The Bull Is Dead

Another brutal week in the markets at large as the long running bull market officially died.  It is perhaps fitting it came to an end under the watch of the only president that I can recall that used the stock market as a barometer of his economic prowess.  Perhaps had his team treated the outbreak seriously a little sooner he could have been viewed as managing the outbreak’s severity on the economy as opposed to now being managed by the situation.

The world as we knew it has – at least temporarily – come to an end.  Sports, leisure activities, schools and large gatherings are suspended and working from home is back in vogue.  While the House passed a bill for an initial stop gap measure, Trump finally did declare a national emergency – perhaps bruised by the bad press.  Not helping matters was the meme tweeted by his own staff.

The pace of news related to local and corporate responses to the virus  has been fast moving, one example being the NCAA tournament being changed to an event without fans to outright cancellation.  My initial thought for this week’s topic was how the economic impact of this one event’s lack of fans would impact local economies.  Scratch that research line – but I will share that the play-in game had an average impact to the Dayton economy of roughly $4.7 million, including ticket sales, lodging, restaurants and air travel.  Concession sales benefited Pepsi (PEP), Kroger (KR) and Anheuser-Busch (BUD) as well as a local charity. Airlines serving Dayton are Allegiant Air (ALGT), American (AA), Delta (DAL) and United (UAL).  Arena sponsors (priceless advertising) include Fifth Third Bank (FITB) and Cincinnati Bell (CBB).  Extrapolate that across the other thirteen, larger, multi-day sites and the picture becomes uglier.  Extrapolate further across the overall US economy and all of the events, services and venues potentially impacted and one can easily see why recession worries are on the rise.

One aspect I find troubling in this evolving situation is the confirmation by Treasury Secretary Steven Mnuchin that the administration was considering emergency assistance for affected industries. “This is not a bailout. This is considering providing certain things for certain industries. Airlines, hotels, cruise lines”.  Ignoring the semantics over the ‘bailout’ definition, airlines are perhaps understandable. Hotels, less so due to their existing leverage. But taxpayer money going to cruise lines? Methinks the administration has yet another unforced error looming on the horizon.  

Consider the optics:Royal Caribbean (RCL), Norwegian (NCLH) and MSC are incorporated in Liberia, Bermuda and Switzerland respectively, making them foriegn companies.  Even Carnival (CCL) is not immune having a dual US and UK corporate structure. Adding insult to injury: Only one ship (Norwegian’s MS Pride of America) is US flagged.  All others are flagged Bahamas, Panama or Malta.  While the Jones Act can be cited as the cause – thereby itself needing revisions, my belief, perhaps unfounded, is that these companies use this as an excuse to lawfully circumvent US Labor laws.  Cha-ching!

Another item easily overlooked last week was the Fed’s injection of liquidity into the system.  The rumor mill has been working overtime on this one but the general consensus is that hedge funds and private equity firms have been urging their portfolio companies to draw down their lines of credit – proving once again that cash is king especially in uncertain times.  In the event that the epidemic is little more than an economic blip, this could be considered prudent – essentially, no harm, no foul while generating some income for the banks. The problem I see is if the perception of a bungled operation is allowed to become a reality resulting in greater harm to the economy.

The general investing blogging community has finally awakened to the fact that there’s more than just noise as I’m seeing more posts on the Coronavirus topic.  Other than the drop in portfolio value all else is normal on this front. The dividends keep coming. Overall they are growing with only one cut to report. I was watching with unusual attention the results from my two Hong Kong companies as the virus is literally on their doorstep.  Both cited Coronavirus and the protests as headwinds being dealt with. One (Swire Pacific – SWRAY) maintained last year’s dividend rate while the other (MTR Corp – MTCPY) surprised me with a 2.5% increase. The common denominator being both had retained earnings and lines of credit as a backstop.  Over the next quarter, I believe the number of US companies drawing down their LOCs could be a leading indicator of the direction that this is going, i.e., is the worst behind us or yet to come? Meanwhile, I am selectively averaging down – last week was Australia’s Computershare (CMSQY) and Canada’s Toronto-Dominion Bank (TD).

As always, thoughts/comments are welcome!