The macro trade where stocks fell in unison in late March only to recover in unison in early April is doomed to fail. We will re-test market lows. A staggered economic recovery will require that investors identify “winning” stocks coming out of the downturn and avoid “value traps”. Life is about who you choose to partner with and we advocate that investors “partner” with market leading companies. Below are a few reasons why a “normal” economy is not around the corner. Be sure to check out the videos at the end of this article.
- No economic switch to flip. The phased approach for reopening America’s economy all but ensures that there will not be an economic “flipping of the switch”, vaccine or not. Read about the plan for opening America HERE. Read about a gradual return to “normal” HERE.
- COVID Part II. Some models are predicting COVID the sequel in September. How well are we prepared for the second wave if it comes? Also, COVID may be more prevalent in the U.S. population than initially thought (see video interview with Dr. Jay Bhattacharya below).
- Too early to tell regarding the SBA and small business. How effective was the $350 billion SBA small business stimulus. Difficult to say since many of the funds have yet to be disbursed (read about the SBA’s difficulties HERE). Our advice to the Trump administration would be to hold off on an additional small business stimulus. We first need to measure the effectiveness of the $350 billion tranche. The dust needs to settle. For sure millions of dollars have been allocated to small businesses whom have since gone out of business. The SBA has a lot of work to do on the processing side and banks need a bit more history to fine tune models to determine what level of risk they are comfortable with. Banks will require many small businesses to reconfigure their business models to better be able to defend against the threat of a COVID-like phenomenon. Expect mom & pop businesses to retool. What were once exclusively walk-in business models will begin to accommodate e-commerce and delivery operations or risk not receiving favorable loan terms or not qualifying at all.
- CRE defaults are coming. We are already hearing stories of businesses that mysteriously burned down overnight. Too many high yield loans were packaged as high grade debt offerings for there not to be a large number of defaults. The underlying loans were extended to small business that are high yield credit risks: one-off restaurants, tanning salons, tarot card readers and the like. You don’t need a crystal ball to know that defaults are coming. It’s just that this time they will hit main street U.S.A. business instead of the banking industry as was the case in 2008-2009. See our article: “Credit Risk Is Substantial and Underestimated.”
- Tight budgets mean less robust sales pipelines. CEOs and CFOs have reigned in discretionary expenses. Companies will loosen purse strings for various expense items as they see fit on a company-by-company business. Wall Street analysts want a one-size-fits-all answer to every question but businesses don’t operate with perfect visibility and surgical precision.
- CEO color:
- Facebook (tkr: FB): has cancelled all company meetings with 50 people of more through June 2021.
- Morgan Stanley (tkr: MS): CEO Jim Gorman expects the downturn to last into 2021 (Gorman’s interview is below. His comment on the economy is at the 6:36 mark).
- Expedia’s (tkr: EXPE): Barry Diller certainly does not expect travel to bounce back (Diller interview below. We do not agree with Diller’s comment “we have to bail everyone out” at the 4:45 mark).