The Transcript 03.09.20

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Succinct Summary:  The Coronavirus continues to spread globally and no one knows how bad this could get.  On the one hand, we have projections of its exponential growth.  On the other is the hope that seasonality will help stem the tide.  In the face of a potential pandemic, the health of the economy seems like a trivial concern.  Still, this panic is having a material effect on economic activity and thereby markets. The Fed has tried to address this with lower rates, but even the Fed admits monetary policy can’t do much to stop a virus. Where monetary policy will fail, hopefully, modern medicine will succeed. Stay safe out there!

Macro Outlook:

Things are getting serious

“This is not a drill. This is not the time to give up. This is not a time for excuses. This is a time for pulling out all the stops…This is a serious disease. It’s not deadly to most people, but it can still kill. ” – WHO Director-General Tedros Adhanom

The Coronavirus has spread and is having a material economic impact

“So what changed really was, I would say over the course of the last couple of weeks we’ve seen a broader spread of the virus. We’ve seen it begin to spread a bit here in the United States.  But for us, what really matters of course is not the epidemiology but the risk to the economy. So we saw a risk to the outlook for the economy and chose to act.” – Federal Reserve Chair Jerome Powell

Both supply and demand sides of the economy are under pressure

“Adding to the uncertainty is a potential disruption to demand and supply caused by the coronavirus outbreak. The health issue is causing disruption to both supply and demand.” – Hewlett Packard Enterprise (HPE) CEO Tarek Robbiati

“The bottom line is COVID-19 creates supply chain uncertainty and could create demand uncertainty as well.” – Urban Outfitters (URBN) CFO Richard Hayne 

“There’s going to be some volatility associated to supply chains, which I think will be more temporal. And everything that will be – an area where there’ll be some dispersion between industries.” – BlackRock Capital Investment (BKCC) Interim CEO James Keenan

“There is a lot of challenges, for example, the consumers’ demand has been oppressed and limited for the short period of time.” – JD.com (JD) Retail CEO Lei Xu

“challenges do exist, especially in logistics and customer demand, both in the industrial and consumer businesses.” – Henkel (HENKY) CFO Marco Swoboda

On the demand side, travel and tourism is getting slammed

“things that are – I think whether it’s more congregation of human beings, obviously the airlines and the lodging spaces and convention centers are all more at risk” – BlackRock Capital Investment (BKCC) Interim CEO James Keenan

” I just think that the two sectors that are just falling knives are financials and transports. And I don’t see anything that’s going the reverse that until we get through the other side this valley of this sort of travel shutdown.” – DoubleLine Capital CEO Jeffrey Gundlach

But consumers are also showing hoarding behavior and increased purchasing trends

“I mean the shopping frequency is off the charts for the last few days. And you see it on social media with people sending in pictures…It’s been a little crazy this past week in terms of outside shopping frequency and sales levels and not only in the United States. ” – Costco (COST) CFO Richard Galanti

“I mean customer behavior can change in a period of time like this. I think we saw that some in China as people bought more online and we were able to satisfy some of that demand there.” – Walmart (WMT) CFO Brett Biggs

“while large ticket durable goods and discretionary products have been negatively affected by the outbreak, the consumer staple categories, such as groceries, fresh produce, healthcare and household products are in greater online demand during the past five weeks” – JD.com (JD) CFO Sidney Huang 

On the supply side, Chinese factories appear to be coming back on-line

“it does feel like China is starting to kind of come back to work, which will help from a factory standpoint.” – Walmart (WMT) CFO Brett Biggs

“most Chinese factories and mills have reopened with output running approximately 50% of capacity. The expectation is the output will grow steadily over the next two weeks as workers clear the virus incubation period and return to work.” – Urban Outfitters (URBN) CFO Richard Hayne 

“In terms of supply chain, closures of many manufacturing facilities extended well beyond the typical one week Chinese New Year holiday, which was the last week in January. In many cases factories over there were closed for one to two additional weeks. That’s now improving each week” – Costco (COST) CFO Richard Galanti 

“To-date, we have not seen meaningful delivery disruptions. All factories and mills are now operational, although running with delays, which may cause increased short-term freight costs” – Abercrombie & Fitch (ANF) CFO Fran Horowitz

“Capacity is up to around 60%. We heard today from the Governor Yi Gang that they are aiming by the end of the month to go up to 90%. Of course, we have to caveat that, subject to no revival of the epidemic as factories reopen. But at this point, the news from China is, there is a stepping up in production.” – IMF Managing Director Kristalina Georgieva

Employees in the US are starting to work from home.  Will this affect productivity?

“Given the recent emergence and growing number of coronavirus cases in the United States, we have directed our Headquarter employees to work from home, unless there is a business-critical need for them to be in the office. We’re taking this step out of abundance of caution.” – Zoom (ZM) CEO Eric Yuan

“In order to reduce the risk of virus transmission, we’re taking measures to maximize “social distancing” by asking employees at Lilly’s US facilities to work from home if possible, and by restricting travel within the United States.” – Eli Lilly (LLY) 

“As a precaution, we have limited nonessential international travel and made working from home optional, for the time being, for those who are able to effectively do their work remotely and wish to do so” Intel (INTC)

This is likely to weigh on economic activity for some time

” the virus and the measures that are being taken to contain it will surely weigh on economic activity both here and abroad for some time” – Federal Reserve Chair Jerome Powell

“We also know that the recovery track takes some time. SARS took 5 or 6 months for things to get back to normal in the cross-border business in the markets that were impacted at that time. That was now 20 years ago. China was not significant as a part of our business, nor was it significant as it is today in the global economy. So there’s no question, the impact will be different this time, and they’re hard to predict.” – Visa (V) CFO Vasant Prabhu

So the Fed cut rates, even though they know that low rates don’t cure viruses

“Monetary policy can be an effective tool to support overall economic activity. We do recognize that a rate cut will not reduce the rate of infection. It won’t fix a broken supply chain. We get that.” – Federal Reserve Chair Jerome Powell

“You can’t blame the Fed for cutting the rates . They are just probably going to have to do it again, because this situation doesn’t seem to be doing anything but continuing.”DoubleLine Capital CEO Jeffrey Gundlach

And everyone already knows that rates are low

every banker calls us every day to let us know that rates are even lower today time to borrow.” – Costco (COST) Richard Galanti 

What are our contingency plans if this gets worse?

” we also think it is now the time to put in place precautionary measures should the outbreak become more severe. In other words, do we have credit lines for SMEs? Are we thinking of funding workers that cannot go to work because their kids are at home?” – IMF Managing Director Kristalina Georgieva

Politics

Don’t forget the role of US elections in all of this

We’re never going to consider any political considerations whatsoever. We will not do that and it’s very important that the public understand that.” – Federal Reserve Chair Jerome Powell

The Dem race consolidated to the original two top seeds

I was told at the beginning of this whole undertaking that there are two lanes, a progressive lane that Bernie Sanders is the incumbent for and a moderate lane that Joe Biden is the incumbent for and there’s no room for anyone else in this. I felt that wasn’t right, but evidently I was wrong.” – United States Senator from Massachusetts Elizabeth Warren

Technology:

Coronavirus could accelerate a trend of remote work

“Given this coronavirus, I think the over the night almost everybody read and understand, they needed a tool like this. This will dramatically change the landscape.” – Zoom (ZM) CEO Eric Yuan

Healthcare:

One final note of optimism: we have more tools to confront this epidemic than we ever have in human history

“full genome sequences have become publicly available, thanks to authorities and scientists posting those on publicly available sites. So these genetic sequences have been analyzed by a large number of virologists and scientists across the globe, and WHO is working with a network of scientists on this” – WHO Health Emergencies Technical Lead Dr. Maria Van Kerkhove

 

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