Investing Caffeine

Recovering from the Coma

April 1, 2020 at 4:44 pm 1 comment

The patient, the U.S. economy, is sick and remains in a coma. Although the patient was never healthier six weeks ago, now the economy has fallen victim to a worldwide pandemic that has knocked the global economy on its back. On the surface, the physical impact of coronavirus on the health of the 330 million Americans seems relatively modest statistically (4,394 deaths vs. 45,000 estimated common flu deaths this season). However, in order to kill this insidious novel coronavirus, which has spread like wildfire across 200 countries, governments have been forced to induce the economy into a coma, by closing schools, halting sporting events, creating social distancing guidelines, instituting quarantines/lockdowns, and by shutting down large non-essential swaths of the economy (e.g., restaurants, retail, airlines, cruises, hotels, etc.). We have faced and survived other epidemics like SARS (2003-04), H1N1 (2009-10), MERS (2012), and Ebola (2014-16), but the pace of COVID-19 spreading has been extraordinarily rapid and has created dramatic resource drains on healthcare systems around the world (including New York with approximately 75,000 cases alone). The need for test kits, personal protective equipment, and ventilators, among other demands has hit the U.S. caregiving system especially hard.

Given the unique characteristics of this sweeping virus, U.S. investors were not immune from the economic impact. The swift unprecedented downdraft from all-time record highs has not been seen since the October 1987 crash. And although the major indexes experienced an illness this month (Dow Jones Industrial Average -13.7%; S&P 500 -12.5%; NASDAQ -10.1%), the nausea was limited in large part thanks to trillions of dollars in unparalleled government intervention announced in the form of monetary and fiscal stimulus.

Healing the Patient

While the proliferation of the viral outbreak has been painful in many ways from a human and financial perspective, the beneficial impact of the medicine provided to the economic patient by the Federal Reserve and federal government through the Coronavirus Aid, Relief, and Economic Security (CARES) act cannot be overstated. The measures taken will provide a temporary safety net for not only millions of businesses, but also millions of workers and investors. Although last month many investors felt like vomiting when they looked at their investment account balances, gratefully the period ended on an upbeat note with the Dow bouncing +20% from last week’s lows.

Fed Financial Fixes

Here is a partial summary of the extensive multi-trillion dollar emergency measures taken by the Federal Reserve to keep the financial markets and economy afloat:

• Cut interest rates on the benchmark Federal Funds target to 0% – 0.25% from 1% – 1.25%.
• Make $1 trillion available in 14-day loans it is offering every week.
• Make $1 trillion of overnight loans a day available.
• Purchase an unlimited amount of Treasury securities after initially committing to $500 billion.
• Purchase an unlimited amount of mortgage-backed securities after initially committing to at least $200 billion.
• Provide $300 billion of financing to employers, consumers, and businesses. The Department of the Treasury will provide $30 billion in equity to this financing via the Exchange Stabilization Fund (ESF).
• Establish two lending facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
• Create the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses, including student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA).
• Expand the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF) to include a wider range of securities.

Corona CARE to Country

Here is a limited summary of the sprawling $2.1 trillion bipartisan stimulus legislation that was recently passed by Congress (see summary and table below):

• Direct Payments: Americans who pay taxes will receive a one-time direct deposit of up to $1,200, and married couples will receive $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples, and phase out completely at $99,000 and $198,000, respectively.
• Unemployment: The program provides $250 billion for an extended unemployment insurance program and expands eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay. It also extends UI benefits through Dec. 31 for eligible workers. The deal also applies to the self-employed, independent contractors and gig economy workers.
• Payroll Taxes: The measure allows employers to delay the payment of their portion of 2020 payroll taxes until 2021 and 2022.
• Use of Retirement Funds: The bill waives the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to Jan. 1. Withdrawals are still taxed, but taxes are spread over three years, or the taxpayer has the three-year period to roll it back in.
• Small Business Relief: $350 billion is being earmarked to preventing layoffs and business closures while workers need to stay home during the outbreak. Companies with 500 employees or fewer that maintain their payroll during coronavirus can receive up to 8 weeks of financial assistance. If employers maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
• Large Corporations: $500 billion will be allotted to provide loans, loan guarantees, and other investments, these will be overseen by a Treasury Department inspector general. These loans will not exceed five years and cannot be forgiven. Airlines will receive $50 billion (of the $500 billion) for passenger air carriers, and $8 billion for cargo air carriers.
• Hospitals and Health Care: The deal provides over $140 billion in appropriations to support the U.S. health system, $100 billion of which will be injected directly into hospitals. The rest will be dedicated to providing personal and protective equipment for health care workers, testing supplies, increased workforce and training, accelerated Medicare payments, and supporting the CDC, among other health investments.
• Coronavirus Testing: All testing and potential vaccines for COVID-19 will be covered at no cost to patients.
• States and Local Governments: State, local and tribal governments will receive $150 billion. $30 billion is set aside for states, and educational institutions. $45 billion is for disaster relief, and $25 billion for transit programs.
• Agriculture: The deal would increase the amount the Agriculture Department can spend on its bailout program from $30 billion to $50 billion.

Source: The Wall Street Journal

Patient Requires Patience

As we enter the new 30-day extension of social distancing guidelines until April 30th, there is good news and bad news for the patient as the economy recovers from its self-induced coma. On the good news front, their appears to be a light at the end of the tunnel with respect to the spread of the virus. Enough data has been collected from countries like China, S. Korea, Italy, and our own, such that statisticians appear to have a better handle on the trajectory of the virus.

More specifically, here are some positive developments:

• Peak Seen on April 14th: According to the IMHE model that the White House is closely following, the number of COVID-19 deaths is projected to peak in two weeks.

Source: IHME

• Testing Ramping: The United States definitely got off to a slow start in the virus testing department, but as you can see from the chart below, COVID-19 tests are ramping significantly. Nevertheless, the number of tests still needs to increase dramatically until the percent of “positive” test results declines to a level of 5% or lower, based on data collected from South Korea. In another promising development, Abbott Laboratories (ABT) received emergency approval from the FDA for a rapid point-of-care test that produces results in just five minutes.

Source: Calculated Risk

• Closer to a COVID Cure: There are no Food and Drug Administration (FDA)-approved therapies or vaccines yet, but the FDA has granted emergency use authorization to anti-malarial drugs chloroquine phosphate and hydroxychloroquine sulfate to treat coronavirus patients. Patients are currently using these drugs in conjunction with the antibiotic azithromycin in hopes of achieving even better results. Remdesivir is a promising anti-viral treatment (also used in treating the Ebola virus) manufactured by Gilead Sciences Inc. (GILD), which is in Phase 3 clinical trial testing of the drug. If proven effective, broad distribution of remdesivir could be administered to COVID-19 patients in the not-too-distant future. Another company, Regeneron Pharmaceuticals (REGN), is working on clinical trials of its rheumatoid arthritis antibody drug Kevzara as a hopeful treatment. In addition, there are multiple companies, including Moderna Inc. (MRNA) and Johnson & Johnson (JNJ) that are making progress on coronavirus vaccines, that could have limited availability as soon as early-2021.

Darkest Before the Dawn

It is always darkest before the dawn, and the same principle applies to this coronavirus epidemic. Despite providing the patient’s medicine in the form of monetary and fiscal stimulus, time and patience is necessary for the prescription to take effect. As you can see from the chart below, the median total deaths projected is expected to rise to over 80,000 deaths by June 1st from roughly 4,000 today.

Source: IHME

The physical toll will exceedingly become difficult over the next month, and the same can be said economically, especially for the hardest hit industries such as leisure, hospitality, and transportation. Just take a look at the -93% decline in airport travel versus a year ago (see chart below).

Source: Calculated Risk

The closure of restaurants, retail stores, and hotels, coupled with a cratering of travel has resulted in a more than a 1,000% increase in Americans filing for unemployment payments (see chart below – gray shaded regions correspond to recessions), and the unemployment rate is expected to increase from a near record-low 3.5% unemployment to a staggering 10% – 30% unemployment rate.

Source: Macrotrends

The spread of the incredibly debilitating COVID-19 virus has placed the economic patient into a self-induced coma. The financial and physical pain felt by the epidemic will worsen in the coming weeks, but fortunately the monetary stimulus, fiscal emergency relief, and social distancing guidelines are pointing to a predictable recovery in the not-too-distant future. Financial markets have survived wars, assassinations, recessions, impeachments, banking crises, currency crises, housing collapses, and yes, even pandemics. Each and every time, we have emerged stronger than ever…and I’m confident we will achieve the same result once COVID-19 is defeated.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, MRNA, JNJ, and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in ABT, REGN or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

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