by 12% in 4Q and 11% in 2021. Drivers of our reduced EPS estimate include lower crude oil prices and interest rates that diminish Energy and Financial company profits. Domestic business activity outside of those sectors is also likely to be weaker than we originally forecast, as underscored by reduced or withdrawn guidance from a number of firms in recent weeks.
Despite low bond yields, a widening yield gap explains our new mid-year S&P 500 target of 2450 (15% below the current level and 28% below the market peak).
Kostin sees 3200 at year-end.
By year-end, economic and earnings growth will be accelerating, the fed funds rate will be at the zero lower bound, and the impact of any fiscal stimulus will be flowing through to consumers. Under this scenario, equities will appear attractive relative to bonds and cash. Investor sentiment will improve as policy uncertainty abates following the US election.
Using his quarterly estimates, I infer that trailing EPS would trough at about $150 after Q3, so by mid-November. At 2450, this would be a 16.3 conventional P/E and, assuming 1.5% inflation, 17.8 on the Rule of 20 scale, pretty much along my numbers in BOTTOM FISHING?.
His year-end number of 3200 looks heroic, however, unless investors “normalize” 2020 earnings, assuming much of the damage is temporary and will disappear come 2021. Kostin sees $175 EPS in 2021, meaning 18.2x forward earnings. Seems stretched to me. Read on.
A BEAR? WHAT KIND?
Another GS strategist, Peter Oppenheimer, wrote a good piece Monday, arguing there are 3 kinds of bears
- Structural bear market – triggered by structural imbalances and financial bubbles. Very often there is a ‘price’ shock such as deflation that follows. This bear market on average see falls of 57%, last 42 months and take 111 months to get back to starting point in nominal terms (134 months in real terms). My old friend Don Coxe called this a “Mama Bear”.
- Cyclical bear markets – typically a function of rising interest rates, impending recessions and falls in profits. They are a function of the economic cycle. Cyclical bear markets on average see falls of 31%, last 27 months and take 50 months to get back to starting point in nominal terms (73 months in real terms). “Papa Bear”
- Event-driven bear markets – triggered by a one-off ‘shock’ that does not lead to a domestic recession (such as a war, oil price shock, EM crisis or technical market dislocation). This “Baby Bear” on average see falls of 29%, last 9 months and recover within 15 months in nominal terms (71 months in real terms).
“Event-driven bear markets have typically emerged with fairly modest inflation. When there has been deflation, it has been very modest. To some extent it was this more stable monetary environment that prevented the event from causing the stresses that would have turned it into a more sustained bear market. There have been no deflationary periods during event-driven bear markets.”
Yes but, what if Baby Bear brings along Papa Bear in its footsteps? The 6-month demand/supply shock could bite companies, large and small, so much that they would see a need to restore their even more stretched balance sheets, reorganize their supply chains, and cope with bruised export markets (think Europe, Italy, Japan). And oil prices? And interest rates? Can we expect Financials earnings to simply rebound in a V-shape manner?
Ailing Chinese Bank Secures $1.7 Billion of New Capital Bank of Jinzhou, one of a handful of Chinese regional lenders that have run into trouble as the economy cools and Beijing tries to crack down on financial risk-taking, will sell $1.7 billion in new shares to two state-backed buyers.
U.S. Small Business Optimism Improves Slightly
Only if you care. I wait for March data.