What we do know... not much, really. We do know that as Senator Rand Paul has tested positive for Covid-19, and four of his Republican Senate colleagues have gone into self-quarantine. This all but assured the failure of a procedural vote (That needed 60 votes, and only met a 47-47 tally anyway), that would have at least illuminated a path for up to $2 trillion in fiscal support for a U.S. economy that has come to a standstill.
As has been the norm for a number of years, legislative leaders from either side of the aisle in DC are having trouble seeing eye to eye. The difference is that this time, time itself is of the essence as it is the average Joe and the average Jane who will suffer in real time as the political theater plays out in our nation's capitol. House Speaker Nancy Pelosi has indicated that the House may introduce legislation vastly different from the bill under negotiation in the Senate. Under normal circumstances, maybe this kind of "grind it out" politicking might be one way to reach a compromised solution. These are not normal circumstances.
What the nation needs right now is a negotiated bill that meets approval from all sides before any votes move forward, and we need this agreement last week. Catch my drift, DC? I am talking to you. American households have been knocked out of bounds by policy. Those people need a direct cash transfer immediately. State jobless benefits need to be expanded just as quickly. Loans, or even grants need to be offered to small businesses pronto. Large employers on the brink do need to be saved. Why? Because they are large employers. Does this really need to be spelled out?
I'll tell you what is going on, just in case you don't know. Talked to a small business owner last night. The individual I speak of runs five retail locations, plus a home response business. He has 40 employees. They have all taken pay cuts in order to try to keep anyone of them from being laid off, but that is where we are going. As in any day now. That is the reality of small business. What do we know? I think we do know that neither side wants to be the one blamed in the court of public opinion for withholding relief from hourly wage workers and their local or regional level employers.
Good Morning !
The failure of the Senate bill to advance on Sunday night is the immediate reason for the lower opens for global equities as well as weaker prices for equity index futures in the U.S. As the S&P 500 gave up 15% last week alone, and nearly 29% year to date (32% off of the 2020 highs), the performance across sectors has just been astonishing, and small wonder.
There are a number of key macro-economic data-points due this week, perhaps none will draw the attention though of the weekly report on initial jobless claims. For this item, most economists are now projecting seven figure numbers. Even the least damaging estimate that I have seen would break the all-time record for the series.
The Federal Reserve can buy Treasuries and mortgage backed securities. The Fed can provide support to bond dealers, and money market mutual funds. The Fed can even try to ease support into municipal bond markets and eventually maybe even corporate debt. What the Fed can not do is make the economy function, if the functioning of said economy is shut down (necessary or not) do to a public health crisis.
There is no solution to something like that. The best I think we can do is take the necessary steps to shorten the duration of the crisis. Large fiscal support (not stimulus, let us label this appropriately) is necessary, and will have to be a function of central bank financing. While in theory I truly disdain the idea of simply creating a vastly expanded national debt, and monetizing it immediately, I can not in any good conscience advocate right now for anything else. Letting folks go hungry is not acceptable. Along that same vein, there are also no acceptable losses.
Make no mistake, the need is in my opinion, far greater than the up to $2 trillion being talked about in DC. The increased debt-load will certainly drag on growth moving forward, well after the current crisis abates. There will have to a period of either draconian austerity or currency devaluation. That said, lives are at stake, and that takes priority. Just be fully cognizant that there will be no smooth transition back to an old normal.
Markets
I am asked often if markets are at, or near the bottom. The short answer is that there would be a pop on passage of a large fiscal package. This pop may very well be significant. That said, moving forward over months, there can be no healthy market for corporate equity, or corporate debt without an economy to support these markets. The best thing that could happen right now would be medical breakthrough. That said, it's not like the brightest people around the world have not been working on this since the start of the year.
You see something that prevents this virus from making people critically ill, or prevents the infection altogether, and you'll have your market bottom. Barring the potential for such a happy day, you may have seen or read what St. Louis Fed Pres. James Bullard told Bloomberg News over the weekend. Bullard sees unemployment possibly hitting 30%, while GDP could ultimately contract 50%. Far worse numbers than the already horrific estimates that we are seeing from many private sector economists. Bullard, never any kind of shrinking violet, is expected to make public comment this week on both Tuesday and Thursday mornings, so expect increased detail on these thoughts.
The Bright Sides
There are some. The U.S. Army Medical Research Institute of Infectious Disease at Fort Dietrick is on the case, producing strains of the coronavirus and helping test vaccines in an attempt to speed the process. Still, testing on non-humans could take a year and if then safe, would have to be mass produced. You'll recall that last week the NIH (National Institute of Health) reported that Moderna's (MRNA) vaccine candidate had gone into trial. Should all go well there, and that is asking a lot, making that vaccine widely available to the public could still be 18 months out.
International Business Machines (IBM) is now in collaboration with the White House Office of Science and Technology Policy to launch the "Covid-19 High Performance Computing Consortium." In short, IBM is providing the federal government with the power of the firm's super-computer in order to aid those researching the virus in the rapid development of predictive models as well potential identification of treatment. It's not just IBM, stories abound of many large firms, including, but not limited to Tesla (TSLA) , General Motors (GM) , and Hanesbrands (HBI) stepping to the plate to aid the cause.
Let's face it, awful as it is, the activation of the National Guard in the most highly impacted states is a necessary step that will have to replicated elsewhere. This increases both funding and manpower available to individual state governors staring into the crosshairs of this pandemic. Let's also try to bear in mind that the rapid growth in confirmed cases is, to some degree, learning of known cases and the density of these cases in certain areas more than it is a story of rapid transmission (though rapid transmission remains a threat.). This is the U.S. government, really just now, wrapping their arms around the situation in an early step toward understanding what needs to be done. As one quickly sees, nearly every nation on earth with a free media is going through a spike in known cases right now.
Work From Home
As working from home has become the norm for those lucky enough to remain employed, I have three favorites, that I thought I would share with you. No, I do not pretend that I have not taken a beating in recent weeks, just like the majority of you probably have. My only saving grace was that I had long been advocating high cash levels, so while I have still been tagged by the "ugly stick", outperforming markets has not been difficult (even if this fact offers small consolation.)
Remember that these lists evolve in real-time, I take action when profits seem to get too large too quickly, or losses if panic points are reached. For example, I took profits last week in MRNA. Still believe in the work. Still hope that Moderna finds a vaccine. The stock is still in my "virus group", as I look to repurchase those shares the next time that the group tumbles. I'll just sell this name in the mid-30's and buy it back in the mid-20's if I'm doing my job right.
A real winner has been Zoom Video (ZM) , as the need to work from home has never been greater. Though I cut Slack (WORK) from my portfolio when it appeared that ZM was winning this space, that name appears to have bottomed as well. Two other names, that drive significant revenue from recurring revenues and are supportive of a "work from home" culture were already elsewhere on my books. Both are significantly off of their highs, but both are out-performing broad large cap equity indices. I speak of Adobe (ADBE) , with its Creative Cloud and a suite of desktop applications. ADBE is down 24% from the highs. Microsoft (MSFT) , off 28% from its high, of course offers "Teams" software which is a direct competitor to Slack, as well as the traditional legacy software offerings such as Office. Not easy to pick names right now, but I think these are names that at least I am comfortable staying long... and the number of stocks I can say that about is not so large these days.
Economics (All Times Eastern)
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The Fed (All Times Eastern)
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Today's Earnings Highlights (Consensus EPS Expectations)
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