Cashflow and monthly operating costs are key

Wed, 8 Apr 2020

AFTER watching Prime Minister Tan Sri Muhyiddin Yassin’s announcement on the enhanced stimulus package for SMEs, my various chat groups came alive with all kinds of comments and opinions. In particular, one chat group which comprises experienced retired senior bankers, entrepreneurs and senior business journalists (all about the same age of 60 and above) stood out for its wisdom and sharp foresight.

When asked about potential SME casualties in this economic crisis, a senior banker commented, “TH... I went through four deep recessions/business cycles, ie, 1987,1997,2007/8, and now 2019/20. Same like you, and no wiser than my friends in this group.

"My gut feeling is that there will be more casualties this time around because the pandemic is world-wide. But like all recessions, the economy will turn around. It will not likely be a V-shaped recovery. We all have to tighten our belts, cut losses, and make sure we survive to enjoy the recovery.”

He is correct, as this recession is like no other. It is the first time that almost all economic activities have stopped in all the major countries in the world at the same time. There is a supply shock as the supply chain has been completely disrupted to a standstill.

There is demand shock as sales of most industries have fallen off the cliff to almost zero during lockdowns, and there is capital market shock as global stock markets crash.

Predicting the timing of the recovery is extremely difficult as we now have to deal with a virus pandemic with no solution in sight. Yes, a complete lockdown can flatten the curve but the risk of a re-occurrence of a new wave of infections is very high when the movement control order (MCO) is lifted. Economic activities have to resume, so we will have to practise some form of restricted MCO for the next six months.

And this affects business.

Sales will continue to be very soft as consumption drops due to lower consumer confidence, higher unemployment and reduced personal income, as widespread paycuts are implemented. As in most recessions, not all businesses will do badly. From experience, consumers tend to trade down, ie, purchase lower-priced alternatives to sustain their lifestyle. Hawker stalls will continue to do well, while higher-priced restaurants will suffer.

The logical conclusion for SME owners is to focus on surviving the next six months. Once the moratorium on your loans ends in October, will you still be standing with the ability to start repaying them? Will you have sufficient cash flow to participate in the economic recovery which will probably start in 2021?

Your survival strategy till October will have to focus on two key issues - 

• cash flow and 
• monthly operating costs.

Managing cash flow 

> Sufficient banking facilities - Since all your loans have been placed under a moratorium (meaning that you won’t need to repay them for the next six months) by your bank, you will need to check if the balance amount of banking facilities will allow you to trade normally.

If not, quickly apply to your bank for additional trading facilities. If you have spare cash, it might be wise to start paying down your loan when you can and not wait till the end of October.

> Cash reserves - You will need to cover March and April losses from your cash reserves. Reduce your losses for the next five months through aggressive cost-cutting. Most businesses will face delayed collections so cash reserves, if available, will be most useful to cover cash-flow deficits.

> Wage subsidy - Expect delays in your claims as the government will not be able to cope with the massive influx of applications. If approved, expect delayed payments of at least a month in your cash-flow planning. The wage subsidy is only for three months but you need to survive the next six months. So, plan accordingly.

> Corporate tax - For companies that will definitely declare a loss in 2020, my advice is to write in to the Inland Revenue Board informing them that you will declare zero profits for the financial year-end 2020, and suspend all tax payments for future projected profits. There is no point loaning the money back to the government when you need it more to survive.

> Deferred EPF payments - Just like bank loans, EPF payments have been deferred for six months when you will have to restructure your payments with the agreement of the EPF. Do not consider this as savings. It goes into accounts payable, interest-free of course.

> Rental subsidy - The announced tax deduction for rental rebates of 30% for three months from April to June will be effective in encouraging private-sector landlords to implement only if double deduction is allowed. In times of need, business partners should help one another. This is how the Chinese business community has been built over the last 100 years in Malaysia.

This is probably the best Bank Negara strategy to help preserve cash-flow liquidity for businesses to continue trading. By allowing the banking system to prevent classifying non-payments after three months as non-performing loans (NPLs), businesses can breathe and continue trading for another six months. Individuals too have more cash in hand to offset the paycuts that will definitely happen. By end-October, Bank Negara must allow another restructuring of existing loans by another six months to businesses who will benefit from the economic recovery.



Reduce monthly operating expenses.

The survival of your company depends on the amount of cash reserves you have to fund losses in March and April and also losses to be incurred from May to October. So, it is imperative that losses are kept to a minimum in the next five months.

Losses are calculated after deducting expenses from net sales. Net sales is gross sales less cost of sales. So, if net sales are down, expenses must come down proportionately, which in this case might not be possible for companies which suffer a big drop in sales.

While your sales revenue is dependent on external factors which are beyond your control, to a major extent, you are in control of your own expenses. For most service companies, payroll forms the biggest portion of the monthly expense. This is normally followed by rental or in some companies, advertising and promotion.

> Rental - At the maximum, expect your landlord to give you a rebate of 30% from April to June. This means that you can factor into your expenses a reduction of 15% in rental payments for the next six months.

> Advertising and promotion - It has been proven in the last recession that companies that continue advertising and conducting promotional activities will sell more than their competitors who stop completely. You are advised to work with your media suppliers to get more bang for the same budget. I am sure the media companies will support you, as they too need sales and have excess inventory to give away.

> Office expenses, allowances and claims - Cut all the unnecessary frills that you can ill-afford. Not much but every penny counts. Spend some on healthcare, though, to look after the team.

> Wages - I have stopped comparing with the Singapore government’s wage subsidy plan because our government does not have sufficient reserves.

With the latest proposed enhanced wage subsidy, it looks like SME owners must take matters into their own hands. Some companies will enjoy reasonable support of up to 30% subsidy on the wage expense, while some will only enjoy 5% to 10%.

Do remember that this is only for three months. Why the government is not exempting EPF payments for six months is beyond my understanding. This will only translate to a higher paycut across the board.

I have an investee company where the senior management has given the board of directors a revised sales forecast, with sales revenue dropping by 20% against the 2020 budget. But no corresponding reduction in expenses was given.

I have replied that this sales forecast might not be achievable and that we should start looking at reducing our expenses, mainly the payroll, which is a massive portion of it.

I would recommend a minimum 20% paycut across the board, freezing all intakes, probably retrenching a few positions deemed not necessary and linking the paycut to sales. If the sales for May to October drop by more than 50%, then the paycut will be more severe like 30%-40% for those who earn above RM4,000. However, if sales recover to its original budget then the salary will revert to its original amount.

Different companies will have to tailor different strategies, depending on the sales performance of the company up to October. For companies where payroll forms the bulk of expenses, detailed human resource requirements must be considered.

Where possible, the fixed salary cost should be changed to a variable cost, as a percentage of sales. This will help minimise losses to a great degree and at the same time save jobs and keep your key employees employed.

Some form of right-sizing is required now. Where possible, eliminate jobs to reduce 10% of your current payroll. Then undertake a paycut of 20% to make total savings of 30%. Then, submit for wage subsidies to the government if your company qualifies, which will probably save you another 5% to 10% of your existing payroll. With immediate savings of 35% to 40% from payroll deduction, you can take your chances with the remaining five months, of which April is already a complete loss for you.

Then my entrepreneur friend asked, “What if the employee does not accept a paycut?”. My answer: “Nobody can stop this employee from leaving the company on his own free will.”

At this moment of truth, SME owners’ only objective is to save the company from going bust. Minimise the losses so that you can stretch your reserves till October.

At the next moment of truth in October, SME owners will have to decide whether to continue or close their business. Don’t forget that you still have deferred EPF payments and the loans with interest to pay off. You can avoid bankruptcy if your business is still alive in October 2020.

From one battle-scarred entrepreneur to all the young entrepreneurs and SME owners out there: “Stay alive today to fight the next battle tomorrow. And you will win again.”

Views expressed here are the writer’s own.



https://www.thestar.com.my/business/business-news/2020/04/08/cash-flow-and-monthly-operating-costs-are-key

When, and How, Does the Coronavirus Pandemic End?

By James Paton
April 4, 2020

With confirmed cases of Covid-19 globally exceeding 1 million and more countries going into lockdown to slow the pandemic, the emerging question is: “When will this all end?” The answer depends in large part on uncertainties about the novel coronavirus that causes the disease, including whether you can get it more than once and how quickly the world’s scientists might produce a vaccine. The cost and benefits of a prolonged shutdown and what different countries can afford, from both an economic and political standpoint, are factors, too.


1. So how does this end?
There’s a consensus that the pandemic will only end with the establishment of so-called herd immunity. That occurs when enough people in a community are protected from a pathogen that it can’t take hold and dies out. There are two paths to that outcome.

• One is immunization. Researchers would have to develop a vaccine that proves safe and effective against the coronavirus, and health authorities would have to get it to a sufficient number of people. 
• The second path to herd immunity is grimmer: It can also come about after a large portion of a community has been infected with a pathogen and develops resistance to it that way.

2. How do we manage until then?
For many countries, the strategy is to lock down movement to dramatically slow the spread, closing businesses and schools, banning gatherings and keeping people at home. The idea is to prevent a huge burst of infections that overwhelms the medical system, causing excessive deaths as care is rationed. “Flattening the curve” staggers cases over a longer period of time and buys authorities and health-care providers time to mobilize --

• to build capacity for testing, 
• for tracking down contacts of those who are infected, and 
• for treating the sick, by expanding hospital facilities, including ventilators and intensive-care units.

3. When can restrictions loosen?
The public shouldn’t expect life to return to normal quickly. Lifting restrictions too early risks inviting a new spike. Authorities in China began to re-open the city of Wuhan, where the pandemic began, two months after it was sealed off from the world, when transmission had virtually halted. But China’s measures were stricter than anywhere else so far, and at least one county has gone back to a lockdown. England’s deputy chief medical officer, Jenny Harries, said lockdown measures there need to last two, three or, ideally, up to six months. Annelies Wilder-Smith, a professor of emerging infectious diseases at the London School of Hygiene and Tropical Medicine, recommends restrictions stay in place until daily cases drop consistently over at least two weeks.


4. Then what?
A road map authored by a group of U.S. health specialists including former Food and Drug Administration commissioner Scott Gottlieb calls for an intermediate stage in which schools and businesses would reopen but gatherings would still be limited. People would continue to be encouraged to keep at a distance from one another, and those at high risk would be advised to limit their time in public. If cases begin to rise again, restrictions would be tightened. Their report, published by the pro-business American Enterprise Institute, is arguably more optimistic than the future envisioned by researchers at Imperial College London. Their models suggest that for at least two-thirds of the time until herd immunity is established, all households would need to reduce contact with schools, workplaces or the public by 75%. In any case, the widespread availability of testing is important in this stage. At the heart of the U.S. plan: at least 750,000 tests per week.


5. Why is testing so important?
This virus is wreaking so much havoc, not because it’s especially lethal, but because it’s insidious; many who are infected are well enough to go about their daily business, unwittingly spreading it to others. That makes it vital to test for infection widely in the population, and to test everyone with symptoms. That way, those who are infectious can be put in isolation and everyone they’ve had close contact with while contagious can be tracked down, tested and if necessary isolated as well, limiting the spread in the community. Another kind of test looks for antibodies to see who has already beaten the virus and is thus unlikely to be re-infected, at least for a time. Once widely available, such tests might enable people who test positive for antibodies to move about more freely.


6. Why does where you are matter?

Authoritarian countries such as China can impose stricter controls on movement and more intrusive means of surveillance, such as house-to-house fever checks, tracing and enforcement of quarantines, and are less vulnerable to pressure from businesses and popular opinion. That gives them powerful tools to keep the virus in check, so long as they are vigilant against imported cases. That’s a more difficult proposition for other nations. The poorest countries can less easily afford the economic losses caused by prolonged restrictions, and often don’t have the health infrastructure for extensive surveillance.


7. How long will a vaccine take?
Dozens of companies and universities around the world are working on it, but there’s no guarantee they will prevail. Vaccine development normally is a long and complex process that includes years of testing to ensure shots are safe and effective. In the coronavirus fight, some of the players aim to deliver a vaccine in 12 to 18 months, an extraordinarily ambitious goal. As well as using tried-and-true approaches, scientists are relying on new technologies, like those that add viral genetic material to human cells, inducing them to make proteins that spur an immune response. Some vaccine specialists believe governments, citizens and investors should temper their optimism. It’s not clear if the methods will work, that the timelines will be met or that companies will be able to manufacture enough shots.


8. What about the second path to herd immunity?
First, it would occur only if recovering from an infection leaves people with lasting immunity. It’s not yet known if that’s the case with the novel coronavirus. The portion of a population that would have to be exposed to the virus to establish herd immunity is also unknown. Generally, it’s high, for example 75% for diphtheria and 91% for measles. Patrick Vallance, the U.K. government’s chief scientific adviser, estimated the figure at 60% in February. How long it would take to reach the necessary threshold would depend on measures governments impose in response to the pandemic. Without tight restrictions, it would be faster yet come at a steep cost in illness and deaths as health systems would be overburdened. Some research assumes the actual number of infections is much higher than the confirmed cases. If that’s true, countries are closer to herd immunity than we know.


9. Are there other variables?
We could get lucky, and the virus could fade with the onset of summer in the northern hemisphere, where most cases are, just like outbreaks of influenza subside with seasonal changes. But it remains unknown whether warmer weather will play a role. Even if the outbreak wanes, it could return in the fall. Some are pinning their hopes on an ultra-effective therapy or a cure.



The Reference Shelf
Related QuickTakes on what you need to know about Covid-19, how it transmits, the quest for treatments and a vaccine, and the seasonality question.
Bloomberg News looks at the hurdles to development of a coronavirus vaccine.
The roadmap published by the American Enterprise Institute and the modeling done by Imperial College London.
An article in MIT Technology Review argues that the pandemic will change our lives, in some ways forever.
A commentary in the New York Times suggests the near future will be like a roller coaster ride.

https://www.bloomberg.com/news/articles/2020-04-03/when-and-how-does-the-coronavirus-pandemic-end-quicktake

COVID-19 Symptoms - Here is what you need to know. Please Observe Social Distancing and Stay at Home.

The lockdown only buys us time: to really defeat the virus we need mass testing now

Instead of endless mass isolation or just waiting for a cure, the UK needs a data-driven, targeted approach to coronavirus testing


SD Biosensor factory in South Korea

‘SD Biosensor, a company in South Korea, is making 350,000 test kits a day, but it is prioritising the US, United Arab Emirates and Indonesia.’ Photograph: Ed Jones/AFP via Getty Images


After squandering valuable time to prepare for the spread of Covid-19 in February and the first half of March, the government made a dramatic U-turn and put the country into lockdown two weeks ago. But amid the drama of shutting down our entire way of life – with kids out of school, shops closed and millions working from home – we appear to have forgotten that lockdown itself is not the solution to coronavirus. It is simply a means of slowing its spread and buying time – while we race to catch up.

The real question facing Britain now is how to most effectively make up for lost time: what can we really do to fight this instead of simply cowering in our homes and waiting for it to blow over? If things carry on much as they are now, one possible scenario is that we will find ourselves in an endless cycle of lockdown and release over the next year – while the population slowly acquires the virus and hopefully gains immunity.

From Chinese data reported to the World Health Organization, we estimate that

• roughly 80% of people who contract the virus will not need medical attention and will have mild symptoms (largely children and people under 40); 
• 14% will have severe disease including pneumonia;
•  5% will require critical care for respiratory failure, septic shock and multi-organ failure; and 
• 1-2% will die regardless of medical care. 

Therefore, the challenge for the government (in the absence of a vaccine or treatment) is to ensure that healthcare capacity is not overwhelmed; that while the virus is transmitted throughout the population, the 19% who require either hospitalisation or an ICU bed are able to access that care and survive.


The burden on the NHS will be tremendous, especially given concerns about lack of appropriate personal protective equipment, and this will have knock-on effects on other services it offers: routine surgery, cancer treatment, the ability to deal with emergencies such as heart attacks and strokes. The decision whether to extend lockdown will be made by looking at

• the modelling of NHS capacity in three weeks’ time as well as 
• assessing public willingness to comply.

In an optimistic version of the above, over the next three to four months an antiviral therapy would be discovered while we hold out for a vaccine. Antiviral therapies would give doctors an additional tool to treat critical patients with, while vaccines would provide a prevention measure so individuals can build up immunity and the necessary antibodies before being exposed to Sars-CoV-2, the virus that causes Covid-19. Effective therapies have helped with how we deal with HIV/Aids (antiretrovirals), malaria (antimalarials) while vaccines have been effective against measles, mumps and rubella. Repurposing a drug that has already been tested for safety in humans would be the quickest path, and clinical trials are taking place for antimalarial cocktails (chloroquine and hydroxychloroquine), remdesivir and plasma therapies, which involve extracting antibodies from recovered patients and injecting them into ill patients.


The endgame would be a vaccine that is widely available, effective and affordable. Currently there are about two dozen vaccine candidates, with several being tested on animals and one imminently due to begin testing on humans. However, time is the problem, as vaccines require three phases of clinical trials to test for safety, side effects and whether they actually work. It will take about a year to 18 months even if all goes to plan – and even then, given all countries would be looking to acquire the vaccine, manufacturing enough of it would present a further challenge.

But instead of quarantining the entire population (and assuming anyone could be carrying the virus), the most pragmatic way out would be via a more nuanced and data-driven approach of mass-testing 75-100,000 people per day. This would not be testing random people but rather those presenting with symptoms, and then tracing all of their contacts (household members, colleagues, flatmates) to ensure they are also tested. All those who are virus-carriers would be put into a mandatory two-week quarantine in their homes, enforced through tracking and fines. This will allow the public health community to identify where exactly the virus is, to break further chains of transmission and to keep case numbers low and within the NHS capacity limit. It would also allow most of society, and the economy, to continue on a somewhat more “normal” basis.


The testing capacity could be built up through using private and university labs, as well as working with South Korea and other partners to bring in rapid diagnostics as quickly as possible. SD Biosensor, a company in South Korea, is making 350,000 test kits a day and is scaling up, but currently is prioritising the US, United Arab Emirates and Indonesia. When a reliable antibody test is available, one that shows whether someone has had it or not, individuals with high likelihood of exposure should be tested to see what percentage of immunity has built up and ensure they can be kept in the workforce.

If we want to work towards the best-case scenario, then we need to

• place the highest political priority on acquiring the testing kits, 
• while drawing on apps and big data to support contact tracing. 

Through this path we can start quarantining only those carrying the virus, and not the entire population. The economy, society and health all win in this plan, and it seems the best way out of our current situation.

Prof Devi Sridhar is chair of global public health at the University of Edinburgh


https://www.theguardian.com/commentisfree/2020/apr/01/lockdown-buys-time-virus-mass-testing-coronavirus-uk?CMP=Share_AndroidApp_News_Feed&fbclid=IwAR2yDiBwqzVWpmA9ZxjzMgnNjKoh1I8lIuxo1DLnoZVC3n1Yw41bO_GUCFw

Beware of chasing bear market rallies, strategists warn

PUBLISHED MON, MAR 30 2020
Nancy Hungerford


KEY POINTS

• Attributing the recent gains in equities and emerging market currencies to extraordinary monetary and fiscal stimulus measures, Eric Robertsen, head of global macro strategy at Standard Chartered, warned clients that the risk-rally lacks sustainability.
• “The full extent of the economic fallout is still unknown, and equity and credit markets still face considerable risks from earnings, downgrades and regulatory changes,” said Robertsen in a note.
• Daniel Gerard, senior multi-asset strategist from State Street, agreed that more information is needed from corporations before declaring a bottom. “No one has real insight yet into the impact into earnings, the fundamental drivers of markets here, that’s the next stage to come,” he said.

Investors in Asia are kicking off the new trading week with a note of caution, keeping an eye on volatility emanating from Wall Street.

Following the Dow’s biggest weekly rally since 1938, and the best performance for the S&P 500 and Nasdaq on the week since 2009, investors are debating whether U.S. markets have already bottomed or if more pain is in store.

Attributing the recent gains in equities and emerging market currencies to extraordinary monetary and fiscal stimulus measures, Eric Robertsen, head of global macro strategy at Standard Chartered, warned clients that the risk-rally lacks sustainability.


Consumer confidence hit

“The release of Q1 brokerage statements over the next month will coincide with the release of global economic data showing the depths of the economic collapse,” Robertsen explains in his weekly note. “We believe these two factors combined will exacerbate the weakness in consumer confidence, already under attack from the growing health crisis and the prospect of extensive unemployment.”

He pointed out that while the market declines have been well publicized, these first quarter statements will put “negative returns in black-and-white print” for retail investors. The losses incurred on traditionally safe investments will also hit home, Robertsen suggested, pointing to a recent 5% to 15% decline in exchange-traded funds tied to U.S. credit markets.

The full extent of the economic fallout is still unknown, and equity and credit markets still face considerable risks from earnings, downgrades and regulatory changes.

Investors are waiting on a deluge of economic data this week stateside that could fuel economic gloom. The focus will be on the weekly jobless claims due Thursday, after the prior report revealed a record 3.2 million in claims for the week that ended March 21. The monthly non-farm employment report is due Friday, but is expected to have less significance since the survey will not yet reflect the major shutdowns in the states most impacted by the virus.


Unknown risks

“The full extent of the economic fallout is still unknown, and equity and credit markets still face considerable risks from earnings, downgrades and regulatory changes,” Robertsen said. “For equities and credit, for example, we believe the hit to corporate profits will last longer than the immediate shock of the health crisis.”

No one has real insight yet into the impact into earnings, the fundamental drivers of markets here, that’s the next stage to come.

Addressing arguments that a 25% peak-to-trough drawdown has already priced in a worst-case scenario from these missing variables, Robertsen said: “We believe this sentiment is premature.”

Daniel Gerard, senior multi-asset strategist from State Street, agreed that more information is needed from corporations before declaring a bottom.

“No one has real insight yet into the impact into earnings, the fundamental drivers of markets here, that’s the next stage to come,” Gerard told CNBC’s Street Signs Asia. He credited central bank and fiscal stimulus measures with taking some of the fear out of the market and allowing participants to get back in.

However, he cautioned that this would not lead to a straight line higher from here.



No sign yet of a strong rebound

Vishnu Varathan, head of economics and strategy at Mizuho Bank, questioned if the stimulus-induced upside for risk assets has already run its course.

He predicted that revenue shocks from coronavirus-related containment measures, as well as supply-chain disruptions, would continue for the foreseeable future.

“The bad news could be seeping in, whereas the big bazookas are done with. The shock and awe of policy is about climaxing right now, and there is still not a good sign of a very strong rebound coming through,” Varathan told CNBC’s Street Signs Asia.

Robertsen looked back to the global financial crisis as a lesson in policy-induced rebounds. “Don’t forget that equities bounced in November 2008 when support measures were announced, before trading down to new lows in March 2009. Only then did the recovery begin.”


https://www.cnbc.com/2020/03/30/beware-of-chasing-bear-market-rallies-strategists-warn.html?fbclid=IwAR1sEiaZiQog6-V-SeTaPnTM74qSc2IbaOAOtIb5-_EzHP2cruiYslgyRFU

THE MAJOR INDICES REMAIN MILES BELOW THEIR PRE-PANDEMIC LEVELS.

Despite an unprecedented response from global governments and central banks, the major indices remain miles below their pre-pandemic levels. 

 MAR 27, 2020, 5:33 PM

While the late-session selloff on Friday wasn’t pretty, the major indices held on to most of their mid-week gains, giving hope for bulls that last week’s lows might be successfully defended.  

We saw a textbook risk-off shift on Friday, with utilities and healthcare stocks performing well and tech issues and industrials struggling together with the energy sector, but technically speaking, last week’s lows look safe, for now, which is already a huge plus for bulls.

The major indices all finished significantly lower following one of the strongest three-day rallies in history, despite the approved U.S. stimulus bill, as the global COVID-19 situation continued to deteriorate. 

The Dow Jones Industrial Average (INDEXDJX:.DJI) was down 915, or 4.1%, to 21,637, the Nasdaq (INDEXNASDAQ:.IXIC) lost 295, or 3.8%, to 7,502, while the S&P 500 (indexsp:.inx) fell by 89, or 3.4%, to 2,541. Decliners outnumbered advancing issues by a 3-to-1 ratio on the NYSE, where volume was extremely high again.

Bulls Make A Comeback

Following one of the worst week's for stocks in history, bulls staged an epic comeback this week, with the Dow gaining over 16% in three days. Despite the rally, which was fueled by an unprecedented response from global governments and central banks, the major indices remain miles below their pre-pandemic levels. 

The uncertainty regarding the length of the necessary, but economically damaging global lockdowns continues to weigh on risk assets, and equities finished the week on a negative note. Volatility will likely remain very high for several weeks, and bulls hope that we will get positive reports from Europe, and there won't be secondary outbreaks in China and South Korea.

The Fed’s unlimited QE program and emergency rate cut helped investor sentiment this week, but the economic uncertainty led to continued pressure on credit market. 

The key economic releases were mixed yet again this week, but several indicators still didn't fully reflect the effects of the pandemic. 

The week will likely be remembered because of the record number of new jobless claims, as the measure came in at 3.283 million eclipsing even the pessimistic consensus estimate of 1.5 million. 

Services PMIs hit record lows in Europe and Australia, with the U.S. Market services PMI also coming in well below expected, but the key manufacturing PMIs beat expectations, just as durable goods orders, personal income, and new home sales.

https://www.valuewalk.com/2020/03/fed-unlimited-qe-program/

Technical Picture Remains Bearish

The technical picture continues to be bearish across the board, despite the mid-week surge in stocks, with all of the key trend indicators still pointing lower. 

The S&P 500, the Nasdaq, and the Dow are still all well below their declining 50-day averages, and the benchmarks are also all below their 200-day moving averages. 

Small-caps finally showed relative strength during the crazy short-covering rally, but despite its positive week, the Russell 2000 closed below both its short-and long-term moving averages on Friday. 

The Volatility Index (VIX) only finished slightly lower despite the double-digit gains of the major indices, and the fear gauge closed the week above the still extremely high 65 level, due to the economic uncertainty.

Market internals improved substantially thanks to the broad rally, but even though a V-shaped recovery is not impossible, the current positive divergences have to be taken with a grain of salt in light of the extreme market conditions. 

The Advance/Decline line bounced back sharply this week, as advancing issues outnumbered decliners by a 15-to-1 ratio on the NYSE, and by a 14-to-1 ratio on the Nasdaq. 

The average number of new 52-week highs was close zero on both exchanges, edging lower to 1 on the NYSE and 3 on the Nasdaq. 

The number of new lows collapsed in the meantime, falling to 130 on the NYSE and 125 on the Nasdaq. 

The percentage of stocks above the 200-day moving average increased somewhat thanks to the strong rally, but the measure remains near its multi-year low, finishing the week at 9%.

https://www.valuewalk.com/2020/03/fed-unlimited-qe-program/

Short Interest Decrease Due To The Corporate Bailouts And The Fed’s Unlimited QE Program

Short interest decreased on Wall Street for the first time in a month, as bears rushed to the exits due the corporate bailouts and the Fed’s unlimited QE program.  

While Match Group (MTCH) had a rough time, so far, this year, the stock was among the strongest issues this week, and its short interest of 38% could fuel further gains should the market continue to normalize. 

Our previous pick, Sea Ltd. (SE) joined the rally, finishing almost 20% higher, and since the stocks short interest increased to 45%, it could continue to outperform. 

Hormel Foods (HRL) couldn’t get close to its recent all-time high this week, but it remained stable amid the volatile swings in the major indices, and it’s still very high days-to-cover (DTC) ratio of 14 means that there are plenty of shorts that would be squeezed by a rally.

https://www.valuewalk.com/2020/03/fed-unlimited-qe-program/

Bill Ackman's greatest trade of all time

Whitney Tilson’s email to investors 

6) Bill Ackman of Pershing Square Capital Management just made the greatest trade of all time (in my judgement – based on the percentage gain, dollar profit, the speed of the gain, and the perfect timing). He made almost a 100x return in less than two months, turning a $27 million investment into a $2.6 billion profit!

According to this letter he just released, earlier this year he became "extremely alarmed about both the health risks of the coronavirus and its economic impact." To hedge his portfolio, he "purchased credit default swaps (CDS) on various investment grade and high yield credit default swap indices, namely the CDX IG, CDX HY, and ITRX EUR," which "were trading near all-time tight levels of about 50 basis points per annum."

Ackman's thesis was simple:

Because we believed that the coronavirus could only be stopped in Europe and the U.S. with an unprecedented economic shutdown, based on what we learned from China, we were confident that U.S. and European credit spreads would likely widen substantially from their near-all-time lows.

In short, he saw exactly what was going to happen – and figured out the perfect way to profit from it.

Ackman has also made what I think will prove to be another brilliant move: exiting the hedge and plowing all of the gains into buying more of the stocks of the high-quality companies in his portfolio, whose stocks have all been whacked, including Berkshire Hathaway (BRK-B), Lowe's (LOW), Hilton Worldwide (HLT), Agilent Technologies (A), Restaurant Brands (QSR), and Starbucks (SBUX).

He's also investing some of his personal profits from this trade into addressing the crisis, as this article notes: Bill Ackman Puts Part of His Personal Fortune in Covid-19 Testing.

"This will enable the inevitable viral breakouts to be identified early and minimized with localized quarantines, reducing the impact on the overall U.S. economy and the need for future shutdowns," he said.

When I told my daughters about this trade over dinner recently, they asked, "Why didn't you do that, daddy?"

I had to be honest with them: "Well, Bill's a lot smarter than I am."

We should all be asking ourselves the same question. Was it really so hard to see on February 19, only 37 days ago, when the S&P hit an all-time high and credit spreads were close to all-time lows, that the coronavirus might be a big problem?

With hindsight (which is always 20/20, of course), it shouldn't have been hard to see at all, but I think we all got lulled into complacency by the long bull market...

Best regards,

Whitney

https://www.valuewalk.com/2020/03/ackmans-greatest-trade/

There will likely be some sharp pullbacks, but I think they should be bought.

Whitney Tilson’s email to investors

Alan Gula's Comments

5) Alan Gula, a senior analyst at Stansberry Research, shared these comments with me yesterday and gave me permission to share them:

Funny how unlimited [quantitative easing] and a stimulus package equivalent to 10% of GDP (CASH CANNON) cause stocks to rise.

I agree with your assessment. There will likely be some sharp pullbacks, but I think they should be bought.

The credit markets remain open... 18 investment-grade issuers priced $35 billion across 33 tranches [on Thursday]. NVDA, HD, TGT, ED, CSX, MS, and CVS all issued bonds. Pessimists will say that these companies are just rushing to issue while they can. But I think the issuance is positive considering that we didn't see this in late 2008.

Total U.S. corporate bond issuance was only around $80 billion in the entire fourth quarter of 2008. There was more investment-grade issuance than that this week.

And if investment-grade and high-yield spreads tighten, it will be bullish for equities. (I have long believed that the most important second-order effect of quantitative easing is spread tightening.)

Right now, high-yield sector spreads are all wider than 600 [basis points] (in particular, high-yield spreads in the energy sector blowing out to wider than 2,000 basis points shows devastation reminiscent of the global financial crisis).

https://www.valuewalk.com/2020/03/ackmans-greatest-trade/

Wild Week

Whitney Tilson’s email to investors discussing the wild week


1) What a wild week! The sharpest, fastest bear market in history – the S&P 500 Index was down 35.2% from its closing high on February 19 to its intraday low on Monday – was followed by the sharpest, fastest move back into bull market territory in history, as the index rallied 20% from that point through yesterday's close. Both Tuesday and the past three days were the best for the Dow in 87 years.

I can't recall such a violent upward move in my entire career. I checked the bounces off the bottoms reached on October 10, 2002 and March 6, 2009 (the closing low was March 9, but the intraday low was on March 6) and, in the four days afterward, the S&P 500 rose by "only" 12.5% and 12.3%, respectively. And going back to the Dow's 22.6% plunge on Black Monday on October 19, 1987, while it rose 5.9% the next day, it then trickled downward for another month and a half – going well below its Black Monday close.

I rarely have opinions about where I think the market in general is going, especially in the short term, as this isn't my area of expertise. I find it a far better use of my time to study particular companies and industries to try to develop proprietary insights.



But Monday was one of those rare times. In my e-mail that day, I wrote:

..... why we've come to the firm conclusion that this is the absolute best time to be an investor in more than a decade. To borrow a phrase from one of my friends, "we're trembling with greed" right now.



................



If this doomsday scenario doesn't come to pass, stocks will likely go nuts.

So after the big move in the past three days, what's my thinking? Over the next few months, I no longer have a strong feeling. I think there's a bell curve of possible outcomes, and we're right in middle of it.

But if you ask me where we will be in a year (which is the absolute minimum time horizon I tend to consider) – I think odds are at least 75% that stocks will be higher.




2) In yesterday's e-mail, I wrote:

I just completed a report on [the coronavirus crisis] that I think is the best work I've ever done.

It's broken into three parts:

1. Why I'm Optimistic That We'll Soon Stop the Coronavirus

2. The Five Reasons We're Bullish on Stocks Right Now

3. 10 Stocks to Buy to Profit from the Coming Market Upturn

As it becomes clear that we've controlled the spread of the virus and know exactly where the outbreaks are – which could happen as soon as a couple of weeks from now – we can start bringing our economy back to life.


https://www.valuewalk.com/2020/03/ackmans-greatest-trade/

A World Awash In Liquidity

Whitney Tilson’s email to investors 

3) One of the reasons I'm bullish over a one-year horizon is that many macro factors are highly favorable. Here is an excerpt on this from part two of my report: "The Five Reasons We're Bullish on Stocks Right Now":

• To be clear... we're surely already in a recession and the damage is already significant.
• But our economy is gigantic and was doing quite well on the eve of this crisis...
• American households have the least leverage since 1984 (measured by total liabilities divided by total assets)...
• Interest rates are at all-time lows, providing unprecedented monetary stimulus...
• It looks like Congress will soon pass a $2 trillion stimulus bill that President Donald Trump has promised to immediately sign into law, which will provide unprecedented fiscal stimulus. And if that proves insufficient, the government can easily borrow trillions more at minimal rates...

The Federal Reserve has dusted off the playbook it implemented during the global financial crisis and is injecting massive amounts of liquidity into the financial system. In particular, the stimulus bill includes $454 billion in funds for the Treasury to backstop emergency actions by the Fed. Since every dollar from the Treasury can stand behind $10 lent by the Fed, this translates into $4.5 trillion to keep credit flowing and make direct loans to U.S. businesses, in effect doubling the Fed's current $4.7 trillion balance sheet...

And don't forget that Trump views a recovery in stock prices as critical to his reelection hopes.

4) As further evidence that we're in a world awash in liquidity, see this chart that Compound Capital Advisors CEO Charlie Bilello tweeted:

https://www.valuewalk.com/2020/03/ackmans-greatest-trade/

Dissecting Volatility

POSTED BY: PROF. BRADFORD CORNELL, CORNELL CAPITAL GROUP MAR 27, 2020,
https://www.valuewalk.com/2020/03/level-of-volatility-stocks/


It is one thing to say that the market is volatile. It is quite another to appreciate fully what that really means. So let’s spend a moment to dissect the level of volatility.



The Current Level Of Volatility

The first thing to make clear is how is volatility measured. One way is to use historical data. The data necessary to estimate historical volatility is not a series of past prices, but past daily returns. The return is the percentage change in price adjusted for any payouts. Because payouts during that last couple of months have minuscule compared to price fluctuations, you can think of the return as the percentage change in price. To measure volatility, you cannot average past returns because positive and negative returns cancel each other leading to a vast underestimate of volatility. Therefore, volatility is measured by either the standard deviation of the returns, or more simply by the average of the absolute values of the returns. In most cases, the two estimates are quite similar.

By these measures, how volatile has the aggregate value of all U.S. publicly traded stocks been over the last three weeks? The average daily absolute price change comes to about 6.5% (with some negative and some positive). This level of volatility means that every day you can expect the market to move 6.5%. To appreciate how astonishing this is it is helpful to keep two observations in mind. First, remember that the value of the aggregate stock market is the present value of the cash flows to equity owners expected to be produced by all listed companies in all future years.

Second, that present value is a big number. At the end of 2019, the data base maintained by the Center for Research in Securities Prices calculates it to be $41.14 trillion. Of course, it has declined since then by an amount that depends on the day you do the calculation, but to keep things easy let’s use $35 trillion.



How To Measure Volatility

Based on that number, the current level of volatility implies that every day the market value of publicly traded American business can be expected to change by about $2.25 trillion. It takes a moment for that number to sink in. On average, based on whatever information comes in that day, the market is revaluing total equity by $2.25 trillion – and it is doing it day after day. While one may think that on a day or two, in response to major news, a move of this magnitude might be warranted, to have it occur day after day, often without the arrival of much in the way of value relevant new information is remarkable.

All that said, there is one factor, news about which may be driving the market up and down and that is the term of the lockdown associated with the virus. In a previous post, The Market and the Virus: Deconstructing the Drop, I calculated that the impact of the virus should be less than 10%. Ironically, if we use January 1, 2020 as the starting point, we are getting back to that level after the run-up of the last three days. The good news is that this interpretation implies that the market should sustain this level, but the offsetting bad news is that no further increase would be warranted. Of course, all of this depends on the assumptions used in modeling the duration of the virus-related economic shutdown, a number which, like the market, changes daily.



VIX Index Has Risen 5x

It is also possible to calculate forward looking measures of volatility. By far the best known is the VIX index which calculates the volatility implied by the prices of options on the S&P 500 index. Between the beginning of the year and the close on Thursday, the VIX index has risen by a factor of about five times. Options on individual stocks have seen their implied volatilities rise by similar factors. For those who employ hedging strategies using options, as we do at Cornell Capital, the pickings were slim prior to the virus crisis because volatility, and therefore option premia, were near historic lows. Needless to say that has changed dramatically. Option premia are at levels last seen at the height of the 2008 financial crisis.



In closing, it may seem that investing based on fundamental valuation is fruitless during times when the large daily price changes seem to have little relation to changes in value, but the reverse is true. Given the unpredictability of the massive short-term price movements, attempting to play a pricing game is ill advised. The best an investor can do is take positions based on his or her fundamental valuations and maintain sufficient reserves to ride out the bumps in both direction that are highly likely to occur. Those bumps can be softened by careful use of options, particularly in light of the current high option premia.

Seven Questions you should be able to answer when you Invest

https://www.valuewalk.com/2020/03/graftech-international-mohnish-pabrai/