Posts tagged ‘cares’

What the Heck & What Now?

The Covid-19 viral pandemic that hit our shores in early 2020 shut down the economy to a virtual halt, and unemployment has skyrocketed to an estimated 19%, as 30 million people have now filed for unemployment benefits over the last six weeks (see chart below). Shockingly, we have not seen joblessness levels this high since the Great Depression. All this destruction has investors asking themselves, “What the heck, and what now?

Forecasts for 2nd quarter economic activity (Gross Domestic Product) are estimating an unprecedented decline of -12% (see chart below) with some projections plummeting as low as -34%. Despite the dreadful freefall in the stock market during March, along with the pessimistic economic outlook, the major stock indexes came back with a vengeance during April. More specifically, the Dow Jones Industrial Average soared +2,428 points, or +11% for the month. The other major indexes, S&P 500 and NASDAQ, catapulted higher over the same period by +13% and +15%, respectively.

Source: The Atlanta Fed

Certainly, there have been some industries hurt by Covid-19 more than others. At the top of the misery list are travel related industries such as airlines, cruise lines, and hotels. Retailers like Neiman Marcus, Pier 1, and JCPenney are filing for bankruptcy or on the verge of closing. Restaurants have also been pummeled (partially offset by the ability to offer pickup and delivery services), and entertainment industries such as sporting arenas, concert venues, movie theaters, and theme parks have all painfully come to a screeching halt as well. Let’s not forget energy and oil companies, which are battling for their survival life in an environment that has witnessed oil prices plunge from $61 per barrel at the beginning of the year to $19 per barrel today (with a brief period at negative -$37…yes negative!) – click here for an explanation and see the chart below.

Source: Trading Economics

What the Heck?!

With all this horrifying economic data financially crippling millions of businesses and families coupled with an epidemic that has resulted in a U.S. death count surpassing 60,000, how in the heck can the stock market be up approximately +34% from the epidemic lows experienced just five short weeks ago?

I was optimistic in my Investing Caffeine post last month, but here are some more specific explanations that have contributed to the recent significant rebound in the stock market.

  • Virus Curve Flattening: The wave of Covid-19 started in China and crashed all over Europe before landing in the U.S. Fortunately, as you can see from the chart below (U.S. = red line), social distancing and stay-at-home orders have slowed the growth in coronavirus deaths.
Source: Our World in Data via Calafia Beach Pundit
  • Fiscal Stimulus: The government fire trucks are coming to the rescue and looking to extinguish the Covid fire by spraying trillions of stimulus and aid dollars to individuals, businesses, and governments. Most recently, Congress passed a $484 billion bill in stimulus funding, including $320 billion in additional funding for the wildly popular Payroll Protection Program (PPP), which is designed to quickly get money in the hands of small businesses, so employers can retain employees rather than fire them. This half trillion program adds to the $2 trillion package Congress approved last month (see also Recovering from the Coma).
  • Monetary Stimulus: The Federal Reserve has pulled out another monetary bazooka with the announcement of $2.3 trillion dollars in additional lending to small businesses  . This action, coupled with the long menu of actions announced last month brings the total amount of stimulus dollars to well above $6 trillion (see also Recovering from the Coma for a list of Fed actions). You can see in the chart below how the Fed’s balance sheet has ballooned by approximately $3 trillion in recent months. The central bank is attempting to stimulate commerce by injecting dollars into the economy through financial asset purchases.
Source: Dr. Ed’s Blog
  • Improving Healthcare System: Treatments for sick Covid patients has only gotten better, including new therapeutics like the drug remdesivir from Gilead Sciences Inc. (GILD). Dr. Anthony Fauci, the NIAID Director (National Institute of Allergy and Infectious Diseases) stated remdesivir “will be the standard of care.” With 76 vaccine candidates under development, there is also a strong probability researchers could discover a cure for Covid by 2021. With the help of the Defense Production Act (DPA), the government is also slowly relieving critical manufacturing bottlenecks in areas such as ventilators, PPE (Personal Protective Equipment) and Covid test kits. Making testing progress is crucial because this process is a vital component to reopening the economy (see chart below).
Source: Calculated Risk
  • Economy Reopening: After I have completed all of Netflix, participated in dozens of Zoom Happy Hours, and stocked up on a year’s supply of toilet paper, I have become a little stir crazy like many Americans who are itching to return to normalcy. The government is doing its part by attempting a three-phase reopening of the economy as you can see from the table below. You can’t fall off the floor, so a rebound is almost guaranteed as states slowly reopen in phases.

What Now?!

In the short run, it appears the worst is behind us. Why do I say that? Covid deaths are declining; Congress is spending trillions of dollars to support the economy; the Federal Reserve has effectively cut interest rates to 0% and provided trillions of dollars to provide the economy a backstop; our healthcare preparedness has improved; and global economies (including ours) are in the process of reopening. What’s not to like?!

However, it’s not all rainbows, flowers, and unicorns. We are in the middle of a severe recession with tens of millions unemployed. The Covid-19 epidemic has created a generation of germaphobes who will be hesitant to dive back into old routines. And until a vaccine is found, fears of a resurgence of the virus during the fall is a possibility, even if the masses and our healthcare system are much more prepared for that possibility.

As the world adjusts to a post-Covid 2.0 reality, I’m confident consumer spending will rebound, and pent-up demand will trigger a steady rise of economic demand. However, I am not whistling past the graveyard. I fully understand behavior and protocols will significantly change in a post-Covid 2.0 world, if not permanently, at least for a long period of time. Before the 9/11 terrorist attacks, nobody suspected air travelers would be required to remove shoes, take off belts, place laptops in bins, and carry tiny bottles of mouthwash and shampoo. Nevertheless, a much broader list of social distancing and safety codes of behaviors will be established, which could slow down the pace of the economic recovery.

Regardless of the recovery pace, over just a few short months, we have already placed our hands around the throat of the virus. There are bound to be future setbacks related to the pandemic. Physical and economic wounds will take time to heal. Turbulence will remain commonplace during these uncertain times, but volatility will create opportunities as the recovery continues to gain stronger footing. Although Covid-19 has produced significant damage, don’t let fear and panic infect your long-term investment future.

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 (May 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, Zoom, Netflix , and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in Neiman Marcus, Pier 1, and JCPenney 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.

May 1, 2020 at 3:22 pm 3 comments

Recovering from the Coma

cpr

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.

cares act

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.

curve project cases

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.

tests per day

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.

deaths curve project 2

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).

travel numbers

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.

unemploymen claims

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.

Investment Questions Border

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.

April 1, 2020 at 4:44 pm 1 comment


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