Tag: news

Last week we reported that yet another aircraft carrier had been diverted from its mission due to a coronavirus outbreak among crew following the USS Theodore Roosevelt fiasco, but in the latest case it was France’s lone nuclear-powered aircraft carrier, the Charles de Gaulle, forced to return home early from deployment in the Atlantic while en route to a routine mission in the Middle East region. 

Initially some some 40 sailors had been put under medical observation for coronavirus as of a week ago, but now a whopping one-third of the entire crew have tested COVID-19 positive – 668 out of nearly 2,000 – according to the French Navy.

It was revealed at the start of the week that American sailors are also on board, likely in support of recent NATO exercises the carrier was involved in. At least two Americans are confirmed positive, after the ship docked at the port of Toulon and as testing ramped up. 

And two additional Americans are in quarantine and being monitored for symptoms. “Two of four U.S. Sailors assigned to the French nuclear-powered aircraft carrier FS Charles de Gaulle (R91) tested positive for COVID19 and are receiving excellent host nation medical care at French facilities,” a Navy spokesman told CNN.

Currently, at least 20 French sailors are in the hospital, including one in intensive care. It’s believed the numbers of infected are further set to rise rapidly as it’s been reported 30% of test results have yet to come back.

Like the USS Theodore Roosevelt docked at Guam, which also saw its cases spike to nearly 600 as of early this week, the French carrier is now in quarantine, after cutting short its deployment by ten days.

Before being diverted it was to continue France’s Operation Chammal in support of anti-ISIL missions in the Middle East.

No doubt enemies of the United States and Europe are taking note of the ease with which this virus took out multi-billion dollar state-of-the-art aircraft carriers, which up to now appeared unbeatable and unable to be thwarted from their missions.

As we noted before, Chinese state media is positively boastful about it, using these developments to brag that its PLA navy hasn’t been impacted, supposedly.

FANG stocks are at record highs…

Which has lifted the Nasdaq 100 back into the green for 2020…

The Nasdaq 100 is soaring as its EPS expectations collapse…

S&P is not as exuberant as Nasdaq… as its earnings expectations collapse…

But as Nasdaq soars, Small Caps are collapsing… down 30% YTD…

Sending the Nasdaq/Small Cap ratio back near dotcom record exuberance highs…

…this didn’t end well last time.

Submitted by Market Crumbs

With the outbreak of COVID-19 being unlike anything seen before in our lifetimes, the resulting economic damage is starting to enter unprecedented territory as well.

Just a day after the International Monetary Fund warned “The Great Lockdown” would be the worst economic downturn since the Great Depression, a handful of economic data released yesterday was the worst on record.

U.S. retail sales—which account for more than two-thirds of U.S. economic activity, fell 8.7% in March, the largest decline since data began in 1992, according to the Commerce Department. With Americans confined to their homes, the breakdown of sales by category revealed where most people’s priorities are.

Food and beverage sales jumped more than 25%, while nearly every other non-essential category showed large declines. Clothing and accessories sales fell more than 50%, with furniture/home furnishing and food services/drinking places sales each falling more than 25%.

With the economy in shambles, confidence among homebuilders also took a record hit. Homebuilder confidence for single-family homes fell 42 points to a reading of 30 from last month, according to the National Association of Homebuilders/Wells Fargo Housing Market Index, the largest monthly decline since the index’s creation in 1985.

A reading above 50 is positive, while a reading below 50 is negative. It’s the first negative reading for the index since June 2014 and lowest since June 2012.

“This unprecedented drop in builder confidence is due exclusively to the coronavirus outbreak across the nation, as unemployment has skyrocketed and gaps in the supply chain have hampered construction activities,” NAHB Chairman Dean Mon said.

In the energy sector, the International Energy Agency released its latest monthly Oil Market Report, where it predicts global oil demand will fall by a record 9.3 million barrels per day this year. “We may see it was the worst year in the history of global oil markets,” IEA Executive Director Fatih Birol said.

Not surprisingly, demand for fuel also saw an “unprecedented” drop, according to GasBuddy’s first quarter report. GasBuddy found that gallons of gasoline purchased dropped 20% last month compared to the same period a year earlier. “Even if oil does see some sort of rebound then the problem still exists for refiners that millions of Americans are parked,” GasBuddy senior petroleum analyst Patrick DeHaan said.

Lastly, manufacturing activity in the New York area dropped to -78.2 in April, according to the Empire State Manufacturing Index, the lowest reading ever. April’s reading blew away the prior record low of -34.3 during the financial crisis. Just 7% of respondents reported stronger conditions, while 85% reported conditions had weakened.

“New orders and shipments declined at a record pace. Delivery times lengthened, and inventories fell. Employment levels and the average workweek both contracted at a record pace,” the New York Federal Reserve said.

With record drops over the last month in retail sales, homebuilder confidence, energy and manufacturing, it’s likely we’ll see more record economic readings in the months to come as the U.S. economy remains at a standstill.

The mini bounce after US airlines reached a bailout deal on Tuesday with the US Treasury lasted exactly one day, and on Thursday US airlines stocks sank after United Airlines warned that travel demand was “essentially zero,” and showed no signs of in the near term.

The US carrier warned its employees of bleak times and potential long-term payroll cuts despite billions of dollars in U.S. taxpayer assistance, saying the outlook for travel demand will remain depressed into next year. In response to the collapse in demand, United said it will further cut its flight schedule in May to roughly 10% of the capacity it had planned at the start of 2020, and similar cuts are in store for June, said Chief Executive Officer Oscar Munoz and President Scott Kirby. As an example of the shortfalls, the carrier will fly fewer people during all of next month than on a single day in May 2019.

“Travel demand is essentially zero and shows no sign of improving in the near term,” Munoz and Kirby wrote in a message to employees late Wednesday. “While we have not yet finalized changes to our schedule for July and August, we expect demand to remain suppressed for the remainder of 2020 and likely into next year.”

As Bloomberg adds, “the dire tone underscored the depth of the crisis facing airlines as the Covid-19 pandemic and government travel restrictions force people to stay home.” Rescue funds contained in the U.S. stimulus package signed into law last month will help airlines pay employees while obliging them not to cut jobs through Sept. 30. But United signaled that even with the bailout funds – many of which are in the form of grants – deep cost reductions will be necessary for the company to survive. Translation: we will need a bigger bailout.

As a reminder, United will collect about $5 billion from the government in grants and a low-interest loan, part of $25 billion in airline assistance being doled out by the U.S. Treasury. Carriers are also in line for $25 billion in additional loans as part of the overall economic rescue plan of about $2 trillion.

“The challenging economic outlook means we have some tough decisions ahead as we plan for our airline, and our overall workforce, to be smaller than it is today, starting as early as October 1,” Munoz and Kirby said.

Meanwhile, more than 20,000 United employees have accepted voluntary leave and separation programs that the company has offered in recent weeks as it seeks to reduce labor expenses. The Chicago-based airline, which had a workforce of about 95,000 at the start of the year, said it would renew efforts to interest more workers in the programs.

“The challenge that lies ahead for United is bigger than any we have faced in our proud 94-year history,” Munoz and Kirby said. “We are committed to being as direct and as transparent as possible with you about the decisions that lay ahead and what impact they will have on our business and on you.”

Kirby assumes the role of CEO on May 20, when Munoz becomes becoming executive chairman.

Late on Wednesday, American Airlines released a somewhat more upbeat video late Wednesday in which CEO Doug Parker told employees that the almost $11 billion the carrier expects to receive in U.S. grants and loans should help get the company through the crisis.

“It feels strange and even a little frightening when we don’t have as many people to care for as we’re used to,” Parker said. “But this will pass and when it does, the American team will be ready to safely care for our customers.”

We’ll timestamp that and revisit in one month.

Following the United warning, the S&P Supercomposite Airlines Industry Index dropped as much as 7.6%, with UAL, AAL, HA, ALK, DAL the biggest decliners.

The index is down 57% since mid-February when the market meltdown in the U.S. took hold; the SPX is down about 18% over the same period.

As some states prepare to reopen their economies in early May, a “new normal” is starting to emerge in a post-corona world: face masks.

Governors of Connecticut, Maryland, New York, and Pennsylvania have just issued orders or recommendations that residents wear face masks while out in public, reported Reuters.

“If you are going to be in public and you cannot maintain social distancing, then have a mask, and put that mask on,” said New York Governor Andrew Cuomo.

So, there’s a problem: Most Americans do not have access to 3M N95-99 masks and are wearing flimsy surgical masks and or makeshift masks. While a mask of some sort is better than no mask, not having the proper medical equipment could lead to further transmission of the virus. Just watch the simulation below, a COVID-19 carrier coughs in a supermarket, releases an aerosol cloud of the virus and infects others. The right gear saves lives.

Last week, New Jersey and Los Angeles issued new social distancing orders for residents to wear masks. Kansas Governor Laura Kelly, on Tuesday, said residents must cover their faces when in public.

California Governor Gavin Newsom suggested that wearing masks in public could be a trend for some time.

“We are going to be getting back to normal; it will be a new normal,” Connecticut Governor Ned Lamont said.

President Trump has said the federal government, not governors, will make the call on reopening economies across the Heartland. However, there’s been pushback from some officials who say reviving the economy too soon could lead to a second coronavirus wave.

This is exactly what Morgan Stanley believes, a potential second wave of infections could strike around November/December timeframe.

And to make matters worse, social disobedience developed on Wednesday afternoon when protesters led by conservative and pro-President Trump groups surrounded the state Capitol building in Lansing, Michigan, demanding Democratic Governor Gretchen Whitmer to cancel the stay-at-home order and reopen the economy.

Some of these protestors were wielding AR-15s and other types of rifles, as it is becoming evident that a month of lockdowns, crashing the economy and resulting in high unemployment, has angered the public.

With the overall economy in freefall, stumbling into a depression, reopening businesses to early could result in a second coronavirus wave. That is precisely what is happening in China at the moment, as the communist government tried to reopen businesses in mid-February, now faces a possible second wave.

And if you want to know the future of masks, it could be AO air’s atmos faceware. The company touts an independent test via the Auckland University of Technology, specifying that the high-tech mask is 50 times better than traditional masks.  

To reopen an economy, it appears governments will force their residents to wear masks. Welcome to the post-corona world. 

Authored by Chris Whalen via TheInstitutionalRiskAnalyst.com,

This week, The Institutional Risk Analyst releases our Q1 2020 bank earnings report, which is for sale in our online store. In our latest credit comment, we feature net loss rate and earnings estimates for JPMorgan, U.S. Bancorp, Bank of America and Goldman Sachsthrough Q2 2020.

Suffice to say that our view of Q1 2020 bank earnings is pretty grim, but the real fun won’t start until the Q2 2020 earnings are released in about 90 days.

The key variable in the credit analysis for both banks and bond investors: unemployment.

In March, unemployment reached 4.5% nationally. Estimates for April vary but are all in double digits. We write:

“We expect that commercial banks too will take losses on default events involving commercial real estate.

Imagine, for example, the wreckage that will result from the impending default of WeWork and other leveraged investors in commercial and high end residential real estate in major cities like New York, Los Angeles and Miami.”

Distressed credit investors are already assembling funds to take advantage of what may be the largest liquidation of commercial properties in a century. Rather than 2008, however, the operative model for the COVID19 crisis may be closer to the deflationary years of the mid-1930s. The chart below shows unemployment through March from the Bureau of Labor Statistics and the consensus estimate for April unemployment.

Source: BLS Survey

Despite the grim unemployment numbers and related loan loss estimates for US banks, it is important to remember that the US banking industry is quite liquid and well-capitalized. While there are a lot of dire predictions about the economy and employment, remember that in Q4 2019, US banks had almost $150 billion in net income, dividends and cash used for share repurchases available potentially to absorb losses. This substantial cash flow is now about to absorb the full weight of the COVID19 virus disruption.

In our latest IRA Bank Earnings analysis, we assume that US bank loan loss provisions double in Q1 and then double again in Q2 2020, taking American banks back to 2009 levels of loss reserve build. Yes, the numbers for credit losses due to COVID19 are large and earnings will be ugly for the rest of the year, but in our judgement, the task is more than manageable by the US banking system.

Because US banks are stable and healthy, these institutions will be more than able to weather the huge storm of credit losses to come. In addition to $45 billion per quarter in cash earnings, the industry has $35-40 billion in share repurchases and $50 billion or so in dividends each quarter. Just by suspending share repurchases, the largest banks will retain over $100 billion annually in additional equity capital, as shown in the table below.

Source: Federal Reserve Form Y-9C

While the banks may be islands of liquidity, though, the bond market and particularly “fringe” products such as non-QM residential mortgages and non-bank business loans and the like are going through the meat grinder. The Fed has agreed to buy limited amounts of AAA and recently investment grade paper, but there are piles of leverage loans and real estate paper that is currently looking for a bid. If we get to 5% loss rates on 1-4 family loans owned by US banks – roughly 2x the levels of 2008 – we should count ourselves lucky. Anything close to double digit loss on $2.5 trillion in residential mortgage loans owned by banks is a problem for everyone.

Why? Because if bank default rates on 1-4s go to 5%, then loss rates on the other $8 trillion in agency and government loans will be higher. The GSEs, Fannie Mae and Freddie Mac, will be swamped by loan repurchase demands and will require additional capital funds from the US Treasury. And, meanwhile, the carnage in commercial loans, CLOs and all other manner of ineligible securities will be equally bad but also will provide a sizable opportunity for the vultures. All that said, between Fed Chairman Jerome Powell’s commitment to do “whatever it takes” to liquefy the system and Dr. Fauci’s determination that the rate of infection from COVID19 may have crested, the index of FRED Spreads created by our friend Fred Feldkamp dropped 280 bps last week (a little more than 10% of its total rise during the crisis).

As we all know, falling credit spreads are good. Some people are even talking about getting “AAA” CLOs restarted by June. We’ll see.

The chart above shows the Barcap HY Index showing the spread vs the 10-year Treasury through today.

Until you see HY spreads inside of 500 bps over the curve, not much is likely to happen in sub-investment grade debt.

Yesterday we reported that ancient retail icon and anchor tenant at malls everywhere, JC Penney, was finally preparing to call it a day, and was set to file for bankruptcy protection, in the process ending lease payments and putting the thousands of malls in which it had an outlet in cash flow peril. A few hours later, rhe Texas-based department store chain disclosed in an SEC filing that it will not pay $12MM to bondholders that had been due. And while under the terms of the bond, due in 2036, the retailer has a 30 day grace period to make the payment before it is deemed to have defaulted, entering the grace period is usually a warning to customers and business partners – and especially vendors who immediately go Cash on Delivery – that a Chapter 11 filing is imminent.

While JC Penney’s default was long coming – not least due to the collapse in mall foot traffic long before the covid-crisis and the company’s untenable debt load which led to several near-death experiences in the past decade – it was the complete collapse in clothing store sales that was the tipping point. According to the Census Bureau, clothing store sales crashed more than 50% in March, an apocalyptic collapse for any levered retailer.

Indeed, JC Penney is just the beginning and on Thursday morning, Reuters reported that another mall anchor icon, luxury retaeiler Neiman Marcus Group, has also skipped a bond payment week to Marble Ridge Capital LP, according to a letter from the hedge fund to the luxury department store retailer sent Thursday, setting the heavily indebted chain on a path toward bankruptcy.

This confirms a recent report from Reuters according to which Neiman Marcus was preparing to file for bankruptcy. As Reuters adds, a Neiman bankruptcy filing would likely be contentious. A trustee for some of the company’s bondholders, including Marble Ridge, sued Neiman last year, claiming the company and its owners robbed investors of the value of luxury e-commerce site MyTheresa in the earlier debt restructuring.

The biggest loser from this waterfall of default which will collapse all cash flow payments from these massive retail giants, is the mall sector, which as a reminder was the target of the “Big Short 2” via the CMBX Series 6 BBB- index, and which plunged in late March making all those – such as Carl Icahn 0 who had bet on the collapse of that icon of US life, malls, very rich…

… and in fact, unlike the broader market which has staged a remarkable rebound in recent weeks, the mall-heavy Series 6 CMBX tranche continues to slide, and was just shy of all time lows at last check, which is a vivid reminder of what price discovery looks like when there is no Fed backstop (for now Powell is not buying deeply impaired CMBX tranches; that may change soon).

Once both JCP and Neiman Marcus file, that’s when the real downhill kicks in.

While the FANG stocks has staged a dramatic rebound from their March lows, and have in fact surged to new all time highs…

… fundamentally these trillion-dollar companies are nothing more than ad platforms, whose viability and growth depends on continued increases in ad spending. Needless to say, if said advertising dollars stop growing or, worse, plunge well there goes the bulk of FANG revenue, and their value.

Well, according to Barry Diller, chairman and senior executive of IAC and one of the biggest online advertising spenders, Expedia Group, the booking-based company will slash ad spending this year, joining a chorus of advertisers that are putting campaigns on hold or cancelling spend altogether.

“At Expedia, for instance, we spend $5 billion a year on advertising. We won’t spend $1 billion on advertising probably this year,” Diller said. “You just rip that across everything.” He noted that advertising spend across the board would be hit in the second quarter. What is even strangers is that shares in Expedia Group, whose brands include Expedia, Hotels.com, Trivago, Orbitz and more, have plunged almost 50% YTD while the companies who ads Expedia funds, are paradoxically soaring.

Speaking to CNBC, Diller described the landscape during the coronavirus crisis as “cataclysmic” and said “I don’t think this is analogous to anything…. There’s nothing like it before, and while we know some things we really know nothing.”

“I don’t think this is analogous to anything.” IAC Chair Barry Diller discusses the “cataclysmic” landscape he’s seeing during the coronavirus crisis. https://t.co/lGL9R326lD pic.twitter.com/pyaiqUljhe

— CNBC (@CNBC) April 16, 2020

He then added that “we’re all too frightened right now. We’re going to have to get over it,” on returning to public spaces in the wake of coronavirus. “Or everything will change.”

“We’re all too frightened right now. We’re going to have to get over it,” says IAC’s Barry Diller on returning to public spaces in the wake of #coronavirus. “Or everything will change.” pic.twitter.com/HrBBKXrBFp

— Squawk Box (@SquawkCNBC) April 16, 2020

Diller, who bought Expedia soon after 9/11, said today’s conditions are worse: “What I said then is if there’s life there’s travel. I still do believe that but this is not going to be what happened then … I don’t think it’s until Sept, Oct, Nov that we really get life back.”

Barry Diller bought Expedia soon after 9/11. He says today’s conditions are worse: “What I said then is if there’s life there’s travel. I still do believe that but this is not going to be what happened then … I don’t think it’s until Sept, Oct, Nov that we really get life back.” pic.twitter.com/eDirXBWust

— Squawk Box (@SquawkCNBC) April 16, 2020

Diller made one final notable point saying that nobody knows what is “fair value” in this market: “How the hell would I know? No one knows these things” Diller said, although clearly FANG management teams know: after all they have been buying billions of their own shares in the past few weeks.

What is fair value in this market? “How the hell would I know? No one knows these things” says Barry Diller. pic.twitter.com/mMKjdxCRGw

— Squawk Box (@SquawkCNBC) April 16, 2020

In a major hit to online ad giants whose stock prices have staged a tremendous rebound thanks to a spike on stock buybacks, advertisers have pulled back significantly because of budget uncertainty in the months ahead. Companies in the travel space, for example, have little reason to buy ads when much of the globe is under stay-at-home orders.

As CNBC reports, Expedia Group and its peers, like Booking Holdings, spend heavily on Google, since so many travelers search for trips with terms like “flight to London” or “hotel in San Francisco.” On the company’s February fourth-quarter earnings call, Diller mentioned Expedia is one of Google’s biggest advertisers and that Expedia is trying to move away from its “reliance on Google and Metasearch” to grow more direct relationships with its customers. That happened after shares of Expedia reached new year-to-date lows in November when the company said changes in Google’s search algorithm has lessened its visibility on search results, resulting in a heavier reliance on paid advertising.

MediaRadar in a March research report called the deceleration in ad spend in the travel industry “like a car hitting the brakes in advance of an oncoming accident.” A chart from Ezoic shows that the CPM plunge in recent weeks has been furious.

In a survey last month, the Interactive Advertising Bureau surveyed nearly 400 media planners, buyers and brands responsible for U.S. ad spend, and found that 74% of them believe the coronavirus will have a greater impact on ad spend in the country than the 2008-09 financial crisis. Nearly a quarter of respondents said they have paused all ad spend for the rest of the first and second financial quarters.

Sooner or later, investors will realize what this means for the stock price of Facebook and Google. Until then, thanks for the very cheap puts.

We warned yesterday that it was imminent, and now it has occurred…

The Trump administration’s Paycheck Protection Program (PPP) for small businesses slammed by coronavirus has run out of funds, hitting the $349 billion initial allotment Thursday morning, according to the Small Business Administration (SBA).

The SBA says more than 1.62 million applications were approved, totaling $349 billion in loans from more than 4,900 lending institutions.

According to the Small Business Administration:

“The SBA is currently unable to accept new applications for the Paycheck Protection Program based on available appropriations funding. Similarly, we are unable to enroll new PPP lenders at this time.”

“Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.”

In a joint statement on Wednesday evening, Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza said:

“The SBA has processed more than 14 years’ worth of loans in less than 14 days…

We urge Congress to appropriate additional funds for the Paycheck Protection Program—a critical and overwhelmingly bipartisan program – at which point we will once again be able to process loan applications, issue loan numbers, and protect millions more paychecks.”

While both Democrats and Republicans want to add $250 billion to the small-business aid program, the two parties have been sparring for days over whether to add restrictions to the funds. As reported previously, Democrats want to expand access to the loans as well as include more money for hospitals, food assistance and state and local governments. Republicans, on the other hand, said they want to keep the bill focused on increasing small-business aid and defer other funding debates until the next, broader legislation is crafted.

And so the political buck-passing continues: top Senate Democrate Chuck Schumer told reporters he had spoken with Treasury Secretary Steven Mnuchin Wednesday morning and that both House and Senate Democratic staff were expected to meet with officials from Mr. Mnuchin’s office later in the day.

“We see no reason why we can’t come to an agreement,” Mr. Schumer said.

“We Democrats believe we need more money for small businesses, but we need it to go to the people who are under banked and underserved.”

As the WSJ added, the discussions were the first signs of progress this week, but it remains uncertain whether congressional leaders and President Trump will be able to reach an agreement by week’s end. Both chambers are scheduled to hold brief sessions later this week.

Get back to work Mr. Schumer.

As RSM’s Chief Economist Joe Brusuelas notes, “After only 13 days the PPP is now officially oversubscribed. My sense is that there is greater than $1 trillion in demand following discussions with our SME client base. Congress & the administration cannot act fast enough. “