Seeing red…and then green
Well folks, it looks like the weekend didn’t calm investors’ worries as the overseas markets closed red and we opened red as well. The continued selloff appears to come in the wake of increased global COVID 19 cases, as we broke 8 million global cases today. By the late afternoon, the U.S. indices turned green on the day, putting and end to the downturn at least for today.
As you can see from the S&P 500 breakdown, it was a mixed day to say the least:
Investors are having difficulty grappling with the ongoing ‘first wave’ and the potential for a second, potentially worse spike in the fall once cooler weather returns. More players in the pharma space globally are stepping into the ring, providing funding or doing research into developing a cure for the novel coronavirus.
Did you miss yesterdays’s piece? No worries! Get it right here and catch up on the madness.
Fundamentals
Monday Close:
Dow Jones Industrial Avg: +0.62%
S&P 500: +0.83%
NASDAQ: +1.43%
US 10 YR: 0.717% | 99 1 / 32
Crude OIL: $37.04
Market Madness Portfolio: +0.88%
COVID 19 Global Cases: 8,068,859
Indices Overseas:
FTSE 100: -1.36%
Nikkei: -3.47%
Hang Seng: -2.16%
Economic recovery chart follow-up
A few editions back, we looked at a unique CNBC post that followed the U.S. recovery across several different non-financial charts. These included use of Apple maps for directions, restaurant bookings, hotel occupancy, air travel and home purchases. Since we last investigated these charts, we’ve seen significant improvements across all five areas, with some more dynamic than others. This is expected, as different industries will have different recovery patterns and challenges as they move forward.
In a time where fears over a second wave are reigniting and the markets are continuing to sell off, it is nice to see that there is some level of forward momentum. I consider the worries over continued spreading of COVID 19 to be a legitimate concern. It is tough to get a grip over the market dynamics because they had been so out of sync with the economic news for some time now. We have mentioned this a lot in the past too; when there is a gap between economic movements and financial movements, there tends to be a negative result when they realign.
I do think, however, that it is valuable to keep an eye on these smaller trackers. They provide micro insights about industries, particularly the ones put on life support because of COVID 19. If we can see steady recovery in these areas, and reduced impact of the ongoing COVID 19 spread, then we could see a considerably positive economic recovery in the timeline that has been outlined by the Fed in their most recent meeting. For now, all we can do is hope.
PPP: an insider’s take - a special interview
I am pleased to share with everyone the first Market Madness interview piece. At Bentley, I was able to become good friends and receive career advice from Mike (who is also a founding reader to Market Madness). He works as a portfolio manager at Eastern Bank and has been working very closely with the bank’s issuing of PPP loans. I found this to be a great time to follow up and get some insider’s takes on how the process has been, what has changed since the beginning and what the road ahead looks like.
Q: How as the first week following the introduction of PPP?
Mike talked a lot about how the first week was a very confusing and hectic time. The banks were trying to understand from the government and the SBA (Small Business Association) what the payback and fee structure was going to look like. The customers of these loans (businesses) were also trying to get answers to questions regarding what was being advertised by the government as a ‘free loan.’ On both sides, there was a rush to get answers because of how important the loans would be for the banks to issue to their customers in need, and for the businesses to get their much needed funds to stay afloat.
Q: What was the communication like between the Treasury/SBA and the issuing banks?
The communication coming from the SBA was strong and often, with either daily or near-daily updates on the process, guidelines and expectations for documents needed to process these loans. As the process moved along, the documentation became more stringent, likely as a result of trying to better ensure that the money was going to the right hands.
Q: What was the most common question being asked by applicants?
The most common question was regarding payback, forgiveness and interest. Originally, the loans were supposed to be paid back on a 24 month time frame, which has now been changed to a longer time frame. The original allocations were on a 75/25 basis - 75% was to be used to fund payroll and 25% to be used on other things like utilities and rent. This has also changed to a more lenient 60/40 allocation.
If companies were unable to meet the proper allocation guidelines, they would be responsible for repaying the entire loan, not just the 25% (now 40%) allocated to non-payroll expenses. This of course can be subject to change, as we have seen a lot of guidelines change, so you’re mileage may vary.
Another big change that was made was in the timeline for spending the money. In the beginning, the SBA outlined a requirement by businesses to spend the money within 8 weeks of receiving the funds. This quickly became apparent that it was not going to work for businesses like restaurants where they’d be unable to meet the allocation requirements for the loans. The timeline has now been changed, requiring businesses to spend the money within 24 weeks.
Q: How has PPP changed the bank’s operations?
Since the issuing of PPP loans was a mad dash, many banks including Mike’s bank operated with an ‘all hands on deck’ approach, with anyone within the bank helping however they were able. There was no time really for new hiring and on-boarding/training, so many banks were forced to find additional help internally. A lot of long hours were put in to meet the deadlines for loan funding, which stretched the limits of what was thought to be possible.
Some challenges faced by the bank and many other banks is how to treat PPP loans from a risk management perspective. The original assumption, as detailed by the Treasury and SBA was full forgiveness on the loans. This had changed to match the original 25% allocation not used for paycheck funding and further changed to match the new allocation. Mike discussed a large increase in the balance sheet to accommodate the issuance of these loans. Risk in this area has appeared to be reduced as payback and a more lenient allocation should be easier for businesses to make repayments.
An insider’s take on PPP loans really shows how important this program was and still is for re-funding the most essential businesses in our economy. The hard work by banks and individuals like Eastern Bank and Mike are the reason why we’ve seen so many loans issued under the program and help our favorite businesses stay afloat and see the other side of the lock downs and challenging times.
Thank you, Mike for your time and insights - your words help the average person get a solid understanding of the PPP.
Grab a WSJ article for some additional context here. Connect with Mike here.
Quick Takes
Robinhood stock picks outperforming hedge fund picks. (via CNBC)
U.S. Supreme Court rules that businesses cannot fire workers for being gay or transgender. (via CNBC)
Europe plans to roll out contact-tracing apps for COVID 19. (via CNBC)
“The Trump factor: Asian allies question America’s reliability.” (via FT)
White House says that extra jobless benefits are keeping workers from going back to the office. (via FT)
BP takes $17.5 billion write down as they adjust their future outlook. (via WSJ)
Reader’s Corner
The reader found an interesting WSJ article discussing the long-term road ahead, comparing the battle with COVID 19 to wartime spending seen in WWII. Read that piece here.
Behind the Madness
Thank you again for checking in.
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Email: christopherdolliney@gmail.com
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