Mar 31, 2020

Axios Markets

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🎙"There is an attraction, a special charm in the colossal to which ordinary theories of art do not apply." - See who said it and why it matters at the bottom.

1 big thing: Hotel industry warns of looming financial crisis

Illustration: Sarah Grillo/Axios

Hotel industry lobbying groups have fired a warning shot, exhorting lawmakers to provide them with financing to avoid a series of debt defaults they say could set off a widespread financial crisis.

Why it matters: Without the bailout — which would be in addition to government funds from the $2 trillion CARES Act — the industry says its members could be the first in a wave of debt defaults that would hit everyone from real estate investors and pension funds to average homeowners.

What's happening: In a letter to the U.S. Treasury, the Fed and the SEC, the American Hotel and Lodging Association (AHLA) and Asian American Hotel Owners Association requested government assistance to avoid defaulting on at least $86 billion in loans over the next several months, the Business Journals' Craig Douglas reports.

Details: The loans coming due are held in the collateralized mortgage-backed securities (CMBS) market, which is similar to the residential MBS market that crashed, setting off a wave of defaults, foreclosures and bankruptcies in 2008.

  • Rather than the slow churn of buyers falling behind on their mortgages because of unexpected increases to their adjustable rates that happened then, hotels are on the brink of default because of an "unprecedented cash flow crisis."
  • "The impact to our industry is already more severe than anything we’ve seen before, including Sept. 11th and the Great Recession of 2008, combined," AHLA president and CEO Chip Rogers said in a statement earlier this month.

What they're saying: Moody’s Investors Service cut its outlook for corporate debt to negative on Monday, saying "the coronavirus outbreak continues to halt normal business activity worldwide, with no clear turning point yet."

  • Ratings analysts are expecting that "credit quality will deteriorate for rated corporate entities around the world, with defaults rising in the coming quarters."

The big picture: The corporate debt market is in a very precarious position as a result of years of high issuance and desert thirsty investors hunting for yield.

  • The Fed expects to open a lending facility to buy bonds from issuers who run into trouble, but their programs only apply to investment grade companies at the top of the credit ratings pyramid.
  • Many of the sectors most at risk of default issue bonds in the so-called high yield or junk bond space, which makes up almost 30% of issued debt.
  • Moody's has said it expects to see significant defaults in the market.
2. Catch up quick

Mortgage servicers are facing a liquidity crunch due to a provision in the CARES Act allowing borrowers impacted by COVID-19 forbearance on loan payments for up to a year. Estimated losses total $40 billion to $100 billion. (Politico)

Democrats are eyeing a fourth coronavirus relief package after House Speaker Nancy Pelosi threw support behind increasing direct payments to U.S. households. (The Hill)

Hungary’s parliament gave Prime Minister Viktor Orban the right to rule by decree and bypass the assembly on any law indefinitely. (Bloomberg)

"Oil prices have already lost more than half their value in March alone, but Bank of America analysts said both the U.S. and Brent benchmarks will fall into the teens by the end of March." (Reuters)

3. Dallas Fed index hits record low
Data: Dallas Fed; Chart: Axios Visuals

The Dallas Fed's business activity index fell to -70, the lowest reading ever, dating back to the survey's creation in 2004.

By the numbers: Measures of production, new orders, shipments and capacity utilization were the lowest since 2009 while prices declined and wage growth slowed, according to the survey of 110 Texas manufacturers conducted March 17–25.

  • Expectations about the future hit all-time lows, with the survey's company outlook index falling from 3.6 to -65.6.
  • The index measuring companies' uncertainty jumped from 11.0 to 62.6.
4. China's V-shaped recovery looks too good to be true
Data:; Chart: Axios Visuals

Official statistics out of China suggest it is bouncing back from the COVID-19 outbreak that shuttered the country for much of the first quarter, but there is growing speculation that data are being massaged to paper over a bevy of nagging issues.

Driving the news: China said manufacturing activity returned to expansion in March, with its official metric rising to 52.0. Economists had expected a reading of 45.0 after hitting a record low of 35.7 in February.

  • The official index tracking services and construction rose to 52.3, the government said.
  • Official reports also showed 95% of factories had reopened by mid-March, the Institute of International Finance notes, cautioning that anecdotal evidence suggests "utilization rates are still low due to the lack of orders and workers."

What we're hearing: The services sector numbers, in particular, are worth watching, says Matthew P. Goodman, senior adviser for Asian economics at the Center for Strategic and International Studies.

  • "It’s still pretty dubious that there’s been a substantial bounce back yet, and the authorities may be exaggerating those numbers to make people feel a little better about this than has been quite warranted yet," he said during a conference call Monday hosted by the Council on Foreign Relations.

Others were less kind. "The China COVID numbers are fake and the China PMI number is also fake," Alan M. Cole, senior economist at the U.S. Congress Joint Economic Committee, said on Twitter.

On the other side: Unofficial numbers tell a different story. "Overdue credit-card debt swelled last month by about 50% from a year earlier," Bloomberg reported, citing unnamed executives at two banks. Per Bloomberg...

  • "Qudian Inc., a Beijing-based online lender, said its delinquency ratio jumped to 20% in February from 13% at the end of last year."
  • "China Merchants Bank Co., one of the country’s biggest providers of consumer credit, said this month that it 'pressed the pause button' on its credit-card business after a 'significant' increase in past-due loans."
  • "An estimated 8 million people in China lost their jobs in February."

Why it matters: "These issues in China are a preview of what we should expect throughout the world," Martin Chorzempa, a research fellow at the Peterson Institute for International Economics, told Bloomberg.

5. Zoom's stock boom may be doomed
Data: FactSet; Chart: Axios Visuals

Video conferencing giant Zoom's stock has taken flight in recent weeks, up 121% this year while the S&P 500 has fallen 19%. But the good times may be coming to an end.

Driving the news: The New York attorney general's office sent a letter to the company Monday outlining a number of concerns about security flaws and vulnerabilities "that could enable malicious third parties to, among other things, gain surreptitious access to consumer webcams," the New York Times reported.

The big picture: Zoom has taken off as more small- and medium-sized businesses have begun using the service as they have been forced to go remote because of the COVID-19 outbreak.

  • However, Goldman Sachs equity research analyst Heather Bellini issued a "sell" rating on the stock, arguing that its current price outpaces reasonable expectations of growth.

Between the lines: Bellini expects around three quarters of the companies currently using Zoom's free trial option will become users, but as the economy worsens she expects many will have to cut their subscriptions to reduce costs and others will simply go out of business.

  • Further, Zoom's stock currently sells for more than 1,600 times trailing earnings and she expects the company's profits growth rate will subside as it ramps up expansion.

Quote: "There is an attraction, a special charm in the colossal to which ordinary theories of art do not apply."

Why it matters: On March 31, 1889, Gustave Eiffel's Eiffel Tower officially opened in Paris. It held the title for tallest man-made structure in the world until the Chrysler Building in New York City was finished in 1930.