(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?

(New York)

The S&P 500 hit a wall last week and saw its worst performance in a couple of months. Today notwithstanding, the market could be in for another big fall, according to Barron’s. Stocks fell 2.7% and it could be a sign that a reversal is coming. According to Nomura, “If [the S&P 500] continues to fail, you’ll hear about topping patterns, lower highs, exhaustion, and a lack of momentum”.

FINSUM: So the argument here is basically “death spiral caused by attrition”, so sort of like someone pushing a boulder up a hill and when they can’t quite get it to the top, they tumble back down. We are inclined to disagree here given that the Fed is sending such strong support signals.