Jun 16, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🚨 Situational awareness: The Trump administration is preparing a nearly $1 trillion infrastructure proposal that could include 5G wireless. (Bloomberg)

🎙 “Please don't shoot when you see. I'm taking from them 'cause for years they would take it from me." - See who said it and why it matters at the bottom.

1 big thing: Companies set to ramp up competition

Reproduced from PwC; Chart: Axios Visuals

Businesses have moved beyond the initial shock and crisis management phase of the coronavirus pandemic, and are shifting their focus to fundamental changes that will reshape their companies, according to the latest survey of top corporate executives from accounting firm PwC.

What it means: While executives say they are concerned about things like bringing workers back into the office, cybersecurity and investments, right now "there is a very common theme around revenue generation going forward that we're seeing dominate the C-Suite," PwC chair and senior partner Tim Ryan said during a call with reporters Monday.

  • For an increasing number of companies, the goal seems to have changed from growing the overall revenue base to taking market share from competitors, as the pandemic is expected to depress spending broadly.
  • Corporate leaders are looking to redraw their workforces and cut costs as they expect to be "fighting for a bigger piece of a smaller pie."

What we're hearing: "There’s a sense that 'We’re settled in, the environment’s going to be challenging for a while but we can compete,'" Ryan said. "It’s going to shape up for an interesting, let’s call it, six to 18 months of fairly intense competition."

The big picture: Companies are simultaneously focusing on long-term strategies, many of which include terms like "digital transformation" and "automation" that are generally code for replacing human workers with machines.

  • These trends had long been in the works, but with uncertainty growing about global supply chains and the availability of cheap overseas goods and labor, top executives look to be pushing to accelerate them.

The bottom line: "One thing CFOs and executive teams are very focused on is fundamental changes in the business model and we’re seeing that move at a rate that, frankly, we’ve never seen before," Ryan said.

2. Catch up quick

Chesapeake Energy is close to sealing a roughly $900 million debtor-in-possession loan to support its operations while under Chapter 11 bankruptcy-court protection. (Reuters)

The Bank of Japan voted 8-1 to leave its policy rates unchanged and voted unanimously to maintain its broad range of asset purchases. (Nikkei)

Secretary of State Mike Pompeo is quietly planning a trip to Hawaii to meet with Chinese government officials in the first face-to-face talks since January. (SCMP)

“If Biden is elected, I think this could be more dangerous for China, because he will work with allies to target China, whereas Trump is destroying U.S. alliances,” said Zhou Xiaoming, a former Chinese trade negotiator and former deputy representative in Geneva. Four current officials echoed that sentiment. (Bloomberg)

3. Axios-Ipsos poll: Americans fear a second wave
Data: Ipsos/Axios survey; Note: ±3.3% margin of error. This survey defined self-quarantine as staying at home and avoiding contact with others for 14 days and social distancing as staying at home and avoiding others as much as possible; Chart: Naema Ahmed/Axios

Axios' Margaret Talev writes: Eight in 10 Americans are worried about a second wave of the coronavirus, with large majorities saying they'll resume social distancing, dial back shopping and keep their kids out of school if it happens, in Week 13 of the Axios-Ipsos Coronavirus Index.

Why it matters: Businesses and schools around the country are trying to assess how quickly and fully they should reopen based in part on what Americans will demand and tolerate. These findings underscore the challenges in predicting how they should proceed.

  • But getting Americans to swallow a second round of 14-day self-quarantining could be tougher than getting them to go back to social distancing, with one in three saying they likely won't do it.
  • The biggest factor is partisan identification, with 81% of Democrats but only 49% of Republicans saying they'll self-quarantine if a second wave hits.

The big picture: The latest installment of our national weekly survey shows a renewed sense of worry following reports of new hospitalizations since states began lifting stay-at-home orders — but quarantine fatigue is still driving people to take their chances.

  • People's assessment of large or moderate risk grew last week for each of these categories: Returning to their normal workplace, dining out, retail shopping, going to the hair salon or participating in protests.
  • But the share of those going out to eat rose from 31% to 41%. Those visiting friends or relatives rose from 56% to 60%.
  • Those getting their hair done rose from 26% to 31%. Those attending demonstrations rose from 11% to 14%.
4. The next phase of coronavirus policy response

Illustration: Aïda Amer/Axios

The massive stimulus that U.S. policymakers flooded into the economy is starting to run dry. With some states just beginning to reopen businesses and millions still unemployed, fiscal and monetary authorities are gearing up for another round.

What's happening: As various "stay at home" measures are being lifted, so are many of the relief measures put in place to help the U.S. economy through the unprecedented coronavirus-induced shock.

  • First, the group of small businesses that received $350 billion for the original eight-week term under the Paycheck Protection Program (PPP) will exhaust those funds over the next few weeks.
  • The extra $600 per week in jobless benefits Congress approved in March expires at the end of July.
  • The last of the $1,200 relief payments sent to millions of Americans as part of the CARES Act are trickling out now.
  • Eviction moratoriums are starting to expire in states, which will allow landlords to remove struggling residential and business tenants.
  • Corporate tenants may face increased pressure from landlords given the strong stock market and extreme level of debt taken on by many businesses that will put them in position to take advantage of attractive vacancies.

Where it stands: As in March, the Fed is taking action early, announcing last week it planned to keep U.S. interest rates near zero through 2022 and continue purchases of about $80 billion per month of U.S. Treasuries and $40 billion of mortgage-backed securities.

  • Experts predict the Fed's balance sheet could rise to $10 trillion by year-end, up from its current level at just over $7 trillion and more than double where it started the year at under $4.5 trillion.
  • The Fed also announced it would start buying individual corporate bonds through its Secondary Market Corporate Credit Facility in addition to ETFs and opened up its $600 billion Main Street Lending Program on Monday.

Why you'll hear about this again: U.S. economic analysts at Goldman Sachs expect Congress to "enact another $1.5 trillion (7% of GDP) in fiscal measures" in addition to the estimated $3.5 trillion so far. But some are starting to worry that lawmakers in Washington D.C. won't do their part.

  • "We see risks of implementation and policy exhaustion," strategists at the BlackRock Investment Institute said in a recent note to clients.
  • "Next rounds of U.S. fiscal stimulus look harder to achieve because of a return of political polarization after a short window of bipartisanship."

What they're saying: National Economic Council director Larry Kudlow said in an interview with CNN that the White House wants the additional $600 per week in unemployment pay to end next month.

  • President Trump is considering a “panoply of ideas” for new economic stimulus that would be worked on after the July Congressional recess period, Kudlow added.
5. Q2 earnings season preview

Data: FactSet; Chart: Axios Visuals

Second quarter S&P 500 earnings are expected to decline by 43.5%, with revenues falling by 11.5%, according to FactSet, the largest year-over-year drop since Q4 2008 (-69.1%).

By the numbers: Estimated earnings per share for the second quarter have decreased by 36.2% since March 31.

  • That's more than 10 times the five-year average and the largest decrease in a quarter since FactSet began tracking the data in 2002.

Keep it 💯: The earnings picture is being clouded by a lack of forward guidance.

  • Through Friday, 183 S&P 500 companies had withdrawn or confirmed a previous withdrawal of annual EPS guidance for fiscal year 2020, FactSet senior earnings analyst John Butters said in a note.
  • Only 48 companies have issued guidance for Q2 — with 27 providing negative EPS guidance and 21 issuing positive ones — less than half of the five-year average for a quarter (107).
  • Even with the small sample size, the percentage of companies issuing positive guidance (56%) is well below the five-year average of 69%.

On the other side: As EPS estimates have fallen, price-to-earnings ratios have skyrocketed toward record highs.

  • The 12-month forward P/E ratio for the S&P 500 is 21.2, significantly above the 5-year average (16.8) and 10-year average (15.1) for the index.

Between the lines: The one sector in the S&P 500 that has not seen a significant negative impact to earnings guidance is utilities.

  • Utilities were, by far, the sector with the highest number of companies to confirm previous EPS guidance for 2020 and are projected to have the highest year-over-year earnings growth of all eleven sectors at 2.4%.
Dion Rabouin

Thanks for reading!

Quote: Please don't shoot when you see. I'm taking from them 'cause for years they would take it from me."

Why it matters: The greatest rapper of all-time and the first solo rap artist inducted into the Rock & Roll Hall of Fame, Tupac Amaru Shakur was born on June 16, 1971. He would have been 49 years old today.

Tupac's words are still incredibly relevant 24 years after his death. For the uninitiated who want to get up to speed quickly on who Pac was and why he was the greatest of all time, check out:

  • Snoop Dogg's speech inducting him into the Rock & Roll Hall of Fame.
  • The lyrics (with annotations) to his opus on the LA riots "I Wonder if Heaven Got a Ghetto."
  • His poem "The rose that grew from concrete," which inspired his book of poetry of the same name.
  • The video for his song "Dear Mama," an ode to his mother that was released while he was in prison, making him the first artist ever to have a No. 1 album while incarcerated.
  • His interview from jail in 1995.
  • The video for his song "Changes," which features a number of photos, interviews and sound bites.