The Newsletter

The Transcript 04.06.20

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Succinct Summary: The next two weeks could be very painful for the US but hopefully we are approaching the peak for the growth of infections.  Still, the economy could be locked down for a long time and no one really knows how things will look as we come out of this.  It’s hard to keep the consumer down.

Macro Outlook:

The next two weeks could be very painful for the US

“As the experts are predicting…you’re going to start seeing some real light at the end of the tunnel, but this is going to be a very painful, very, very painful two weeks…This will be probably the toughest week between this week and next week” – US President Donald Trump

“The next two weeks are extraordinarily important” – White House Coronavirus Taskforce Coordinator Dr. Deborah Birx

We’ve never really experienced anything like this

“We’ve never had anything like this in the United States. We live in a country that is – it’s never been invaded in our lifetime, right, like this is an invasion. It’s like a war. We’ve never experienced this. We’ve never experienced lockdowns. We’ve never went through things like this, but it will pass and it will get worse before it gets better, but it will get better.” – RH (RH) CEO Gary Friedman

“In the Global Financial Crisis, I worried about a downward cascade of financial news, and about the implications for the economy of serial bankruptcies among financial institutions. But everyday life was unchanged from what it had been, and there was no obvious threat to life and limb.Today the range of negative outcomes seems much wider, as described above. Social isolation, disease and death, economic contraction, enormous reliance on government action, and uncertainty about the long-term effects are all with us, and the main questions surround how far they will go.” – Oaktree Capital Management Co-founder Howard Marks

But we’re near the peak

“we’re looking at this seriously now because by the data we could be either very near the apex or the apex could be a plateau and we could beyond that plateau. Right now we won’t know until you see the next few days.” – New York Governor Andrew Cuomo

“In the next several days to a week or so, we’re going to continue to see things go up. We cannot be discouraged by that” – US President Donald Trump

How long will it last?

“I don’t see this problem going away in a couple of months. It’s spent, it’s taken several months to more or less bring under control in China. It’s taking off in Europe now and will take many months to bring under control. It’s taking off in America now. And I, that’s not going to disappear soon. And there are other huge parts of the world where we don’t quite know what’s happening, but I think that it will happen.” – Singapore Prime Minister Lee Hsien Loong

“the last time H1N1 was more confined to the West. MERS – the Middle East. And then we had the SARS, that was more Asia. Nothing global. So, it is very serious. The last time was probably the Spanish flu in 1917. Killed a lot of people. It was a different world there. I think this time it’s going to be prolonged, more prolonged than SARS, more widespread.” –
Raffles Medical Group (SGX:BSL) Executive Chairman Dr. Loo Choon Yong,

And what will the world look like on the other side?

“We will get back to a better place, but it’s just not going to bounce back in a V-shape back to January of 2020.” – DoubleLine Capital CEO Gundlach

“The world will be back to normal someday, although today it seems unlikely to end up unchanged. What matters most – in terms of both health and finances – is how we do in the interim. Stay safe!” – Oaktree Capital Management Co-founder Howard Marks

” The real question is how fast can we get those parts of the economy restarted? And that’s going to come by getting comfort about the testing and understanding the disease” – Bank Of America (BAC) CEO Brian Moynihan

There’s a huge amount of uncertainty

“We’re in such a time of change and uncertainty. It’s – this is a time where things are changing, not weekly, not daily, but changing hourly.” – RH (RH) CEO Gary Friedman

Earnings season may not give much clarity

“we’re going to have an earnings season that is anything but typical. We have many of our companies who are trying to do their cash flow analysis they have they have lots of uses, and many of their sources have been impaired or dried up. They have to figure out what their liquidity position. And our investors are thirsting for that information. They want to know how they’re doing from a liquidity point of view, how they’re doing from an operational point of view… We said, to the extent you’re unable to get your reviewed financial statements together because the auditors can’t get to your locations to do physical inventory or the extent you have other problems, we’re going to give you more time.” – SEC Chairman Jay Clayton

The consumer is getting hit hard

“The bright spot of the economy, the underpinning, has been the consumer. And clearly, the consumer is going to come out of this weakened from what we’ve had in the past.the consumer is going to be much more cautious…because of this shutdown, the service sector is going to come out, I think, more challenged, and the consumer is going to come out more challenged. ” – Dallas Fed President Robert Kaplan

“March was really different each week. From the beginning of March to the end of March, the amount of money that flowed through the company by our consumers went from around $60 billion a week to $mid-40 billion a week and that can bounce around depending on the week runs and where it is in the monthly cycle. But you saw it slow down.” – Bank Of America (BAC) CEO Brian Moynihan

But it’s tough to keep the consumer down

“people are going to want to get out. People are going to be dying to get out. Spring is coming. The weather is going to be nicer. Hopefully, the virus subsides and speed. People are going to want to get out.” – RH (RH) CEO Gary Friedman


China is almost back to normal

“We do see that in China there is relative success in containment, and… I would say, more than 70 per cent of large enterprises have begun production, but they’re not operating at full capacity. Small and medium enterprises are still struggling. That is positive” – World Bank Chief Economist for East Asia and the Pacific Aaditya Mattoo

“The biggest piece of the disruption has already happened on our end of the business, and that really dealt with China and Asia, the broader business that we source out of Asia. And that is pretty much back to normal. It’s actually 100% back to normal.” – RH (RH) CEO Gary Friedman

“The Chinese economy is opening again, people are going back to work. Factories, restaurants are opening again. I am looking at life, and life is not such that we are all going to take the bus and take boats again” – Rogers Holdings Chairman Jim Rogers

“Among all the doom, there are some glimmers of hope with China slowly and purposefully starting to turn to some degree of normality, with both manufacturing and demand gradually starting to recover.As we speak, several Navigator vessels are on route to China and Southeast Asia with LPG and petrochemical cargoes.” – Navigator Holdings (NVGS) Chief Executive Officer Harry Deans

Developing countries’ economies could be hit especially hard by the virus

“Containment of the pandemic would allow recovery, but the risk of durable financial stress is high even beyond 2020…Most vulnerable are countries that rely heavily on trade, tourism, and commodities; that are heavily indebted; and that rely on volatile financial flows.” – World Bank Chief Economist for East Asia and the Pacific Aaditya Mattoo

“even if you see growth, thousands of tourism workers in Thailand, garment workers in Cambodia could be pushed below the poverty line. The worst suffering could be for informal workers, people who are…invisible and very hard to go identify, find, and help.” – World Bank Chief Economist for East Asia and the Pacific Aaditya Mattoo

Adjustments made in previous crises have made Greece a bit more resilient

“The impact of the economic expansion may also be mitigated by the relatively close nature of the Greek economy and its lack of dependence on the international supply chains. Its lower level of gross fixed investment and consumption comprising basic goods, both are result of adjustments made during the previous crisis are the positives. The extent to which the tourism season is affected is another critical factor.” – National Bank of Greece (NBGIF) CEO Pavlos Mylonas


Consumer delinquencies are rising

“Not surprisingly, in the second half of March, we did experience an increase in delinquencies and a greater demand for payment extensions.” – CarMax (KMX) CEO Bill Nash

“right now we’ve helped nearly a half a million customers defer their payments.” – Bank Of America (BAC) CEO Brian Moynihan

ABS markets are currently disrupted

“while the public ABS market is currently disrupted, we see the feds recent actions to bolster liquidity in the credit markets, including bringing back TALF as encouraging.In any event, we’re actively assessing alternatives, similar to the creative solutions we employed during the Great Recession should the ABS market remain disrupted for an extended period of time.” – CarMax (KMX) Tom Reedy

But investment-grade debt markets are open

“…the investment-grade market opened up quite strong over the course of the last two weeks. I think you have heard this from a number of guests. Record issuance last week, record issuance for the month, record issuance for the quarter. And so, high-grade companies have had access” – Goldman Sachs (GS) CEO David Solomon


If you spend so much time at home, you may find things you want to change about your house

“Everybody is forced to spend so much time at home. Like if you spend as much time at home as I’ve been spending the last couple of weeks, you can start looking around and going like, “Oh my god, there’s so many things that I wish were different about my house. Oh my god, I can’t believe like, I need to update my sofas or I need to update these pillows or god my window treatments.” – RH (RH) CEO Gary Friedman

Incredible surge in demand for groceries and essentials

“We are seeing an incredible surge in demand from consumers stocking their pantries and cooking at home, as our other consumer packaged companies. For example, for the week ended March 15th, scanner sales for the total McCormick US branded portfolio grew 65%, with all major categories up double or triple digits.” – McCormick & Company (MKC) CEO Lawrence Kurzius

“In the U.S., we saw very strong sales in the first three weeks of March as customers accelerated their purchases across multiple categories. ” – Walgreens Boots Alliance (WBA) CFO James Kehoe

With less spending on discretionary items

“we have noticed less consumer spending in discretionary items such as beauty, photographic and seasonal and the drop-off in food traffic.” – Walgreens Boots Alliance (WBA) Co-COO Alex Gourlay

“we expect to see future destocking by our customers and short term sales may be negatively impacted by lower foot traffic. This is particularly evident in discretionary categories such as beauty and photo as customers redirect spending to everyday essential categories.” – Walgreens Boots Alliance (WBA) CFO James Kehoe

Hard times are good for strong & trusted brands

“Brands are even more important at a time like this because many people are seeing the opportunity and our category is one of those for simple pleasures in life. Let’s face it, the more people are sheltering in place, the more that they look for those small pleasures in life, and our category is one of those that addresses that…we feel very comfortable that we will actually get a disproportionate amount of benefit that occurs when people go to the more tried and true brands. That’s what we saw in 2008. That’s what we saw in the previous recession before that those tried and true brands end up winning.” – Constellation Brands (STZ) CEO Bill Newlands

Touchless delivery for cars now

“…we’re calling it the curbside pickup, but think about it as what we used to refer to express pickup where customer can do everything online, they can swing by the store, and previously they could take the car for their test drive, they can come in and sign any few documents that remained. We’re now calling it curbside because literally they never have to come in the store. They can come, the car can be waiting there for them, really touchless.” – CarMax (KMX) CEO Bill Nash


E-commerce and Click & Collect gaining traction

“We’ve also seen a very rapid uptick in click; things like 3-tier e-commerce, click and collect, our company had its single biggest direct-to-consumer week we’ve ever had last week as consumers again found alternate ways to continue to buy our products.” – Constellation Brands (STZ) CEO Bill Newlands

Zoom has been having privacy issues

“we recognize that we have fallen short of the community’s – and our own – privacy and security expectations…we did not design the product with the foresight that, in a matter of weeks, every person in the world would suddenly be working, studying, and socializing from home. We now have a much broader set of users who are utilizing our product in a myriad of unexpected ways, presenting us with challenges we did not anticipate when the platform was conceived…I feel an obligation to win the users’ trust back.” – Zoom (ZM) CEO Eric Yuan

The gig economy is going to be affected

“I think the gig economy companies are going to come out of this harmed, not enhanced…I know there’s a body of thought that oh, well everybody will just do food delivery and we’ll all take Ubers and no one is going to buy a car again, and I think the flip side of it is that the labor pool issue for the gig economy companies is going to loom very very large coming out of this crisis.” Kynikos Associates CEO Jim Chanos


Companies are putting capex and projects on hold

“We’ve put a pause on the majority of our capital expenditures from new stores. We’ve paused our new store expansion. We’ve paused our remodels. And we’ve really paused work that is not currently essential from a CapEx standpoint. So, if it’s essential, we’re doing it. If it’s not, we’re on pause currently.” – CarMax (KMX) Enrique Mayor-Mora

“We have projects, we believe that we were going to get the developer seats that has been delayed. And once the project – the new projects have been delayed, I remind you, they didn’t go away at all. It’s just been delayed because a lot of these are Tier 1 and OEM.” – BlackBerry (BB) CEO John Chen 

Bailout discussions with airlines & cargo companies but not cruise lines

“There are limited industries that I can deal with direct, the airlines, the passenger airlines, the cargo airlines, and national security companies are the only areas and their contractors that we can deal with direct. And we have begun to have those discussions…We do not have the ability under the congressional programs to do anything with cruise ships direct.” – US Treasury Secretary Steven Mnuchin

Materials & Energy:

There is substantial oversupply of oil in the market

“As long the coronavirus continues, there’s just a substantial amount of excess capacity being generated every day. As you know, so much excess supply being generated every day. So much so that we’re starting to worry about storage capacity for it. .we’re going to be spending a substantial amount of time working off a high level of oversupply..the oversupply is so substantial.” – Dallas Fed President Robert Kaplan

The oil price levels are bad for almost everyone

” I think what you’re seeing here is that no one is benefiting from prices at this level. The Saudis aren’t benefiting, the Russians aren’t benefiting. So, I think what you’re seeing here is people acting within their common interests that we have to get the markets rebalanced and the best way to do it is for production to come down in the short-term.” – American Petroleum Institute (API) CEO Mike Sommers

” at a number even in the low 30s, it’s challenging for many producers, drillers to make a profit. And so, we would expect that a number of – with this amount of oversupply that’s going to go on, there’s going to be a consolidation in the industry. There will be some producers that are going to struggle to make it through” – Dallas Fed President Robert Kaplan

No tariffs on oil for now

“Am I thinking about imposing it [tariffs] as of this moment? No. But if we’re not treated fairly, it’s certainly a tool in the tool box” – US President Donald Trump

The US may buy oil for strategic reserves at these low prices

“we talked about getting approval from Congress of buying oil at these prices, filling up our strategic reserves. We’ll continue to ask Congress for that approval.” – US Treasury Secretary Steven Mnuchin

Gold production has peaked

” what we’ve seen in the gold industry is that gold production has effectively peaked. We have seen peak gold…When I got into the business, it was calculated that the odds of being able to make a discovery that would take a prospect to production was somewhere between 1,000 to 10,000 to 1 against you. Those odds still pertain and this is the longest period in which we have seen really no new great discoveries in the gold market.What’s worse is that even if you do make the discovery, the timeline from discovery to production is now calculated on average to be in excess of 20 years,” – NovaGold Resources (NG) Chairman Thomas Kaplan


Abbott is scaling up testing

“I have to say while we’re very pleased with the performance that we’ve been able to deliver here — we’ve launched two tests in the last couple of weeks — there’s still more, and there’s a need for more..There are more tests coming…also putting a lot of effort … into capacity expansion because, while 50,000 a day sounds like a lot, it’s not enough … and for a while we’ll be allocating and prioritizing to high-need areas” – Abbott Labs (ABT) CEO Miles D. White

J&J to begin human testing on a vaccine in September

“we expect to begin first human testing in September. But, in parallel, not only do you need a safe and effective vaccine but you also need to have one that can be produced in large volumes. We are going to be doing that at risk simultaneously right here in the United States. And we expect to have results, interim results at least, from our trials likely in December at the latest early January.That should put us in position early in 2021 to literally have hundreds of millions of doses available and by the end of the year up to 1 billion.” – Johnson & Johnson (JNJ) CEO Alex Gosky

Antibodies that affect the spread of the virus have been isolated

“What AbCellera has done is isolated antibodies from actual human survivors of COVID-19 and have selected antibodies that appear to have a strong effect on arresting the spread of the virus. We’re going to try to isolate those and make them into a one, two or three antibody-drug cocktail. We hope to start clinical trials as early as July. Other companies are doing different things, making vaccines, or repurposing existing treatments. We’ve heard about antivirals and some anti-inflammatory drugs.” – Eli Lilly (LLY) CEO David Ricks.

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