Economic Damage Sinking In

This week finally looks like the week where investors start to realize that the economic damage done to the global economy will not be quickly repaired. For anyone watching Fed Chair Powell this morning he was in a somber mood–and trying to tamp down expectations without spooking the markets.

I have expected this to happen, but didn’t know it would take this long for all the ‘dip buyers’ to begin to get burned. Fortunately, for all of us, the sell offs have been orderly allowing investors to shift their dollars around slowly.

I haven’t even considered doing any buying this week as last weekend the more I read the more I was convinced that having lots of dry powder is the best way to ride out the next few weeks–or maybe months.

Lodging REIT preferred are getting paddled good today–off 2-5%. I had previously held a couple minor positions in these, but took some ‘steak dinner’ profits (small profits) a number of days ago. It’s going to be a long, long process to get these REITs back in the black.

mREIT preferreds are getting the same shellacking as the lodging REITs–down 1-6%.

I feel good having the largest chunk of money in the utility and closed end fund (CEF) preferreds and baby bonds–not too much movement in this arena. Won’t be buying more of this stuff now, but wouldn’t hesitate to add to positions if we get a downdraft.

Everyone should have lots of patience right now waiting for bargains on decent quality issues—many of the ‘bargains’ are likely traps–this will be realized more and more in the next few weeks.

55 thoughts on “Economic Damage Sinking In”

  1. There is big news in the municipal bond market today. Illinois issued new 10 year bonds @~ 4.5% spread to high quality bonds. This is up from @ 0.88% spread in February. So they are paying over 5% for ten year money. And they had to lower the quantity from an original $1.2 billion down to $0.8 billion. Illinois has the appearance of being in a death spiral financially. When they had to pay that high a rate, it moves them one step closer to investors saying NO at any rate. Not clear how this gets resolved short of a Fed bailout since they cannot declare bankruptcy under current law.

    https://www.stltoday.com/business/local/trading-like-it-s-junk-illinois-hit-with-fat-yields-in-800-million-bond-sale/article_83247e2d-2a0f-5603-b5fc-6d2361bad471.html

    1. If the Fed bails out Illinois then who’s going to bail out the Fed? Does the government of Jupiter have any money to hand out?

      1. Federal government is just fine…Debt issued in own currency like ours can be paid off by printing more money. We will never default on a debt….Now the consequences that are suffered to the citizens from this method could be a very painful outcome, though.

        1. There is another problem that Greenspan described well in his short phrase:
          “We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.”
          No state can even theoretically go bankrupt if its debts are denominated in domestic currency, but by unstopable printing the thin air money it can destroy the assets of its owners and the welfare of citizens…

    2. From Bloomberg: “The biggest names in finance are coming around to a view that seemed unlikely a few weeks ago: Stocks are vastly overvalued.Legendary investors Stan Druckenmiller and David Tepper were the latest to weigh in after a historic market rebound, saying the risk-reward of holding shares is the worst they’ve encountered in years. Druckenmiller on Tuesday called a V-shaped recovery — the idea the economy will quickly snap back as the coronavirus pandemic eases — a “fantasy.” Tepper said Wednesday that next to 1999, equities are overvalued the most he’s ever seen.”
      https://finance.yahoo.com/news/wall-street-heavyweights-sounding-alarm-223330724.html

      Did all these very smart biggest names have an epiphany… at the same time? Or maybe they used the rally to dump their losers, and then short the market back down, only to buy more of what they want at the bottom. Hmmm?

      1. Exactly, they all get on TV. And talk their book. Take it with a grain of salt. Price is king, follow price and have a plan. Let your winners run and cut your losers short and live to trade another day. ATB.

    3. My brother lives in Illinois and it does not surprise me they had to pay 5% for 10 year money. Their finances are a total mess and their pension plans are funded about the worst in the nation, with only Kentucky and New Jersey being funded lower. I would not purchase their municipal bonds at any rate and am avoiding any Money Market funds made up of municipal bonds because I’m worried about defaults.

  2. Tim, our Governor Walz is speaking tonight on the state of covid. Expect that he will extend to shelter in place order least June 1, from May 18th. I’m in Apple Valley and out and about most days…grocery store, hardware store for projects (my house is in the best shape ever), etc. Albeit, now seems normal to walk buy the HS baseball field and it is empty. Personally, I crave a beer and a burger at the local, and really want to fly to Colorado to see family, but i see neither of these happening soon.

    I agree….more and more people are out and about and disregarding the shelter in place. My biggest concern is the economy.

    On a related note. The media has made the story about people dying versus the economy/$. What is missing in the dialogue are all the people at tipping points who tipped over due to the shut down. Mental illness, emotional issues, domestic abuse, financial ruin…etc I would like to see statistics be published on these suffering to get a complete and compassionate picture, and a public conversation.

    Windy

    1. Hong Kong on May 13 2020 still reports 4 deaths total since December 2019 due to covid 19 in a city with a population of 7.5 million. A total of about 1,000 cases totals. The city is open except for bars and karoake clubs. Singapore has 27000 cases and under 30 deaths (lower death rate than influenza). But in the USA, where we spend more on health care per person than any country on earth with worse health outcomes than about 20 other countries in the first world, we have over 80,000 deaths and over a 5 % death rate. Why do the governors of blue states and the media continue to ignore the facts of low transmission and low death rates in so many other places is my question. Could it be that the economy has to be so beaten down with unemployment that a very old Joe Biden with a sexual harassment case hanging over him needs the economy to be terrible to beat Trump.
      What is at stake is at least two liberal Democratic leaning judges over 80 years old in Breyer and Ginsberg are unlikely to be working five years from now. Trump’s past appointments are younger, conservative judges that will tip the Supreme Court to a 7-2 vote for many years. But our democratic leaders are always about saving lives and making the world a better place according to their public relations people and K street lobbyists.

      FYI LA Times article May 3, 2020 detailed that nursing homes are paid four times more per day $800 vs non covid long term patients at $200 per day..
      That is $24000 per patient vs $6000 per patient per month. The Cares Act pays 3 times more to a hospital for a patient on a ventilator over 4 days than a patient hospitalized not on a ventilator per Kaiser Health News.
      Fortunately, most people in health care in the fifteen years I have worked in the financial end of health care are not tempted by money but mostly to make the world a healthier place. Finally, the banks need people like us to sell in fear when Jerome Powell makes a comment or raises interest rates in the past to make their profits in a low net interest margin world

      1. Difference is that Hong Kong and South Korea took immediate action to test, identify, isolate and track all contacts. They succeeded in contaiment early whereas we waited, denied it was a problem, fumbled on the testing by releasing a flawed test then resorted to extreme measures of total lockdown in one state while the one next door remained open, in short an uncoordinated response with lack of preparedness. A similar thing has happened in Europe leading to massive deaths and economic collapse. However, compare Germany (Lockdown, test, trace) and Sweden which decided to remain open: Sweden’s death rate is more than 3 time that of Germany yet despite remaining open Sweden’s economy suffered just as much as the rest of Europe (https://www.cnbc.com/2020/04/30/coronavirus-sweden-economy-to-contract-as-severely-as-the-rest-of-europe.html).
        I’m certainly not proposing that countries should be in perpetual shutdown but it’s important to be realistic and accept that just because businesses remain open does not mean that the economy will continue as if nothing has happened. People need to feel safe before they can go back to normal and not having to worry that they are literally risking their lives to go to a movie theater or fly on a plane with someone coughing in the seat behind them.

        1. It is a fool’s game to try to compare Hong Kong and South Korea with the USA. Vastly different attitudes to civil liberties. Huge difference in size of the population. And extreme difference in proximity to China and having to deal with our diseases which originated in China

          As I said before, people are now standing up against the shutdown. Anyone can look at the numbers and see that most of America can go back to work, with precautions – while more protections are put in place for the elderly and in particular, those in nursing homes which make up typically 50% to 70% of the deaths in most states. Not saying the economy will go back to exactly how it was before, but it should not be as bad as the shut it down crowd has been saying

        2. Its way too soon to declare Sweden a loser in its response to the pandemic. For all we know their approach will yield better health results in the longer term, especially if there is a second wave of pandemic. As usual however, central banks and institutional think tanks obsess about estimated GDP numbers while ignoring the fact that most small businesses and wage earners in Sweden are faring much better than their counterparts in countries operating under strict shut down orders.

        3. Singapore and other countries already had isolation hospitals ready to go because of SARS from years ago.

    2. Windy—yes, my house has had all kinds of updates and repairs–not by me, but by one of our sons who works in construction and is temporarily idled.

      I originally thought Walz was doing a good job, but everyday I am more and more disappointed–these long term care deaths are a major fubar by the state.

  3. I see this as a very short term correction. 2790 is about 50% from recovery to high and many look at it as a support level. Bounched off it today.

    As long as consensus of many analysts keep projecting the market is 18 times 2022 estimated earnings on the Sp500, then a major drop isnt happening.

    2022 earnings? Yep, some idea that our sp500 level in 2020 should be based on some SWAG on 2022 earnings which I find insane.

    It is what it is.

  4. Did anyone else notice that net or active cases in the US declined for the first time yesterday: from 1,041,000 to 1,028,000. Powell also disavowed negative interest rates, a folly on Trump’s part. There is good news out there but the press doesn’t want it. As long as one more person dies, it’s too risky to open up.

    Ten year treasury is falling but gold is up. If maintained that is a bad combination.

  5. Chuck P, You’re moving around some serious change.

    Could I interest you in some RLJ-A? Now I invited Jay Powell, but there’s room for all. Would you mind buying RLJ-A until it gets up over $25. Seriously excellent properties in the hotel biz whose recent wear and tear has dropped considerably. Just keep buying until say $26/share. lol

    1. Hello my friend Alpha8; Sorry about that RLJ+A but I no longer buy anything in the hotel/hospitality/airlines, restaurants BIZ. As the old saying goes no, nada, no thanks, not happening–LOL. On a different note I watch waaaay too much CNBC and freely admit it. So this morning they had on the Mayor of Los Angeles–Eric Garcetti. He was saying they are shutting down L.A. until “AUGUST 1st”. So let me ask you all a question. Is L. A. or California going to bail out all those small business’s until Aug. 1st???? Thats another 2 1/2 months from now. Here in Omaha people are acting like nothing happened. My wife and I just got back from the grocery store and the gas station and you would have thought everything is back to normal. It was the middle of the day and there was traffic everywhere. My point being many places are getting back to normal and reopening their business’s.

      1. Have you seen that map of the US which shows which way each county voted for President in 2016? A sea of red with pockets of blue in the major urban areas? Let me suggest that that is probably a pretty good map for the concentration of covid 19 with some allowance for packing plants and other exceptions. If so, that will a good proxy for which counties stay locked down and which open up. On top of all our other polarization, we now have the counties that have high covid and high lock down in the cities and low covid and open economies in the country.

        My guess is that LA won’t pay to stay locked but the US will Pay in a bailout which means the low covid areas will pay taxes that go towards keeping the cities locked down.

      2. CP good comments. It seems Blue States have a winning hand – at least until the election. Rely on PPP, conflate all their debt with C19, spend Red State worker revenue, and inflate current losses whenever possible or at least until liquid states can pay up for at least part of their pre-C19 debt. Don’t forget to make those funeral directors and doctors get the records right – those pneumonia, Influenza A, respiratory deaths can mostly all be counted as C19 for added stimulus $$.

      3. Chuck P, I hear about all these lockdown extensions and wonder what will make the difference in the future for these people. Short of a vaccine, this is not going away until most everyone has been exposed.

        1. Alpha – what will make the difference? The public. There are stories from everywhere of people telling their Governor to in essence go pound salt.

          I am in PA. The Governor came up with a plan to open by region, with defined criteria. My region met every single criteria laid out and the Governor refused to allow it to open. The outcry was tremendous, even from local Democrat officials (same party as the PA Governor). Several counties moved to file lawsuits. Others just opened with District Attorneys saying they will not prosecute anyone charged with violating his do not open order. He relented less than a week later for all but one county in the region. The county he still restricted had an extremely low number of cases and deaths except at one single nursing home – a nursing home that was forced by the Governor’s administration to take patients. That outcry from them was even worse.

          I suspect you find similar stories everywhere. To me, it is the people standing up to Governor’s acting as tyrants that will make the difference

          1. Maverick, I am located here in PA as well. My County wants to open as well and sent a letter to the Governor stating we would – so he stated that he would withhold federal funding and businesses might lose their licenses if they open without state approval. To date, my County has 13 deaths out of a total of 155,000 people. However, 7 of those came from just one nursing home which really skews the data. Hoping my County opens soon, as small business owners are really struggling.

            1. Kaptain, stay out of PA nursing homes and you minimize the risks considerably evidentially.
              According to the report, New Hampshire and Pennsylvania reported the highest share of coronavirus deaths — 72% and 70% respectively.

              However, the total deaths behind those ratios vary widely from state to state. In the case of New Hampshire, 66 of 114 total deaths occurred in long-term care facilities. Whereas, in Pennsylvania the slightly lower percentage represents a much greater death toll — 2,355 of 3,364 deaths.

            2. Kaptain – yes, the nursing home issue in PA is bad and really has skewed the data in a number of counties, From what I understand, Wolf’s threatening to extort counties by withholding federal aid quelled some of the rebellion for now, but not all of it. There are reportedly 3 or 4 counties still defying him. But since he quelled the majority, he views it as a victory. I believe the one county by me is allowing businesses to open up in a stealth manner.

              1. Maverick, If PECO is your service provider, just make sure you and Lou are men of integrity and are paying your electric bill. I want my KTH interest payments to flow to me in an uninterrupted manner. Besides they will just jack your rates up next time to pay for it anyways, so just put it in the mail.

            3. kaptain, great hunting and fishing there in Pa. All you have to do is stay outdoors. Some of the counties there have more deer than there are people.

          2. Mav, Agree that it’s completely ridiculous. Have a co-morbidity or otherwise vulnerable? – we want you to be safe. So stay home if you want to and wait for a vaccine. Everyone else, on with it.

            We’re over 60. My wife actually discussed the efficacy of being intentionally exposed to it so as to trigger development of the antibody and be done with it.

            We didn’t build this nation hiding in hovels.

            1. Yeah Alpha, my wife is a nurse at a busy city hospital which is part of a large system. She helps manage the OR. Because they stopped all elective surgeries, the hospital was a ghost town for over a month. They had to tell staff to stay home, no patients to treat. They had a grand total of one covid patient in their hospital. Thankfully she said the CEO started ignoring the Governor and began ramping up “elective” surgeries a few weeks ago. And I say “elective” because other than some plastic surgery, no surgery is really elective. You don’t get it unless you need it.

              As you said, if you are of a certain age or have risks from other conditions, stay home and be cautious. But everyone else , time to move forward. Let’s not forget, the whole concept of the shutdown was not shutdown until their is a vaccine – but rather shutdown to flatten the curve

          3. Yeah, Mav. I live 2 miles from PA. Your brilliant governor closed all the liquor stores in the state with the result that they all come to Delaware. If one drives by the local totalwine 90% of the license plates are from PA. You see cars depart packed to the gills. Much, I think, is for resale.

            It’s even more pronounced at the one and only Costco in Delaware, which is less than 10 miles from 3 other states.

            PS – I get my wine shipped from other states to my door. Delaware stores can’t by law deliver but out-of-staters just can. There are more stupid laws in the alcohol trade then anywhere else. Except maybe medicine.

            1. LOL, yep, that is part of our brilliant Governor’s poor thinking. And it makes it worse that the PA liquor stores are all state owned and run. Don’t blame me though, I didn’t vote for him :).

              It’s the same flaw the governor has in his plan of opening some counties and not others. Does he really think people don’t commute between counties. Hell, I am close enough to my county line I can cross it on a long walk

              Then we have our mind boggling health secretary whose department oversees Nursing Homes and has done a terrible job. While around 70% of all the covid deaths in PA are from nursing home patients, the secretary was quietly moving his mother out of a nursing home when the pandemic was underway.

    2. RLJ actually seemed to have a couple bits of decent news yesterday. Working on forbearance, plus 1.2B cash and another 200 million they can call on.
      Cash burn rate is 25-35 million per month.
      We’ll see.

      1. Gary, The cash burn for some of these operations is astounding. If you’re in forbearance, it raises the question – where’s $25M-$30M going every month? RLJ actually has some better than average properties which I believe will be more sought after post-lockdown. We’re obviosuly not headed for a hotel-less landscape.

        If open and without a mandatory 14-day quarantine on arrival, we’d been on the plane for Hawaii within a few days. I mean that literally. I’m sure there are plenty others ready to kick-start this economy.

  6. I think it is more the decision of some states to extend the lockdown that is the problem. Leaving aside whether that is the correct decision, it is certainly more economic damage.

    Prior to that the numbers had been looking good from the states which had reopened and people were optimistic. Of course, Musk used leverage to get his business open, but there are going to be no small businesses or middle class left in CA once this is over. That seems to be more or less their goal anyway and has been for decades now so this is just an acceleration.

    On the bright side, these decisions can always be revisited to either loosen or tighten things up as necessary.

  7. Could the fixed-income and preferreds specifically selling off more today as the Fed which was supposedly buying ETFs and IG bonds bought ‘too few’ or ‘just the best’ from WallStreet bonds trader’s perspective?

  8. Also think the pandemic itself is far from abating.

    All this opening up of the society is very premature.

  9. I feel good having the largest chunk of money in the utility and closed end fund (CEF) preferreds and baby bonds….Tim are our stash’s linked in same account, lol…Though I suspect you dont own the AILNPs and CNTHPs of the world like I do, ha.
    Not a big player in CEF’s, but even I have parked money in them via GGO-A bought back during March sell off and more recently GLU-B which has a double put option date to go with its anemic yield. Pretty much exited bank preferred arena having only CBKLP and SBNCM left in the fold.

  10. Tim, agree…the sentiment quickly changed from a almost euphoric best case covid/market scenario to “holly crap batman.” Appears the media is going with “this is going to be bad”…interesting how quickly it turns.

    The equity market has broken thru key support levels…these are keys to watch as 80% of equity trading is automated which triggers on technical indicators, media stories, etc. If there is a significant pullback, it likely will be more orderly, unlike the prior panic selling.

    Unfortunately, but a reality, the political narratives exacerbates the problem. Fortunately the FRB and Congress are getting ready to load up BIG wheel barrows full of Billion Dollar bills.

    Windy

    1. Windy – the media have been in the let’s scare everyone tact for some time. They have an agenda and scaring everyone thru , oh lets say November, is part of that agenda.

      It’s interesting because when you look at the data in Florida and Georgia for example, who got bashed for opening back up, the data looks quite promising since they made those decisions.

      In any case, this sell off will let me finish the positions in some stocks I had started in several weeks ago that had run away

      1. Maverick…yes to media has been sowing dissension for a while now.
        My comments was thinking back to when covid first hit and everyone was singing “we are in it together”…didn’t last long. Now it is “jokers on the left, fools on the right, stuck in the middle with you” This site is my sane place.

        If you follow the money, I assume the media is driven by politicians, big business and financial institutions. If history repeats, the retail investor and the little guy will be left holding the bag.

        I don’t like it, but knowing what is driving the markets takes the emotion out of investing/trading.

      2. maverrick61–if I had faith in media before (not really) I sure don’t have any now.

        Of course there is risk in opening stuff back up, but life is full of risk. In Minnesota our governor thinks he is going to keep things locked down forever, but the troops are restless and stores are beginning to open up–we will see what happens next–could be fun.

    2. Windy–yes – maybe even dump trucks full of moola. I think we could get some bouncing back in markets when they drop some more money.

    3. Today told you just how thin the conviction in the markets is. Powell says “Boo” and 500 points off the Dow. Nervous as a cat in a room full of rocking chairs.

  11. Fauci’s scary comments about future possibilities didn’t help and the prospect of another $3 Trillion on anything should chill us all. Did you hear Pelosi’s justification for the $ 3 Trillion “rescue package”? She said that interest rates are so low that borrowing is cheap. When are we ever going to run a balanced budget let alone a surplus?

    If I get any personal payments, I am going to give them to my children because they’re going to have to pay them back.

    1. George–afraid we as a society are moving toward a test of MMT (modern monetary policy)–this won’t end good–someday.

    2. Fauci is reveling in his 15 minutes just a little too much. He is a negative force in my humble view.

      The Senate hearing on COVID yesterday was enlightening. The Chairman of the meeting was spot on, in my view, that the way out of the present situation is testing. Testing for acute illness and testing for exposure (antibodies). Plus, down the line, acute therapies and (hopefully) a vaccine.

      Also, Sen Rand was spot on in pointing out that those who have been exposed (and have antibodies) are likely immune.

      So, those that have immunity, and those who are negative and have no symptoms, can go back to work. The current public policy is foolish. It’s really a state and local issue now, and they are failing to deliver sensible policies. The policies are changing only because the voters are screaming.

      In Delaware, they state government shut an entire factory because almost all the workers tested POSITIVE for COVID exposure. They were asymptomatic but had antibodies. This is exactly who can and should be working. But the state government here, 100% run by one political party, cannot get a single decision right.

      Keep screaming.

      1. Bob, I love the internet…You can find the answer you are looking for no matter what side of the fence you are on…I like this one…
        Tobacco is also a major risk factor for noncommunicable diseases like cardiovascular disease, cancer, respiratory disease and diabetes which put people with these conditions at higher risk for developing severe illness when affected by COVID-19.
        https://www.who.int/news-room/detail/11-05-2020-who-statement-tobacco-use-and-covid-19
        But yet maybe it helps you from not getting it in the first place…
        Researchers are investigating the effects of nicotine on COVID-19, the rapid spread of the novel coronavirus SARS-CoV-2 and evidence for a surprising hypothesis: Cigarette smokers are less likely than non-smokers to contract the virus.

        Cardiologist Konstantinos Farsalinos told InsideSources he is investigating why smokers are disproportionately unlikely to become COVID-19 cases. He explained there is a need to explore the prevalence of current smoking behaviors among those who were diagnosed with the virus.
        https://www.insidesources.com/nicotine-could-prevent-the-spread-of-covid-19-studies-suggest/

        1. Grid – the demo information on COVID is fascinating and evolving quickly.

          I gave up smoking 40 years ago and won’t go back but I’m working on the assumption that alcohol has prophylactic properties. Burgundies and cremants especially so.

          1. Im right in the middle, Bob. Quit 20 years ago and was only a half a packer for 10 years. But religiously suck on nicotine mints for past 20 years. Doc says have at it until bp ever goes up or 70 whichever comes first. But for now, I enjoy the relative protective shield it provides me from Covid.

  12. Hello Tim; I added another 3,000 shares of STT+D today at $25.49 and some at $25.50. Its a 5.90% coupon and not callable until March 15th, 2024. You say NO not another f—ing BANK!!!!! LOL Well just hear me out on this one, LOL again. Its not what I would call a normal traditional bank in my opinion. They are a custodian for over $34 TRILLION IN ASSETS and they also have another $3 Billion under Management. So in my opinion this is a far cry from a bank that has billions and billions of “bad loans” on the books. Anyway, I now own 8,500 shares. Hope and Pray I don’t get my head handed to me.

    1. Chuck P- no problem from me on holding plenty of quality assets–I am swearing off the junk stuff for now.

    2. Chuck (and others) – STT is a great non-bank bank. I put BK FRC and NTRS in the same category. But do watch the reset rates on those STT issues. STT-D has a huge rate drop in built in at present LIBOR rates.

      I see the pricing on some of these F2F issues and have to assume the buyers assume they are going to be called. But if they are not you are looking at some very low rate perps where the issuer has the option to call if rates ever do go up again. Heads they win, tails you lose.

      If your view is lower for longer than F2F may not be the place to be.

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