[Market Madness] Edition 0075
A Start to the Week
What have we here
Well folks, today has been a really confusing one. Futures pointed to a green open, which we saw, lifted by rising airline stocks and record pending home sales in May. By the close, major indices were
Elsewhere, the major indices overseas were mixed, with Asia closing in the red and Europe making gains. Political risk is creeping in on all fronts, with international tensions rising between the U.S. and Russia, Iran, and Germany. As more information comes out, the markets will have to price it in, determine how the international players will move and shift.
COVID 19 is taking another toll here in the states, forcing paused reopenings and even re-closings. This information does not appear to be influencing the markets today as investors remain optimistic about companies and their abilities to recover and reopen, despite worsening conditions.
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Fundamentals
Monday Close:
Dow Jones Industrial Avg: +2.32%
S&P 500: +1.47%
NASDAQ: +1.20%
US 10 YR: 0.636%
Crude OIL: $39.48
Market Madness Portfolio: +0.86%
COVID 19 Global Cases: 10,341,415
Indices Overseas:
FTSE 100: +1.08%
Nikkei 225: -2.30%
Hang Seng: -1.01%
TEDRATE: 0.16
LIBOR (3 month): 0.30788%
What’s your credit worth?
We’ve talked about this here and there in past editions, but a piece in today’s WSJ helped explain the challenges looking ahead. Given the large amount of personal deferments, banks have been rolling back their willingness to lend as freely as they had before. What banks are seeing currently is akin to shooting in the dark — targets are likely to be missed…by a lot.
Despite recovery and reopening processes, the large level of consumer-based financial distress is going to force banks to tighten their exposure as well. As we saw today, the rise in pending home sales for May was a major record. A lot of this can be attributed to the very cheap interest rates for mortgages currently. But as banks continue to tighten lending restrictions, it could become the case that many are unable to capitalize on these low rates if banks are unable to determine strength of credit.
“Lenders can’t tell if a borrower in deferment has fallen on tough times or is simply taking advantage of lenders’ relief options.” (excerpted from article)
The question of credit comes largely due to the onset of COVID 19. FICO scores will likely be adjusted multiple times in the coming recovery months, in order to help banks better determine good borrowers from bad ones. Many banks have increased their bottom-level acceptable FICO score for borrowing already.
“Fair Isaac Corp., the creator of the widely used FICO credit scores, is rolling out an index that will appear next to loan applicants’ scores and inform lenders how likely the applicant is to withstand financial difficulties during the downturn.” (excerpted from article)
“Coronavirus has “thrown existing models off,” TransUnion’s Mr. Miller said.” (excerpted from article)
Some are beginning to wonder how else the government could support individual consumers. Many look to the billions in business stimulus but the single $1,200 check for individuals and scratch their heads. Capitol Hill is still punting additional consumer stimulus around, but to little avail yet.
It is much easier, and in many respects it makes more sense, to provide the stimulus through the business channel and not through the consumer channel. In this way, money flows to businesses to open and sell their goods and services to demanding consumers. Workers are then paid, cycling that money from stimulus back to consumers. The continuing cycle increases business stability and profitability, and provide a stable paycheck to consumers who are putting in working hours.
The problem with applying this strategy to what we are experiencing now is that people could not spend money at businesses because they were largely closed. The PPP was helpful in supporting businesses’ payroll obligations, but we did not see the multiplier effect from consumers taking payroll earnings and spending it, increasing the level of economic activity and thus, economic growth. Some might argue that the better alternative would be to provide stimulus to consumers hands, allowing them to meet their personal obligations and then take the rest and make spending/savings decisions once reopening processes began.
There is one thing that is inarguable; the onset of the virus created unprecedented challenges to our societal and economic frameworks which required immediate actions and could not afford to draw up well thought out plans. The well thought out plans can come in preparation for the next global disaster. This time, we will learn through trial and tribulation, suffering the consequences of reduced GDP numbers, increased credit requirements and a difficult adjustment to the new ‘normal.’
Quick Takes
Pending home sales in May spike record 44.3% versus expected 15%. (via CNBC)
Gilead’s trial COVID 19 drug, remdesivir, expected to cost over $3,000 per U.S. resident with private insurance. (via CNBC)
BP sells petrochemical business in a $5 billion deal. (via WSJ)
Iran issues arrest warrant for U.S. President Donald Trump and 35 others in the killing of Iranian general Qassem Suleimani. (via The Guardian)
Chesapeake Energy, U.S. shale mining company, files for bankruptcy. (via CNBC)
China’s strategic ownership of rare Earth deposits position them against the U.S. in trade. (via WSJ)
Reader’s Corner
The reader found a new online financial markets ‘dashboard’ that aims to put institutional quality insights in the hands of every investor. Check TOGGLE out here.
(no sponsorship here, I just think they are a cool company that is doing something interesting)
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