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Bankruptcy Watch
Oklahoma-based Chesapeake Energy Corp. filed for chapter 11 bankruptcy protection on Sunday as energy prices remain below pre-pandemic levels. According to the Wall Street Journal, “more than 200 shale companies may file for bankruptcy over the next two years if oil and gas prices stay around their current levels.”
The difference between chapter 11 and chapter 7 bankruptcy is that in the former, you’re reorganizing, allowing you to negotiate with creditors to modify the terms of your debts while with chapter 7, you’re required to sell your assets to pay as many creditors as possible.
“At $35 a barrel, roughly 30% of large public US shale operators are technically insolvent, meaning their net liabilities exceed their discounted future value, according to consulting firm Deloitte.”
Chesapeake joins the unfortunate club of pandemic-induced bankruptcy filers, including Hertz, J.C. Penney & Co. and Chuck E. Cheese, among others. Concerns continue to mount as the worry is no longer whether companies can keep borrowing, but whether they can pay back their existing obligations. “As of March 31, nonfinancial corporate debt reached $10.5 trillion, much of which has been issued by companies with low investment-grade ratings.
Covid-19
As cases continue to surge, cities and states reconsider their reopening plans, with some deciding to close certain businesses, including bars and gyms. Fauci warned new cases could reach “100,000 a day if people continue to flout advice on social distancing and face masks.” As of Saturday, the US has recorded 50,000 new coronavirus cases for a third consecutive day and more states have required mask wearing in public as well as reinstating bar closures, among other measures, including Texas, where in Houston ICU capacity has reached its max.
Fiscal Stimulus
On Tuesday Fed Chairman Jerome Powell and US Treasure Secretary Steve Mnuchin appeared before the House of Representatives Financial Services Committee in which they pledged to consider additional relief to labor markets and businesses.
Later that day the Senate passed by unanimous consent a five-week extension of the Paycheck Protection Program (PPP), which has $130 billion of unclaimed funds meant to help small- and mid-sized businesses.
Now all eyes are on the extra $600 a week unemployment benefit that is set to expire at the end of this month, with many Republicans and the White House claiming it is an incentive to not work, since many are getting paid more than what they were earning at their previous jobs under the program. Failure to act before the end of the month will strip more than 20 million Americans of a total of nearly $842 billion to spend.
This comes at a time when banks are saying they are no longer able to tell who is creditworthy, as Americans deferred debt payments on more than 100 million accounts from March through May, according to TransUnion. These missed payments are now allowed to be reflected on credit reports, per recent stimulus legislation, making it hard for lenders to discern who is creditworthy, leading the tightening of lending standards. All of this bodes ill for the companies that have ballooning debt and are relying on consumer spending to hold them over through the pandemic.
Time will tell how this plays out.
Employment Picture
Payrolls rose by 4.8 million in June, a better-than-expected figure that pushed the unemployment rate down to 11.1%.
The separate weekly unemployment claims report showed that the figure fell by less than expected to 1.43 million while continuing benefits rose slightly to 19.3 million.
Although the employment picture appears to be steadily improving, it’s important to point out that the unemployment rate data was collected in mid-June, which is before the reports of surging coronavirus cases across the country. This data may worsen as states re-implement stricter measures designed to help stem the spread of covid-19.
Financial Markets
We had a shortened week due to the Fourth of July holiday. Stocks closed the week up thanks to the aforementioned better-than-expected jobs report. All three major indices finished the week up 3.2% or more. The 10-year Treasury note remains relatively unchanged, hovering at around 0.670% while gold finished the week at, funnily enough, ~$1,776. 1776, of course, is the year the Second Continental Congress adopted the US Declaration of Independence, which explained the thirteen colonies were no longer under British rule.
Pending Home Sales
The National Association of Realtors’ index of pending home sales increased 44.3% to a three-month high of 99.6 as contract signings to purchase previously owned US homes surged in May. This data provides additional evidence the real estate market is recovering faster than people expected, thanks in part to low low mortgage rates.
Breaking News
On Sunday evening it was announced Berkshire Hathaway finally unloaded its elephant gun, ending a dearth of acquisition activity, with its purchase of Dominion Energy's natural gas pipeline and storage assets totaling $4 billion. Berkshire will be assuming $5.7 billion in debt as part of the deal, while Dominion will use $3 billion of the proceeds to buy back shares. Buffett has been receiving a lot of scrutiny as of late since Berkshire Class A shares have under-performed the broader market, landing at -21.21% YTD while the S&P generated -3.56% in the same time period.
Monday - ISM nonmanufacturing index
Tuesday - Job openings
Wednesday - Consumer credit
Thursday - Initial and Continuing Jobless Claims, Wholesale inventories
Friday - Producer Price Index