They are letting every company live. That's what you must think when you see the biggest percentage gainers, companies like Carnival (CCL) , Norwegian Cruise (NCLH) , Discover (DFS) , American Air (AAL) and United (UAL) .
Until this week it wasn't clear what the Fed and the administration had in what seemed like a peripatetic, arbitrary plan to reverse the rising tide of unemployment.
With the payroll protection plan they intend to protect small business as best as they can even if it means that they ended up funding some companies they shouldn't. Shame has brought some of the money back from large public companies that violated the spirit of the plan. Jawboning by the Treasury Secretary on CNBC did the rest.
When you see the stocks of the cruise lines, the marginal credit card companies and the airlines fly then you have to understand that the Fed is going to backstop loans to any of those companies. We know that because the Wall Street Journal already exposed that the Fed got directly involved with backstopping the most visibly troubles cruise line, Carnival, which was the signal that it would help anyone else -- cruise line, airline, credit card, with some quiet debt guarantees too. They would be the buyer of last resort if necessary. That's how Southwest Air (LUV) was able to sell 70 million shares at $28.50, a vastly oversubscribed offering, and then see the stock zoom to $31.50, and a ton of bonds, showing investors that it's worth putting in for what the distressed issuers put out.
This is huge, people. Huge.
What the Fed and Treasury are saying that these businesses, often profitable businesses, through no fault of their own have been threatened, perhaps even with bankruptcy, which would produce a colossal number of layoffs.
Rather than have to put all of these people on the dole, the Fed and Treasury has said it's better just to keep these companies alive until the virus runs its course or is stopped by vaccines or is less deadly because of anti-virals like Remdesivir.
The ripple effect is extraordinary. The bank stocks had been a one way ticket to hell. But now they are rallying back because for all we know the Fed will backstop all of the loans they are making to companies that would normally fail. If that's the case then the tangible book value is real and even though there will be credit card and mortgage debt that goes unpaid, it's not the end of the world. No, the banks are not allowed to buy their own stocks. Yes, the virtual guarantee makes it so you can. We own a bunch for Action Alerts PLUS, my charitable trust, and I couldn't figure out a way for them to come back short of ending the pandemic. Now we know they can come back because the loan losses will be much lower.
It's not perfect. We know many of the small businesses will fail when the PPP runs out because physical distancing makes them un-economic. Good restaurants try to put in as many seats as they can, stopping only if patrons can't hear their own table for the one next to them.
Now you have to take out tables and specifically show where people can stand at the bar. I would say the vast majority of restaurants that did okay or even thrived before the pandemic would never have been started if their owners knew that they can't become a hot place and get a crowd. That's the economics of the business.
Again though it is easier to keep them alive hoping for a vaccine than it is having the biggest percentage of unemployed in history.
You may think it is unfair that these companies get to live. After all it is capitalism. I look at it differently. We didn't know there would be a novel coronavirus coming to destroy the nation's business while it raged through the population. Had we known they could have occurred then you would have insured the business against them.
Consider the Fed and Treasury as ad hoc insurers demanding no premiums. Maybe it ends up being a small price to pay to avoid a depression.