Institutional Research (June 16, 2020)

Macro Strategy

• Was it the briefest recession ever? Jobless claims suggest recession ended & recovery began in April.
• Unusual for a recession, personal income rose sharply (7.2%). Social income support policies more than offset declines in wages and salaries as employment fell.
• Consumer confidence about future economic conditions not only held up well, it has been rising over the last 2 months. Consumers expect the impacts will be short and are less likely to alter behavior.
• Companies largely viewed the slowdown as likely to be short-lived. They have been planning for recovery.
• Credit crunch or explosion? Corporate bond issuance is running at twice the pace of prior peaks.
• Vs other recessions that had a move out of cash begin around market bottoms, this time the cash mountain continues to grow, up by $1.2 trillion since early March, even as risk assets have rallied for 10 weeks now. A move out of cash should be positive for growth and risk assets.
• Global pandemic brought retail investors back into the equity market after being largely absent for a decade. They were important buyers of the correction in equities.
• Institutional investor positioning in equities by contrast remains extremely low (10th percentile). Tends to be correlated with macro data and represents an upside risk as growth picks up.
• Visits to grocery and drug stores are back up to normal levels.

COVID Data

• Potential issue in US, but not Europe
• Daily tests in US have increased significantly, so should focus on positive test rate rather than new cases
• Increased testing should reduce the bias of only severe cases being tested. Possible that positive test rate declines and testing captures more benign cases. Focus should also be on hospitalization
• In the US as a whole
  • Positive rates have been on a downward trend but are stabilizing
  • Hospitalizations are still on a downward trend but may
    be lagging
• Among the large states with consistent data, Texas displays rising
  hospitalizations, positive test rates and deaths, but still look benign relative to NY at the beginning of the pandemic
• So far, it looks more like a localized rising tide than a second wave

United Airlines ($UAL)

• United provided a plan for $17 billion of liquidity by September
• United’s liquidity plan should mitigate solvency concerns even in the event of a second wave
• If United is successful in raising $17 billion by the end of the September quarter, it should alleviate solvency concerns among investors and place the company in a formidable position to withstand the negative consequences of a severe second wave of COVID-19

Hertz Global Holdings ($HTZ)

• U.S. + Canadian cash burn until August 21 is probably close to $1.2 billion (excluding International)
• HTZ’s public peer, Avis Budget Group (CAR; Hold; $26.19) estimated a global cash burn of ~$800 million for the Q2
• HTZ indicated it may issue up to $500 million of common equity (~177 million shares using Friday’s closing price of $2.83) following the approval of a request with the bankruptcy court to sell up to $1.0bn of stock
• HTZ’s October 2022 6.25% bonds are trading ~44 cents on the dollar, showing the credit market pricing in significant risk
• HTZ may get delisted from the NYSE
• JO: STAY AWAY!!