(Washington)

The Center for Disease Control made a pretty worrying announcement today. The CDC has previously warned that American could see a big uptick of the COVID-19 virus in the Fall, when temperatures cool down and flu season ramps up. It echoed that more strongly this week, citing evidence that the virus is gaining ground in the southern hemisphere as their winter takes hold. According to Robert Redfield, head of the CDC, “We’ve seen evidence that the concerns it would go south in the southern hemisphere like flu [are coming true], and you’re seeing what’s happening in Brazil now … And then when the southern hemisphere is over I suspect it will reground itself in the north”.

FINSUM: The reality is that a vaccine will not be ready before the next flu season starts, so it is pretty easy to imagine that the virus might see a big second wave in the Fall that leads to another lockdown.

(Atlanta)

The market is making a very strong bet that American Airlines—one of the largest carriers in the US—is going to fail. Bloomberg data shows that based on credit default swap pricing, investors think there is nearly a 100% chance of the Texas-based carrier defaulting in the next five years. There is nothing particularly unique about American Airlines’ exposure to the COVID crisis, except that it has a great deal more debt than other carriers, making it much more vulnerable. For its part, American is trying to “right size” its budget and is planning to downsize its operating expenditures by about $12 bn this year.

FINSUM: Cost cuts are great, but if your revenue has fallen 90%+ plus, all the costs cuts in the world aren’t likely to keep up.

(New York)

Muni bonds are seeing yields way above average right now even as Treasury bonds linger near all-time lows. The reason why is that it is increasingly apparent that there has been a huge erosion in municipal credit quality alongside the lockdown. Costs have surged at the same time as revenues have plummeted, leading to a significantly deteriorated financial picture for municipal issuers. The has been exacerbated by the fact that municipalities have largely been unsupported by the Fed as opposed to corporate issuers. But the sell-off has created opportunity, as even AAA issuers are seeing big discounts and much higher than usual spreads to Treasuries.

FINSUM: This is all about careful credit selection, as there are big opportunities, but there may also be major pitfalls.

(New York)

The bond market is usually ahead of the stock market in predicting and reacting to the economy. It seems to be doing so again. While stocks have had a huge run higher, bond yields have largely been stuck at very low levels. The ultra-low yields of around 0.7% on the ten-year Treasury mean that bond investors see a long, hard, recovery looming and many years of continued aggressive monetary stimulus by the Fed.

FINSUM: Stocks seemed to have gotten a dose of realism over the last two weeks, but yields may be more reflective of the difficulty of the recovery to come.

(Detroit)

There has been a lot of gloom for the auto industry lately. With showrooms and dealerships almost completely shut, car buying has dropped off a cliff, leaving auto companies sitting on big inventories with little demand. However, early signs from China and Europe are showing that the lockdown may have led to pent up demand for cars. In one sense, there is natural pent up demand from the closure of dealerships, but more interestingly, there seems to be more demand than usual. This is because people are growingly afraid of public transportation—in some cases governments are warning against using public transit . This means people are seeking the relative safety of traveling in their own vehicles.

FINSUM: This idea of surplus demand for private vehicles because of fear of the virus makes perfect sense. Auto stocks undervalued?