The Wall Street Journal - 11.03.2020

B14| Wednesday, March 11, 2020 THE WALL STREET JOURNAL.

Don’t Jump to Conclusions

Number of confirmed virus cases will rise but use care in analyzing any trends

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

China’s Other Health

Crisis Isn’t Fixed

Pork prices surge as this year’s troubles compound

the effects of last year’s African swine fever

This year’s epidemic is making it

harder for China to recover from

last year’s epizootic.

African swine fever decimated

the country’s pig population in 2019

in what lovers of Greek etymology

would have insisted was an epi-

zootic—relating to animals—and

not an epidemic—relating to people.

Livestock numbers were down more

than 40% until the government

stopped reporting them in October,

partly because farmers hesitated to

restock their herds. Pork prices

surged before falling late in the

year.

Now pork prices are rocketing

again as farmers struggle to revive

the pig population amid the novel

coronavirus epidemic. Live hogs fetch

almost triple what they did a year

ago, while the value of piglets has

risen even further, potentially point-

ing to higher prices down the road.

While the spread of African

swine fever has slowed, the disease

still isn’t fully under control. But

that hasn’t stopped farms, espe-

cially larger ones, from starting to

rebuild their herds in response to

the skyrocketing prices. Pig stocks

at large farms in December rose

2.7% compared with the previous

month.

The coronavirus will likely delay

this inventory buildup due to the lo-

gistics and labor disruptions it has

caused. Rabobank expects pork pro-

duction to fall 15% to 20% this year

in China, even after a more than

20% decline last year.

Imports, which should help alle-

viate the supply shortfall and keep

a lid on prices, have also been dis-

rupted in the first two months of

2020. Due to staffing shortages, op-
      erators have been slow to handle
      the large quantity of frozen pork in
      the ports, according to Rabobank.
      The situation should improve, but
      higher prices will likely persist lon-
      ger than originally expected.
      That may explain why Chinese
      pork producers have been among
      the best performers on the Chinese
      market. Muyuan Foods is up 47%
      this year, while Henan Shuanghui
      has gone up 27%. The latter is con-
      trolled by WH Group , which owns
      Smithfield Foods in the U.S. WH
      Group, whose Hong Kong-listed
      stock is down 1.6% this year, may be
      suffering from the trade disruptions
      now, but it will also be in a
      uniquely favorable position when
      China starts ramping up its pork
      imports, given the company’s sub-
      stantial operations in both China
      and the U.S.
      —Jacky Wong

Restaurant chains often suffer if

the economy swoons, but the threat

posed by the novel coronavirus may

be on a different scale.

When people have fewer dollars

in their pocket or fret that they

soon might, skipping a family meal,

drive-through stop or a fancy coffee

drink is a natural way to cut back.

When they also fear picking up a

potentially deadly pathogen in the

process, the consequences could be

far nastier.

Over the past two weeks, shares

of large restaurants including Chi-

potle Mexican Grill , McDonald’s

and Starbucks have dropped

sharply. Smaller casual dining

stocks have fared even worse. That

trend continued in Monday’s mar-

ket wreck.

There is good reason for the

worry: Starbucks, which had an-

nounced in January that it closed

half of its stores in China, recently

said the vast majority have since

reopened. But the sting was signifi-

cant: Comparable-store sales were

down 78% versus the prior year

during the month of February.

Starbucks said it has yet to log

any evidence of a decline in its

much larger U.S. business. Declines

of the magnitude seen in China are

unlikely in the U.S., where the pub-

lic response to the outbreak has

been far less aggressive. But that

reassurance is worth only so much.

Given the quick spread of the dis-

ease, it seems likely that fewer U.S.

customers will be traveling to res-

taurants in the days ahead, whether

on their way to work or on vaca-

tion. Third-party delivery-service

usage might increase, but more de-

livery sales likely won’t make up

for that entire shortfall.

The industry’s expectations of a

good year are in serious jeopardy:

Major restaurant companies had

forecast mid-single-digit same-store

sales growth as recently as last

month. Wendy’s launched a new

breakfast menu at its restaurants

just last week. Given the high fixed

costs and low profit margins of the

industry, even small declines in

sales can mean a major hit to prof-

its.

Companies that own a large

share of their locations outright

will be hit harder at first than

those big fast-food companies that

favor a franchise model. But high

leverage among franchisees means

this protection could be illusory.

Even before the coronavirus

emerged as a serious economic

concern, Carrols Restaurant

Group , which owns over 1,000

Burger King locations, warned this

year that it was sharply cutting

capital spending to help reduce le-

verage. Carrols stock is down more

than 60% this year.

“This is a bona fide force ma-

jeure, and franchisers should be

communicating plans to relieve the

pressure from franchisees over the

next two to three months,” said

Nick Mazing, director of research at

financial data firm Sentieo.

Remedies could include delaying

required spending, reductions in

royalty fees owed to the parent

company or menu or store-hour

modifications based on local condi-

tions, he added.

Those initiatives, while disrup-

tive, appear increasingly necessary

to prevent shareholders from get-

ting burned.

—Charley Grant

McDonald’s

Chipotle Mexican Grill

Starbucks

Share-priceperformance

Source: FactSet

0

–30

–20

–10

%

Feb. 26 March 2 10

The unprecedented surge in the

value of Treasurys means that U.S.

investors can now get the best risk-

free yields from a most unlikely

source: Japan.

Concerns about the coronavirus

and a sharp drop in the price of oil

have led markets to expect even

more interest-rate cuts from the

Federal Reserve. Treasury yields

have fallen to records as a result.

Even after Tuesday’s rebound, re-

turns on 10-year paper are around

0.7%.

At first glance, it might seem

like there is nowhere to run. Yields

are plunging everywhere: Negative-

yielding debt makes up 25% of the

global investment-grade bond mar-

ket, compared with 19% in mid-Jan-

uary, data by JPMorgan shows.

Ten-year German bunds, the risk-

free benchmark in the eurozone,

are edging close to minus 0.7%. In

Japan—a country famous among

traders for decades of almost-zero

yields—government bonds trade for

around minus 0.05%.

Yet perhaps there is an answer

hiding in plain sight.

For U.S. investors, a crucial met-

ric is how much an asset bought

sult, U.S. bond yields have much

more space to fall relative to Japa-

nese ones.

When using full-maturity hedges,

10-year Japanese bonds have con-

sistently earned a pickup over

Treasurys since at least 2008. But

the latest market turmoil sent the

yield premium to its highest level

since 2013 on Monday. It narrowed

on Tuesday, but the return avail-

able is still sizable.

In theory, this shouldn’t happen,

because arbitragers usually make

sure that no extra money can be

made without risk. Since the global

financial crisis, though, regulatory

constraints placed on banks have

restrained lending in global mar-

kets, forcing investors to pay a pre-

mium for borrowing dollars in ex-

change for foreign currencies. This

is especially true in times of stress.

Since the plumbing of financial

markets has remained broadly resil-

ient during the recent coronavirus

selloffs, the anomaly presents an

opportunity for U.S. investors who

can suddenly find no yield. Ironi-

cally, the place where they can now

get returns is infamous for offering

none. —Jon Sindreu

Where to Find Some Yield Now? Try Japan

abroad returns after hedging out

the currency risk. Fund managers

often do that by rolling over three-

month currency derivatives con-

tracts, which tend to be more liquid

than longer tenors. On that metric,

Japanese government bonds

yielded around 1.4% at Monday’s

close, almost a full percentage

point more than Treasurys. This ex-

cess yield or “pickup” has been in-

creasing in recent months, to the

point where the return available

from hedged Japanese debt has

even outpaced that from hedged

German bunds.

A reason for this is that Fed

rates were previously higher than

their equivalents in Europe and

Japan, which are already negative

and can’t go much lower. As a re-

The latest market

turmoil sent the yield

premium to its highest

level since 2013.

Widespread testing has yet to begin and some states have yet to test a single patient. A nurse conducts a test.

REUTERS/LINDSEY WASSON

Nobody should be surprised if

there is a surge in the number of

confirmed cases of the novel coro-

navirus within the U.S. in the weeks

ahead. And nobody should confuse

that surge with how rapidly the vi-

rus is spreading.

There is a risk that the coronavi-

rus data will be misinterpreted in

exactly that way by many investors

and Americans at large. As a result,

they may respond in ways that only

intensify some of the problems

stemming from the epidemic.

The increase in the number of

confirmed cases is driven not by a

jump in the number of people in-

fected with the coronavirus but

rather the number of people in-

fected with the virus who have been

found.

So far they are mostly people

who had a known contact with

somebody who had already fallen

ill, such as residents and staff in the

nursing-care facility in Washington

state that has been tied to several

deaths.

Widespread testing has yet to

begin, with state-by-state figures

collected by data scientist Jeff

Hammerbacher showing that so far

4,384 tests had been conducted

through Monday afternoon, and

that some states have yet to test a

single patient.

But with the Centers for Disease

Control and Prevention ramping up

shipments of testing kits and large

commercial lab companies launch-

ing coronavirus-testing services, the

capacity to detect the virus is in-

creasing in the U.S. With that in-

crease in testing capacity, many

more cases will likely be discovered.

“The more you look, the more

you’re likely to find,” said Jennifer

Nuzzo, an epidemiologist at the

Johns Hopkins Bloomberg School of

Public Health. “We have to recog-

nize that isn’t a sign of an expan-

sion.”

Which isn’t to say that the num-

ber of people coming down with

Covid-19 isn’t growing—just that

care needs to be taken when work-

ing with the raw case-count figures.

The dangers of not understanding

the nuances of the data were in full

display in early February when

many on Wall Street took a slowing

in the growth rate in the number of

cases in China as a sign that the

outbreak was on the verge of being

contained there, failing to appreci-

ate that it would become a problem

elsewhere.

That was an enormous mistake—

one that led to stocks hitting new

highs even as epidemiologists and

other health experts became in-

creasingly alarmed. It contributed

to many people viewing the risks of

the virus becoming a problem in the

U.S. as lower than it actually was.

Ms. Nuzzo also worries that dif-

ferences between how states ap-

proach testing could give rise to

false perceptions about what the vi-

rus is doing within the U.S. One lo-

cality might look safer, for example,

not necessarily because it is, but

because fewer tests have been con-

ducted there than other places.

That could lull people there into a

false sense of security and lead in-

vestors to falsely believe that busi-

nesses in some regions will be

shielded from disruption.

With hope, investors will now be

a little less quick to jump to conclu-

sions based on an incomplete un-

derstanding of the data and a little

more apt to listen to what epidemi-

ologists are saying.

—Justin Lahart

PigpricesinChina

Source: Wind

Note: 1 yuan = $0.14

100

0 Weekly data

25

50

75

yuan a kilogram

2018 ’19 ’20

Piglets

Live hogs

OVERHEARD

Believe it or not, Stitch Fix has

been here before.

The reaction to the online

fashion retailer’s fiscal second-

quarter results on Tuesday morn-

ing seemed one for the books.

Stitch Fix shares plunged more

than 30% in morning trades—

a notable contrast to the

market’s broad-based recov-

ery from the previous ses-

sion’s near-record selloff.

The company’s revenue

from the quarter was a little

disappointing and its forecast

was very disappointing, with the

midpoint of the latter about 7%

below Wall Street’s targets. The

company blamed a mix of factors,

including lower order values and a

plan to reduce marketing spending

to shift focus onto its newer direct-

buy feature.

Stitch Fix has also long been a

favorite target of short sellers,

which tends to amplify the reac-

tions to its results.

The stock has risen or fallen by

double-digit percentages following

seven of the 10 quarterly reports

it has issued since going public,

according to FactSet. The larg-

est drop to date has been 35%

following its fiscal fourth-

quarter report in late 2018.

More than 40% of available

shares has been sold short

since September of last year, ac-

cording to FactSet. That made

Stitch Fix a sure bet for a big

drop if Wall Street didn’t find its

numbers to be a perfect fit.

Restaurants Face

A Double Threat

TOM SWEENEY/MINNEAPOLIS STAR TRIBUNE/ZUMA PRESS