(New York)

We are headed towards Great Depression like unemployment, yet the market is rallying. What gives? That is a question everyone is asking themselves. We have already far exceeded Great Recession era unemployment levels and are quickly heading higher. Over 20m Americans lost their jobs in April and more than 33m have lost jobs since the start of the pandemic. The unemployment rate is just under 15%, and most analysts think it will get north of 20%, putting it on part with the Great Depression. Mnuchin himself said we may hit 25%.

FINSUM: We do not think the market has ever had to navigate such a difficult situation in recent memory. On the one hand we are dealing with the worst economy in a century. On the other, there is a temporary nature to this downturn (because it is self-imposed) and the government is doing a lot to stimulate the economy.

(New York)

One of the aspects of this bear market that has really alarmed investors is the speed with which the market has rallied from its lows. Huge gains of well over 35% have shocked investors into feeling like indexes are bound to fall again. In some sense that sentiment makes sense since it has happened before, such as in the dotcom bubble. However, according to BlackRock, it is absolutely time to go risk-on, but with a twist. The asset manager says that sovereign bonds have very little upside or protection to offer right now, so instead investors should put their capital into credit and higher-quality equities. “Over the next six to 12 months, we favor credit over equities given bondholders’ preferential claim on corporate cash flows and prefer an up-in-quality stance in equities”.

FINSUM: We particularly like the argument about sovereign bonds not offer much right now. With central banks already at their zero lower bound and sovereigns priced very highly, there is just not much to gain and plenty to lose.

(New York)

This COVID crisis has made whole areas of the economy uninvestable. Many companies have had to halt operations entirely and as the lockdown drags on it has become more clear that many may not reach their previous levels for years (if ever). One problem is that many stocks and sectors appear to be “stubs”, or stocks that have very binary value propositions. Unless things go very right, they are worth almost nothing. Energy is a good example. If oil prices don’t come back and demand for oil stays low, what is the US oil sector worth? Big brock and mortar retailers are the same—what are they worth if the re-opening doesn’t go well?

FINSUM: This is a useful way to think about some sectors, but the outcomes are probably not as binary as they may seem right now.

(New York)

PPP has been nothing short of a disaster. Big companies gobbled up all the money first, leaving small businesses without the capital they needed to survive. Those big businesses then had the rules changed so that the capital is no longer attractive. By the time that small businesses could really access money, the terms around forgiveness have grown so uncertain that many don’t even want it, according to COVID Loan Tracker, a site that tracks PPP loan disbursement. Now, for those who have already accepted a loan there is a new problem—workers don’t want to be hired back. In many cases workers are getting more on unemployment than they are from being re-hired, and coupled with the fact that many can’t find childcare right now, it makes little economic sense to return to work. This has very bad ramifications for small business owners, as if they cannot rehire their workers, then the forgive-ability of their loans is seriously in question.

FINSUM: This program has been full of mismanagement and unintended consequences, and businesses all over the country are feeling the brunt.

(New York)

Hotels are increasingly in trouble. About a quarter of all hotels in the US are now behind on their loan payments. COVID has obviously had a huge effect on hotel occupancy rates, which is now causing financial difficulties for the hotels and their lenders. The situation echoes other data from across the commercial real estate sector. For instance, Vornado Realty Trust yesterday said that it had only collected 53% of retail rents in April, and 90% of office rents.

FINSUM: We think it is critical to remember that re-opening is not a sign that all is clear in commercial real estate. Even once they re-open, restaurants and retail stores are still very likely to be doing MUCH less business than before they closed, and since a lot of cash reserves have probably been used up, their financial situation and thus the sector are just going to grow more precarious.