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Powell speaks, stocks fall (News – May 13, 2020)

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WSJ: Stocks Fall About 2% as Powell Says Outlook ‘Highly Uncertain’

  • Worries about fresh outbreaks of coronavirus as well as rising U.S.-China-tensions dampen sentiment
  • declines were broad, with all 11 sectors of the S&P 500 in the red
  • Jerome Powell came out saying his outlook on the economy is highly uncertain and subject to significant downside risks
    • “Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery”
  • Economists believe GDP will decline 6.6% this year vs Q4 2019
  • The S&P has been trading at 21.14x Price to Next 12 Months Earnings
    • JO: this is wayyyy too expensive to be a buyer. I’ve adjusted my thinking that we should start thinking about 16.5-17.0x P/E as “cheap”
  • U.S. and China tensions are also worrying investors
  • The Stoxx Europe 600 fell 1.9%.
  • Asian markets were mixed
  • Experts say the level of testing in the U.S. continues to fall short of what is needed to reopen the country safely.
  • Coronavirus to expected to cause 17% unemployment in June in the US
  • Economists see the Fed’s balance sheet swelling to $9.29 trillion by December, $9.63 trillion by December 2021 and $11.27 trillion by December 2022. This is more than twice the size from the Great Financial Crisis

Uber is continuing conversation with Grubhub to take over the company through an all-stock deal. $GRUB was up big on Tuesday in anticipation of a takeover

  • Meal delivery business is cutthroat and low margin
  • from WSJ: “Grubhub recently proposed that Uber pay 2.15 of its shares for each Grubhub share, which Uber rebuffed as too high, and now the two sides are discussing a lower price, some of the people said.”
  • Analysts have called for much needed consolidation in the food delivery industry for a long time
  • Combined company would control ~55% of the 3rd party food delivery market. DoorDash has 35% of the market
  • Uber Eats bookings grew 52% in Q1 ($4.68bn) while $GRUB’s Q1 sales was $363m, up 12% due to people staying home and ordering in
  • Huseyin Yasar of Carmignac sold its $GRUB position because it’s “Highly loss making, cash burning, basically handing out food for free”.
  • They require a lot of advertising and compete with many restaurants building a direct delivery capability
  • JO: I don’t really love these business models, super commoditized and hard to scale. Could be fine to own DoorDash in private market long term, but in general it’s not a super attractive business to me thematically

WSJ: Gilead’s Remdesivir Tested With Other Drugs to Fight Covid-19

  • Six COVID drug trials are being performed testing remdesivir with another medicine
  • $GILD is also studying new formulations of remdesivir to be taken outside the hospital with an inhalation device or a prefilled syringe
  • The remdesivir molecule resembles one of the COVID RNA bases, so it gets added to an RNA strand when COVID reproduces. This hampers the reproduction process for COVID
  • It’s not a silver bullet because it’s only modestly effective in very sick patients. It’s been shown to shorten recoveries of hospitalized patients by 4 days vs placebo
  • Researchers are exploring how to make its impact stronger by pairing it with something that reduces the immune response (cytokine storm), such as arthritis drugs

WSJ: Coronavirus Meat Shortages Have Plant-Based Food Makers’ Mouths Watering

  • Beyond Meat Inc., Impossible Foods Inc. and Tofurky Co. are ramping up production, discounting their products to take market share as there is a meat shortage
  • “Shutdowns and slower production at other plants, as concerned workers remained home, drove beef, pork and other red meat production 28% lower last week compared with the same period last year, according to the U.S. Department of Agriculture.”

WSJ: Britain Starts Easing Lockdown as Pressure Builds on Boris Johnson

  • UK economy declined 7.7% in Q1 annualized
    • But this is less than the declines seen through the rest of Europe because of their late lockdown
  • PM Boris Johnson is facing political pressure over how his government is handling the crisis
  • The UK announced steps to reopen while keeping social distancing
    • Workers who can’t work from home are asked to return
    • Golf and tennis allowed to reopen
    • Real estate agents are allowed to show homes
    • Meetings and schools are still shut down and elementary schools are set to reopen June 1
  • The relaxation has happened only in England, with Wales, Scotland, and Northern Ireland leaving lockdown in place
  • “A poll conducted by Kekst CNC on Monday showed that 73% of Britons preferred to limit the spread of the disease even if a recession and job losses ensue. That compares with 57% in the U.S. and 49% in Germany.”

US sends 3 naval warships on patrols near oil & gas operations off Malaysia’s coast, supporting the country against pressure from China

  • JO: It seems like China has been patrolling around Malaysia maintaining an intimidating presence, and having coast guard vessels escort survey vessels. China is against oil-and-gas operations that don’t involve China and the US accuses China of coercing smaller countries out of developing offshore resources

WSJ: Companies’ Next Coronavirus Challenge: Getting Cash-Strapped Shoppers to Spend

  • TLDR: big companies like Kellogg, Nestle, and Hershey are preparing for lower consumer confidence and consumers to have less to spend on goods. They are making adjustments such as smaller package sizes, promotions tied to pay cycles, and offering cheaper products

WSJ: Companies Start Reaping Billions in Tax Breaks to Ride Out Economic Slump

  • ~$650 billion of new tax breaks are flowing to US businesses, both to public and private companies to give them cash to ride COVID out
  • They include several outright tax cuts including those for interest deductions and a credit for $5,000 for each employee paid not to work

Coronavirus is triggering a global food crisis because of logistics and trade issues.

  • There is plenty of food, it just can’t get to where it needs to be. The prices for food staples like rice, wheat, potatoes, etc have risen 20, 30, 40+ percent in countries that don’t have local production

WSJ: “U.S. authorities denied initial regulatory approval for N95 masks from China’s BYD Co. which had secured huge orders for the product including a $1 billion deal with authorities in California.”

  • Denial details are confidential but onsite Chinese BYD factory assessments were “not acceptable” earlier this month
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