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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. US markets sell off into the close

2. US Dems roll out new stimulus bill

3. China producer prices fall, hurting recovery hopes

4. Pension pain

5. The Fed buys bond ETFs, and the market shrugs

Markets Closed

Dow
23,764.78
−457.21 (-1.89%)

S&P
2,870.12
−60.20 (-2.05%)

Nasdaq
9,002.55
−189.79 (-2.06%)

VIX
33.04
+5.47 (+19.84%)

Bitcoin
$8,825.31
+$248.97 (+2.90%)

US 10-Yr Yield
0.678
−0.048 (-6.61%)

Image credit: alexandrumagurean/Getty

Markets Today

There was bad news everywhere you looked today and investors voted with their money, sending all markets and sectors lower. Even the Nasdaq traded lower, as the giant tech stocks couldn't manage gains for the first day in six. Selling accelerated into the close, which is never a good sign.

China's producer prices sank in April, sending an ominous sign about its economic recovery, which allegedly began last month. U.S. consumer prices fell 0.8% in April, the second month in a row and the biggest drop since 2008.

Boeing CEO David Calhoun told a national television audience this morning that a major U.S. airline is likely to fall this year. That's no way to talk about your customers, and airline stocks shrank across the board.

Dr. Anthony Fauci, the nation's leading epidemiologist and the Trump Administration's face of the health crisis, testified to Congress today that lifting social distancing guidelines too soon would cause another outbreak, more senseless deaths, and a further setback to the economy. Almost on cue, California said it would be extending restrictions for the next three months, at least.

That hurts, and outside of the markets in small business land, that's going to hurt minority, female, and veterans' businesses the most. Many may not make it, according to a recent survey by the Minneapolis Fed.

Headlines:

Democrats in the House of Representatives released their latest stimulus bill Tuesday. Party leaders expect to vote on the more-than-1,800-page package on Friday, along with a plan to allow proxy voting on legislation during the crisis. Here's a quick summary of what's in it:
- Nearly $1 trillion in relief for state and local governments, a second round of direct payments of $1,200 per person, and up to $6,000 for a household
- About $200 billion for hazard pay for essential workers who face heightened health risks during the crisis
- $75 billion for coronavirus testing and contact tracing—a key effort to restart businesses
- An extension of the $600 per week federal unemployment insurance benefit through January (the provision approved in March is set to expire after July)
- $175 billion in rent, mortgage, and utility assistance
- Subsidies and a special Affordable Care Act enrollment period to people who lose their employer-sponsored health coverage
- Relief for the U.S. Postal Service
The U.S. Treasury reported a record $738 billion budget deficit in April, as an explosion in government spending and a shrinking of revenues amid the novel coronavirus pandemic put it deeply into the red. The Treasury Department said the budget deficit last month was the first to reflect the enormity of government spending that has been authorized to try to mitigate the economic impact of the crisis.
China's producer price index (PPI) fell 3.1% year-over-year in April, according to the National Bureau of Statistics. This is its sharpest decline in four years, and it follows a 1.5% drop in March. The pace of falling producer prices is worse than analysts expected and was driven by a slump in global crude oil and commodities prices.
Uber has made an offer to buy food delivery company Grubhub, according to CNBC. The two companies have had discussions about an all-stock deal that would offer Grubhub shareholders 2.15 Uber shares for each Grubhub share. Shares of Grubhub (GRUB) soared 36% on the day.
Saudi Aramco's first quarter net income slid 25% year-over-year to $16.6 billion and was below expectations. It cited the impact of the pandemic on global crude oil demand and prices, as well as declining refining and chemicals margins and inventory re-measurement losses. Production was 9.8 mmbpd. Dividends of $13.4 billion were paid in the first quarter, and $18.75 billion will be paid in the second quarter.
Simon Property Group, the biggest mall owner in the U.S., says 50% of its locations will be reopened this week. The REIT giant has already reopened 77 of its U.S. retail properties and twelve of its designer and international premium outlets properties where local and state orders have been lifted and retail restrictions have been eased.
Biotech company Novavax's (NVAX) stock is skyrocketing 62% today. Yesterday it announced the Coalition for Epidemic Preparedness Innovations (CEPI) will invest $384 million more to advance clinical development of its COVID-19 vaccine candidate, NVX‑CoV2373. Recruiting for the Phase 1 trial began this month with preliminary immunogenicity and safety results expected in July.
Coffee chain Tim Hortons, the only thing Canadians will fight you on, has received funding from Chinese tech giant Tencent. The amount was not revealed, but the money will be used to build 1,450 more stores in China and upgrade digital infrastructure.
PNC Financial Services intends to sells its 22% stake (35 million shares) in BlackRock. BlackRock has announced a secondary offering of the common stock and that it will repurchase $1.1 billion of common stock directly from PNC. Shares of BlackRock (BLK) fell 7% on the day.
Toyota (TM), one of the world's largest automakers, predicts its operating profit will fall 80% this fiscal year, which began in April. Net revenues declined 1% and global vehicle sales declined by 18,372 in the 2020 fiscal year. Shares in the company closed almost 2% lower in Japan.

chart courtesy Wilshire.com

Pension Problems

Public pension plans lost a median 13.2% in the three months ended March 31st, according to Wilshire Trust Universe Comparison Service data released Tuesday. The losses were slightly more than in the fourth quarter of 2008. The March plunge in the U.S. stock market led to the biggest one-quarter drop in the 40 years the firm has been tracking.

"The performance of U.S. institutional plan assets was negatively impacted by both equity and fixed income exposures. Credit markets have deteriorated due to the abrupt shutdown of the global economy, and many investor portfolios had more credit risk than what is indicated by the performance of broad fixed income benchmarks," said Jason Schwarz, chief operating officer, Wilshire Associates.

There is some $4.82 trillion in public pension assets in the U.S. That includes everything from police and firefighter pensions to foundations and endowments. Wilshire benchmarks the pensions' performance against a standard 60/40 portfolio of U.S. stocks and bonds, as per the chart above. All plans, on average, underperformed the 60/40 portfolio, and smaller pension plans suffered much steeper losses.

chart courtesy YCharts

The Fed Buys Bond ETFs

The Fed's brand new program, the Secondary Market Corporate Credit Facility (SMCCF), kicked off today with the Fed beginning purchases of U.S.-listed corporate bond ETFs as part of the effort to support the economy. "The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds," said the statement from the New York Fed.

Other factors that will determine if an ETF is chosen will be:

Composition of investment-grade and non-investment-grade rated debt
Management style
Amount of debt held in depository institutions
Average tenor of underlying debt
Total assets under management
Average daily trading volume, and leverage, if any
BlackRock is the investment manager

This scenario kind of puts the Federal Reserve (and BlackRock, the biggest investment manager in the solar system) in a position to pick favorites. The healthier companies with the healthiest balance sheets may get favored since the Fed doesn't want to throw good money after bad.

The alternative, of course, is that there are no buyers of junk bond debt or its ETF derivatives. That could have far deeper consequences and be a slippery slope to bankruptcies.

Investors originally cheered the news when the Fed said it would enter this market. But the thrill appears to be gone. You could have bought three of the biggest corporate bond ETFs a month ago, or you could've just bought AMZN.

More News:

How are Qualified and Ordinary Dividends Taxed?

What's the Difference Between Restricted Shares and Stock Options?

Fed Kicks Off Unprecedented Corporate Bond-Buying Program

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(chart courtesy YCHARTS)

Shares of Marathon Oil are up by over 3.5%. Oil futures finished higher today on expectations that declining production levels and economies reopening will relieve the global surplus. Amcor's stock price rose by more than 3% following the packaging company reporting higher profits over the past nine months, in addition to an increase in its full year earnings outlook.

Shares of CBRE are down by nearly 9% after the real estate investment firm announced a hold on the launch of its in-house coworking brand. Albemarle's stock fell 8% after the chemical company was downgraded from "Buy" to "Neutral" by Goldman Sachs. The investment bank justified the cut on a decreased demand of lithium, of which Albemarle is a major producer, due to the COVID-19 pandemic slowing down sales of electric vehicles.

Word of the Day

The Secondary Market Corporate Credit Facility (SMCCF)

The Secondary Market Corporate Credit Facility (SMCCF) is a special purpose vehicle (SPV) launched by the Federal Reserve on March 23rd, 2020, to support the corporate bond market in the face of the COVID-19 coronavirus crisis. The SMCCF will purchase U.S. investment grade corporate bonds and bond ETFs in the secondary market. The idea is that banks will be more likely to lend to corporations if they know there is a strong secondary market to sell that debt to. The program was expanded to purchase more bonds and bonds of lower credit quality on April 9th, 2020.

photo courtesy EcoIntersect.org

Today in History

May 12th, 1927:

With the German stock market up more than 160% in the previous 17 months, central banker Hjalmar Schacht is worried about irrational exuberance. He pressures Berlin's biggest banks to issue a joint statement in which they announce that margin loans (which enable speculators to trade stocks with borrowed money) will be restricted. The next day, "Black Friday," German stocks crash 11%, helping to trigger the early onset of economic depression.

Source: http://econintersect.com/pages/analysis/analysis.php?post=202003182313