Month: April 2020

At the depths of both the post dot-com bubble and the financial crisis, the New York City Purchasing Manager Current Business Conditions index, a relatively obscure indicator which focuses on the economy of the financial capital of the world, slumped to levels in the mid-20s after normally moving in a range between 50 and 70.

Then, moments ago we got the first post coronacrisis print: at 12.9 this was the lowest reading on record, crashing from a solid 51.9 in February (there was no expectation). Specifically:

• The Business conditions outlook fell to 37.9 vs 53.8 prior month
• The Employment index fell to 36.7 vs 49.3

As with all diffusion indexes, a reading below 50 indicates contracting activity, while readings above 50 suggest expansion. It was not clear what a catastrophic reading of 12.90 indicates for the Big Apple, one which at this rate may drop to 0 next month, but the dreaded D-word comes to mind.

After a surprise tumble in January (before the virus impacts really hit), US Factory Orders were expected to rebound modestly in February (data released today and still lagging the current effects of the lockdowns and supply chain disruptions).

However, unsurprisingly, Factory Orders were flat (0.0% MoM) in February (below the +0.2% expectations). However, this did lift the YoY change in factory orders into the green (barely) at +0.1% YoY – the first annual gain  since July

Source: Bloomberg

Ex-Transports, factory-orders tumbled 0.9% MoM (the worst since Nov 2018), and YoY declined 0.1%…

Source: Bloomberg

And this is before the lockdowns began…

Having reached near-record high levels of consumer comfort in late-January, Bloomberg’s Consumer Comfort Index has plunged to its lowest since June 2018.

Source: Bloomberg

This is the biggest two-week drop in comsumer comfort… ever…

Source: Bloomberg

“These unprecedented declines in consumer sentiment mark the vast economic fallout of the coronavirus crisis,” Gary Langer, head of Langer Research Associates, which produces the index, said in a statement.

“Unemployment claims have skyrocketed, commerce has plummeted in the face of business closures and stay-at-home orders, and the markets are in turmoil.”

Views of the economy also saw largest-ever two-week plunge, while attitudes toward the buying climate and personal finances deteriorated further amid volatility across financial markets. The 12.1-point drop in comfort about the economy dwarfed a previous record decline of 8 points in February 2008 during the last recession.

Notably, while, sentiment deteriorated in almost every category, two groups showed slight improvement: Comfort ratings for those without high school degrees and part-time workers both rose.

Ah, the benefits of free money!

After weeks of finding new ways to embarrass himself in the coronavirus news cycle – most recently taking a stab at doctors and saying they were too “scared” to help coronavirus patients – Elon Musk has opened up a new chapter in both virtue signalling and public humiliation as it relates to the ongoing global pandemic.

As a reminder, we have been reluctantly covering Musk’s “bizarre” actions surrounding the coronavirus pandemic: First, he called the panic around the virus “dumb”. Then, Musk came out and said kids were “essentially immune” to the virus despite the fact that there have been numerous reports of teenagers “fighting for their lives” on ventilators and passing away from the virus (source and source).

Then, Musk went to battle with Alameda County about keeping his Fremont factory open, all the while Tesla and SpaceX employees were contracting the coronavirus. 

One has to exhale and ask, “What could possibly be next?”

Well, how about saying you’re going to donate ventilators in a half-hearted effort to try and end the PR fiasco hanging above your head, and then donating a bunch of sleep apnea machines instead?

Musk proclaimed on March 23 that he bought “1255 FDA-approved ResMed, Philips & Medtronic ventilators on Friday night and airshipped them to LA”. 

A couple of days later, NYC mayor Bill de Blasio was publicly thanking Musk for “donating hundreds of ventilators to New York City and State, including our public hospitals”. de Blasio said he was “deeply grateful”.

Then, yesterday, the NYC Health and Hospitals system Tweeted out a photograph of “40 ventilators” that were donated by Tesla to a hospital in queens. Many of the boxes sport a “ResMed” logo and printed out sheets of paper with the Tesla logo on them.

But then, a bit of reality sank in and the FT pointed out  some “peculiar” items of note about these boxes. First is the fact that sitting on top of the boxes is a Bilevel Positive Airway Pressure, also called a “BiPAP” machine, which is used to treat sleep apnea.  While these machines are sometimes referred to as “non-invasive ventilators”, these are not the ventilators that are commonly used in intensive care units for coronavirus. 

In fact, it turns out that these machines may make things worse for coronavirus patients. As FT noted, The American Society of Anesthesiologists on February 23 issued guidance warning that CPAP and BPAP machines “may increase the risk of infectious transmission”. 

Russ Mitchell of the LA Times put out a Tweet thread yesterday, stating that: “The head of Resmed medical device maker appeared on Cramer today and said the 1000 machines Musk said he would be donating were five-year old Resmed BiPap breathing devices, usually used to treat sleep apnea, which I presume were bought in bulk at deep discount.”

“BiPap devices are not the high-end highly desired invasive ventilators that hospitals so desperately need. (GM and Ford have partnered up with ventillator makers to manufacture these),” he continued.

Musk, meanwhile, continued to refer to these machines as “FDA approved”, because the FDA recently adopted an emergency policy that allowed these machines to be used – instead of actual ventilators – in the event of a shortage. When FT reached out to ResMed’s CEO, Mick Farrell, he put on his best PR hat and claimed that these machines could be used to fight Covid-19, stating:

The bilevels featured in Tesla’s tweet are built on the same platform as our S9 CPAP machines for sleep apnea but deliver non-invasive ventilation that can be beneficial to many COVID-19 patients struggling to breathe while trying to fight off this virus. We have seen large numbers of patients in China and across Europe that have been treated with non-invasive ventilation via bilevel devices.

… before confirming to FT that the machines Musk purchased were, in fact, sleep apnea machines:

We think it’s great that Tesla purchased bilevel non-invasive ventilators from a platform of ours that we developed five years ago in Asia and sent them to New York. We applaud any company who can help get ventilators and other respiratory products to those in need.

Up until now vendors of “essential” products such as grocery stores and pharmacies were seen as the sole silver lining in a decimated retail sector, where businesses from restaurants, to lodging, to bars, to cinemas had all effectively shut down is part of the ongoing coronavirus lockdown.

However, that changed this morning when Walgreen reported earnings in which it warned that “strong” sales are slowing and foot traffic is staring to decline, suggesting that the coronavirus buying exhaustion is starting to spread even to formerly impregnable outlets.

While Walgreens reported earnings that beat Q2 expectations, this is what the company said about its outlook, which not surprisingly was focused entirely on covid:

Prior to the COVID-19 pandemic, the company was on track to maintain its guidance for full-year fiscal 2020, of roughly flat growth in adjusted EPS, at constant currency rates, with a range of plus or minus 3 percent. Second quarter financial performance exceeded the company’s expectations. Although the COVID-19 situation is ultimately temporary, given the many rapidly changing variables related to the pandemic, at this time WBA is not in a position to accurately forecast the future impacts. The company will continue to closely assess and manage this situation, and will provide further updates in the next earnings report when both the potential positive and negative effects of the pandemic will be known in more detail.

But it is what the CFO said in the call that spooked markets:

• *WALGREENS CFO: NOT ABLE TO ACCURATELY FORECAST COVID-19 IMPACTS
• *WALGREENS DEFERRING SOME INVESTMENTS: CFO
• *WALGREENS SEES LESS DISCRETIONARY SPENDING: CO-COO
• *WALGREENS SAYS FOOT TRAFFIC STARTING TO DECLINE
• *WALGREENS ‘STRONG’ SALES HAVE SLOWED, NOW DECLINING: CFO
• *WALGREENS: FULL IMPACT OF COVID-19 WON’T BE KNOWN FOR MONTHS

And with traders now forced to reprice their assumptions about the formerly “safe” pharmacy space, Walgreens Boot stock tumbled over 6% in a preview of what awaits most other companies as they unveil how the new corona reality affects their top and bottom lines.

Submitted by Michael Every of Rabobank

As COVID-19 continues to spread worldwide, economies slump, stocks of personal protective equipment and key drugs dwindle in the US, and as Americans buy record numbers of guns, the market focus today is arguably going to be on one thing:

How high is the spike in US initial jobless claims going to be this week? Last Thursday saw a staggering 3.3 million figure, far worse than what were already shocking consensus figures, and producing the kind of chart that many observers presumed must have been a mistake. It wasn’t – and this time round the expectation is 3.7 million newly jobless.

Yet there is a further claim to be made today: what the market should be focusing on is whether there are still markets.

To put it another way, how much and how rapidly are Western economies going to look like their Chinese counterpart (which is not recognized as a market economy)?

On a surface level we already see lockdowns, and state drones in the sky monitoring people to see what they are doing, virus-wise; or intelligence agencies using mobile phone monitoring to see where people have been, again to track the virus spread and infection risk. Yet those are arguably just to fight the virus itself.

Economically and financially we can also see that we are about to face fiscal deficits of 10-20% of GDP with no prospect of that debt being dealt with the ‘traditional way’ and repaid (which overlooks the fact that financial repression and de facto default is actually the traditional way and arguably more effective for economic development if the state is spending the money right).

We are already used to zero rates in the West – which are lower than in China by the way. We are used to an alphabetti spaghetti of different central bank mechanisms to try –and largely fail– to force liquidity into the parts of the productive economy that actually need it as opposed to the bloated and/or extractive and/or low productivity zombies that really don’t.

We now have yield curve control too: sovereign bond yields are going to be where they need to be. So while any part of the curve that central banks don’t control yet can still go wild for now, that will just end up with the central banks extending their powers to it too eventually. The price will be what they want it to be.

We know that equity markets can still go down, but that authorities won’t allow this to last for long without stepping in with support of some kind. “Because markets.” That might even mean nationalisation in some cases; or slush funds and bail outs for firms who squandered all their free cash flow on dividends and executive bonuses in others.

We know that credit is now going to be channelled by the Treasury and central bank in the USD trillions to companies large and small – and it will be political decisions rather than market ones as to which then make it through this crisis – and afterwards. As a result, SMEs will be saved – and tied ever-more closely to the whims of the state; and big companies will either end up serving the state directly (to produce ventilators, for example) or dependent on its ongoing largesse, which will no doubt also come with a social quid pro quo.

Then we have trade, where everyone is going to become more protectionist as they stimulate in order to keep that precious liquidity at home; and against Eurodollar liquidity pressures it could easily be outright mercantilism in an “All of your dollars is belong to me” kind of way.

Even on oil, imagine if the US were to impose tariffs on foreign energy imports at the equivalent of USD40 a barrel. This would immediately place a market floor at that level, while US shale, after being saved at that price, would provide an energy cap of around USD50. These are rough, hypothetical figures: yet as the US suggests Russia and the Saudis and itself need to find common energy ground, could we also be looking at a future oil ‘market’ that is also channelled into a narrow range that suits the state best?

For now we still have FX, the ‘terrible twos’ of the financial markets: extreme mood swings, and no idea of what it is doing even as it is doing it. In short, hard to control. It seems unlikely we are going to get capital controls in the West, or a new Breton Woods era of FX stability – for now. But if FX is allowed to play the role of honest broker – selling off sharply when a country decides to repress all its government bond yields at artificially low levels, for example, or saves low productivity industries at high cost, then perhaps it would be politically useful to enforce naptime on this toddler too. China has done its level best to stop the FX market functioning as it should via various mechanisms – and talking about USD/CNY is not the same as talking about EUR/USD! (Yet regular readers will know we believe that unless the rest of the world climbs on board with a new global currency compact, CNY is heading one way: down.)

And we have one more key Rubicon ahead for the West that runs parallel to the US jobless claims figure: where do they draw the line?

In the face of an unprecedented economic downturn, Western governments are doing their best to ease the pain. However, what are they going to allow to fail? Perhaps nobody can fail – as France’s Macron has publicly promised. Good luck with that and keeping a market economy. Yet who or what can be allowed to let go without starting a domino effect that threatens the broader system and shaky confidence? Don’t ask China, because they have no clear idea. We will shortly find out if market economies still do – or if we still do market economies.