Econ Recon; Jobs at Amazon; Theaters Be Gone
Dead Cats Can Dance
Initial reports on the U.S. economy started rolling in this morning … and I’m not sure if you really want to look or not.
The New York Federal Reserve’s Empire State Manufacturing Index plunged by the biggest margin on record: 34.4 points. The reading, which now stands at -21.5, indicates contraction in the New York manufacturing sector.
Elsewhere, U.S. retail sales fell a greater-than-expected 0.5% in February. According to the Department of Commerce, February’s weakness stemmed from a 0.9% drop in auto sales and a 2.8% plunge in gasoline sales.
In other words, the U.S. economy was on shaky ground even before the coronavirus’ rolling mass retail closures. In fact, when you throw COVID-19 into the mix, Goldman Sachs Group Inc. (NYSE: GS) believes that the U.S. economy will show zero growth in the first quarter and a 5% decline in the second.
It’s no wonder that the Fed cut interest rates to zero. It’s also no surprise that the Trump administration is now pushing for $850 billion in economic stimuli to limit COVID-19’s economic havoc.
Despite today’s poor economic data, the S&P 500 Index is in rally mode, gaining roughly 5%.
Don’t believe it.
This is what we in the industry call a “dead cat bounce.”
It’s a complicated technical term that deals with math, velocity … and cats. The gist goes like this: If you drop something (anything … even, say, a dead cat) from high enough, it will bounce.
Yesterday, we saw the markets suffer their third-worst plunge ever, only behind 1987’s 22% plunge on “Black Monday” and a 13% drop in late 1929.
After a drop like that, even you’d bounce … and you’d probably join the cat in the choir invisible. But I digress…
We’ve had a few of these reactions in the past couple of weeks. Plunge and bounce. Plunge and bounce. It’s happening so often that this dead cat isn’t just bouncing … it’s dancing.
It’s a deadly dance that lured many investors who are used to buying into the 10-year bull market’s dips.
But we’re not in a bull market anymore. We’re in a bear market that’s headed toward a potential recession.
Now more than ever, you need a strong guiding voice in the market. Great Stuff has strived to be that voice, recommending solid action and investment ideas to protect and grow your wealth — even in these trying times.
But I know that some of you want a more diversified approach.
Enter Banyan Hill expert Ted Bauman (or “Cassandra,” as we call him these days).
Ted diversifies like no one’s business. In fact, his readers in The Bauman Letter had diversification at their fingertips long before this mess began…
That’s why Ted’s model portfolio in The Bauman Letter is actually three diversified model portfolios in one:
- The “Base Hits” portfolio for investing in long-term gain opportunities in solid, financially stable companies … the ones that should outlive viral markets.
- The “Home Runs” portfolio for impressive shorter-term opportunities — those quick stock rallies that most investors will miss in a blink in these volatile times.
- The “Endless Income” portfolio for opportunities to generate income in the meantime.
Trust me when I tell you that Ted is the man to have in your corner when volatility like this hits the market.
Going: Cat-ching Up to Demand
Great Stuff constantly talks about holding on to well-run companies with solid business models. These, as we say, are the stocks to not sell in the current market downturn. But we never really mention any names, do we?
Shame on us…
Well, here’s one to add to your list: Amazon.com Inc. (Nasdaq: AMZN) is doing so well right now that it’s having trouble keeping warehouse shelves stocked and meeting delivery times. It should come as no surprise that the biggest online shopping center is outperforming at a time when everyone’s confined to their homes.
To remedy the situation, Amazon will hire 100,000 new full-time and part-time positions. Furthermore, the company also announced that it will raise wages by investing more than $350 million, increasing pay by $2 an hour in the U.S.
Now that’s a well-run company with a business model designed for the COVID-19 scare.
Going: The Cat’s out of the Bag
Comcast Corp. (Nasdaq: CMCSA) has done the unthinkable — something so taboo that there may be no putting this genie back in the bottle. No … it didn’t raise your cable prices again in the middle of the COVID-19 outbreak.
The company’s NBCUniversal unit is skipping the “theatrical window” for movie releases. In layman’s terms, that means it will release feature movies directly on demand … at the same time those films arrive in theaters.
With coronavirus quarantines roiling the movie theater business, now’s the perfect moment to break this final taboo.
“Rather than delaying these films or releasing them into a challenged distribution landscape, we wanted to provide an option for people to view these titles in the home that is both accessible and affordable,” said NBCUniversal CEO Jeff Shell.
Let’s not kid ourselves: NBCUniversal (aka Comcast) isn’t doing this out of kindness. It’s because movie theater revenue is in the toilet right now. What’s more, Comcast is set to launch its own streaming service (Peacock) in April.
The company has said that first-run movies will be available on a number of streaming partners. You can bet that Peacock will strut its stuff with new movies in no time.
My only misgiving is that Trolls World Tour will be the first movie to hit on-demand and theaters at the same time. Let’s be honest here … this movie would’ve been direct-to-DVD back in the ’90s.
Regardless, once NBCUniversal gets a taste of that oh-so-sweet on-demand cash, there may be no going back to the old way of releasing movies.
Gone: Cat-astrophic Development
With NBCUniversal’s announcement, no longer will people go to the movies just to see a movie. The advent of the “direct to on-demand” model means that the tide has finally turned. Netflix Inc. (Nasdaq: NFLX) pioneered this model, but no one really took it seriously. NBCUniversal’s move lends this model credence like nothing before.
This is catastrophic news for theater owners, such as AMC Entertainment Holdings Inc. (NYSE: AMC) and Cinemark Holdings Inc. (NYSE: CNK). These companies aren’t totally lost, however. They have long known their time would come.
Both AMC and Cinemark offer monthly subscription packages for movie-watching, stealing from the Netflix model. Both have also moved toward enhancing the “movie experience,” offering in-seat catering, drinks and superior video and sound quality. Not to mention … those nice, reclining leather seats!
The bottom line, however, is that “going to the movies” is no longer about the movies per se. It’s about the experience, convenience and luxury.
“It’s going to be hard to go back once they get a taste of it,” said Tom Ara, law firm DLA Piper’s co-chair of entertainment. Tom is talking about the increased revenue and lower marketing costs for movie studios.
Once NBCUniversal’s move takes hold, there’s no going back. Companies like AMC and Cinemark need to act now or be left in the dust.
If your business is closed it will make less money than if it is open; if it is closed for months it will make a lot less money. If you are buying the future earnings of businesses, you should probably pay less now than you would have last week, never mind a month ago.
Sometimes we need to be brought back to life, back to reality … back to the here and now, yeah. (Soul II Soul break for the win!)
Seriously, though. I get asked all the time why I think the market is crashing and why I think it will continue to go down. And now, I’ll probably be asked why I think a recession is coming.
Matt Levine sums up my line of thinking in plain language. Companies are making less money right now due to coronavirus closures and quarantines. They will continue to do so for the next several weeks … possibly months.
It doesn’t matter that China’s supply lines are finally flowing. Demand in the U.S. is falling off a cliff. I have friends who were already let go from their jobs due to the coronavirus. They’re drawing unemployment now. That demand is no longer there, and the same story is happening across the country.
That means less earnings for companies right now and lower future earnings in the coming months. Consequently, this means lower price-to-earnings ratios and lower stock prices (assuming anyone really traded on fundamentals in the first place during the past 10 years).
Great Stuff: Let’s Catch up Right Meow
I think we’re long overdue fur a paws in the action … a chance to lick our battle wounds and claw back a meow-ment of respite.
It’s only Tuesday, if you can believe it…
And that’s my cue to call on you! Write in to GreatStuffToday@banyanhill.com and let us know how you’re faring in this wild, whacky week!
Purr-haps you’d like a few conversation starters:
- Are you stimulated by the White House’s stimulus plans? Or is the White House scratching up the wrong cat tree?
- How will mass isolation in the U.S. affect your personal line of work? For my retired folks out there … did you ever experience a work disruption like this?
- What are your go-to recession stocks to hold? (If you aren’t the “cash in the mattress” type, that is!)
You know the drill: You have just two days to spin a yarn to GreatStuffToday@BanyanHill.com to make this week’s edition of Reader Feedback.
Until next time, good trading!
Editor, Great Stuff