PrefBlog

American banks are issuing dire warnings:

• Goldman Sachs economists on Friday forecast an unprecedented 24% hit to U.S. second-quarter GDP, following a 6% decline in the first-quarter, due to coronavirus; the bank also expects unemployment to surge to 9% and full-year GDP for 2020 to fall 3.8% on an annual average basis.
• Bank of America warned late on Thursday that a recession due to the coronavirus pandemic is already here: “Jobs will be lost, wealth will be destroyed and confidence depressed,” the bank’s U.S. economist, Michelle Meyer, wrote in a note, as the Bank of America also forecast the economy to “collapse” in the second quarter, shrinking by 12%, with GDP for 2020 taking a 0.8% hit.
• Morgan Stanley warned investors of the same thing: “Global recession in 2020 is now our base case,” the firm’s chief economist, Chetan Ahya, wrote in a recent note, predicting global economic growth to slow to 0.9% this year—the lowest level seen since the 2008 crisis.
  Deutsche Bank predicts that the U.S. economy will contract by 12.9% in the second quarter, with the coronavirus-driven declines set to “substantially exceed anything previously recorded going back to at least World War II,” according to a note Wednesday.

• UBS similarly sees a “massive contraction” of almost 10% in second-quarter GDP, while also predicting a deep recession in the first half of 2020 due to the coronavirus pandemic.
• But: Most of the economists at the big banks listed above still predict the economy will rebound later in 2020, or by 2021 at the latest.

And pension plans are looking sick again:

Canadian pension plans have seen their funding crater in recent weeks amid falling interest rates and a meltdown in stock markets, leaving some with shortfalls just weeks after being fully funded.
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Consulting firm Mercer Canada Ltd. said its pension health index closed 2019 at 112 per cent — a reading that suggests the plans were over-funded, with more assets than obligations — up 10 percentage points over the course of the year. It was 103 per cent on Feb. 29, but had fallen to 89 per cent on Monday, March 16.

Aon PLC said its measure of pension solvency in Canada, which approached record highs in the fourth quarter of 2019, declined from 102.5 per cent on Jan. 2 to 95.8 per cent on Feb. 28, then to 90.6 by Friday, March 13.

So the Fed is ramping up its efforts:

The Fed pledged to buy as much government-backed debt as needed to restore normal functioning in the markets for housing and Treasury bonds. It announced that it would buy longer-dated corporate debt, including the riskiest investment-grade bonds, for the first time in its history. And it promised to unveil more — including supports for small businesses — in the days and weeks to come.
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The central bank, which restarted its massive bond-buying program eight days ago, said it would expand well beyond the “at least” $700 billion in Treasury and $200 billion in mortgage-backed securities it initially committed to buying. Instead, officials will buy bonds “in the amounts needed to support smooth market functioning” — including buying government-backed debt tied to commercial real estate.
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One of them, the Primary Market Corporate Credit Facility, is open to investment-grade companies and will provide bridge financing of four years, according to the Fed’s release. The Fed will create a special purpose vehicle that will both purchase bonds from eligible issuers and extend loans.
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The other program, the Secondary Market Corporate Support Facility, will purchase already-issued debt, which has become hard to trade, including by buying exchange-traded funds that bundle bonds together. The Fed said that together the programs were intended “to support credit to large employers.”

The markets were unimpressed:

The Toronto Stock Exchange’s S&P/TSX Composite index was unofficially down 623.32 points, or 5.26%, at 11,228.49.

The Canadian death toll from the virus outbreak jumped by more than 50% on Sunday, and impatient officials threatened to punish people refusing to take precautions to fight the spread of the highly contagious illness.

Nine of the index’s 11 major sectors fell.

The energy sector dropped 3.8% as crude prices fell.

The financials sector slipped 7.9%. The industrials sector fell 3.7%.

The materials sector, which includes precious and base metals miners and fertilizer companies, added 5.4% as gold prices rose.

Based on the latest available data, the Dow Jones Industrial Average fell 575.58 points, or 3%, to 18,598.4, the S&P 500 lost 65.55 points, or 2.84%, to 2,239.37 and the Nasdaq Composite dropped 16.37 points, or 0.24%, to 6,863.14.

The Dow at one point traded below its closing level on Nov. 8, 2016, effectively erasing all the gains since the election of Donald Trump as U.S. president.

The pan-European STOXX 600 index lost 4.30% and MSCI’s gauge of stocks across the globe shed 3.81%.

Emerging market stocks lost 5.61%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 5.75% lower, while Japan’s Nikkei rose 2.02%.

Which might well have been considered good news in some quarters:

Brookfield Asset Management Inc. chief executive officer Bruce Flatt says his company is moving away from private assets and buying publicly traded debt and stocks – including its own – in the recent market carnage.

“We have switched our focus for investments to the listed stock markets. … There are some stocks and debt starting to trade at a large discount to intrinsic value and we are focused on these,” Mr. Flatt said in a shareholder letter released Monday.

But there is bad news in other quarters:

Consensus continues to grow among government leaders and health officials that the best way to defeat the virus is to order nonessential businesses to close and residents to confine themselves at home. Britain, after initially resisting such measures, essentially locked down its economy on Monday, as did the governors of Virginia, Michigan and Oregon. More than 100 million Americans will soon be subject to stay-at-home orders.

Relaxing those restrictions could significantly increase the death toll from the virus, public health officials warn. Many economists say there is no positive trade-off — resuming normal activity prematurely would only strain hospitals and result in even more deaths, while exacerbating a recession that has most likely already arrived.
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Officials have said the federal government’s initial 15-day period for social distancing is vital to slowing the spread of the virus, which has already infected more than 40,000 people in the United States. But Mr. Trump and a chorus of conservative voices have begun to suggest that the shock to the economy could hurt the country more than deaths from the virus.

On Monday, Mr. Trump said his administration would reassess whether to keep the economy shuttered after the initial 15-day period ends next Monday, saying it could extend another week and that certain parts of the country could reopen sooner than others, depending on the extent of infections.

“Our country wasn’t built to be shut down,” Mr. Trump said during a briefing at the White House. “America will, again, and soon, be open for business. Very soon. A lot sooner than three or four months that somebody was suggesting. Lot sooner. We cannot let the cure be worse than the problem itself.”

TXPR closed at 392.69, down 7.77% on the day. Volume today was 4.57-million – and this enormous figure was the lowest of the past five trading days.

CPD closed at 7.85, down 8.40% on the day. Volume of 546,111 was third-highest of the past 30 trading days, trailing March 13 and March 16.

ZPR closed at 6.11, down 6.72% on the day. Volume of 1,706,900 was third-highest of the past 30 trading days, behind March 20 and March 9.

Five-year Canada yields were down 4bp to 0.71% today.

I’m not reviewing suspect quotes today, as has been the case for the past while. I’m saving my sarcasm for less turbulent times.

Equities had another lousy day:

A brief semblance of stability in stock markets melted away on Friday, ending a disastrous week for North American equities, as the signs of economic carnage wrought by the fight against the coronavirus pandemic started to come into view.

The S&P/TSX Composite Index ended the trading day down 2.6 per cent, while the S&P 500 index dropped by 4.3 per cent, capping off the worst week for Canadian and U.S. stocks since 2008, each having lost 14 to 15 per cent.
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Canadian energy stocks initially led a market rally on Friday morning after reports that the federal government is preparing a $15-billion support package for the sector, which has been decimated by the twin spectres of the COVID-19 crisis and plunging crude oil prices.

But the global oil market resumed its descent on Friday afternoon, as West Texas Intermediate dropped by 11 per cent on the day to settle at US$22.53 per barrel.

Crude futures have now declined by 64 per cent since their January peak.
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The collapse of crude prices has devastated the energy component of the Toronto Stock Exchange, which has declined by 70 per cent just since the start of the year. Going back to the sector’s last major peak in 2014, the S&P/TSX Capped Energy Index has lost more than 85 per cent of its market value.
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Friday was the one-month mark since the Canadian stock market last registered a record high on Feb. 20. In the chaotic month that followed, the domestic benchmark index dropped by 34 per cent, wiping out more than $1-trillion in market capitalization.
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The containment measures required to flatten the curve on coronavirus infections ensure that a severe economic slowdown is taking hold. U.S. GDP growth is expected to fall by 8 per cent in the second quarter, while in Canada the decline will be closer to 11 per cent, Mr. [Jean-François] Perrault [chief economist at Scotiabank] said.

You might as well get sick if there are no jobs:

Prime Minister Justin Trudeau says the federal government has received 500,000 applications for employment insurance, compared to just 27,000 for the same week last year.

In fact, maybe you should get sick now and beat the rush:

A new study by some of Ontario’s leading medical researchers paints an alarming picture of the strain on the health-care system as the number of COVID-19 cases continues to rise, suggesting the province will run out of intensive-care beds and ventilators in just 37 days, even if it manages to cut current infection rates in half.
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The study authors acknowledge their modelling is based on a number of key assumptions:

They begin with a starting point of 250 cases, which Ontario hit Thursday.
They assume that 19 per cent of cases will require hospitalization.
They assume that 26 per cent of hospitalized patients will require an ICU bed.
They assume an average ICU stay will be eight days long.
With those assumptions in mind, they predict the following outcomes:

If Ontario can free up 25 per cent of ICU beds for COVID-19 patients, resources will be depleted in 37 days.
If 75 per cent of ICU beds can be allocated to COVID-19 patients, resources can last 52 days.
If, on top of 75 percent of ICU beds, Ontario can make available some 2,000 more beds and 600 additional ventilators, resources can last 60 days.

S&P downgraded Air Canada:

• The effect COVID-19 is having on air travel is much worse than we expected earlier this year, with many countries around the world, including Canada, temporarily restricting non-essential cross-border travel.
• We believe the steep drop in air traffic at Air Canada stemming from the COVID-19 outbreak will contribute to credit metrics that are meaningfully weaker than we previously expected, including a decline in adjusted EBITDA of about two-thirds and adjusted funds from operations (FFO)-to-debt of about 10% in 2020.
• As a result, S&P Global Ratings lowered most of its ratings on Air Canada by one notch, including its issuer credit rating on the company to ‘BB’ from ‘BB+’ and placed all the ratings on CreditWatch with negative implications.
• As of now, we expect traffic to begin to recover in late 2020, but also recognize there is a high degree of uncertainty in the timing of a recovery that, if pushed out later than we expect, is likely to result in another downgrade.
• We expect to resolve the CreditWatch when the effects of the outbreak on Air Canada’s financial position and timing of a recovery become more apparent.

TXPR closed at 425.75, up 3.78% on the day. Volume today was 6.05-million, second-highest of the past 30 trading days, behind only March 18.

Today’s rally means the total return version of this index is down only 10.05% from last Friday, so that’s a pretty good week, eh?

CPD closed at 8.57, up 4.26% on the day. Volume of 244,986 was above the average of the past 30 trading days.

ZPR closed at 6.55, up 2.66% on the day. Volume of 1,763,758 was second-highest of the past 30 trading days, behind only March 9.

Five-year Canada yields were down 10bp to 0.75% today.

I’m not reviewing suspect quotes today, as has been the case for the past while. I’m saving my sarcasm for less turbulent times.

Click for Big

Brace yourself for staggering unemployment numbers:

Numbers released on Thursday by the Labor Department — as well as a preliminary analysis of even more recent data — provide the first hard confirmation that the new coronavirus is bringing the United States economy to a shuddering halt. The government reported that the number of initial unemployment claims rose to 281,000 last week, a sharp rise from 211,000 the previous week. This rise in initial claims of 70,000 is larger than any week-to-week movement that occurred during (or since) the 2008 financial crisis.

But even these numbers understate the economy’s free fall, as they reflect the state of the economy last week. Based on preliminary news reports this week from 15 states, it’s already clear that initial claims will skyrocket next week, most likely to levels never seen before.
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Although Washington has not revealed the most recent official figures, state officials said that claims increased 150 percent last week and that the state was seeing an “even more dramatic increase this week.” They also mentioned that call volume surged more than eightfold on Tuesday.

As the accompanying charts show, jobless claims rose sharply in the vast majority of states. These figures come from state unemployment insurance offices tallying up the number of people newly applying for unemployment benefits.

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DBRS downgraded Alberta:

DBRS Morningstar downgraded the Province of Alberta’s Issuer Rating and Long-Term Debt rating to AA (low) from AA and its Short-Term Debt rating to R-1 (middle) from R-1 (high). In addition, DBRS Morningstar changed the trend on the Province of Alberta’s Short-Term Debt to Stable from Negative. DBRS Morningstar also downgraded the Alberta Capital Finance Authority’s Long-Term Obligations rating to AA (low). The trends on all Issuer Rating and Long-Term Debt ratings are Negative.
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DBRS Morningstar believes that Alberta’s credit profile is no longer consistent with a AA rating and that risks remain firmly tilted toward the downside; as a result, DBRS Morningstar has maintained the Negative trend on Alberta’s Issuer Rating and Long-Term debt rating. Current economic conditions and actions taken by Saudi Arabian and Russian governments suggest that oil prices will be under pressure for the foreseeable future, which will have a significant and adverse impact on Alberta’s economic activity and government revenue. This will likely drive debt ratios significantly higher in the near to medium term.

DBRS Morningstar has estimated possible impacts using Alberta’s 2020 Budget, released in late February 2020. DBRS Morningstar estimates that the 2020–21 deficit (on an adjusted basis) may exceed 4.0% of GDP and that the adjusted debt-to-GDP ratio may rise above 30% in 2020–21 alone. Notwithstanding these estimates, there is uncertainty with respect to the current situation and Alberta has yet to outline a full fiscal policy response.

Yesterday I mentioned the problem of bond ETFs and inverted liquidity and, right on cue, I got a call from a client worried about his holdings in VCSH – Vanguard Short-Term Corporate Bond ETF. Holy smokes, look at that price chart!

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When I looked into this, I found another Reuters article with a bit more colour:

For the iShares iBoxx Investment Grade Corporate Bond ETF , that has created the widest gap between the price at which it trades and the underlying value of the assets – known as net asset value. LQD on Thursday traded at a nearly 5% discount to its net asset value, the widest spread since 2008.
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That has meant that corporate bonds are traded less, and when they are, the difference between bid and ask prices are wider. But the ETFs that track those bonds have had less trouble trading. The harder the asset is to trade, the greater the price dislocation.

The problem seems to be in investment grade debt at the moment rather than in high yield. Two major high-yield bond ETFs saw spreads between their trade price and net asset value widen, but far less dramatically than in LQD. (Reporting by Kate Duguid Editing by Marguerita Choy)

Fortunately, I was able to refer my client to the VCSH website which contained the information that although VCSH closed 3/19 at 71.75, down 2.55 (!), its NAVPU as of 3/18 was 77.79, implying it was trading at a 4.5% discount to NAV. Incredible.

What’s more, I understand this fund is actually bringing in money:

Looking today at week-over-week shares outstanding changes among the universe of ETFs covered at ETF Channel, one standout is the Vanguard Short-Term Corporate Bond ETF (Symbol: VCSH) where we have detected an approximate $408.0 million dollar inflow — that’s a 1.8% increase week over week in outstanding units (from 303,016,326 to 308,330,856).

… but its growth is an exception:

BlackRock’s exchange-traded fund focused on investment-grade corporate bonds has seen big price declines. The net asset value of iShares iBoxx $ Investment Grade Corporate Bond ETF, which trades under the ticker LQD, dropped 5 percent on March 18. Its shares continued to fall Thursday.

The steep price declines of the ETF over the past few days resemble the massive drop seen in a similarly short period during the financial crisis, the Bank of America report shows. A downward spiraling effect is at play, with investors fearing corporate cash flows will dwindle as the escalating coronavirus crisis halts economic activity.
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The billions of dollars in outflows from U.S. investment-grade corporate debt funds and ETFs in each of the past few days reached record levels, according to the Bank of America report. During the financial crisis, investment-grade bond funds and ETFs lost 3.7 percent of assets over two months, which the strategists estimated would be $133 billion based on today’s assets under management.

The VCSH fact sheet indicates that all the bonds are investment grade – although I bet that a few downgrades are pending!

Fortunately for shareholders, the fund’s prospectus indicates:

ETF Shares of the Fund cannot be directly purchased from or redeemed with the Fund, except by certain authorized broker-dealers. These broker-dealers may purchase and redeem ETF Shares only in large blocks (Creation Units), typically in exchange for baskets of securities.

… which offers some measure of protection for shareholders … the fund doesn’t have to sell securities at garbage prices to fund redemptions, all that risk is borne by the market-makers who, presumably, are currently having a hell of a time right now.

It’s a wild world; I fear that are a lot of people making some very bad decisions right now; although the nature of markets demands that other people are making some very good ones, as the rich get richer.

TXPR closed at 410.23, up 1.96% on the day. Volume today was 5.35-million, fourth-highest of the past 30 trading days.

Today’s rally means the total return version of this index is down only 13.33% from last Friday, so it looks like a pretty good week!

CPD closed at 8.22, up 3.27% on the day. Volume of 183,495 was … oh, I don’t know, around the median of the past 30 trading days.

ZPR closed at 6.38, up 1.59% on the day. Volume of 764,911 was pretty low in the context of the past two weeks.

Five-year Canada yields were down 6bp to 0.86% today.

I’m not reviewing suspect quotes today, as has been the case for the past while. I’m saving my sarcasm for less turbulent times.