I suppose it’s a matter of which train you want to step in front of.
Clearly, it’s going to be a while before the data turns any semblance of “good”. For the next several weeks, it’s going to be downright awful. Corporate management teams are still fumbling around in the dark, and many have understandably elected to just to withdraw their outlook rather than attempt to predict the unpredictable. Just like everyone else (including Warren Buffett, by the way) the C-suite is struggling to assess what the post-COVID reality will mean for supply chains, consumption habits and society more generally.
If everyone’s being honest, nobody knows when profits will inflect in earnest. All we know right now is that Q2 2020 will be the low point – at least when it comes to the “first wave” of the coronavirus.
Some remain resolutely skeptical. “We are monitoring the evolution of consensus EPS and dividend forecasts on an almost daily basis and there is very little sign of earnings downgrades abating”, SocGen’s Andrew Lapthorne wrote Monday, noting that the bank is seeing “almost 200bp cuts from 2020 global EPS expectations every week [with] near-term forecasts obviously seeing the biggest hit… but 2021 also seeing a 22% cut”.
Morgan Stanley has a slightly more constructive take – at least when it comes to US equities. “We think the worst of revisions are now behind us as S&P 500 revisions breadth improved again this week and cyclical sectors are also seeing bottoming revisions breadth versus the market”, the bank’s Mike Wilson said.
And yet, as Tyson’s report made clear, things are far from… well, far from clear.
“Due to the uncertainty of the COVID-19 impacts to our operations, we are currently unable to provide segment adjusted operating margin guidance”, CEO Noel White admitted, after the company missed estimates, prompting a steep swoon in the shares. Tyson is on the frontlines of the battle to keep America’s meat supply chain intact amid safety concerns, shortage jitters and rising prices for pork and beef.
New polls of C-suite executives conducted by consultancy West Monroe underscore solvency concerns and illustrate how sentiment has evolved over the crisis. “The fear is that as businesses are forced to alter their operations overnight, they take drastic measures, cease communications, and go dark on suppliers and vendors”, West Monroe CEO Kevin McCarty remarked. “If this happens, we are going to have a much bigger problem on our hands than we do already”.
So, if you’re not particularly excited about the prospect of buying into equities in the face of what might very fairly be described as unprecedented uncertainty, nobody is going to blame you.
That said, if you’re a bear, you’re stepping in front of a freight train too. The Fed has helped engineer a truly rapid recovery by bear market standards since late March. The latest mini-selloff notwithstanding, we are now well ahead of the historical average bounce.
On Monday, the Fed said it will start buying credit ETFs early this month. Both the primary and secondary corporate credit facilities will begin buying bonds shortly after the ETF purchases get cranking.
As a reminder, the combined size of those facilities is up to $750 billion. Eligible issuers for the primary facility are required to “provide a written certification that [they are] unable to secure adequate credit accommodations from other banking institutions and the capital markets and that [they aren’t] insolvent”. As JonesTrading’s Mike O’Rourke quipped on Monday evening, “being solvent and unable to borrow would generally be considered an oxymoron”. The Fed cleared that up, though. To wit:
In certifying whether the issuer is unable to secure adequate credit accommodations from other banking institutions or the capital markets, issuers may consider economic or market conditions in the market intended to be addressed by the PMCCF as compared to normal conditions, including the availability and price of credit. Lack of adequate credit does not mean that no credit is available. Credit may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.
“This language makes it clear that, if properly applied, this is a backstop facility for when credit markets freeze [and since] this is in an environment where Moody’s Corporate BAA Average yield is approximately the same level it was in January, no solvent corporations should have need of the backstop at this point in time”, the above-mentioned O’Rourke went on to say, noting that “single companies accessing the PMCCF will experience the same type of stigma as a bank does tapping the Fed’s Discount Window”.
There are no such certifications required for the secondary market corporate credit facility (you can’t really ask issuers to certify anything when it was someone else who chose to sell their debt, or shares of products containing their debt, to the Fed).
The bottom line is that these facilities are going to be operational and buying, and as every “moral hazard” critic on planet Earth has been keen to emphasize over the past several weeks, this is a historic shift. If you’re betting against corporate credit, there’s a very real sense in which you’re putting your dollars up against the guy who prints them. Best of luck with that.
“We remain of the view that this downturn will be sharper but shorter than the GFC”, Morgan Stanley’s Chetan Ahya said, over the weekend, before elaborating as follows:
To begin with, the trigger for this recession is an exogenous shock in the form of a public health crisis, rather than the classic, endogenous adjustment triggered by rising imbalances. This also did not start out as a financial crisis, and the banking system is in better shape today than prior to the GFC. Moreover, this recession has prompted the most coordinated and aggressive monetary and fiscal easing that we have witnessed in modern times. For the G4 and China combined, fiscal deficits as a percentage of GDP will be 1.5 times GFC levels. Similarly, G4 central banks are aggressively expanding their balance sheets. The Fed’s balance sheet will expand by 38 percentage points of GDP, more than the 20 percentage points during QE1, 2 and 3 combined.
Note that last line again. The Fed’s balance sheet is on track to expand by 38 percentage points of GDP. This will be larger than all previous iterations of QE combined – and it’s not even going to be close.