No More Corporate Guidance: April began the first quarter earnings report recaps for many companies, and very quickly a familiar tone began to emerge. Most companies declined to provide forward-looking guidance on revenue and profits for the remainder of the year such as Apple (AAPL) which still managed to grow during the 3-month period, January to March 2020. In the cases where companies did offer market participants some guidance, such as Intel (INTC), expectations for both the top and bottom lines were revised significantly lower from where they stood a few months ago when companies last provided updates. Others provided market participants with surprising information related to the response to the virus such as Amazon (AMZN) who said in a press release, “If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small.” They plan to spend all of their projected Q2 profits (about $4 billion) on their response to the virus in the form of COVID-19 tests for its workers and beefing up their delivery network to make deliveries in a timelier manner.
Our Takeaways: This is not that surprising given the scope of the global response to the virus. Companies have no real model to use in determining how consumer behavior may or may not be affected, nor do they (or, at least at the time, did they) have the full picture in terms of how their suppliers’ ability to get good or services necessary for conducting business would be impacted. One thing that has been an interesting development from this trend is the resurgence in the debate over whether companies should even be required to provide quarterly guidance. Proponents against this idea will of course point out that frequent corporate reporting and guidance provides timely information to shareholders, and, at least in theory, helps protect them against any malfeasance by management. However, those who support less frequent updates argue that by creating these short-term milestones where companies are judged by market participants an unintended, short-termist mindset is created for management where they are incentivized to make numbers look good for the quarter which can often be at the expense of long-term initiatives that may be better for the company. It will be interesting to see if corporate guidance becomes a permanent casualty of the Great Health Crisis (GHC), or if companies return to the pre-crisis norm once global markets have stabilized.
Jobs, Jobs, Jobs No More: The April jobs report showed 20.5 million Americans lost their job in a single month. This huge loss caused the unemployment rate to shoot up to 14.7%. Market commentators have been quick to point out that the current reality could be (and likely is) much worse at this point since the April numbers technically come from a survey conducted in the middle of the month. Since then we have had weeks where 4.4, 3.8, and 3.2 million Americans (totaling approximately 11.4 million) have filed for unemployment benefits. A point worth noting is that 78% of people surveyed view their unemployment as “temporary.” As states begin to “reopen” (discussed more below), it will be interesting to see how well these predictions hold.
Our Takeaways: There was really no surprise around how bad the April numbers were when the report hit the headlines. In fact, there were many estimating much higher levels of job loss and unemployment (although these predictions still have time to come true as the data works its way through the reporting mechanism). U.S. stock markets have been up slightly since the release of this news, which in any other time would seem totally unfathomable. We certainly are living in interesting times. What we focus on as it relates to the jobs picture is twofold. First, in the short-term, how does widespread unemployment affect other sectors such as retail (consumer spending) and real estate (everything from rent payments, to mortgages, home purchases, etc.)? And second, in the intermediate and long-term, how long does it take for the lost jobs to be recovered or replaced? The first piece is important for obvious reasons such as consumer spending which, particularly in the U.S., drives a huge portion of the economy. Even if people are just inclined to spend less (meaning they have the money, but choose not to spend or spend as much) this can create a negative chain reaction starting in retail/consumer facing sectors that works its way up the supply chain. The rate of the second piece is important because it gives a sense of how long the current trend may last. For example, if we see consumers are not spending as much right now, but we are (at the same time) continuing to see net job loss, then that would seemingly make sense. Conversely, if we see net job gains and a return in consumer spending, then that also tells us something of particular interest. Yet, where we can gain the most insight is if either of these trends are coming opposite one another. That tells us that either consumers have adjusted their long-term economic conditions (and therefore are saving more) or there is some significant, exogenous force encouraging them to spend - both of which give useful feedback for the likely state of the economy going forward.
The Great Reopening: As of the writing of this letter in early May 2020, 18 of the 50 states were “reopening”, or were beginning to “reopen”, part or all of the economic sectors that were deemed “non-essential,” or otherwise had operational restrictions placed on them. At the peak of the “lockdown” in the U.S., it was estimated that upwards of 95% of citizens were subject to some form of restrictive order, commonly referred to in many states as “stay-at-home” orders. However, with new daily cases and deaths attributed to COVID-19 flatlining, the pressure has been mounting to get businesses back open as unemployment rates, and new and continuing jobless claims have been skyrocketing over the last several weeks. As mentioned above, with tens of millions of people out of work, the prospect of having Great Depression level unemployment is becoming a very real possibility (if it is not already the case as some market commentators - notably the St. Louis Federal Reserve - have estimated), so it appears that, at least for now, some states, particularly those who have not experienced much of a direct impact from the virus, are seeing further “lockdowns” as being more costly than not at this time.
Our Takeaways: In addition to our usual disclaimers, it is probably also worth noting that no one at Gold Sail is a licensed medical professional, epidemiologist, or experienced/trained in any field of medicine, biology, anatomy, chemistry, or the like. That being said, we do pride ourselves on being excellent data gathers and analyzers, and it is through that lens that we say it is now becoming clear that COVID-19 has fortunately had an impact somewhere between 10 and 50 times less than what was initially anticipated. There were some very good reasons, albeit somewhat misguided, at the beginning of the outbreak to approach this novel coronavirus with a degree of caution. Furthermore, we may never be able to fully determine the effectiveness of decisions by policymakers globally to “lockdown” their countries and to what extent these decisions made everyone better or worse off in the long run. Although, one thing was made abundantly clear - “locking down” large portions of any capitalist society breaks the fundamental mechanisms upon which it is based in a completely unsustainable manner. In a very short amount of time, the U.S. government was able to legislate over $2.2 trillion dollars in “relief” money to combat the impact these “lockdowns” have been having on the economy. The Fed, for its part and in conjunction with the Treasury, was able to conjure up several times that in liquidity to provide support for various financial markets. And all of this is still not being viewed as enough. As of this writing, several additional relief bills are being passed around Congress with numbers ranging from $3 to $10 trillion just in direct payments to taxpayers - not to mention the possibility of many more trillions to state and local governments who have yet to receive any direct relief money. It should be clear that continuing to have the government provide relief to citizens, companies, and other public entities, while arguably necessary in the short-run, is not compatible with our economic model. As Tesla CEO, Elon Musk, pointed out on a recent podcast in reference to the notion that you can “just legislate money and solve these things,” that “several people have this absurd view that the economy is a magic horn of plenty...if you don't make stuff, there's no stuff.”
Oil Goes Negative: Mid-April introduced some unprecedented uncertainty in the global oil markets. Last month we noted how a price war between Russia and Saudi Arabia, combined with the expectations for a significant decline in the global demand for oil led to a huge drop in prices during March. This rout was further extended in April where contracts for May delivery went below zero on a number of occasions going as low as about negative $40 per barrel on the NYMEX exchange. Unusual pricing led to many market commentators questioning the functioning of the oil exchange markets, but Chicago Mercantile Exchange CEO Terry Duffy said on CNBC’s Closing Bell the exchange worked “to perfection.” In fact, according to Duffy, the CME had “worked with the government regulators two weeks prior to making our announcement that we were going to allow negative price trading, so [it] was no secret that this was coming at us.”
Our Takeaways: Mr. Duffy’s assessment of market functionality is clearly correct. While atypical, it is certainly possible for markets of any kind to transact in a manner inverse to their normal functionality. In this case, the traders who held futures contracts for May oil delivery were put in a position where they had to pay other market participants to relieve them of the obligation to take delivery of the oil. Normally, the underlying assets for a futures market have intrinsic value on which the contracts are exchanged. Nevertheless, in this case, the traders who had the obligation to take delivery of the oil did not want to or could not, and therefore were willing to pay for someone else to shoulder that obligation. Put another way, the traders valued not having to take delivery greater than the intrinsic value of the underlying asset. Or, in some cases, they physically were unable to accept delivery and therefore had to pay someone else for the cost of doing so. Prices have since stabilized back around March levels, but until a supply/demand equilibrium is achieved, we expect there could be further dislocations such as what we saw in April in the oil markets going forward.
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