Financial medicine. Stocks rallied yesterday as the administration shared its plans to heal the sickening economy. The Fed continued to roll out stimulus for banks and added a package for corporations as well.
N O T E W O R T H Y – SPECIAL EDITION
What happened yesterday:
Stocks started yesterday’s session bouncing around the zero mark after their epic Monday drubbing but soon rallied as some bold traders rushed in to pick up some perceived bargains. President Trump held a press conference in which he, Treasury Secretary Stephen Mnuchin, along with other Administration officials gave an update on the virus and, more importantly (to Wall Street), described an economic stimulus plan. The plan would amount to some $1.2 trillion in stimulus to companies and individuals. The plan, if approved, would eclipse the originally approved $700 billion TARP program introduced during the financial crisis in 2008. On a high level, the package is expected to include $300 billion in small business aid, $100 billion in aid for airlines and other affected companies, and $550 billion in aid for individuals in the form of tax cuts or direct payments. The market gave its quick approval by rallying stocks but to go forward it would still need approval from Congress. The Fed was also active yesterday conducting massive repo transactions to increase lending liquidity, adding a primary dealer discount borrowing window similar to the ones used by banks, and by reintroducing a commercial paper lending facility. Let’s unpack some of that in the Q&A below.
Q: Did I hear that correctly, did Mnuchin say direct payments to individuals? A: You sure did, the Administration is proposing to pay most Americans something like $1,000 each. It is not clear which ones will actually qualify but more info will trickle in during the next few days and I will share them as soon as I can. You may have heard the term “helicopter money” which was largely used by academics for years to describe schemes where governments would give money… cash money… to citizens to stimulate the economy rather than attempting all sorts of indirect, trickle-down, and mostly ineffective schemes. The theory is that if you give Americans a tax cut, which means more net income in their paychecks, they would simply save it rather than spend it. In this case savings is not good because the goal of the cut is to stimulate spending. Remember my oft-repeated fact that the US economy is driven by consumer spending, amounting to roughly 2/3 of GDP. That is clearly what is needed here and the Administration is proposing to do just that.
Q: What can the Administration do to help struggling industry? A: WHILE YOU SLEPT, United Airlines announced that it was cutting 85% of international flights and 45% of domestic and Canada flights in April. That is going to come at a hefty cost to revenues, but it is just the latest, and to the date most aggressive, move by a struggling carrier. For their part, the airlines have already lobbied for a $50 billion bailout package. If you remember back to the TARP days, bailouts like these saved many large banks as well as GM and Chrysler. The aid came in the form of special loan facilities engineered to get the companies back on their feet. And that it did, as all recipients have done well in the wake of the crisis… some better than others. It should be noted that all loans except 2 were repaid and one of those not repaid (Citicorp) converted into common equity which was sold at a profit.
Q: What is the commercial paper lending facility? A: Commercial paper is a borrowing instrument used by many companies for short term cash. They are unsecured short term loans typically underwritten by banks and sometimes offered to the public. As you might have guessed the appetite for these loans has gone down significantly as the Coronavirus crisis has grown, putting massive stress on companies that rely on them. First to be clear, companies that use commercial paper are typically the highest quality companies and they don’t use them to keep their business afloat. Proceeds from these loans are used for short term cash needs like bridging the gap between current obligations and high quality receivables which are yet to be received. The Federal Reserve announced a facility to underwrite commercial paper which amounts to its lending directly to companies.
Q: Does this mean that the crisis has hit bottom and it is time to start buying stocks? A: No, the crisis is far from over. While stocks rallied yesterday, a one-day bounce does not a bull market make. There are still plenty details which have to be made clear about the stimulus package which still needs Congressional approval. Any funds would still have to be distributed and utilized before we even know if the package will be successful. Unfortunately we still don’t have any clarity on what the real financial effects on companies will be. In the weeks ahead, we can expect more tangible guidance from companies which has to be carefully studied before selecting investment opportunities. Further, the market itself is still quite volatile, fluid, and emotional. I would suggest that until investors get a better handle on the progress of healthcare industry’s war on the virus, markets will continue to trade emotionally. In other words, it will most likely be the Doctors, Healthcare Professionals, and Scientists that will turn the market around, not the politicians… though the aid surely will help shore things up for families and companies.
– Housing Starts are expected to have declined by -4.3% versus a decline of -3.6% in the prior month.
– Building Permits may have slipped by -3.2% compared to last month’s +9.2% surge.
– Most of these numbers represent conditions in February which was really prior to the more significant slowdown associated with closures and quarantines.