[Market Madness] Edition 0046
Vaccine Race
Back on the hype train
Well folks, the race to a vaccine has investors feeling optimistic in the equity markets, drowning out the cries of worry by more bearish investors. Rising debt concerns are putting the Eurozone on edge, Germany takes a stake in Lufthansa, and the NYSE trading floor re-opens. Let the madness continue.
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Fundamentals
Tuesday Close:
· Dow Jones Industrial Avg: +2.17%
· S&P 500: +1.23%
· NASDAQ: +0.17%
· US 10 YR: 0.691% | 99 4/32
· Crude OIL: $34.09
· COVID 19 Global Cases: 5,646,287
International Edge:
· FTSE 100: +1.24%
· Nikkei: +2.55%
Germany makes a move
In times of desperation for the airlines, Germany has agreed on a bailout deal to assist Deutsche airliner Lufthansa out of its financial hole. The two have agreed to $9.81 billion bailout deal, giving the German government roughly 20% control over the company. The deal is still to be worked out by regulatory agencies, but will stand as one of the largest single-company assistance deals to come out of the COVID 19 pandemic.
The deal will include two parts, an injection of new equity shares as well as a government note with unlimited-time duration quarterly repayment schedule. Here in the U.S., the airlines have received some help too. Delta Airlines is set to receive 5.4 billion in payroll support, and American Airlines is receiving $5.8 billion for payroll support. Set aside is another $25 billion for airlines in need as the crisis continues to unfold and weaken the industry’s financial stability.
We all know how hard the travel industry has been hit by the shutdowns and widespread outbreak of COVID 19. It did not help that some airlines were using excess cash to fund stock buybacks, further harming their cash reserves for times like these. There were also suggestions about the potential for the Fed to begin buying shares of the different U.S. airlines, but has since evaporated and replaced with large scale grants and loans.
Having some level of government intervention in the form of a equity stake raises many different and new complications for any business. Seeing that airlines are built into national defense in some way or another, concerns regarding potential conflicts of interest may have been less likely here than in other industries. I’d also like to think that given such desperate times, government control in a firm, like Germany’s, will only be temporary in duration and provide adequate assistance in helping bridge the financial gap for the company until more adequate levels of demand for flying return.
Read more here: https://www.wsj.com/articles/germany-lufthansa-agree-on-9-8-billion-bailout-11590430966
Hertz hurts
Hertz will live on forever in infamy as a prime financial case study example of a distressed firm. Experts are starting to note that the firms in serious trouble financially due to COVID 19 were most likely the ones also hurting before the crisis even began.
It is not a surprise that with such reduced levels of travel that car-rental agencies are also feeling the heat too. What sets Hertz aside was their massive levels of borrowing before the crisis and back stepping some poor financial transactions. They had collected some $19 billion in debt to fund future operations as well as recuperate losses from its acquisition of Dollar Thrifty in 2012 that didn’t go as expected. Combined with their efforts to move into a newer competitive landscape dominated by two key players, Hertz got bullied and left the sandbox.
That does not even mention the influence ride-share companies like Uber and Lyft, which have completely changed how people drive and commute. It will be interesting to see how firms like Avis and Enterprise react to the news of Hertz and to see if they make any strategic adjustments to capture the new market share. As we know, those who gain and sustain a competitive advantage win.
Read more here: https://www.wsj.com/articles/hertz-was-already-in-terrible-shape-the-pandemic-finished-it-off-11590434631?mod=searchresults&page=1&pos=3
Eurozone worries
The Eurozone’s government budget forecasts suggest budget deficits will rise over 8% of GDP (on average), well above the levels seen following 2008. In addition, aggregate government debt is expected to rise to 100% of GDP as member states take on increasing debt loads to combat the ongoing pandemic. In more distressed nations like Greece and Italy, public debt levels are 200% of GDP and 160% of GDP, respectively. Economic thinking prior to COVID 19 suggested that any government debt level above 90% of GDP was unsustainable.
Although most economists do not now believe there is such a clear limit, many still think that allowing public debt to build up ever higher would threaten to undermine private-sector spending, creating a drag on growth. (excerpted from article)
Needless to say, there is a storm brewing, and no one is really sure what the aftermath is going to look like. With so many different and new tactics being put into action all across the globe to help stave off a global economic meltdown, it might get a little shaky when the chickens come home to roost. While the U.S. is not in as bad of a place with respect to distressed debt, we have surpassed the 100% government debt to GDP level, and further into uncharted territory as we continue raising the debt spending ceiling partially to fund the ongoing COVID 19 pandemic relief as well as general day-to-day spending. With no end in sight, and an empty promise of reducing debt levels from back in 2016, we can only speculate so much before we’re getting too ahead of ourselves.
Read more here: https://www.ft.com/content/4d60cbfd-722e-4eee-af4a-50198321e0f8 and get the U.S. debt/gdp levels information here: https://tradingeconomics.com/united-states/government-debt-to-gdp
Quick takes
· SpaceX nearing launch, sending Astronaut into orbit. The launch on Wednesday, if successful, will open up space exploration to commercial investment. (via FT)
· S&P 500 rally pushes index back over 3,000. (via WSJ)
· Experts suggest that rapid COVID 19 tests are still months away, with growing fears of a ‘second wave’ in the Fall. (via WSJ)
· Apple looking to re-open 100 U.S. stores, most serving curbside pickup. (via Reuters)
· Germany extends social distancing measures to June 29. (via Reuters)
· Shares of JPMorgan rise after CEO Dimon says that the stock is ‘very valuable’ at current prices. (via CNBC)
· JPMorgan issues warning to investors not to ‘overstay welcome’ on current market rise. (via CNBC)
· Congress will ‘probably’ pass another coronavirus relief bill. (via CNBC)
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