I don't remember what day it was. Already well aware that the coronavirus was spreading globally, but really still more concerned about the volatility that had permeated financial markets, I was out and about.
I visited my local office supplies store. I do, after all, run a small business. The first thing I noticed was the paper goods aisle. This is an office supply store, not a Costco (COST) location, and not a Walmart (WMT) . The toilet paper and paper towels were gone. There was one package of facial tissue left. I grabbed those. There were two boxes of K-cups left for coffee machines. I grabbed one and left one for the next soul who walked in.
Then I walked up to the register. A young fellow, with an obvious flair for individual style, stood behind the counter. He had long hair, some visible jewelry, and I noticed that every other finger nail had been painted black. I guess that's why I remember him. I also remember thinking that this poor kid probably doesn't even know that he's about to lose his job, and that he probably should not be dealing so closely with the public. He was upbeat. He wished me good fortune upon the completion of our transaction, and I returned that wish. I meant it. I'm sure he did too.
The Next Shoe Drops
Monday. The Fed had just taken aggressive action on Sunday afternoon. Another emergency reduction made to the Fed Funds target. the return of quantitative easing in earnest. Financial markets apparently still screaming out for help. It would be easy to miss a monthly regional Fed survey covering the state of the manufacturing sector within that district. The Empire State Manufacturing Index for March printed not just down, but deep in the hole. New Orders, Shipments, and even labor-based components such as number of employees and average workweek had all reversed trend and printed in a state of contraction.
Tuesday. The Census Bureau reports February data for Retail Sales at the national level. Headline? Ex-autos? Either way, a nasty miss, led by a minus sign when measured month over month. Sure, the weekly Redbook number, also released on Tuesday, did show incredible growth. We all know that this growth was the output of panic and fear, as individuals felt compelled to hoard. I do not cast blame. I get your fear. I state fact. My point here would be that this is the tip of an iceberg that from the viewpoint of a statistician will likely get much, much worse.
Why that is would be easy to figure. The U.S. economy is/was an economy driven by the consumer, an economy that thrives/thrived on an incredibly robust service sector. We all already know several folks that, if they have not already lost their jobs, have been asked to not come in... indefinitely... And for the un-salaried, that means no income in an environment where one can not just go find another job. Even if they did find a "Now Hiring" sign in a window, the individual would have to weigh a number of risk factors such as exposure to fellow members of the human race.
This is one reason why the Fed has been so aggressive, along with the now-very-obvious effort to maintain liquidity everywhere that our central bankers see a hitch in the wheels of proper function. This is one reason why every time there is a report seen in the news regarding the still-evolving fiscal package, that package is larger and more complex.
The danger now comes in the form of not being able to meet normal, monthly household bills. For individuals. For families. The very real danger extends to small businesses. This is who employs most Americans. The convenience store down the street, or the pizza place around the corner. Not the multinational corporation.
These smaller businesses will not make payroll, or if they can make payroll, it will be because they have been forced to reduce that payroll. That small business owner knows that he/she is looking at significantly reduced receipts that will shrink further, with no idea how to plan capital expenditure moving forward.
If there is any positive here, and there really is not much in the way of positivity, it appears -- at least as I peer out my blackened office window -- that political leaders on both sides of the aisle seem to have started cooperating. They actually do seem to understand that this national/global crisis is far more daunting than any continuance of petty politics. There are, of course, exceptions -- but far less so.
Treasury Department Secretary Steven Mnuchin has already come to an agreement with Speaker Pelosi on the initial emergency spending bill worth $8.3 billion. The second bill, now with a price tag of greater than $100 billion and which would enact certain guarantees for sick leave, is expected to pass, but has not yet received Senate approval. The third bill, and this is the big one, for now has been sized anywhere from $750 billion at the low end and quite possibly as large as $1.3 trillion. A positive part of this fiscal package would be checks for perhaps $1,000 to be sent to nearly every American. (Psst... the package probably needs to be a lot bigger than $1.3 trillion.)
While I know that this would help so many in the short-term, the sad reality is that every head of household, while grateful, knows that more than that $1,000 is already spoken for. What then? What if a large percentage of the population is simply unemployed, or unemployable for several months? For his part, Senate majority leader Mitch McConnell has stated that the upper body of the U.S. legislature will remain in session until all three bills are passed.
The Treasury & The Fed
The severity of this still-building crisis has never been lost on Jerome Powell, nor Steven Mnuchin. The Fed Chair deserves credit for being no shrinking violet in the face of broadly halted economic activity. It seems that every day, several cracks appear in the pavement, or some particular market will freeze, and the Fed has been aggressive, plugging holes as they appear, in real-time. You will not hear me knock their effort any time soon.
The action, or lack thereof in recent weeks, in markets for corporate paper had become a problem. This market froze up as corporate demand ratcheted higher for short-term cash. This, in turn, forced money market funds to draw back on the offer side of that market. This is important because this is how many corporations fund short-term operational needs -- including payroll. The U.S. Treasury, in response on Tuesday, provided a potential $10 billion to fund a Commercial Paper Facility where the Federal Reserve bank would participate through the New York Fed as purchaser of three-month commercial paper. This, for now, will eliminate some of the risk that issuers will not be able to roll over maturing short-term obligations. You have no idea how key that is to sustaining any economic continuity.
I go on. Tuesday evening. the Federal Reserve Board reintroduces yet another "crisis era" tool, through a Primary Dealer Credit Facility (PDCF). The intention here is to allow primary bond dealers (there are 24 of them) to pledge securities for up to 90 days in exchange for cash. The Fed will accept a wide array of securities as collateral, while charging the primary credit rate (That rate, you'll recall was reduced from 1.75% to 0.25% on Sunday) for these loans. By wide array of securities, I refer to corporate bonds, municipal bonds, asset-backed securities, commercial paper and even equities, though due to the volatility in equity markets, should a dealer use equities, they are still on the hook for the balance should those equities decline in value.
The idea here is to smooth out function across Treasury markets, thus supporting the credit needs of businesses and households. Why are longer end of the curve Treasury securities selling off through the early morning, even as equity index futures remain "limit down"? Until the next crack in the system shows up, my guess is that we have just never had to price in a global economic collapse of this magnitude before. Longer-maturity sovereign debt is selling off around the globe on Wednesday. Even gold is lower. Again. Redemptions create a need for cash in times like this, impacting anything that might be liquid enough to move. Cash is now king. Until cash is not.
Trading These Markets
Too late to sell? Not if markets keep going lower. There is no such thing as earnings guidance at this point. Oh, sure, one can look at charts. I do. One can look at trailing earnings. I do. One also knows that past performance is no promise for tomorrow. Especially now. People will change. Habits will evolve. The entire employer / employee relationship in American society may change drastically. Will corporations learn to need fewer people? Will corporations learn to place a higher value upon loyal employees? If we only knew. How about the role of government?
Americans have long been independent thinkers. Does that change now that government, due to a pandemic, is forced to curb the entire economy, which was performing pretty darned well at the time? Does the citizenry, now reliant upon that same government, then cling to this reliance moving forward? That can go both ways. I don't know. the same thinking might be applied to large corporations.
As I scan my vast book of charts, which is now many times larger than my actual book of holdings, I see two names that I have not seen long in quite some time that have taken tremendous beatings. McDonald's (MCD) and Boeing (BA) . Are these names cheap down here? They are if business ever returns to normal. I would think McDonald's to be the better business right now, as long as those drive-thru lines remain open. Boeing, after all, has had to draw upon its $13.8 billion loan facility in full. The 737 Max? Does it matter right now? Boeing has already gone to the government for help as the firm's credit rating has been downgraded at S&P Global from A- to BBB, leaving Boeing just two notches above junk status.
All that said, Boeing has always been a great U.S. manufacturer, a large employer -- placing laborers in good jobs -- and one side of a global duopoly, at that. As I said, both of these names are dirt cheap at these levels in normal times. Normal times will not return next week, or next month. That's being hopeful. If there were ever a corporation likely to receive a lifeline from the federal government, I would have to think Boeing to be a candidate that would be at the top of any list. Where to buy this name? Given Boeing's place in our nation, does anyone else maybe think that America's enemies might be thinking the same thought?
Economics (All Times Eastern)
08:30 - Housing Starts (Feb): Expecting 1.51M, Last 1.567M SAAR.
08:30 - Building Permits (Feb): Expecting 1.5M, Last 1.55M SAAR.
10:30 - Oil Inventories (Weekly): Last +7.664M.
10:30 - Gasoline Stocks (Weekly): Last -5.048M.
The Fed (All Times Eastern)
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (GIS) (0.76)