Banks Boost Reserves, Some States Ready To Open, And Next Week’s Earnings Preview

With a three-week total of unemployment claims reaching over 22 million, citizens in our country have a right to be a little irritable. In combination with over ninety percent of the country forced to stay at home unless they participate in an essential business or activity, let’s just say the natives are more than a little restless. Of course, if you have lost a family member or are suffering from the virus, economic questions seem trivial. The issue of balancing the measures needed to treat, test, monitor, and control the spread of the virus versus the economic costs and personal restrictions of these tactics are causing extreme reactions across the United States. Where do I stand?

Well, based on Mr. Jefferson’s quote, my thinking is pretty clear. From simply a numerical perspective, the idea that 99 percent of the population has their ability to earn a living and have their personal freedoms taken away for a problem that applies to less than one percent of the citizenry is, how shall I say this diplomatically, highly questionable. The public health concern does have to be addressed, and rightly so. When President Trump held his conference call with the ‘Task Force’, business leaders expressed to him that citizens won’t have confidence to resume normal activity without believing they won’t suffer health consequences. Providing enough testing and having them quickly processed has to be the priority over the next few weeks to get the country ready to open. Pardon me, those states that want to and are able to open, I stand corrected.

Here in Las Vegas, the question is front and center as our Mayor, Carolyn Goodman, is skeptical of the Governor’s sanity. Mr. Sisolak, an emotional fellow who is quite chummy with the teachers and culinary unions (along with the MGM and Station Casinos brass), believes health care experts and data should guide the way. Of course, with tax revenues from gaming and hotel rooms evaporating, I suspect Mr. Sisolak will come around fairly quickly. This example is a microcosm of what is taking place in states across the land. Whether you believe in Mr. Jefferson’s point of view, two hundred years ago his forethought remains distinctly impressive.

On the earnings front last week, the four largest banks posted earnings which were dramatically lower than a year ago. The results were impacted by huge reserves taken for future credit losses. Those reserves amounted to over twenty billion dollars, and last year at the same time the reserves totaled a little over four billion. Still, the banks made billions, as always. Meanwhile, their stocks remain unchanged from ten years ago, even though all pay nice dividends and have bought back billions in stock . Clearly, an unloved group. The economy needs to recover for sentiment to improve in this sector.

Another unloved bunch remains energy, with investor psychology at all-time lows. The Saudis and Russians agreed early last week to a ten million barrel production cut, and the market saw it as a day late and too small of a cut. The bigger issue is demand destruction, and when does demand start to recover? Mr. Putin and Mohammed Bin Salman (MBS) have misread the market and now face reduced prices as far as the eye can see for their only revenue-generating product. The pain is being felt in the Permian, Bakken, Western Canada, and anywhere oil is produced. When the economy opens, demand will slowly recover, but how quickly is anyone’s guess. Consistent with this view, Mr. Munger gave his thoughts on the current predicament in an interview in the Wall Street Journal. Essentially, Charlie and Warren are playing defense and letting the cash build up. They are in no hurry to do much, and I mistakenly thought Mr. Buffett would have the whole world knocking at his door. This does not seem to be the case. Still, with $100 billion to play with and more coming in the door by the second, the idea that Berkshire is going to sit tight is interesting. Maybe buying back their own stock offers more for their money? We will know in time.

Next week will see plenty of earnings reports from major companies like Visa, TDAmeritrade, E-trade, 3M, Intel, Amazon, Verizon, AT&T, Netflix, and American Express. Very few will offer much guidance, especially in the consumer-related areas. It remains a unique time across the globe. If you are like me, a return to an open society cannot come soon enough. Stay safe.