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COVID-19 remains a global crisis and we realize that many people need to keep up with COVID-19 developments, particularly since we are moving into the more critical stage (“restart economy”), so feel free to share our commentary to anyone who has interest.
On the COVID-19 front, the only notable development seems to be a surge in reported cases in California to 2,417, nearly +1,000 higher than the previous day and a new high (2,258 on 4/21/2020 was old high). CA is the only state reporting a new high in cases and the county-level data shows the +1,000 was all in Los Angeles county. CA Governor Newsom noted the +5% increase in cases but did not seem particularly alarmed and noted that hospitalizations and deaths increased by less than 1%. But he did emphasize the need for beachgoers to comply with social distance measures.
The most important development today, in our view, is the massive $25 billion bond deal priced by Boeing, the largest debt deal in 2020. This is a company caught in a double maelstrom – 737Max and the complete travel shutdown from COVID-19. Yet the company managed to not only do the largest deal in 2020 (after drawing its $14 billion credit line) but at fairly reasonable rates. The 40-yr tranche is priced at ~6% yield. And credit markets closed a record issuance in April, exceeding the record $260 billion priced in March. The fact that Boeing is able to price such a large deal speaks to both the health of the debt markets (very healthy) but also that debt investors are likely looking past COVID and realizing BA is still BA.
That is why we are focusing this note on the travel sector. Travel and Leisure is an epicenter group, getting massacred with 65%-80% declines as the global shutdown evaporated their business. But some of the data gathered by our data scientist, tireless Ken, shows forward travel bookings are barely but perceptibly rising (Adara is the data source), particularly among singles/couples which are 42% of US households. And of the 5 groups within travel, 3 can comply with the ‘6 feet rule’ — casinos, timeshares, and hotels.
These are among the ‘operating leverage’ and epi-center stocks we think can outperform as the post-COVID 19 world starts to actualize. As most states open, we expect more local leisure travel to take place.
I really liked the “lead” from the latest The Information briefing. Basically, it is reminding us that nobody wants to be profiting from this pandemic. This is our view. This is a global crisis, causing unimaginable misery to the entire world. And it is a reason we have been somewhat careful in speaking about the upside and the moves in the stock market. Stocks have reasons for rising, including the fully functioning credit markets, fiscal stimulus, likely huge operating leverage by businesses (cost cutting) and the potential for a faster end to the pandemic. But the problem is that rising stocks gives the impression the financial markets are ignoring the misery. That is not the case. But this article is a good reminder.
POINT #1: CA cases surge (flat testing), which is not good. USA cases rise but testing rising elsewhere.
Total USA COVID-19 cases rose to 29,951 up from 25,586 the day before, or a +4,095 increase. Total tests in the US has been jumping around a bit but was a tad higher from a few days ago, so the rise is mostly falling within that band of lumpiness.
– But among the states reporting higher daily numbers, California reported a new all-time high in daily cases at 2,417 cases.
– This is >900 from the day prior and exceeds the prior record of 2,288 on 4/21/2020.
CA Gov. Gavin Newsom did not offer much explanation for this 5% daily rise but noted that this further justifies his desire to further limit congregating in areas, including the state beaches. We discuss this more fully below.
Source: Johns Hopkins + COVID-19 tracking project
Several states reported increased cases today, CA and Connecticut stand out…
Of the daily states reporting cases, the 2 that really stand out to us are CA and CT. CT doubled to 933 from 455 the day prior. CT has known variability in its reporting. And since CT has seen known outbreaks, it is less concerning for now.
Source: Johns Hopkins + COVID-19 tracking project
Testing in the USA has moved to a higher level of activity. And as we wrote earlier in the week, significant new capacity is coming on both the federal level as well as by the private sector. So, the level of testing is expected to rise in coming weeks and with it a logical rise in detected cases. This is not necessarily organic new breakouts of pandemics, but better capture as testing expands. And as several serology studies have shown, the prevalence of COVID-19 is likely 10X to 50X to 85X the confirmed levels. We do believe testing is important, but given the high prevalence, we think expanded testing does not necessarily improve the ability of state and local governments to mitigate the outbreaks. And that is why we see treatments > testing > vaccines.
Source: Johns Hopkins + COVID-19 tracking project
California rise in cases is a new high, the first for any of the major states in some time…
Of all the 50 states, CA is the only that seems to be breaking trend. California is not really a place where COVID-19 has ravaged. Of the state’s 39 million residents, there are 48,917 confirmed cases. Or 1,238 cases per 1mm residents. Westchester and Rockland County, NY have 25,000 cases per 1 million residents. So you can clearly see the difference.
Source: Johns Hopkins + COVID-19 tracking project
Los Angeles County accounted for the +1,000 rise in cases…
The rise in cases is entirely within Los Angeles county which saw a 3X in cases from 573 to 1,531. Just last week, USC and LA county published a study showing the prevalence of COVID-19, based on antibody studies, was likely 13X to 27X reported cases. Or about 4% of the County is likely COVID-19 positive.
– the fact that LA County has 2,247 is high vs the state but it is nowhere near the prevalence of the NYC metro area.
Source: California Department of Public Health
Governor Newsom does not seem particularly alarmed at the 5% daily increase (2,400 cases) and noted the less than 1% increase in hospitalizations.
During his press briefing, he repeatedly noted the rise in cases but did point to slow hospitalizations and also deaths. See below. And he discussed several times the need to improve the compliance of beachgoers as the weather has improved.
And to keep all this in perspective, no other place in the US has seen a breakout as bad as NYC and its metro area. Below shows the cases per 1mm residents and even counties outside NYC have higher COVID-19 prevalence.
– this is the argument against population density, or even subways explaining the high number of cases.
– I can personally attest to knowing first hand none of the counties of Rockland, Westchester, Nassau, Suffolk and Orange (which is very rural) has a subway system nor has high population density.
Source: Johns Hopkins + COVID-19 tracking project
That said, NY state has come a long way. The chart below shows daily cases, hospitalizations and deaths and the current figures vs the previous peaks for NY state. As you can see, these are down 60%-plus from their peak.
– we generally view -75% as the decisive line and NY state is getting there.
Source: Johns Hopkins + COVID-19 tracking project
POINT #2: Boeing $25 billion bond sale, large private debt sale in 2020 — arguably sign debt investors looking past crisis “window” — 40-year tranche at around a 6% yield. YUP.
Boeing (BA-NYSE) sold $25 billion in bonds, the largest private debt offering in 2020 and this after the company had fully drawn its $14 billion credit line. The company says that this bond sale has now fully capitalized the company. Broadly speaking, April is another record month for debt offering, surpassing the March $260 billion. So, it is clear debt markets, investment grade and high-yield, are fully functioning.
Boeing, the company at the center of two vortexes –> the 737Max and COVID-19.
Yes, that company.
– They just did the largest bond offering of 2020.
– And for their 40-yr tranche (due 2060) paying 6%
We do not have the full pricing breakdown. But the 40-year tranche was priced at a yield of around 6% (462bp above Treasuries). This is surely a sign the credit markets are looking through the near-term morass and obliteration. And clearly this should have positive implications for equities and valuations.
The US federal debt service is set to actually decline, despite massive COVID-19 related stimulus spending due to falling rates…
Our data scientist, tireless Ken, get the updated CBO model post-CARES act. The two obvious changes compared to the start of the year:
– Federal debt is set to surge to 120% of GDP by 2030 (+800bp)
– US interest rates are down 130bp since start of the year, across the entire spectrum of maturities.
The combined effect of the two is actually a drop in US federal debt service. As shown below, the revised debt service (as % GDP) is actually lower now than it was at the start of the year.
– One way to see this is the CARES Act spending is having no “crowding out” effect on the economy, as the debt burden is falling.
– The other way is to observe that low interest rates is a bad sign. And thus, ominous.
But there is a logical flight to safety. And US rates are still higher than the rest of the world. So, this drop in rates, while not really an inflation signal, does suggest that the massive fiscal spending that is in CARES act is not going to crowd out private spending short term. That is a good thing.
Source + footnotes: * 2020 – 2021 GDP forecast is based on Bloomberg median consensus growth
** 2022 – 2030 GDP forecast is based on March 2020 Baseline Budget Projections
*** Federal Debt forecast is based on March 2020 Baseline Budget Projections and Preliminary Estimate of the Effects of H.R. 748, the CARES Act
**** Assuming US Treasury 10-Year Rate remains at ~0.6% level
POINT #3: Real-time data showing barely perceptible rise in travel bookings, especially for singles/couples (42% households).
Today, the JPMorgan Private Bank hosted a webcast with Egon Durban, co-CEO of Silver Lake and Brian Chesky, CEO of Airbnb. There were several topics covered but it mostly focused on how Airbnb is embracing and adjusting to the global shutdown. We do not have permission to share the content of that webcast.
Travel is one of the “epi-center” social distance victim industries. If the world is largely under “shelter at home” (most of the developed world), there is no travel business. Oxford Economics, in coordination with its Tourism Economics subsidiary, published a report about two weeks looking at the economic impact on US travel industry losses. That report can be found here –> Oxford Economic report here
– By their estimate, the total losses for 2020, assuming no economic re-start, is $519 billion first order (direct) and second order-plus impacts bring this loss to the US to $1.2 trillion. And in GDP terms (which look at final sales), the combined effects are $651 billion or 3% of USD GDP.
– And this would lead to 8 million job losses with the bulk in food service (2.8 million) (see below) and would account for 20% of all jobs lost if the US sees 30% unemployment rates.
So Travel/Leisure is a biggie when it comes to assessing the economic impact of COVID-19, not only on the US but globally. We could not verify this number, but Airbnb has in the past noted that 10% of all employment in the World is travel related. In the words of Oxford Economics, the impact of COVID-19 is 9X 9/11. So there is no precedent.
Source: Oxford Economics
Travel spending is down 89% YoY in the week ending 4/18/2020… same story in every state
According to data from Tourism Economics, US national travel spending is down 89% YoY to $2.5 billion per week. This compares to what should be $20 billion per week. So it is not surprising to see significant distress across all areas of the travel industry: airlines, cruises, agencies, hotels, restaurants and businesses that rely on tourism.
There is really no way to plug this hole when the global economy is shuttered.
Source: Tourism Economics
The weekly data available for the US is quite detailed (this is the report here –> Tourism Economics weekly), but given the entire US is in a shutdown, there is little differentiation. For instance, this chart shows that YoY drops in weekly travel spending is pretty much the same between states. Granted, some states like Arkansas , Alaska and Mississippi are down “only” 80% compared to 95%-99% for Hawaii and Rhode Island. But this is one of those comparative “misery” measures–there is not any region showing positive comps.
– we will be monitoring this data as more states open and we can therefore see how travel rebounds.
Source: Tourism Economics
Conceptually, in a post-COVID-19 world, travel likely returns but transformed… so there is “uncertainty”
Post-pandemic, one obvious behavioral change is every person will be mindful of physical distance.
– standing in lines, 6 feet
– eating in restaurant, 6 feet
– at bank, 6 feet
– grocery store, 6 feet
So industries that can accommodate and function with 6 feet of space will eventually adapt. Of course, what the future looks like is uncertain, and any analysis we provide is only “theoretical” since there is no precedent in the modern world for this.
But travel seems like an industry that can accommodate 6 feet (except for airplanes). So, in sense, once the fear recedes (if it does, but that is what we expect), then travel will rebound. Business and consumer. But obviously, there will be changes.
We are not being particularly profound but among the likely changes:
– vacation involves driving more versus flying — aka “road trips”
– hotels and tourist destinations make less $$$ from food & beverage (harder to scale with 6 feet) but offset with experiences
– if COVID-19 fades more substantially, and quickly, these changes are transitory and we are back to packed tables.
Booking data from Adara, a data intelligence provider to travel industry, shows a “barely perceptible” bump in bookings…
There are many ways to track the forward bookings of individuals and businesses. One group that is providing fairly detailed data is Adara. Adara labels itself the “world’s richest travel data co-op”. Adara, a Mountain View, CA based company and founded in 2009. While we cannot confirm if their data is the world richest, it is quite detailed and encompasses several categories. The following set of charts look at bookings relative to January 2, 2020 and is update daily. While they are listed as the content provider, the data was rendered via Google Data Studio.
– Flight volumes collapsed and that spike seen in early March was likely people “making their way to their final shelter destination” whether being somewhere else and needing to get home. Or finding a new home.
– and after a massive plunge and it flatlined for many weeks.
– But in the past few days, it looks like the flat line has possibly increased. This data is updated daily, so we can track this…
Hotel bookings similarly collapsed and there was not early March “spike” but rather an early March crash. And similar to flights, after weeks of being flat-lined, there is barely perceptible rise.
Source: Adara
Leisure (both Family and single/couples) travel bookings are rising, for short term and for +91 days…
The last week has again shown a barely perceptible rise. This is interesting because this is prior to any states formally easing travel restrictions. And while we not know exactly why this is happening, it is a good thing.
– this reflects that consumers are engaging in some renewed travel, although barely rising.
– and we will watch this as more state ease restrictions.
Source: Adara
Looks like “single” and couple travelers making bookings for immediate travel… 42% of households in USA
The leisure bookings by solo/couples seems more pronounced. The purple line is 0-15 days, or immediate trips. And that line seems to be rising more visibly than other booking windows.
– does this mean “cabin fever” is worse for singles/couples and thus, they are more eager to travel?
Perhaps, but again, it is a positive sign as it shows a consumer’s willingness to become a consumer again.
Source: Adara
STRATEGY: Casinos, Timeshares and Hotels/Resorts can do ‘6 feet’ and 30%-45% upside to match S&P 500 62% retrace…
If travel activity is indeed recovering and if Boeing can price 40-yr bonds at 6% (yes Boeing), there is undoubtedly opportunities in the travel-related stocks. The group was among the hardest hit since Feb as the shutdown caused a completed zeroing out of activity. Airlines, Casinos, hotels, all fell >65% (see below). We define 5 basic categories for travel-related stocks and we list their ability to comply with ‘6 feet’ in a post-pandemic world.
– Cruise lines LOW (cannot scale dining and common areas with 6 feet)
– Airlines LOW (cabin does not scale at 6 feet distance)
– Casinos MEDIUM (already happening Macau)
– Timeshares HIGH (plenty of space, demand probably surging post-COVID 19)
– Hotels/Resorts HIGH (plenty of space, rethinking dining)
If demand is picking up and compliance is more achievable for the latter 3 (casinos, timeshares, hotels), there are the 3 we believe can also achieve operating leverage in a post-COVID 19 world.
The best “epicenter” travel ideas may be casinos, timeshares and hotels…
We show the “upside” of these stocks (Russell 1000) based on their achieving a 62% retrace of the Feb to March decline (matching S&P 500). The upside is obviously greatest for cruise lines, but they have significant challenges.
So it leaves the 3 groups with better ability to manage 6 feet distance. The upside is based on a 62% retrace of the decline.
– Casinos +45% overall. Biggest upside is Eldorado Resorts (ERI) +113% but even WYNN is +29% upside (to 62% retrace)
– Timeshares + 38% overall. Biggest upside is BBX Capital and Wyndham +57%/+53%
– Hotels +28% overall. Biggest upside is Red Lions (tiny) +71% followed by Marriott +28%
Hotels seem to have already benefited from ‘6 feet’ as they did not fall as much and have recovered more of their losses. But the epicenter stocks still have lots of upsides.
Source: Fundstrat, Bloomberg
