The 'Ackman Bottom' or Bottom of Hell?
Investor Bill Ackman urged President Donald Trump and corporate America in an impassioned plea on CNBC to shut down the country for 30 days to contain the fast-spreading coronavirus, calling it the only option to rescue the economy.Bill Ackman also said if things continue to go the way they're going, "private equity is dead" too as many of these funds hold companies with 'lots of leverage".
“What’s scaring the American people and corporate America now is the gradual rollout,” Ackman told Scott Wapner on “Halftime Report” on Wednesday. “We need to shut it down now. ... This is the only answer.”
“America will end as we know it. I’m sorry to say so, unless we take this option,” he said. Ackman added that if Trump saves the country from the coronavirus, he will get reelected in November.
Ackman urged U.S. companies to stop their buyback programs because “hell is coming.” The biggest U.S. banks have already halted repurchasing stocks to put their capital to use helping consumers and businesses.
Worldwide coronavirus cases topped 200,000 on Wednesday, while confirmed cases in the U.S. have surged to at least 6,496. The Trump administration is working on a $1 trillion stimulus package to combat the impact of the virus, including sending out checks to the American people and providing financial relief to airlines.
“The hotel industry and the restaurant industry will go bankrupt first, Boeing is on the brink, Boeing will not survive without a government bailout,” Ackman said. “Capitalism does not work in an 18-month shutdown, capitalism can work in a 30-day shutdown.”
‘Tsunami’ is coming
The founder and CEO of Pershing Square Capital Management said he felt a “tsunami” was coming before anyone else raised a red flag about the outbreak.
“Beginning in late January I was getting increasingly bearish and I woke up with a nightmare,” Ackman said. “And my nightmare was you have this virus that replicates and infects incredibly rapidly.” He added his colleagues thought he was a “lunatic” when he took out cash from an ATM.
In the emotional interview, Ackman revealed he went into lockdown almost a month ago to save his father’s life who is immunocompromised.
“The only shared sacrifice that is going on right now is the health-care community, the nurses, the doctors, the people taking care of patients. Those people are making enormous sacrifices,” said Ackman. ”[The president] is not saying storm the beaches of Normandy right now, he’s saying go home, go home, spend a month with your family.”
Hilton could go to zero
Ackman predicted that hotel stocks including Hilton could “go to zero” soon if no action is taken. He is a major shareholder in Hilton.
“Every hotel is going to be shut down in the country. ... If we allow this to continue the way we have allowed it to continue, every hotel company in the world is done. No business can survive a period of 18 months without revenue,” Ackman said.
Shares of Hilton have tanked nearly 50% in March alone, while Marriott plunged 60% this month amid the market turmoil. The S&P 500 tumbled into a bear market last week and the sell-off accelerated on Wall Street as investors feared the coronavirus will tip the economy into a recession. The benchmark was last 29.5% off its record high.
Still, Ackman said he grew optimistic that world leaders including Trump will move immediately to save the global economy.
“I’ve been aggressively buying stocks including Hilton today. And I’ve been buying all the way down — Hilton, Restaurant Brands and Starbucks,” Ackman said.
As of the last quarterly filings, Ackman only invested in a total of 8 positions:
Of these, the stocks I really like are Starbucks (SBUX) and Restaurant Brands (QSR). Both stocks got killed along with the market but even with a coronavirus outbreak, people are still lining up to buy their coffee from Tim Horton's and Starbucks, they're just going to the drive-through at stores that remain open (not the wisest thing to do when the government is asking you to stay home!!).
Anyway, I listened to Bill Ackman, he had a lot to say and I agree with him, we need to shut the entire global economy down for a month (not just US), but that's not going to happen, so the next best thing is to try to limit the damage as much as humanly possible.
After the show, Ackman took to Twitter to clarify some statements:
Some investors have been confused by remarks. To clarify, I am confident the president will do the right thing in temporarily shutting down the country and closing the borders. If that happens, we can win the war against the virus and the markets and the economy will soar.— Bill Ackman (@BillAckman) March 18, 2020
Nonetheless, the damage was done, soon after his apocalyptic doomsday warning, I took a snapshot of markets at around 2:30 this afternoon:
The market was puking so hard on massive volume that it felt like capitulation.
It made me wonder if Ackman called his hedge fund buddies earlier today to tell them he was going on CNBC to scare the the living daylights out of everyone and that the ensuing panic will be a great time to load up on stocks.
In fact, stocks did manage to rally a bit into the close but they were still bludgeoned in yet another volatile session on Wednesday, sinking to a three year low as worldwide cases of the coronavirus soared above 200,000, and wiping out all of the gains made since President Donald Trump was inaugurated on Jan. 20, 2017.
As bad as things are in markets and the economy, I'm not panicking yet.
When people ask me where stocks will bottom, I tell them "nobody knows" but keep your eyes on some important technical levels in the S&P 500 ETF (SPY):
As long as it can hold above its 400-week moving average (210), then I wouldn't panic, but if it falls below, we might be in for a protracted bear market the likes of which we haven't seen before.
Let's face it, the world is dealing with a pandemic, it is bad because it's easily transmissible as many asymptomatic or mildly symptomatic carriers are unknowingly (or knowingly) transmitting it and nobody wants to lose a loved one to COVID-19, but it won't spell the end of civilization.
The biggest challenge policymakers have right now is to take care of millions of workers who are out of a job literally overnight and need money to pay for food and rent.
On Tuesday, Treasury Secretary Steve Mnuchin outlined a stimulus plan, including payments to small businesses, loans guarantees to industries such as airlines and hotels, and stimulus package to workers stating "we are looking at sending checks to Americans immediately":
Treasury Secretary Steve Mnuchin: "We are looking at sending checks to Americans immediately" pic.twitter.com/plNwuxht3U— QuickTake by Bloomberg (@QuickTake) March 17, 2020
Those checks can't come soon enough. In my opinion, given the devastating hit to the US economy, the stimulus package should have been in the order of $3 trillion (not $1 trillion) and they need to pay workers to stay home for at least three months, if not six months:
"We project the US economy to enter a protracted recession based on the expected downturn in travel alone. The recession is likely to last at least three quarters with the lowest point in the second quarter of 2020." - Oxford Economics https://t.co/5sY5n0GkTT— Edward Harrison (@edwardnh) March 18, 2020
*MNUCHIN WARNS VIRUS COULD YIELD 20% JOBLESS RATE WITHOUT ACTION— Jim Bianco (@biancoresearch) March 17, 2020
25% with action?
JPM sees -4% US GDP in Q1 and -14% in Q2— Jim Bianco (@biancoresearch) March 18, 2020
Great Depression numbers
Jim Bianco is right, these are Great Depression numbers, expect the unemployment rate to shoot up to 25% over the next few months.
Markets have already factored in a lot of this economic pain but the problem is the pandemic is fueling ever more uncertainty and nobody knows just how bad it will get over the next few months.
On the health front, I worry a lot about people ignoring social distancing. A lot of younger people aren't taking this virus seriously but if they heard the news conference today, I hope Dr. Birx's sober warning resonates with them, nobody is immune to falling critically ill from COVID-19:
NEW: “There are concerning reports coming out France and Italy about some young people getting seriously ill,” Dr. Deborah Birx says, calling on “millennial generation" to "heed" guidance.— ABC News (@ABC) March 18, 2020
“We cannot have these large gatherings that continue to occur.” https://t.co/piDsmnkG0y pic.twitter.com/uiuCi9shW2
The US Surgeon General, Dr. Jerome Adams, had an equally important message for millennials:
What else? The current coronavirus disease, Covid-19, has been called a once-in-a-century pandemic, but it may also be a once-in-a-century evidence fiasco:
"The data collected so far on how many people are infected and how the epidemic is evolving are utterly unreliable. Given the limited testing to date, some deaths and probably the vast majority of infections due to SARS-CoV-2 are being missed. We don’t know if we are failing to capture infections by a factor of three or 300. Three months after the outbreak emerged, most countries, including the U.S., lack the ability to test a large number of people and no countries have reliable data on the prevalence of the virus in a representative random sample of the general population."
In the coronavirus pandemic, we're making decisions without reliable data https://t.co/7FSffSxF7A— Leo Kolivakis (@PensionPulse) March 19, 2020
Lastly, I know investors are fixated on the stock market but it's credit markets and global contagion which really worry me now:
U.S. junk-bond spreads have now exceeded the 2016 highs and are the highest since 2011. 8.46 percentage points over benchmark rates. pic.twitter.com/5XYuaDG7Hy— Lisa Abramowicz (@lisaabramowicz1) March 18, 2020
There's a lot of concern about the pace of the move in EM currencies. The Mexican peso is depreciating at the fastest pace vs the dollar since 2016, surging to new record weakness vs the greenback. https://t.co/t3J0PJ73A0— Lisa Abramowicz (@lisaabramowicz1) March 18, 2020
Italian bond yields surge to the highest in more than a year. U.S. yields keep selling off. It seems like bond vigilantes are waking up as governments prepare to print money. pic.twitter.com/O4bvKlrXED— Lisa Abramowicz (@lisaabramowicz1) March 18, 2020
When liquidity flows out, emerging markets submerge, whatever the cause of the crisis. Mexican govt bond yields are their highest in a decade - and Pemex's borrowing costs have just doubled. pic.twitter.com/EnSnkUMZEM— John Authers (@johnauthers) March 18, 2020
You might have also noticed the yield on the 10-year Treasury note has backed up over 60 basis points in two days sending long bonds tumbling:
A lot of inflationistas are warning us that Modern Monetary Theory (MMT) is here to stay and inflation is coming but I maintain that any significant backup in long bond yields will be bought as investors seek refuge from all the economic turmoil.
Importantly, there's no inflation in the pipeline, inflation expectations are sinking and I can guarantee you at 2% (or even 1.6%), a lot of global investors are going to jump on US 10-year Treasury notes.
So take all this talk about "MMT breaking the bond market" with a shaker of salt, MMT is not here to stay and the US bond market has yet to see its secular lows in bond yields.
Update: Bloomberg reports a big part of the bond selloff was due to investors trying to meet their margin calls:
People are pointing to fire sales of Treasuries to meet margin calls to explain the recent U.S. bond selloff. https://t.co/JJ7AZzZcsu— Lisa Abramowicz (@lisaabramowicz1) March 19, 2020
Before I forget, a couple of important tidbits on COVID-19. Reuters reports that it can persist in air for hours and on surfaces for days and France says Ibuprofen may aggravate it, although that isn’t conclusive. Still, open your windows, clean your surfaces and wash your hands often. Try not touching your face especially when you go out or after you touch a surface (not easy, most people touch their face 20 times an hour).
Below, Pershing Square Capital CEO Bill Ackman makes a plea to President Trump to shut the US economy down. I warn you, if you suffer from 'coronavirus anxiety', don't watch it, he lays it on thick and he is NOT an infectious disease expert.
I prefer to listen to the other Bill, Bill Gates, who said countries that shut down for coronavirus could bounce back in weeks:
“If a country does a good job with testing and ‘shut down’ then within 6-10 weeks they should see very few cases and be able to open back up,” he responded.Gates is saying the same thing as Ackman but with a lot less drama and more common sense. Stay calm, don't let the markets and coronavirus kill your spirits (I know, it sucks!), have faith in humanity and above all, focus on what you can do to help yourself and loved ones who need you during this difficult time.
Gates has been focused on health for many years as part of his work at the nonprofit Bill and Melinda Gates Foundation. The comments come days after Gates said he was leaving the boards of Microsoft, which he co-founded in 1975, and Berkshire Hathaway. He said he wanted to focus more on philanthropy.
On Reddit, Gates elaborated on what shutting down means.
“The current phase has a lot of the cases in rich countries. With the right actions including the testing and social distancing (which I call ‘shut down’) within 2-3 months the rich countries should have avoided high levels of infection,” Gates wrote. “I worry about all the economic damage but even worse will be how this will affect the developing countries who cannot do the social distancing the same way as rich countries and whose hospital capacity is much lower.”
He said people should remain calm despite the circumstances, in response to a question about what Americans can do to help other others in the country.
Above all, listen to Dr. Fauci, Dr. Birx and medical experts who are providing you with sound advice. And if you're feeling down, scared or anxious, listen to actor Matthew McConaughey's message of hope amid the coronavirus pandemic. There's a green light at the end of this, so keep living, stay safe and positive and be kind to one another, we are all going to get through this together.
Update: After reading this comment, an astute pension manager sent me this:
Could not agree more. Following the adage a picture is worth a 1000 words, see attached US air traffic at around 5:00pm today (screenshot from Flighaware). I confirmed this by going on the LaGuardia website to look at departing flights. Very few cancellations.
This looks like a dream scenario for a mushrooming epidemic.
I thank this person for graciously sending me these insights.