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Global markets are mixed to start the holiday shortened week as the pandemic death toll crosses 500,000.
 
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The Express | Insight Before the Bell

By Caleb Silver, Editor in Chief

& Deborah D'Souza, News Editor

 Monday's Headlines

1. Global markets mixed as virus spikes in the U.S. and Brazil

2. Gilead prices remdesivir at $390 per vial

3. The companies the Fed is buying debt from

4. Facebook loses more big advertisers

 
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Markets Today

Global markets are mixed this morning with Asian shares deep in the red while European markets are powering higher to start the week. U.S. futures point to a slightly higher open, attempting to rebound from last week’s downdraft which saw the DJIA and the S&P 500 drop 3.3% and 2.9%, respectively. As we approach the halfway point of this tumultuous year, global health officials report that COVID-19 has taken more than 500,000 lives and sickened more than 10 million people.

 

Financial markets are clearly at another inflection point in this crisis, having rallied aggressively off lows in late March, only to lose steam in the past several weeks as the virus has resurged in reopened economies, especially here in the U.S. As respected economist Mohamed El-Erian puts it, financial markets have exhausted the three key stimulants to the recovery:

 

  1. Policy support from central banks and governments
  2. Company fundamentals: They cratered, then improved, and are now in limbo
  3. An influx of retail investors chasing the rally

 

It’s hard to see where the next wave of enthusiasm will come from for risky assets like stocks. Record high unemployment, a resurgence of the virus, and an unpredictable election here in the U.S. are significant obstacles to more upside. More policy support is clearly needed, and the U.S. Federal Reserve has demonstrated it is willing and able. It started buying U.S. corporate bonds two weeks ago, and now we know which companies are getting backed (see below). But if that is the only reliable weapon in the battle to support a rally in stocks and other risk assets, the climb just got steeper.

 

Meanwhile, this is the only chart that matters.

 
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Image courtesy: Johns Hopkins University

 

Headlines

  • Shale oil pioneer Chesapeake Energy has filed for Chapter 11 bankruptcy as COVID-19 sinks oil demand. It plans to eliminate $7 billion in debt, and has secured $925 million¬†debtor-in-possession financing and $2.5 billion exit financing from its lenders. Term loan lenders and secured note holders will also backstop a $600 million rights offering upon exit.¬† ¬†
  • Coty will buy a 20% ownership interest in Kim Kardashian West's beauty business for $200 million. In January, it acquired a 51% stake in the reality star's half-sister Kylie Jenner‚Äôs brands. The stock is up over 17% in pre-market trading.
  • Apple plans to ship the iPhone 12 without EarPods and power adapters in the box, according to famed analyst Ming-Chi Kuo. This is meant to offset the cost of new 5G components and maybe even boost sales of AirPods. Kuo¬†also says two new iPad models, with 10.8-inch and 8.5-inch displays, will be launched in the next year.
  • Gilead Sciences said it will charge the U.S. government and other developed countries $390 per vial for its coronavirus-fighting drug remdesivir, or about $2,340 for a typical five-day course of treatment. In a statement released Monday, Gilead said it would offer this price to developed countries around the world, in order to create a one-price model that would avoid the need for country-by-country negotiations.

  • Boeing's grounded 737 Max planes will be tested in the air by regulators starting this week, according to The Wall Street Journal. If all goes well, they will return to service around the end of the year with new automated flight control systems. 346 people were killed in two crashes involving the planes, and surveys reveal passengers are nervous to fly on them in the future.
  • China's Luckin Coffee has said it will delist from the Nasdaq after a massive fraud scandal. It has received two delisting notices from the exchange and has decided not to appeal. The board of directors is also pushing for the removal of Charles Zhengyao Lu as a director and the chairman. The stock has fallen to $1.38 after reaching $50 in January.
  • Disney has delayed the release of¬†Mulan once again, the final blow to summer blockbuster reopening hopes. The live-action remake was postponed to July 24 from March 27, and has now moved to August 21. Total domestic box office earnings this year is $1.7 billion, which is extremely low in comparison (see chart below). The highest grossing film of 2020 is Columbia¬†Pictures'¬†Bad Boys for Life released January 7.
 
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Image courtesy: Box Office Mojo

 
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The Big Story

The Fed Portfolio

Yesterday the U.S. Federal Reserve released a list of nearly 800 companies whose investment-grade (as of March 22) debt it plans to buy directly in order to support financial markets. The individual bond purchases pumping in liquidity are done through the newly created Secondary Market Corporate Credit Facility (SMCCF), and the borrowers are chosen to form a broad, diversified market index. The constituents will be refreshed periodically to add or remove bonds, and the list will be published once a month.

 

Below are the biggest constituents of the index:

 
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The Fed began this program on June 16, and it's set to expire September 30. It has so far bought individual bonds worth almost $429 million from 86 companies. Consumer sector firms (cyclical and non-cyclical) make up a third of the index followed by utilities and energy firms.

 

The list has certainly raised some eyebrows and questions about why the central bank thinks buying bonds from cash-rich companies like Apple or foreign companies like Volkswagen and Toyota is good for the American economy. The Wall Street Journal's Nick Timiraos pointed out that the top six companies¬† ‚Äď Toyota, Volkswagen, Daimler, AT&T, Apple and Verizon ‚Äď make up 10% of the index. The Fed's bond-buying, which has led to record issuances this year, has also been blamed for causing a disconnect between the economy and the stock market.

 

The Fed is also buying corporate bond ETFs as part of this $750 billion emergency lending program. As of June 16, it has bought $6.8 billion in corporate bond ETFs. (see below) Total corporate debt purchased through the Corporate Credit Facilities was $8.7 billion through June 24.

 
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Image courtesy: Columbia Pictures

The Big Number: 184

That's the number of brands and artists that have decided to pull advertising on Facebook in July, according to organizers of the "Stop Hate for Profit" movement. The running list of unfriending firms includes several big names like Verizon, Coca-Cola, UnileverUSA, The North Face, The Hershey Company, Starbucks Coffee, Patagonia, lululemon, Levi's and Honda. A few are halting advertising on other social media platforms as well as part of their hate speech boycott. 

 

Facebook shares fell 8.32% on Friday and are trading 3.28% lower in pre-market trading today. On Friday, CEO Mark Zuckerberg announced new policies to connect people with information about voting, crack down on voter suppression, and reduce/label hateful content. It's unclear what the extent of financial impact on Facebook will be. Pathmatics estimates the highest-spending 100 brands accounted for just $4.2 billion, or about 6%, of the platform's ad revenue last year. 

 

99% of Facebook's revenue comes from advertising on its platforms. Revenue was $70.70 billion in 2019, up 27% year-over-year. Growth has been a worry (see chart below), however, and demand and pricing have also been affected by the COVID-19 business closures. Revenue for Q1 2020 rose 18% to $17.73 billion, Facebook's weakest quarterly growth as a public company.

 

"After the initial steep decrease in advertising revenue in March, we have seen signs of stability reflected in the first three weeks of April, where advertising revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020," it said in a press release. "The April trends reflect weakness across all of our user geographies as most of our major countries have had some sort of shelter-in-place guidelines in effect."

 
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Facebook year-over-year quarterly revenue growth

Image courtesy: Macrotrends

Showing Inner-City Kids the Path to Investing

We recently had the pleasure of interviewing Troy Prince, the founder of Wall Street Bound, a nonprofit organization here in New York that teaches Black and Hispanic college students and recent graduates trading and investing skills.

 

Troy and his team are on a mission to open doors to inner-city kids to the world of finance through trading and investing skills and careers they are not typically exposed to. Wall Street Bound provides curriculum, virtual trading and help with internships and job placement for its participants, and the early results are very promising. 

 

Read more about Wall Street Bound here, and watch/listen to Caleb's conversation with Troy Prince.

 
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