Barron\'s - April 6 2020

April 6, 2020 BARRON’S M11

Market View

Thiscommentarywasissuedrecentlybymoneymanagers,researchfirms,andmarketnewsletterwriters,andhasbeeneditedby Barron’s.

The “Full Horror” of Job Losses

Daily Commentary

byMaria Fiorini Ramirez

mfr.com

April 3: With initial unemployment claims

totaling almost 10 million in the second half

of March, it is abundantly clear that today’s

payroll data, as bad as they are, do not even

scratch the surface in terms of depicting the

carnage that is occurring in the labor mar-

ket. The way the establishment survey

works is that if an individual received any

pay at all for the pay period (could be

weekly, bi-weekly, monthly, or other) that in-

cludes the 12th of the month, then they are

counted as on the payroll and thus em-

ployed. Given the timing of the mass layoffs

and furloughs seen to date, most of these in-

dividuals will have still been counted as be-

ing on the payroll for March.

The separate household survey, from

which the unemployment and participation

rates are derived, uses different methodol-

ogy, focusing only on the calendar week that

includes the 12th of the month, and it ex-

cludes workers on furlough for the entire

week even if they received some pay for the

period. Given this difference, the household

survey should have captured more of the

layoffs/furloughs that occurred in the first

half of March than the establishment sur-

vey. Indeed, the household survey calculated

a 2,987,000 drop in employment, or more

than four times as much as the 701,000 drop

tallied by the establishment survey....It will

not be until the April employment data are

released on May 8 that the full horror of

what has occurred (and will occur over the

coming two weeks) will be evident.

—JOSHUASHAPIRO

Sizing Up Sectors

Sectors & Stocks

bySaut Strategy

sautstrategy.com

April 3: After the big gains from last week,

it was encouraging to see the S&P 500

start to consolidate around 2,500 in recent

days. Near term, defensive sectors look

ready to mount an advance, as the economy

still faces a high level of uncertainty. The

market is a few weeks away from Q1 earn-

ings season. It will help investors gain a

better idea which companies will benefit,

and which ones won’t.

• Packaged foods have outperformed in

recent sessions as investors seek shelter in

names that can ride out a recession. It

might be several months before economi-

cally sensitive names come back in favor.

• Biotech has caught the eye of investors

looking for growth in a sluggish economy.

Many have some exposure to C-19 testing

and potential vaccines.

• Semiconductors have pulled back mod-

estly from a big gain from last week. If inves-

tors are going to look through current weak-

ness, semis are often one of the first to rally.

• Home builders are expected to under-

perform as laid-off workers wait for govern-

ment checks. Even though rates are low, de-

mand is expected to wane until workers start

going back to work.

• Health-care providers have come under

pressure in recent days, as the number of pa-

tients grows exponentially. The group is also

vulnerable to reimbursement cuts.

—HARRYG.KATICA

Until Oil Rebounds, Look Out

Momentum Strategies Report

byClif Droke Market Analysis

clifdroke.com

April 2: Lingering weakness in the energy

sector is arguably the biggest problem

hanging over the stock market right now

and preventing a sustainable rally from tak-

ing place. While Wall Street is focused on

the stock market’s recent performance, a

lesser-known fact is that West Texas Inter-

mediate crude oil just experienced its worst

quarter ever. This arguably has far greater

repercussions for the economy than the eq-

uity market’s recent woes.

Indeed, plunging oil prices are a threat

to the global economy, since so many emerg-

ing nations are dependent on revenue from

oil production. Moreover, falling crude

prices reflect a strong deflationary under-

current in which lower manufacturing activ-

ity and lower demand threaten to push com-

modity prices even lower across the board.

While lower commodity prices would ulti-

mately benefit consumers, falling commodity

prices would also encourage producers to

retrench and would likely limit consumption

in the near term as consumers held off on

large-scale purchases in anticipation of even

lower prices.

The deflationary aspect of low oil prices

is a major reason for my argument that a

crude-oil price reversal is needed before the

stock market can establish a major low and

turn itself around.

—CLIFDROKE

Goodbye, Globalization

Insights

byCresset Asset Management

cressetcapital.com

March 31: America, like many of her devel-

oped-market trading partners, embraced

globalization in the early 1980s and bene-

fited from outsourcing manufacturing to

low-cost countries like China. The results

were transformational: Productivity climbed

while profits soared against a backdrop of

disinflation and lower interest rates. At its

manufacturing peak in 1979, America

boasted nearly 20 million goods-producing

jobs, comprising 21% of the workforce. By

the end of 2019, America’s manufacturing

workforce had plunged to 12 million, or 8%

of total employment. Before the coronavirus

pullback, the number of food-service work-

ers in the U.S. nearly equaled the total

number employed in manufacturing.

Reshoring—bringing manufacturing ca-

pabilities back to the U.S.—dovetails with

many of President Trump’s 2016 campaign

stances. The domestic manufacture of criti-

cal products related to national security, like

medical equipment, drugs, microchips, and

lithium-ion battery components, will be top

policy priorities as our economy begins to

normalize. For example, the U.S. currently

manufactures only about 2% of the world’s

supply of lithium-ion batteries. Government

incentives will likely expand to cover other,

nonessential manufactured industrial and

electronic goods. Reshoring of manufactur-

ing will require investment in industrial real

estate and warehouses. Construction will

likely focus on regional, mid-size manufac-

turing facilities that are conducive to auto-

mated production, not the megafactories of

yesteryear. Simply put, the secular trends

ushered in by globalization will reverse.

—JACKABLIN

Target: A Pillar of Strength

Gimme Credit

byGimme Credit

gimmecredit.com

March 31: [Target] has one of the strongest

balance sheets in retailing. It has remained a

solid single-A credit for the past two decades.

Target ended the year with $2.6 billion in

cash, almost no short-term debt, no commer-

cial paper outstanding, undrawn credit facili-

ties of $2.5 billion, and lease-adjusted lever-

age of under 2 times. Free cash flow of $2.7

billion was more than enough to fund $1.6 bil-

lion of share repurchases. Its next big matu-

rity is a $1 billion bond maturing in 2022.

Thus we were somewhat surprised when

Target announced a new [debt] issue. Tar-

get issued $2.5 billion in five-year and 10.5-

year notes, for “general corporate pur-

poses.” This appears to be a “get it while

you can” cash grab. Target’s weighted aver-

age cost was less than 2.5% despite the fact

that the spreads were more than triple what

it paid for its previous issuance in January.

Demonstrating ready capital-markets access

amid the desperate moves of other retailers

drawing down their credit lines is a sign of

strength. We reiterate our Outperform (the

new 10.5-year was priced at T+190).

—CAROLLEVENSON

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“The household survey [of employment levels] calculated a 2,987,000 drop in employment, or more than

four times as much as the 701,000 drop tallied by the establishment survey.” —JOSHUASHAPIRO,Daily Commentary