• cedric lefebvre

Weekend 25th and 26th, April 2020 Weekend reading

Mis à jour : 3 mai 2020

North Korea:

· Questions about North Corean leader's health intensify. In the event he must be replaced, the sister of the North Korean dictator, Kim Yo Jong, seems to be the favorite to replace him.


Opinion : What is the debate about Perpetual bonds?

· The principal need not to be repaid. Can be redeemed or amortized.. Historically used before. UK used “Consols” to finance Napoleonic wars and WWI

· To finance the recovery from the post-crisis at lower cost. A perpetual bond of 1,000 billion euros with a 0.5% coupon would cost the Union budget only 5 billion euros a year. Or less than 3% of the EU budget for 2020.

· Now Spain is proposing them as an extraordinary measure to deal with an extraordinary situation.

· Pension fund and Hedge fund would constitute the demand as already buying 50 and 100 year bonds.

· Perpetual debt poses valuation issues: An investor will have to build very long-term inflation hypotheses, an exercise that is already difficult a few months away. It will be necessary to offer a high interest rate, which risks offsetting the financial interest of the operation. An illustration of the difficulty in launching such an instrument, France and the United States, which considered, a few years ago, to issue debt at 100 years, decided not to launch.

Oil industry

· Traders who took fuel delivery in May turned to ocean-going tankers – barges – as traditional storage are full. Now shipping prices are surging to stratospheric levels as the industry runs out of tankers.

· Worst case scenario of shutting down refineries is looming, would impact jobs, companies, banks and local economies

· Early-to-mid May could be the peak. We are weeks, not months, away from it.” Torbjorn Tornqvist, head of commodity trading giant Gunvor Group Ltd.

· The best indicator of how the U.S. industry is reacting is the rapid drop in the number of oil rigs in operation, which last week fell to a four-year low. Before the coronavirus crisis hit, oil companies ran about 650 rigs in the U.S. By Friday, more than 40% of them had stopped working, with only 378 left.

Food industry

· In Europe and Russia, spring is very dry. Uncertainty around the harvest risks prompting exporters to take protectionist measures and consumers buying massively, with prices soaring.

· In Romania, a drought has dashed hopes for a record harvest, and its neighbor Ukraine has water supplies at the lowest level in six years.

· With the health crisis being in full swing, fears of shortage stir the populations, a potential drought adds uncertainty to the world food system. Fear of excessive behavior: massive purchases and stopping of exports, an explosive cocktail to make prices soar and trigger a baseless food crisis.

· Russia, the world’s biggest wheat shipper, hit the limits of its self-imposed quota on grain exports two months ahead of schedule. Wheat exports for April through June reached the nation’s quota of 7 million tons on Sunday. Exports will resume when the next marketing season starts on July 1.


· To finance the budgetary measures aimed at supporting its economy in the face of the pandemic, the British Treasury has just announced a quadrupling of its emission plan over the next three months, to 180 billion pounds. More than he planned to raise over the whole year.

Numbers to watch this week:

The U.S. economic calendar:

· April 27: Retail trade revisions; Dallas Fed manufacturing

· April 28: Advance goods trade balance; wholesale/retail inventories; S&P CoreLogic home price data; Conference Board consumer confidence and expectations; Richmond Fed manufacturing

· April 29: MBA mortgage applications; first-quarter advance GDP; pending home sales

· April 30: Personal income/spending; personal consumption expenditures deflator data; jobless claims; employment cost index; MNI Chicago PMI; Bloomberg consumer comfort

· May 1: Markit U.S. manufacturing PMI; construction spending; ISM manufacturing; Wards total vehicle sales


· Microsoft: Calendar Q2 '20 is Microsoft's fiscal 4th quarter since its fiscal year ends June 30, and Microsoft is one of just two companies of the above list that is expected to see stronger growth in Q2 '20 than Q1 '20 which is highly unusual given the lockdown. For Microsoft, as of Thursday's consensus, both EPS and revenue for the June quarter are expected to be sequentially higher than the March quarter. Microsoft warned on the PC business back in late February '20, which is roughly one-third of Microsoft's revenue and operating income and the stock hasn't missed a beat. Technically, MSFT remains above its 50-day and 200-day moving averages, with the stock up 6.5% YTD, versus the SPY's return of -14%.

· Amazon: The e-commerce and cloud giant is a clear beneficiary of sheltering-in-place. Revenue is expected to grow +22% and +21% over the next two quarters per the consensus. Amazon was in an "investment period" over the last 12-18 months and after not doing much since September '18 - AMZN has broken out to an all-time-high right in the teeth of the COVID-19 bear market. The stock is up 26% YTD versus the -14 drop in the SPY. No doubt Amazon Grocery and the emerging perishable delivery service gained some traffic during the COVID-19 worries. Some of the expected expense growth around Amazon "same-day" or 24-hour delivery is dissipating as well.

· Apple: Apple will be hurt by the retail store closings and the pullback in consumer spending. It's no surprise to see sequential declines in both revenue and EPS although the June and September quarters (Apple's fiscal year end is September 30) are weaker than the December and March quarters. The company's incredible strengths are its free-cash-flow generation and the ability to pivot to Wearables and Accessories and away from the iPhone business in late 2018, even when the iPhone was still 55% of revenue. Apple rose 82% in calendar 2019 versus the S&P 500's 32% in a year where revenue fell 2% and EPS was flat.

· Facebook: Confidence was lost in Facebook in 2018 when the data disclosure issues arose although some is still owned in client accounts. Facebook beat the S&P 500 handily in 2019, but from 1/1/2018 has underperformed the S&P 500. That's 1/1/18 to 12/31/19 in terms of the performance period. Ad spending is supposed to be down this quarter and that will impact FB.

· Alphabet: Like Facebook, Google is expected to be impacted by an expected decline in ad spending, although that ad spending pullback could probably have a greater effect on Google. Given the declines in 2nd quarter EPS for both Google and Facebook, the June quarter EPS is expected to fall 35% y/y and have negative revenue growth y/y as well.

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