Everything you need to know about the week in the market.

Week Ending 
May 8, 2020


During the quarantine, we have all adopted new routines and habits.  The most ridiculous routine that I have come across is from none other than my own husband.  My husband decided early on in our quarantine to chronicle this period by following the growth of a crape myrtle tree outside of our window.  Seriously?  It is truly unexciting to watch a tree grow.  My ridicule was merciless.  Every morning, at about the same time, in the exact same spot, he takes his iPhone and proudly captures his tree.  And why would he do it if he, like most of us, thought we would resume our normal lives in just a few days? But 58 days later (and with very few alternative entertainment options), I have actually come to enjoy watching this tree change.  From barren branches to a full spring bloom, it reminds us that sometimes you just need to take time out to literally watch and smell the roses.

Once we are out of here, I will share his entire slide show - yes, he already titled it “The Growing Tree.”  It’s actually pretty cool (but don’t tell him I said that).


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MARKETS

The markets just don’t care

The markets have been incredibly resilient.  It is hard to grapple with the fact that the major indexes were up this week when we examine the data - especially the critically important Employment Situation Summary released on Friday - better known as the jobs report.  

The April jobs report was nothing short of horrific.  U.S. employers cut 20.5 million jobs in a month - by far the worst jobs cut on record (dating back to 1939) - with an unemployment rate near 15%.  Remember, as recently as February, the unemployment rate was just 3.5%, a half-century low.  To make matters worse, this report does not paint an accurate picture, since workers are only counted as unemployed if they are actively looking for work (but many people cannot look due to lockdowns).  So ... why the positive stock market reaction?

Of the 20.5 million jobs lost, over 18 million of these workers reported that their layoffs were “temporary.”  This goes back to last week’s discussion on investor optimism - the market is saying that the worst is behind us and that the U.S. economy is resilient and will quickly recover (remember the V-shaped recovery - a sharp rise back following a sharp economic decline).  Investors seem to anticipate a quick recovery and a smooth re-opening of the economy; although, many economists disagree and think that the markets are not appropriately contemplating the potential depth of the recession.  Even so, the stock market is forward-looking while the jobs report is backward-looking, so when things improve from awful to better, it is enough to send stocks higher.

While the jobs data was horrific, there was also some non-economic, virus-related data which encouraged investors.  Covid-19 testing capability increased significantly this week, and virus numbers in some major U.S. cities, like New York City, are declining.  


Lastly, as corporate earnings season continues, some companies have seen glimmers of positivity in the recessionary environment - known as “green shoots.”  The “green shoots” mentioned primarily have been anecdotal; the real telltale signs come when companies project future revenue and profitability.  Right now, the future is so murky that only 40% of reporting companies have discussed projected future performance.  

Still, the market’s optimism seems more focused on these positive signs rather than the negative hard data.

 

Trading Recap - Week in Review

S&P

2,929.80

+3.50%

NASDAQ

9,121.32

+6.00%

DJIA

24,331.32

+2.56%

10-YR

0.68%

OIL

$24.59

+24.89%

GOLD

$1,709.20

-0.06%

UP (& DOWN) TICKS*

*green denotes weekly gains; red denotes declines.

Nasdaq
If you can believe it, the Nasdaq Composite (COMP), a largely tech company driven index, is actually higher today than it was at the start of the year.  The index includes 2,701 companies and is weighted by the size of the companies - so thanks to the outperformance of some large companies like Tesla (ticker: TSLA), Amazon (ticker: AMZN), Netflix (ticker: NFLX) and Microsoft (ticker: MSFT), the index is now up almost 2% for the year (versus the Dow down 15% and S&P down 10%).

Airlines & Berkshire Hathaway
Last Saturday, we heard from Berkshire Hathaway’s (ticker: BRK) leader Warren Buffet, the “Oracle of Omaha.”  On a bright note, Buffet was extremely optimistic about the future of America.  The bad news ... he commented that certain industries, such as airlines, will take much longer to recover from Covid-19.  Berkshire has held significant stock in America’s largest airlines since 2016 - Delta (ticker: DAL), American (ticker: AAL), Southwest (ticker: LUV) and United (ticker: UAL) - and announced that it just sold its entire airline investment worth $6 billion.  This is a short “holding period” for Buffet who once famously said that Berkshire’s “favorite holding period is forever.”  Apparently, Buffet does not want to wait around “forever” to see when people actually get back on planes.  Shares in airline stocks got hit hard this week, with LUV down 7%, DAL down 6%, and AAL and UAL both down 5%.

Disney
Disney (ticker: DIS) did not have a fairytale quarter.  Yes, there is Disney+ which could not have come at a more perfect time - gaining 54.5 million subscribers since its November streaming debut.  However, Disney’s theme parks across the globe are closed and could face ongoing struggles.  These closures cost Disney $1 billion of profit in the quarter - and the quarter only reflected two weeks of closures!  So why was the stock up over 3% this week?  Thanks to Shanghai Disney.  There is a ton of excitement around the soft re-opening of the theme park on Monday.  Even though the park will be capped at 30% capacity, the opening is still a sign of hope and progress.  Fun fact: tickets to re-opening day sold out in three minutes as park goers excitedly await a Disney with no lines! 

Square & Paypal 
Sounds like Square (ticker: SQ) and PayPal (ticker: PYPL) are similar companies - they both focus on payments and even reported earnings on the same night.  Though their business models are different, both companies’ shares were up over 20% this week.  Square (ticker: SQ) needs people to patronize businesses in person, and the company has a lot of small business customers who are struggling.  However, Square does have a bright spot with its Cash App - which benefitted as people opted to get their stimulus checks direct deposited to the app.  PayPal (ticker: PYPL) is more focused on online payments - which are growing significantly in the stay-home era.  PayPal even stated that April may have been the best month for the company since going public in mid-2015.

Peloton 
Struggling with workout motivation at home? Wish you were in a live class with 23,000 other people?  In comes Peloton (ticker: PTON) - the company able to deliver the motivation we lack and the group classes we crave.  The company reported earnings this week and said that equipment sales of its bikes and treadmills were up 66% this quarter versus a year ago.  Demand is also so high that a bike which used to be delivered in two weeks, now takes up to seven weeks for delivery.  Peloton even has 176,000 subscribers to the app who do not own its bike or tread!  Note:  the experts are not always right - back in December, one vocal investor projected that PTON stock was only worth $5; it is now worth $43/share, thanks to the impossible to predict stay-at-home trend.  Shares of PTON were up 34% this week.

Etsy
Etsy (ticker: ETSY) is the online craft marketplace which saw its stock soar to new highs this week - after surging 70% in April.  The pandemic gave a boost to handmade items like face masks - and the company noted that it was selling hundreds of thousands of masks per day last month.  Etsy now has 20,000 face mask sellers on its platform.  Naturally, this positive momentum can’t come from face masks alone - sales of craft supplies and self-care items are also driving sales higher.  Shares of ETSY were up 25% this week.

Uber 
No one was expecting Uber Technologies (ticker: UBER) to report a great quarter - sheltering-in-place can’t be helpful to a ride hailing company.  While Uber’s earnings loss was even larger than expected, the company did share some surprising positive news - the number of Uber trips was actually up 7% year-over-year in the quarter (most likely from strength in January and February).  The other positive was from Uber Eats, which has seen substantial growth due to the pandemic.  As for recent data, Uber discussed “green shoots” with trip volume up week-on-week globally for the past three weeks.  Uber did state that it would lay off 14% of its corporate employees to cut costs; investors were happy to see the company use the recession as an opportunity to become more efficient.  Shares surged over 15% this week.  

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FOCUS SECTOR OF THE WEEK

Many retailers are struggling from the Covid-19 pandemic - with stores closed and consumers changing shopping priorities.  These days, most people are searching online for Clorox wipes and grocery delivery slots rather than the latest spring tends (unless, of course, that trend includes tie dyed sweats).  

Next Friday, May 15, we will get April retail sales numbers at 8:30am ET.  Remember, March sales fell 9% from February - the biggest decline in nearly 30 years.  In the March number, the most significant hit was to clothing stores which dropped a whopping 50% from the prior month.

This hit to clothing sales was one of the forces accelerating two high profile bankruptcies this week - for privately held retailers J. Crew and Neiman Marcus.

What does this mean?  Bankruptcies do not usually mean that a business is going away and permanently closing all stores and liquidating inventory (
à la Barneys).  Rather, and in the case of J. Crew and Neiman, it means that the businesses can restructure.  Both J. Crew and Neiman have a lot of debt, $1.7 billion and $5 billion, respectively, and are having trouble making debt payments.  Both retail chains were not generating enough revenue once the pandemic hit to cover the interest payments owed to the holders of the debt.  

Now that both companies filed for bankruptcy (as the businesses maintain operations for now ...), they can consolidate and adjust the terms of the debt.  The holders of the debt essentially become the owners of the companies.  Bankruptcy can be an effective tool to help overleveraged businesses (see Term of the Week).
  • J. Crew:  The first major retailer to file during the pandemic operates 181 J. Crew retail stores, 140 Madewell stores and 170 factory stores.  In 2011, private equity firms TPG Capital and Leonard Green privatized the former publicly traded J. Crew in a $3 billion deal.  Interestingly, J. Crew avoided bankruptcy once before, in 2017, by working out a deal with the debt holders at the time.
  • Neiman Marcus:  The company operates 43 Neiman Marcus stores, 2 Bergdorf Goodman stores and 22 Last Call discount stores (Neiman is in process of closing 50% of Last Call stores).  Private Equity firm Ares Management and the Canadian Pension Plan Investment Board bought Neiman in 2013 for $6 billion.  
Covid-19 will continue to take a toll on most retailers - once operational, stores will need to adopt new policies to keep employees and customers safe, and consumers will need to gain confidence with in-store shopping.  Expect to see more bad news and more bankruptcies ahead.  

Just this week, Nordstrom (ticker: JWN - the ticker comes from the initials of the company’s founder, John W. Nordstrom) said it would close 16 locations, J.C. Penny (ticker: JCP) skipped another interest payment (and could file for bankruptcy as early as next week), and Macy’s (ticker: M) pushed off reporting quarterly earnings.  Shares of JWN are down 56% so far this year, JCP down 85% and M down 68%.  Not a pretty trend.
 

TERM OF THE WEEK

Overleveraged
 

A business is overleveraged when it has too much debt relative to how much it can pay.  An overleveraged company has a hard time paying its interest and principal payments and is often unable to pay its other bills, too.  The company then has to borrow more, and this can lead to a downward financial spiral.

Why put leverage or debt on a business?  Leverage isn’t always a bad thing.   Leverage allows businesses access to money in order to fuel growth and other investments (think Disney building a theme park or Netflix building out content; companies take on debt to fund investments).  When leverage works out, it can reward the business.  Too much leverage, however, can be precarious and can even lead to bankruptcies.
 

Until next week...

 
Laughter is one of the ways I am coping during this stressful and crazy time.  This weekend, I plan to watch the Jerry Seinfeld special on Netflix (see, I did not reach the end of Netflix yet!).  In anticipation of the comedy special, I am sharing one of my favorite sketches of all time - How The States Got Their Abbreviations - from the talented Gary Gulman.

Enjoy and stay safe!

 

ABOUT THE FOUNDER

Jamie Easton
 

Jamie has nearly 20 years of professional experience in the financial services industry.  Most recently, she was a Managing Director at Evercore, a premier, independent, global investment banking advisory firm.  At Evercore, she ran Investor Relations and was recognized by Institutional Investor Magazine as the top ranked IR professional in her peer group.  She also was a founding partner in Evercore’s Equities business.  Jamie began her career at Goldman Sachs in Investment Research.  Jamie is a graduate of the University of Pennsylvania, where she is very active with the University and is a founding member of the Professional Women’s Alliance.  Jamie resides in Manhattan and is an avid lover of fitness and all things CNBC.

     
 

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