Minutes from the April meeting of the Federal Open Market Committee show that Fed officials are happy with their recent actions. The said actions aims to keep the economy afloat during the coronavirus pandemic. However, they are also deeply worried about the likelihood of further outbreaks. They also expressed concern about how the pandemic will harm lower-income families the most.
The April meeting concluded with the committee talking about the steps they took during the initial outbreak. They said those actions were were “essential in helping reduce downside risks to the economic outlook” of the country. They also decided to keep interest rates at their current level of 0% – 0.25%.
The committee said that the pandemic created both near and medium-term economic uncertainty. Also, “participants commented that, in addition to weighing heavily on economic activity in the near term, the economic effects of the pandemic created an extraordinary amount of uncertainty and considerable risks to economic activity in the medium term.”
The group expressed worry about the negative effects on unemployment and GDP growth of another outbreak of coronavirus cases later in the year. The minutes also say the group views this as a “substantial likelihood.”
“In this scenario, a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year,” the summary said.
The minutes also mentioned that this “more pessimistic” outlook was just as likely as the baseline forecast for improvement.
Baseline For Improvement
There was discussion amongst the members to provide more explicit assurances that rates wouldn’t move higher until a recovery was “firmly in place.” This is defined by the country meeting certain unemployment or inflation rates before the committee would consider raising interest rates. Another idea was announcing a specific date which would be the soonest that the FOMC would consider raising interest rates.
They call this type of forward guidance the Evans Rule. The Fed used this in 2012 when it openly broadcast that it would hold rates steady until unemployment rates started to fall. It also used this to broadcast that there were signs of rising inflation.
The notes also reveal that the committee is very concerned that while the 30+ million jobs lost since the outbreak began also hit all socioeconomic levels. The brunt of losses “would fall disproportionately on the most vulnerable and financially constrained households in the economy.”
Some are concerned that many small businesses, the backbone of our country, simply won’t survive in the “new normal” of social distancing. Meanwhile, other businesses are going to hold off on hiring or growing. Owners say this may last until the threat of a second outbreak passes.
The minutes state “a large number of small businesses may not be able to endure a shock that had long-lasting financial effects. Participants were further concerned that even after social-distancing requirements were eased, some business models may no longer be economically viable, which could occur, for example, if consumers voluntarily continued to avoid participating in particular forms of economic activity.”
As Airlines Suffer, American Most Likely To File Bankruptcy
A few weeks ago, Boeing CEO Dave Calhoun startled the airline sector when he said a major airline would go bankrupt by Halloween.
“I don’t want to get too predictive on that subject. But yes, most likely,” Calhoun said. “Something will happen when September comes around.”
Airline stocks plunged as investors and analysts scrambled to determine which airline became most vulnerable.
RapidRatings, a risk assessment firm, recently completed a comprehensive stress test on the major U.S. airlines. They used dozens of variables including debt loads, cash flow analysis, and a loss of at least 15% of revenue.
American Airlines To Suffer The Most?
We may never know which airline that Calhoun was alluding to. Although, RapidRatings’ analysis says that American Airlines is the most likely to go bankrupt in the coming months.
The company also looked at Delta, United and Southwest, but none of them are in such dire circumstances as American.
In an interview with Yahoo Finance, RapidRatings CEO James Gellert said, “American is the most at risk and that’s it in every way you look at it. American stands out as the weakest of this cohort.”
The stress tests run by RapidRatings produce both a short term financial health rating (FHR) and long term core health score (CHS). According to RapidRatings, the FHR measures a company’s short-term resiliency and default risk. Meanwhile the CHS analyzes risk and company efficiency over a three year period. A score lower than 40 means a company is at risk of failing.
Gellert says the analysis has more than a decade of proven results. Also, “over 90% of companies that failed have been rated 40 and below on our scales.”
The stress tests found that American was the weakest U.S. airline going into the recent pandemic. It has a financial health rating of 59 and core health score of 66.
As the pandemic unfolded and air travel plunged 90%, American’s FHR score plunged to 29. Meanwhile, its CHS score fell to 27.
Gellert added that “I would be quite certain that is the airline in the crosshairs of the Boeing comment.”
The Future Of American
American, in response to the sub-40 stress test scores, said in a statement that it was “focused on rightsizing the airline for the current environment, and plan to reduce our 2020 operating and capital expenditures by more than $12 billion.”
Analysts, however, are starting to smell blood in the water. Cowen equity research analyst Helane Becker recently told Yahoo Finance, “American’s liquidity position is dependent on government aid, bucking the trends we’ve seen from other airlines. The company is receiving a total of $10.6 billion … [and] we expect another capital raise” in the 3rd quarter.”
Savanthi Syth, an equity analyst at Raymond James, also agrees American will need more capital to weather the storm. “I mean, if you look at the cash on hand that’s definitely the case,” Syth said. American has six months of cash on hand, United has 10 months, Delta has 12, and Southwest has almost 19 months, according to Raymond James.
Syth added, “I don’t think bankruptcy is a foregone conclusion… it’s just going to take longer for American to kind of dig themselves out of this kind of debt burden, and therefore equity could be challenged in the near term.”
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Sorry AOC, Billionaires Haven’t Made $434B During Pandemic
Nation’s Billionaire’s See Net Worth Jump $434B in First Two Months of Pandemic
It was an eye-opening headline, and fairly drew the frustrations of a lot of us. This is especially true for the 38+ million Americans who have lost their jobs since the coronavirus pandemic shut down. Our country has been at it a little more than two months ago.
How dare they get richer while we suffer?
Chuck Collins, director of the Institute for Policy Studies Program on Inequality, the co-author of the report, expressed his piece. He said, “The surge in billionaire wealth during a global pandemic underscores the grotesque nature of unequal sacrifice.”
Meanwhile, Frank Clemente, the executive director of Americans for Tax Fairness which co-authored the study, also shared his opinion. He said, “The pandemic has revealed the deadly consequences of America’s yawning wealth gap, and billionaires are the glaring symbol of that economic inequality.”
Democrat Alexandria Ocasio-Cortez didn’t want to miss the opportunity to inject her brand of socialism into the public discourse. “Really great system we got here. Can’t imagine why anyone would question how beneficial or sustainable it is for the working class,” she tweeted. This is in response to CNBC running the headline.
The Study’s Flaws
The top five US billionaires explicitly mentioned in the article are all Democrats. These include Warren Buffett, Bill Gates, Jeff Bezos, Mark Zuckerberg, and Larry Ellison. But setting that irony aside, the problem is that the article is simply dishonest, points out MarketWatch columnist Steve Goldstein.
“The study… examines billionaires’ wealth between March 18 — the rough start date of the pandemic shutdown, when most federal and state economic restrictions were in place — and May 19. It relied on the Forbes’ billionaire list, which itself is built around stock-market performance.”
The flaw, as Goldstein points out, is that the beginning and end dates used for the study are incorrect.
“Think about that in the market context. The pandemic did not start March 18 (nor, of course, had it ended on May 19), and certainly market concerns about the pandemic did not start March 18. Far from it.”
He says that to see a true picture of how much money the billionaires made – or lost – during the pandemic, they need to expand the date range.
“A more logical way to think about whether billionaires got richer, or not, is to think about the performance from the Feb. 19 peak in the market, after which more investors began to get concerned by the novel virus. You then get to see who got richer even in the face of the crippling economic blow.”
If you use this revised date range, Goldstein says the truth is that billionaires have actually lost money since the market peaked and the pandemic began
“Cumulatively, the top 50 billionaires lost $232 billion between the market’s peak and this Tuesday. If the remaining billionaires on the Forbes list lost wealth at the same roughly 12.5% rate that the top 50 experienced, that’s another $200 billion–plus wiped out.”
So while it’s easy to run a headline that bashes billionaires, the truth lies somewhere in the middle.
Many Americans Put Their Stimulus Checks Into The Stock Market
The government sent $1200 stimulus checks to help Americans pay their bills. However, it turns out that many people turned around and put most of that money into the stock market. This is according to research done by Envestnet Yodlee, a data aggregation company.
Bill Parsons, Group President, Data Analytics at Envestnet Yodlee said during a recent CNBC interview, “Covid is causing conversations among family members and family members with their advisors about what to do with their money and were seeing that in the data… Securities trading did see significant lift week-over-week and I suspect that that’s in part due to big changes in the market.”
People Investing in Stocks
In most income brackets, data shows that buying stocks was the second or third most common use for the funds. Fortunately, the most common uses of the stimulus money were increasing savings and cash withdrawals.
The company started tracking the spending habits of 2.5 million Americans in early March. It noticed a divergence in behavior in mid-April when the checks started to arrive in mailboxes. Those that received their check increased their spending by 81% compared to the prior week. Some of that spending went into the stock market.
In the $35,000 – $75,000 income bracket, stock trading increased by 90% in the week the check was received compared to the prior week.
In the $100,000 – $150,000 income bracket, trading increased 82% in the week the stimulus check arrived. Meanwhile, in the $150,000 or higher income bracket, stock trading only increased by 50%. The $150,000 or higher bracket would not have been eligible for a stimulus check. Therefore, it acts as a good baseline.
New Online Trading Accounts
All of this stock buying meant a whole lot of new online trading accounts were opened in the last month or so. However, the brokerage houses aren’t sure if that is due to the stimulus checks, or the opportunity to buy stocks cheaply as the market fell.
Charles Schwab reported “monumental volumes” as it opened 609,000 new accounts in the first quarter. Additionally, the stock trading app Robinhood reported daily trade volume was up 300% in March compared to the previous year. The company co-CEO also said during an interview with CNBC that over 50% of its customers are first-time investors.
You may believe the brand new investors were wise enough to buy stocks because they recognized they were cheap and the markets would rebound. Either way, it seems they have very good timing.
Since the market bottomed in late-March, stocks have staged a tremendous rally in the last two months, with the Dow Jones Industrial Average and S&P 500 climbing nearly 35% from their March lows, and the Nasdaq gaining more than 40% over the same time period.
It’s better than spending the money on weed, sneakers and video games.
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