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Frequent Contributor

From Barron’s, May 4, 2020 (Part 1)



[Italics-bold within the brackets are my additions/elaborations] [New M* Discussions doesn’t allow any colors for cut-and-paste from WORD]


Pg M1, Trader: After a great fall, market had a great rise and a late spoiler. There are hopes for potential remedies for Covid-19 and phased reopening of economy. But US-China tensions are flaring up again over Covid-19. Economic outlook for 6-12 months is muddy assuming no Covid-19 reinfections later. In the near-term, between bulls and bears, there is the middle of stocks going nowhere but with high volatility.

Covid-19 is making a huge hole in company balance sheets that is being repaired by several companies with additional debt. This new debt is being used just to sustain partial or stalled operations and to hang on to workers at-home or furloughed, i.e. for nonproductive uses. In just a few months, the enterprise value [EV = market-cap plus net-debt] of SP500 companies has fallen by $760 billion in spite of the added debt of $210 billion. [Premise seems to be that, theoretically, +$1 change in nonproductive debt should cause -$1 change in equity for a net $0 change in EV; so if EV is down more, the stock should be undervalued – seems questionable] Look at the following stocks where the EVs have dropped more than the added debt: JCI [fwd P/E 12], NTAP [fwd P/E 11], FOXA [fwd P/E 11.5], HPQ [fwd P/E 6]; but value has to rebound as these are value stocks.


The CME FedWatch tool is based on current fed fund futures quotes around the FOMC meetings and the assumption of gradual fed fund rate changes.

ZIRP [0-0.25% fed fund rate] through March 2021 FOMC meeting. ]


For the week [index changes only], DJIA -0.22%, SP500 -0.21%, Nasdaq Comp -0.34%, Russell 2000 +2.22%. DJ Transports +0.65%; DJ Utilities -4.53%. US$ -1.58%, oil/WTI +16.77%, gold -1.68%.

YTD [index changes only], DJIA -16.87%, SP500 -12.38%, Nasdaq Comp -4.10%. [R2000 -24.45%]


Pg M4, Europe: French food services giant Sodexo is not attractive [; fwd P/E 18.9]. Demand for food services at businesses and events has suffered. The firm was doing poorly even before the pandemic and its stock peaked in 2017. Its diversification into cleaning, security, equipment maintenance, massages, etc only distracted. New CEO was/is trying to refocus on the core business and lessening the reliance on big businesses but those efforts will now be stretched out due to Covid-19 pandemic.


Pg M4, Emerging Markets: Argentina has announced an aggressive proposal to restructure its foreign debt – pay nothing for 3 yrs and then 62% reduction in interest payments; bonds are trading at 30-40% of par value. Creditors may reject that unless some GDP-related kicker or another sweetener is added. Argentina didn’t even bother to involve the IMF that has already lent it huge amounts. Many other EM countries are dealing with Covid-19 crisis in a much better way and look at their EM debt.


Pg M6, Commodities: The US is thinking of taking several steps to shore up oil prices and oil industry: lessen regulations on oil industry; limit oil imports [although imports from the OPEC are already under 1 million barrels/day]; add oil to US SPR by renting space or by buying oil [subject to approval by Congress]; taking stakes in oil companies in return for federal bailouts.


Pg M5, Options: Coronavirus may cause food shortages due to food supply-chain disruptions. President used DPA to keep meat processing plants open. Bullish call spread on Tyson [TSN] is recommended.

[SP500 VIX 37.19 (still high), SKEW 130.38] [10-Yr TYVIX 4.74] [Yahoo Finance data]


Pg M22, M28: A good week in Europe [Finland +7.32%, Switzerland -0.79%] and a good week in Asia [India +7.11%, New Zealand +0.11%]. The equity CEF index [data to Thursday] outperformed the DJIA and its discount was -8% [wide fluctuations between -4% to -16% over the last few weeks].

Treasury rates 3-mo yield 0.11%, 2-yr 0.20%, 5-yr 0.36%, 10-yr 0.64%, 30-yr 1.27% [Treasury data*]. Dollar fell, DXY 99.04, -1.7% [M31]. Gold fell, $1,686, -1.7%; the gold-miners were FLAT [M34]. [^XAU was at 117.36, FLAT for the week]

*Treasury Yield-Curve

Top FDIC insured savings deposit rates*: Money-market accounts 1.54%; 3-mo Jumbo CD 0.85%, 1-yr CDs 1.49%; 5-yr CDs 1.98% [M29].

*For local rates


Pg 28, [Online] Cover,Economic Recovery Rests on Consumers. It won’t be Easy”. Consumer spending declined by -7.5%, the worst on record so far. Among all the economic indicators, consumer spending is very important as the US economy cannot recover without the consumer [70% of the US economy is consumer-based]. This recession has hit consumers badly – many unemployed [30+ million] and/or stuck at home. Many Americans don’t have savings to rely on. Credit card debt is rising [even as new charges are down] and card companies have increased their loan loss reserves significantly [doubled/tripled]. Some states have started reopening. But many businesses will be slow to recover due to social-distancing and fears of Covid-19 infections. Lockdowns/shutdowns may also have changed some consumer behaviors. Many retailers would find their inventory stale and out of season/fashion. China has reopened much of its economy, but consumer spending and retail sales remain depressed. The US consumers tend to be optimists, but pent up demand may be slow to materialize. For many companies, social-distancing and new health concerns would mean less capacity utilization [restaurants, theaters, hotels, airlines, outdoor events]. There is gloomy outlook for Fall school season and holiday season. Investors should focus on essentials-retailers [WMT, COST, TGT, NKE, LOW, URBN, DG, AAP, AZO], essentials-producers [PG, MDLZ, KMB, SLM, SPB], discounters [DG, OLLI, FND, DLTR, BIG], fast-foods [MCD, DPZ, WEN, JACK], and avoid highly-indebted mall-based retailers [M, GPS, SIG, JWN].


Pg 9, Up and Down Wall Street: There is a great disconnect between stocks [best month since January 1987; major indexes up +30% from March 23 low] and economy [bad Q1 for the start; 20 million unemployed]. One explanation is that the market is looking ahead and taking into account some good news on potential Covid-19 remedies [GILD-remdesivir; vaccines in development. etc], phased reopening of the economy and forceful actions on monetary and fiscal policies. The Fed balance sheet has quickly expanded to $6 trillion and may peak at $10 trillion; it is buying all kinds stuff [munis, corporates, HY, ETFs]. Corporate bond issuance has surged [record $285 billion in April]. BA raised $25 billion in debt [and for now ditched $60 billion in federal bailout with strings attached]; DAL, CCL, GPS and others also raised money via cheap debt. AAL tapped into federal financing under CARES Act. Will the stocks correct, or the economy would bottom and rebound quickly, or both? Economic data will get worse, much worse. The ISM manufacturing index was at 41.5 showing contraction; upcoming jobs report [-22 million?] and unemployment rate [16%?] will be numbing. Low bond yields are driving investors into stocks; some depressed energy stocks and bonds offer opportunities [but be very selective and stick with potential survivors]. Dollar may weaken and that would benefit commodities and EMs. Seasonality has now turned poor – remember the saying, “Sell in May and go away” [stay home?] that has a mixed record.


Pg 11, Streetwise: Stocks had been rising since March23 low even in the face of terrible economic news. But the author is not selling and stocking with his 60-40 portfolio [60% equity, 40% Alka Seltzer]. Looking at the positive news, he sees new Covid-19 cases declining; several states reopening; rollercoaster of news on GILD-remdesivir; the Fed finding new ways to support the economy and businesses [ultimately, buying stocks? or buying stuff at people’s garage sales at asked-for prices?]. But there is also bad news – bad Q1 data now, worse Q2 data coming; 30+ million unemployed; high Covid-19 mortality among 65+. He called up Savita Subramanian at BoA/ML to get her take on a few things. She told him that P/E is a good predictor of stock prices over a long-term, but not over a short-term; narrow market breadth now is OK as leading companies are tech disruptors and some are benefitting from lockdowns/shutdowns; prefer dividend-paying stocks over bonds, etc. He also called the CEOs of OKTA and WORK, at-home stocks that are subscriptions-based. OKTA simplifies access to various cloud applications. WORK is an alternative to work emails.


More later….

1 Reply
Explorer ○○

Re: From Barron’s, May 4, 2020 (Part 1)

Thanks Yogi...

They say don't fight the Fed but even some members of the FED board some regional Fed presidents are acknowledging that the bridge the Fed is building over troubled water, will have negative consequences to the US economy on the other side, in the longer term.  How can the Fed stop the likes of essentially a foreign corporation predominately operating in US markets like CCL from paying 11.75% on new debt issuances.   How many mortgage REITs and Credit Unions that do cut rate financing deals for those seeking mortgages and car loans are not going forward going to build default that is not a default by the borrowers into their borrowing rates?  Who is going to buy their initiations in the private markets to buildup into CMO and CDOs ?  What, the collateral is protected from seizure for non payment? In all likely hood THE Fed has already lost the ability to control medium and long term interest rates.   No real return income investments without risk eventually puts even money market mutual funds  and THEIR, THE BUCK in jeopardy.  If the Fed can expand it's balance sheet to $10 trillion why can't they just keep going next year and go to $15 trillion  ?

It's been +20 years since Frank Lorenzo finished putting 2 or three airlines into bankruptcy and stiffing many of their pensioners.  And yet there were nearly twice as many US flights per day before the onset of the crisis, as there were when Frank finally ran out of creditors. 

Before the end of the socio-economic disaster there will be the same moral hazard examples of ridiculous excess as we had with the scum like Killinger, CAYNE, Prince, Thompson, Mozilla etc getting their boards' heartfelt thanks for their service as they exited with US tax payer paid for golden parachute bail outs. 

Clearly Saving CCL even the airlines is essential for the purposes of saving their financiers and not to facilitate refunds and credits to their former customer base.  Investing in airline stocks is a sure way of losing your money, has become as common and valid a cliche as Sell in May and Go Away and Sell on the News and buy on the Rumor.  Again as in 2008 where are the HAIR Cuts for this debt being bailed out by the US taxpayers ?  What's next a US Fed Bailout of Lloyds of London and Hennessy-Moet ?  It is pretty clear that LUCKIN Coffee needs FED assistance but not their US shareholders ?  Do not put the levels of hubris beyond your wildest imaginations as 2008 spawned the TRCA bailout assistance to foreign banks just as TARP was shoring up the prospects and personal wealth of the most privileged of American society as previously listed.  

If you are over 65 you had best be sure you have or your beneficiaries have the actual Trust Documents and Wills in their possession.  Lawyers who you already paid for these services often retain the originals to these documents to facilitate more fees in association with what they can ex tract from the estate and your beneficiaries.  At the time you execute these they advise you that these documents will be safer if held by them, "Just in case" and "God forbid" but then I and your documents will be there for your family.   For an additional $400 to $500 an hour or any part thereof. Most banks will still give you limited access by appointment to your safe deposit boxes where these documents may be safer from predation on your estate.

I am already seeing shortages of food / meat items listed in the weekly sales flyers of the grocers who still publish them. Stores are still not clearly labeling all their items with a price placard.  These are items you usually do not want to buy anyway given what they are actually asking IE 99 cents for a lime in the week of Cinco de Mayo when some other grocers are promoting the festivity with 3/$1 limes.   The acts by the ignorant and uninformed in these grocery stores is just deplorable. Who but a scv/\/\ sacca takes a number from the deli number dispenser and then stands there two ft away awaiting their turn to get their order filled ? While they are waiting the Deli worker re-stocks the cooked rotisserie chickens so they take the one already in their cart and put it back into the display for an exchange.  These types make the line cutters, Meter maids, the dogs that are not cleaned up for dog walkers, and ticket scalpers look like responsible citizens.  

Be safe out there.  



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