WSJ: June 8, 2020

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Inside this issue: Fed Yield Caps, Movie Theaters Reopening and Oil Prices Wobbling

Today’s newsletter is 1172 words, a 6-minute read. Let’s get to it:

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Fed Debates Whether to Reinforce Low-Rate Pledge with Yield Caps

For the next three years, the Federal Reserve wants to keep interest rates near zero. And to reinforce that promise, Fed Officials are evaluating a strategy “committing to buy Treasury securities in whatever amounts are needed to peg certain yields at low levels.” No decision is imminent – an announcement is unlikely when officials conclude their two-day policy meeting Wednesday. Until then, the Fed is tasked with figuring out how to manage the pace of bond purchases and how to best publicize its long-term intentions.

How It Might Work

“If the Fed concludes it is likely to hold rates near zero for at least three years, it could amplify this commitment by capping yields on every Treasury security that matures before June 2023,” WSJ’s Nick Timiraos writes.

While there are dissenting opinions on whether caps are needed now, it could limit any uninvited rise in Treasury yields, which could counteract a “coming surge of government debt issuance to finance virus-related economic relief.”

Numbers to Consider

  • 0.25 % — Australia’s target cap, a number U.S. Fed Officials are closely watching
  • 2023 – How long the Fed could look to keep interests rates low until
  • $2.2 Trillion – how much the Fed has invested in purchasing to restore market function

Why It Matters

Because of the rising financial uncertainty in mid-March, investors dumped long-standing securities to scrape up cash. To quell the panic, the Fed started purchasing large quantities of Treasurys and mortgage bonds. Since then, the Fed has slowed down buying each week.

Managing and communicating long-term expectations, also called “forward guidance,” officials say can help “stimulate demand after their policy rate is near zero because it sets public expectations about future policy, which influences the rates set by markets.”

There’s are risks, though. A move like this could fail to provide much stimulus. But ending caps prematurely could damage the Fed’s credibility and spike rates, as a result of inflation or financial stability concerns.

The usual playbook calls for cutting interest rates to create growth after a downturn. But the current situation is different – it’s a cash-flow problem, and a wave of bankruptcies could be on the horizon. Therefore, a boost in demand may not solely solve the problem.

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Movie Theaters Face Their Biggest Summer Thriller Yet

With Christopher Nolan’s highly anticipated psychological thriller – “Tenet” – set to premiere in July, movie theatres are banking on it being a boon to reattracting the large crowds it lost in the pandemic. Cinemark Holdings, the third-largest theatre chain in the world, plans to begin a phased reopening on June 19. And on its first-quarter earnings call Wednesday, the company cited “Tenet” 18 times as a vital recovery tool.

Why It Matters

Back in March, the Hollywood Reporter estimated the film industry could lose $5 billion at the box office because of the pandemic. That was on March 2, and things have gotten a lot worse since then. Summer is usually a time where massive blockbuster movies draw in heaps of viewers. But even as Cinemark and other chains try to reopen, studios have shuffled schedules and moved films back. “Tenet” however, has remained rock-solid on its July 17 release date, and a successful release, even with potential restrictions like 50 percent capacity, could usher in a period of financial and psychological recovery for movie theatres across the country.

Numbers to Consider

  • 4,649 – the number of theaters Cinemark operates in the U.S., with another 1,496 internationally
  • $17.64 – Cinemark Holding’s share price, which a year ago stood around $37
  • $84 million – Cinemark’s Q2 projected revenue, after earning $544 million in Q1, its lowest since 2015
  • $205 million – the budget of Christopher Nolan’s “Tenet” (according to IndieWire.com)

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Oil Falters as Libyan, U.S. Production Threaten to Mute OPEC Cuts

While oil demand recovers, the Organization of the Petroleum Exporting Countries and its allies agreed to extend the deal struck in April Saturday, calling for 23 countries to reduce output by until July. But as Libya restarted production at its largest oil field and Mexico refused to keep curbing its output, American oil producers are “turning the oil taps back on.”

Why It Matters

While oil prices have bounced back somewhat since going negative in April for the first time in history, and continued efforts to ramp up production complicates the industry’s recovery. U.S. companies such as Parsley Energy Inc. and WPX Energy Inc. may be “turning their spigots back on,” but the recent increase in prices may be short-lived.

The latest OPEC agreement has strict compliance regulations, which creates the possibility of it flat out falling apart if countries aren’t willing to comply. Enforcing deals has been a struggle for OPEC in the past, and the aftermath could hurt countries with weaker economies dependent on oil exports.

Numbers to Consider

  • 9.6 million – the reduction of barrels stipulated in OPEC’s deal
  • $42 – the price of Brent crude, the gauge for international oil prices
  • 300,000 – the number of barrels per day in production produced now that Libya’s five-month shutdown at its Sharara oil field is over

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Worth Your Time

New York City Reopening: As the U.S. Coronavirus death toll passed 110,000 and reported cases eclipsed 1.9 million, New York City began the long process of reopening today. Construction, agriculture, manufacturing and wholesale trade will resume operations. (LINK)

Questioning China’s Labor Market: According to official statistics, unemployment has barely changed in China. However, anecdotal evidence and economist’s calculations suggest a different story. Is China in worse shape than it appears? (LINK)

Even with Stimulus, Airline Industry Expected to Shrink: Even with a $25 billion care package, the airline industry won’t be able to return to its pre-pandemic size, at least right now. The future is this – fewer planes, fewer flights and fewer employees, coming as soon as Oct. 1. The government may have stepped in to support industries and preserve jobs, but the economic shutdown is proving overwhelming for airlines. (LINK)

Protests Pushing for Defunding of Police: Protests in response to the killing of George Floyd have continued to put pressure on law enforcement around the country. Over the weekend, the Minneapolis city council agreed to begin disbanding its embattled police department. And as the peaceful demonstrations continue on, people continue to call for significant divestment of funding given to police departments across the U.S. (LINK)

South Korea Can’t Quit Coronavirus Restrictions: The worst may be over in Daegu, South Korea. Yet even with transmissions nearing zero, South Korea’s hardest-hit city can’t escape the trauma the virus inflicted. Street musicians still wear masks, college students couldn’t return without a coronavirus test first and large gatherings remain banned. (LINK)

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A Couple Cents on Social

Watch Justin Oh discuss whether you should buy Spotify, Netflix, Zoom or Microsoft Teams (LINK)

View what Sofia Franklyn’s earnings would look like if she took the Barstool deal (LINK)

Check Out Justin Oh’s two-part evaluation on when he’s buying DraftKings stock (PART ONE) (PART TWO)

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See you tomorrow!

— Justin Birnbaum

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