33% Don’t Have $100 Saved

Quick Note On Buybacks

While most people are sympathetic to small firms and people earning under $75,000 per year, few feel bad for big firms asking for help. We’re not saying they should or shouldn’t get help. We’re merely pointing out that saying that firms shouldn’t have bought back stock and instead saved for a situation where their business shut down for a few months has legitimacy.

According to @SkeleCap on Twitter, the cumulative free cash flow of American Airlines is $-10.6 billion. If the firm had never spent money on capex and saved 100% of 2019 cash flow from operations, it would have $32.7 billion, slightly below its operational expense per year burn rate ($42 billion). Firms prepare for various scenarios, but not for a situation where they don’t have a business for a few months. Maybe they should from now on, and maybe they will as a lesson from this experience, which could impact accordingly the rate of economic growth and/or shareholder returns in the future. If individuals should have 3-6 months of emergency funds (at least), why shouldn’t companies?

Market Implied Growth

Cornerstone Macro did great analysis on the market’s expectation for future GDP growth. The first half of 2020 is a lost cause outside of the first 2 months of the year. Investors are trying to price in when the recovery will occur and how strong it will be. That’s what makes this analysis interesting. Cornerstone Macro has calculated that based on the COVID-19 shock (using the slope of the curve and financial conditions), GDP growth is expected to be -2.3% 6 months in the future. There are 83% odds of negative growth. The chart below shows growth in 1 year is expected to be 0.7% with a 32% chance of negative growth.

(Click on image to enlarge)

Source: Cornerstone Macro

COVID-19 Cases

The betting market is a great way to figure out what is expected for COVID-19 because we don’t have a consensus range of estimates for the number of new cases. According to the betting odds, there is an 80% chance between 500,000 and 1 million cases will be confirmed globally by March 31st. There is a 63% chance of there being more than 1 million cases in America by April 15th. The good news is the situation is getting under control in in Italy. On the other hand, NYC daily new cases are still in an uptrend after the spike on March 25th. New York is the hot spot of America.

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