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From Barron’s, March 23, 2020 (Part 2)

 

 

Pg 7, Up and Down Wall Street: Without much forewarning, much of the US has shut down; stores are closed or have many empty shelves; $12 trillion in stock market wealth has disappeared. Several senators sold stocks after receiving early coronavirus briefings. Bond markets also rolled over, and no area was spared; this despite the Fed’s efforts to shore up short-term markets [unusually, non-Treasury, nonagency-MBS]. After sharp selloff, muni recovered some after the Fed offered support for short-term munis. GDP forecasts for Q1 and Q2 were slashed to negative.

Treasury yields unexpectedly rose [then fell a bit] from forced selling by leveraged funds after the Fed’s emergency move to ZIRP, 0-0.25% fed funds rate and $1+ trillion liquidity support for the short-term funding market. Paulson [Leuthold] noted that in the past several crashes [1987, 1998, 2002], the 10-yr yield rose when stocks were bottoming with financial crisis [2009] being an exception. He thinks that 10-yr may be sending a false signal this time too. Others point to more troubles ahead due to rise in dollar; rise in real yields; widening credit spreads; some of these were due to massive stimulus announced in Europe and the US and some fear that limits of stimulation may have been reached.

 

Pg 9, Streetwise: Many good quality stocks that were attractive last week became more attractive this week. GS has been furiously changing its models – it is now looking for SP500 to bottom around 2,000 mid-year and then rocket to 3,200 by yearend; its new GDP forecast has negative Q1 and Q2 but positive Q3 and Q4. BAC/ML is similarly bearish on GDP. Jefferies attractive stock list includes AMZN, BX, CVX, HD, MCD, MDLZ.

Pg 24: Hough interviewed CEO Schliefer of REGN that is developing Covid-19 treatment. It is working on repurposing existing drugs; trying human antibodies; and developing a new vaccine. REGN previously develop remedies for Mers and Ebola.

 

Pg 12-13: BOE monetary policy decision on Thursday.

Peloton Interactive [PTON] is benefitting from gym closures and people staying at home and exercising there. There is now an attractive group of at-home stocks: AMZN, ATVI, CHWY, NFLX, TTWO, UBI, GRUB, SPOT, PTON.

Federal bailout of Boeing [BA; fwd P/E 3.8] will be costly; it suspended dividend after Barron’s went to press. It was dealing with 737 MAX grounding but then coronavirus hit its entire business. It is looking for $60 billion in federal aid that would be enough to keep it going for 6 months – it is burning cash at $4 billion/month and needs to cover $25 billion in manufacturing costs until airplane buyers resume progress payments and orders pick up. Debt may rise to $40 billion.

Data this week: Chicago Fed national activity index on Monday; new home sales, PMI on Tuesday; durable goods report, home price index on Wednesday; initial jobless claims [est 2 million], final Q4 GDP [+2.1%] on Thursday; personal income and consumption, UM sentiment on Friday.

 

Bullish Recommendations: See other stories.

Bearish Recommendations: See other stories

 

Pg 14: Cover Memo to DC: Go All-In Now or Pay Later”. Several features on Coronavirus.

1st feature makes a passionate case for bold fiscal steps to counter coronavirus pandemic black swan. Two Congressional steps so far are baby steps and a third huge step is coming but it should ASAP to counter an unprecedented shock to the economy [Q2 GDP estimated range from -12.9% (DB) to -24% (GS)]. Creativity, flexibility and novel solutions would be required. The Fed has done its part by multifaceted response [ZIRP; QE; liquidity support within the US (some already is beyond what was done in 2008-09) and globally].

Pg 16:2nd feature suggests war-like-efforts by federal, state and local authorities to fight Covid-19. There is urgent need for vast quantities of medical supplies. Healthcare industry will be stressed but it hasn’t been included in the list of industries requiring assistance or rescue. Defense Production Act can be invoked to order production of medical equipment and supplies. Military medical staff, National Disaster Medical System members and military hospital ships [one each is being to the NYC and the West Coast] can be deployed. Direct aid may be required to build emergency Covid-19 care facilities, to hospitals with payments over the Medicaid amounts and to healthcare workers for their emergency expenses. The CDC botched the initial Covid-19 diagnostic test kit/protocol that was distributed and has been slow to fix it; the devices used for tests have to be authorized by the FDA – this has wasted several weeks.

Pg 19: Big banks [BAC, C, GS, JPM, MS, WFC; and regionals USB, PNC, CMA, MTB] are in better financial shape now [Tier 1 capital, tBV, etc] but they have been hammered in this selloff. They should also be considerate of struggling businesses and consumers. Risks are uncertain actions by the Government on general debt relief. However, big banks are attractive on P/tBV [forget P/E (trailing or fwd) due to coming earnings hell]; their dividends look sustainable; buybacks have been halted. Bank preferreds have 6-7% yields [PFF with 7% yield has heavy weighting in bank preferreds]. Annual stress tests of big banks have helped. Buffett/BRK-A/B held $75 billion in bank stocks at 2019 yearend [worth much less now].

Pg 22: Regional banks have been hit harder [KBW -44% from recent high]. They are less diversified and have higher exposure to businesses and industries in their region. But most are in good financial shape and are attractive including some with higher energy exposures [BOKF, ZION, CMA]. Those with less energy exposure include FFWM. Larger ones are MTB, PNC, USB.

Pg 23: Business halts will hurt highly indebted industries [airlines, energy, hotels, cruise operators; private-equity funded businesses (fast-food restaurants, hotels, hospitals, dentists, etc)]; several will get Government assistance. Corporate debt is record 47% of GDP; more than half of investment-grade debt is BBB and 30% of that is vulnerable to downgrade to HY. Default rates for HY will more than triple to 10% by yearend.

Pg 24: See REGN feature above.

Pg 25: 7th feature on 3 Technicians’ Views.

Andy Anderson, The Institutional View. His January sell signals for oil, copper, small/mid-caps and buy signal for VIX alerted him that something was up and that turned out to be coronavirus black swan that has generated a ferocious selloff. SP500 may hold temporarily at 2,300, rebound to 2,650-2,800, test 2,300 and on failure test support around 2,000-2,100. His concern is dismal action in bank stocks that may mean big loan losses. For turnaround, watch fewer new lows, more stocks above 200-dMA, 50-dMA. Positive signs are relative strength [relative to benchmark; not RSI-14] in healthcare [AMGN, LLY, MRK] and some Chinese e-commerce stocks [PDD].

Robert Sluymer, FundStrat Global Advisors. His weekly momentum indicators in December pointed to February peak but he was looking for only 5-8% pullback and then was expecting SP500 to hold around 2,346 [12/26/18 low] – that was breached by a small amount. In selloffs in 1950s, 1960s, 1980s, 1990s, 2010s, 200-wMA [w=weekly; Stockcharts can be switched from d-daily to w-weekly] held, so when 200-wMA at 2,640 was breached, he had to respect the break for which there are fewer precedents for recovery [1962, etc]. He is discouraged by damage in banks, energy, emerging markets. But he sees some positive signs in the actions of WMT, KMB, ROP, and some drug stocks.

Katie Stockton, Fairlead Strategies. She is looking for temporary support for SP500 around 2,305-2,350, but downside remains. She is watching stochastic oscillator [range 0-100, oversold < 20 (now), overbought >80]. Oil/WTI has completely collapsed and a bearish triangle pattern is pointing to $17 [2001 low]. She is seeing positive signs in healthcare and XLV may have reached downside exhaustion level.

 

Pg 27: Asset mix in commodity funds [115 ETFs/ETNs; 24 broadly diversified (FAAR)] are all over the place; mutual funds include BCSAX, SPCAX, VCMDX. But some commodity funds have held up better than SP500. Many commodity funds have high weight in oil [OILNF] that has pulled them down. Gold funds [SGOL] have done well. Some commodities are below their cost of production [corn (CORN), coffee (JO)]. Copper and Palladium [PALL] have supply deficits and their inventories are going down. Indexing doesn’t make sense for commodities, but several indexed funds exist.

 

Pg 28: Stimulus checks to households will be an ineffective use of $500 billion [vs $1 trillion/month consumer spending] and too little too late. Coronavirus related travel and entertainment restrictions mean that only 25% may be spent. Better use of that money may be for jobs creation, infrastructure improvement/development, healthcare.

 

Pg 28: Dividends may be cut sharply in the retail sector although they may be safe for the home improvement segment [HD, LOW].

 

Pg 29: Big techs with piles of cash may be new defensive stocks [GOOGL, AMZN, AAPL, MSFT, FB, UBER]. This selloff offers these quality growth companies at attractive prices.

 

Pg 30: Many app developers are pushing back on Apple [AAPL] on how the App Store is used [high fees (30% cut); favoring Apple’s apps (existing and new); restricting or dropping others’ apps in the name of security but that often happens when Apple has its own competing new app] and how sometimes the app features are just incorporated into Apple’s own apps. While regulators worldwide have focused on AMZN, FB, GOOGL, they have AAPL in their sights.

 

Pg 32: Inigo Fraser Jenkins, Bernstein Research. Past is less useful in this era of easy monetary policies [helicopter money] and uncertainty about the impact of coronavirus with unknown fiscal policies. Taking into account the fall in operating earnings for SP500, the fwd P/E may be 17.8 and that isn’t low. But it may be time to buy stocks if one has 2-yr timeframe. Nationalization risks are rising in Europe where bailout often means nationalization that is harmful to the current investors. He likes US over Europe as fiscal policies kick in the US; attractive dividend-paying companies are PEP, CLX, KMB, JNJ, TJX. Pension funds will need a more flexible approach to asset allocations with stocks-bonds-private equity. Inflation outlook is highly uncertain – coronavirus and oil crash are very deflationary; supply shocks and fiscal and monetary policies are inflationary. Shareholder activism will grow beyond the current ESG.

 

Pg 34: George Magnus, China Centre in Oxford, former chief economist at UBS. Upcoming book, Red Flags: Why Xi’s China Is in Jeopardy. The US and Europe are about a month behind China on coronavirus both epidemiologically and economically. In China, there was lockdown in February and the economic data for that month had unprecedented collapse and Q1 GDP will have a large contraction; but things have started to improve. That sequence happen in the US and Europe with March/April lockdowns and for Q2 GDP. The G-7 countries are responding with aggressive monetary and fiscal measures. The US Fed has cut rates to zero [0-0.25%], provided liquidity to money-market repos, started QE, supported commercial paper and short-term muni securities; the fiscal stimulus may amount to 4% of GDP for now. What if there is a 2nd wave of infections later in the year after the 1st wave subsides soon? Be careful and watch events unfold in 2020.

 

Extras from Friday – I try to guess on Friday which features will make it in the weekend edition but the following guesses didn’t make it. Almost 75-80% of the weekend edition is now available by 9:00 PM Central on Friday. Barron’s revised website has “Interests” tabs similar to columns topics and that makes it easier to find potential items for the weekend edition. This is also the reason for earlier postings on Saturday – I do wait for my paper delivery [typically between 5:00-6:30 AM Central] to fill in some data.

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2 Replies
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Explorer ○○

Re: From Barron’s, March 23, 2020 (Part 2)

Thank you so much for the weekly summaries! Have a great weekend!

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Participant ○

Re: From Barron’s, March 23, 2020 (Part 2)

It's going to be an interesting week to come. 

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