20/05 – May Market Commentary
US jobless claims fell at the end of May but unemployment rate likely remains near record high. As has happened in the past, it seems this high unemployment rate will grind lower slowly. Restaurants are probably the most illustrative example – it has been estimated that as many of 20% of restaurants may have permanently closed. And what about other hospitality businesses and airlines?
For now, there are federal support programs in place to help with lost income across the country. As time passes, however, it is less likely for these programs to remain in place. Unless many of these displaced workers can return to work in a short period of time there is likely to be an adjustment period. These lost incomes will result in credit losses at lenders (banks, mortgages, credit cards, etc) when debts can no longer be serviced and will result in lower consumption (we are a consumption-based economy). These issues will reverberate around other parts of the economy. It is called a recession. With how deep of a cut this second quarter is expected to be, we may be lucky to avoid a depression.
Investors like to celebrate Warren Buffett and his investment insights. What no one wants to acknowledge is what we have seen the last few months. Berkshire Hathaway has a fortress balance sheet with at least $130 billion in liquidity. Berkshire has announced no deals, something he is known for during market chaos. In fact, Berkshire has been liquidating several large investments – airlines and Goldman Sachs – and trimmed some other positions like JP Morgan and Wells Fargo. Warren Buffett likes to talk positively about long-term outlook for the United States – and we would not disagree, per se… it’s not what the future looks like so much as the path between – but do you suppose he is bullish on the US stock market and economy at these prices? As always, we think his actions speak louder than his words.
Retailers are reeling from the countrywide COVID-19 lockdowns. Many were struggling before the virus. For some major retailer brands it was the last straw. Neiman Marcus, JCPenney, and J Crew are just a sampling of names to recently file for bankruptcy. Others, like Macy’s, Kohl’s, and Nordstrom, have scrambled to shore-up finances and have completed secured debt deals since March. For an industry (brick and mortar retail) that has been in secular decline, it is tough to look across the landscape now and see opportunity, especially on the equity side.
US-China relations continue to fray.
- The Trump administration is blaming China for allowing the virus to infiltrate the United States. To be sure, on the one hand we are to believe that the virus is nothing (just the flu, not even) and on the other hand we are to hold China accountable.
- The trade deal phase 1 may be in jeopardy. For one thing, China has suspended US agriculture purchases.
- China has moved forward with tucking Hong Kong under its unified control and the US responded by moving to strip Hong Kong of its special “One Country, Two Systems” policy. This has allowed HK to remain a central financial and economic hub to Asia post the British handover in 1997.
- The US is threatening to suspend participation in WHO.
- The US has warships in the South China Sea
The US is moving toward stricter listing of Chinese companies on US exchanges and restricting Federal pension plan investment into Chinese companies.
Some bonds issued into the junk bond market since the outbreak of COVID-19 and subsequent lockdown are souring.
Elsewhere in the junk bond world the Federal Reserve is holding worthless bonds it purchased through one of its market support mechanisms. The Fed purchased junk bonds through ETFs in its secondary market purchases and now holds several bankrupt securities like Hertz Global, JC Penney, and Neiman Marcus.
The dichotomy of haves and have nots in this economic calamity is astonishing. While the credit markets still seem to be sorting things out – bankruptcies and distress on one side of the market and open new issue on the other side of the market – equity markets are screaming higher with NASDAQ 100 a short reach from all-time-high. The S&P 500 has cleared 3,000 but is still down modestly year-to-date.
We wonder: if credit has trouble lending to some of these companies then what could a rational investor expect from owning the stock? Are indexers not looking through to the underlying? That is rhetorical.
- Share price tumbles after CEO, Musk, says price too high: link
- Secures $565 million from Chinese banks: link
- Tesla sues to reopen California factory: link
- Tesla threatens to leave California: link
- Tesla and county reach deal for plant reopen: link
- NASA human spaceflight chief resigns: link
- SpaceX inaugural astronaut flight/launch postponed: link
- Musk gets $775 million stock: link
SpaceX launches astronauts into space and to the International Space Station: link
Negative Interest Rates
Low and negative rates appear to be here to stay.
- US money market funds are waiving fees to prevent the funds from generating negative returns for investors. What price are you willing to pay for safe storage of your cash?
- The UK issued its first negative yield gilt. Think of it like I give you a dollar and you give me less than a dollar back. Yay!
Fed funds futures may foresee negative Fed funds rate.