>>> US Close Dow -3.04% S&P -2.93% Nasdaq -0.27% Russell -1.13%

Closing Stock Market Summary

The S&P 500 fell 2.9% on Monday in another volatile session, as disappointment over the Senate's inability to advance its stimulus bill outweighed the unprecedented stimulus measures announced by the Fed. The Dow Jones Industrial Average declined 3.0%, the Russell 2000 declined 1.1%, and the Nasdaq Composite declined just 0.3%.  

Selling was mostly broad-based with ten of the 11 S&P 500 sectors finishing lower, particularly the energy (-6.7%) and financials (-6.1%) sectors. The exceptions were the S&P 500 consumer discretionary sector (+0.4%) and Philadelphia Semiconductor Index (+3.4%). 

Today's action started last night when futures hit limit down after the Senate failed to gather enough procedural votes for its stimulus bill. Losses were later trimmed on some cautious optimism that another vote for a revised plan would fare better today, but the real move came after the Fed's stimulus announcement sent futures into the green. 

Briefly, the Fed lifted the $700 billion cap on its purchases of Treasury and agency mortgage-backed securities and said it will buy "in the amounts needed." In addition, the central bank established new credit facilities and said it will be buying investment-grade corporate bonds, municipal debt, and U.S.-listed exchange ETFs.

Despite the Fed's efforts to support the system and prevent confidence from eroding further, investors continued to sell into strength, leaving the S&P 500 down 4.9% at its low. The disappointing price action suggested that the market was signaling Washington to get its act together and approve a long-awaited stimulus plan for Americans and businesses. 

The S&P 500 did battle back to just below its flat line heading into the second procedural vote in the afternoon, but the rebound effort was squandered after it failed again. Senate Majority Leader McConnell (R-KY) said that procedural delays could push another vote out to Friday, which is a long time for an impatient market. 

In the meantime, confirmed cases of the coronavirus continued to surge while more states enacted stay-at-home orders to curb its spread. General Electric (GE 6.11, -0.41, -6.3%) was among the latest high-profile companies to announce temporary layoffs, specifically 10% of its aviation workforce, due to the virus sapping demand for its business. 

Boeing (BA 105.62, +10.61) shares rose 11.2% in a reprieve from the heavy selling endured over the past month. Today, the company suspended production operations at its Puget Sound area facilities for 14 days, suspended its dividend, and extended its pause of any share repurchasing until further notice.

U.S. Treasuries finished higher amid the continued weakness in equities and the latest actions from the Fed. The 2-yr yield fell eight basis points to 0.29%, and the 10-yr yield fell 17 basis points to 0.76%. The U.S. Dollar Index declined 0.3% to 102.48. WTI crude rose 3.8%, or $0.86, to $23.49/bbl. 

Investors did not receive any notable economic data on Monday. Looking ahead, investors will receive New Home Sales for February on Tuesday.

  • Nasdaq Composite: -23.5%
  • S&P 500: -30.8%
  • Dow Jones Industrial Average: -34.9%
  • Russell 2000: -39.9%

>WSJ : Mortgage Firm Struggles to Meet Margin Calls as Market Turmoil Continues

Mortgage Firm Struggles to Meet Margin Calls as Market Turmoil Continues
AG Mortgage Investment examining asset sale amid coronavirus pandemic

An investment fund focused on mortgage investments is struggling to meet margin calls from lenders and is examining a possible asset sale, the latest sign of turmoil in crucial areas of the credit markets.

In recent days, a cascade of selling has hit the market for mortgage bonds, helping spark unprecedented action by the Federal Reserve on Monday morning to aid markets. The AG Mortgage Investment Trust, MITT -39.01% Inc., a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said.

“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning. The company said it had met “or is in the process of meeting all margin calls received,” though it acknowledged missing the wire deadline for some on Friday.

The missed deadline was due to a logistics glitch, according to someone close to the matter.

On Friday evening, the company “notified its financing counterparties that it doesn’t expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term,” AG Mortgage said in its statement, which said the company is in discussions with its lenders “with regard to entering into forbearance agreements.”

Over the weekend, hedge funds, insurance companies and private-equity firms examined AG’s holdings, according to people close to the matter. It isn’t clear if a sale of any assets will take place. The firm’s market capital, above $700 million before the coronavirus crisis, is down to $150 million.

The company’s shares fell to $4.56 on Friday from $16.66 a month or so ago. In trading on Monday morning, the stock fell almost 40% to $2.86.

A company spokesman wouldn’t comment.

Separately, investment firms are preparing offers for assets held by other REITs, according to one of the investors involved in the AG situation.

On Monday morning, the Fed said it would support financial markets by buying mortgages and other bonds. The Fed has intervened in the mortgage market recently, buying large amounts of mortgage bonds to hold on its balance sheet. On Monday it said it would make those purchases essentially unlimited. It isn’t clear how the Fed decision would affect AG Mortgage or others in that business.

In recent days, a number of funds in the mortgage market and other areas of the bond market have moved to raise cash to meet investor withdrawal requests and shore up their portfolios. Investors often sell mortgage bonds when they need cash because they are easy to trade, despite trouble in recent days. Investors pulled record amounts of money out of bond funds last week, according to Bank of America Corp. calculations. Some $5.2 billion came out of funds that invest in mortgage-backed securities, which pool home loans into fixed income investments.

Mortgage REITs, which typically use borrowed money to juice their returns, have been particularly susceptible investments as mortgage-backed securities sold off in recent weeks. Analysts at JPMorgan estimate that mortgage REITs need to sell between $40 billion and $80 billion of mortgage-backed securities to reduce leverage, or nearly a quarter of their holdings. Their share prices have in some cases dropped more than double the broader market, with some down more than 60% so far this year.

Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.

Before the market’s recent tumble, REITs had been a growing presence in the market, stepping in as investors during a time in which the Federal Reserve was reducing its holdings of mortgage bonds.

FT : The death of the US equity premium

The death of the US equity premium

What adjectives do you normally associate with the US government?

Ask that question across the political spectrum, and you might find the answers pretty paradoxical. However we’d wager most would agree that the US government is, by-and-large, pro-business. Particularly compared with other affluent nations.

Whether it’s under a Democrat or Republican administration, the US has long heralded enterprise as the driving force of growth, and policy has followed suit. Think of Trump’s 2017 corporate tax cuts as a recent example, or the Obama administration’s tacit decision not to chase criminal convictions in the aftermath of the financial crisis.

Putting business first has paid off for the past decade in the form of solid economic growth, record levels of employment and euphoric equity prices.

In particular, investors in US markets have seen their fortunes soar as the main market indexes have outgunned their global rivals over the past decade:

Accommodative government policy is, of course, not the only factor. Strong fundamentals in the form of higher margins, growth and a higher weighting towards tech have all contributed to the bonanza for investors.

Together it has led to what many market observers have referred to as an American equity premium -- a phenomenon where US assets command much higher multiples of earnings than their equivalent counterparts across the globe.

Here’s how the cyclically adjusted price-to-earnings ratio -- a popular measure that uses the average inflation-adjusted earnings of the past decade relative to price -- looked last summer for various global stock markets:

Not even the current administration, with its clear distaste for the formalities of government and America’s wider role in global geopolitics, could deter investors from parking their cash in US equities over the past five years.

It might now.

It’s easy for investors to ignore problematic governments when times are good. The market can paper over endless stories of administrative turnover, slashed departments and extended vacancies in key positions in the knowledge that it doesn’t matter much for the wheels of economic growth. As long as the government stays out of the way, the show should go on regardless.

The coronavirus pandemic has ended this. Equity markets, after a benign decade, are screaming for a co-ordinated, competent and concentrated response from the US government to stem what Wall Street analysts are beginning to pencil in as the fastest economic collapse in recorded history. Suddenly, the Trump administration’s comic approach to government has became a bad joke as a fiscal stimulus bill struggles to make it through the legislature.

Meanwhile in Europe and Asia, governments (some faster than others, admittedly) have responded with vast spending plans to cushion the blow of a twin demand and supply shock. Wage guarantees, small business loans, and quasi-nationalisations are just some of the policy measures being implemented which would have been unimaginable even a month ago.

America’s sluggish response, first in rhetoric and now in action, demonstrates to investors that they ignore the competency of the ruling-government at their peril. Particularly when every day that passes without a government response only deepens the costs -- both to humans and capital -- over the longer term.

But it may also a signal a sea-change in how investors think about pricing risk in the aftermath of the pandemic. For instance, what discount rate do you apply to cash flows if the US government proves to be far less resilient to exogenous shocks than its G20 counterparts? We’d argue: a much higher one than investors do now.

The death of the American century might have been exaggerated, but perhaps this crisis will signal the end of the American valuation premium. After all, what use is accommodative business policy on the way up, if it directly feeds back into the fact it can’t cushion you on the way down?

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance:

  • N/A

Other news:

  • PSO -9.7% (decided it is prudent to pause share buybacks amid COVID-19 outbreak)
  • SPPI -6.5% (files for $150 mln mixed securities shelf offering) M -5% (withdraws 2020 sales and earnings guidance, suspends dividend)
  • LLY -4.9% (issued a complete response letter for the sNDA of the investigational medicine empagliflozin 2.5 mg)
  • HA -4.5% (to suspend most long-haul passenger service)
  • DE -2.8% (withdraws FY20 guidance due to COVID-19)
  • F -2.8% (temporarily suspends production in India, South Africa, Thailand and Vietnam in response to coronavirus)
  • DCP -2.4% (approved a plan to reduce quarterly distributions to its common unitholders to $0.39 per unit) .

Analyst comments:

  • CCL -10.3% (downgraded to Underweight from Overweight at Wells Fargo)
  • T -4.4% (downgraded to Neutral from Outperform at Robert W. Baird)
  • SBUX -4.3% (downgraded to Neutral from Buy at MKM Partners)
  • ABBV -3% (downgraded to Hold from Buy at Societe Generale)
  • BMY -3% (downgraded to Hold from Buy at Societe Generale)
  • UAL -1.6% (downgraded to Neutral from Buy at BofA/Merrill)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • NA

M&A news:

Other news:

  • AMRX +22.6% (accelerates hydroxychloroquine sulfate production in response to COVID-19 outbreak)
  • PCG +15% (announces new commitments that resolve Governor's concerns about plan of reorganization)
  • DHR +8.7% (unit Cepheid receives Emergency Use Authorization from FDA for rapid SARS-CoV-2 Test)
  • BA +4.5% (provides update on actions to navigate COVID-19 crisis; suspends dividend)
  • OGI +3.2% (receives health canada license renewal and expansion for final elements of phase 5 and provides COVID-19 update) . 

Analyst comments:

  • LTM +0.9% (upgraded to Outperform from Mkt Perform at Raymond James)
  • PEP +0.5% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
  • KO +0.5% (upgraded to Overweight from Neutral at JP Morgan)