Whitney Tilson’s email to investors discussing Berna Barshay’s cautious views on the market; his more bullish take; Doug Kass: Does the Continuation of a Rip Your Face Market Rally and the Mother of All Short Squeezes Lie Ahead?
Q1 2020 hedge fund letters, conferences and more
Berna Barshay's Cautious Views On The Market
1) In yesterday's e-mail, I introduced the newest member of the Empire Financial Research team, Berna Barshay.
I also asked readers to fill out a brief survey about whether the market low on March 23 (the S&P 500 Index bottomed at 2,191.86 intraday) will prove to be the low for the year. (Of the first 500 responses, only 44% think so. If you haven't had a chance to fill it out, please do so here.)
I think there's a 70% chance that March 23 will prove to be the low, while Berna thinks only a 30% chance. Because we not only allow, but encourage thoughtful, well-articulated differences of opinion at Empire, I asked her to share her views on why she's more bearish than I am:
Earnings season kicks off in earnest tomorrow, and for many companies the first quarter will only be modestly impacted by performance in the second half of March, as social distancing dragged down economic activity at the end of the quarter.
It's a big week for financials with JPM and WFC on Tuesday, BAC, USB, C, SCHW, and GS on Wednesday, BLK, BK, and MS on Thursday, and STT on Friday. I expect a lot of commentary about how much Fed actions did or didn't work to stabilize the bond markets and financial market liquidity as uncertainty swept into the economy. We'll also get some insights into the area hardest hit by the coronavirus shutdown, travel, when UAL reports on Tuesday and LVS reports on Wednesday. Other names reporting this week include JNJ, UNH, and ABT in healthcare, and HON in industrial. Then, next week, we'll begin to hear from the tech companies.
Probably more this quarter than in any other in memory, nobody is really going to care about what just happened in the recent past. For the companies reporting with a March 31 quarter-end, 10 to 11 of the 13 weeks of results they report will reflect performance from before social distancing started in earnest. With them, I will be looking for commentary around how the last two weeks of the quarter differed from the 11 weeks that came before.
Earnings
But the real action for all of these companies will be in their forward guidance. Guidance for the second quarter will be much lower than previous models contemplated of course, but the open question is whether or not companies will take aggressive haircuts to their guidance for the full year, beyond what they predict for the second quarter.
Will companies build into their guidance now some lingering (or more substantial) disruption to business in the third and fourth quarters? Or will they kick the can on predicting the future beyond a quarter? If all the people who got laid off in March and April aren't quickly rehired as the country begins a staged reopening in late spring or early summer, then the third and fourth quarters will surely be impacted.
But with no concrete information on when the economy reopens and what a reopened economy will look like, CFOs and investor relations departments will have their work cut out for them when they write their second-quarter earnings call scripts.
The other big question out there is how much will investors care about how terrible the results are in the second quarter. Will they just look past this as a one-time event, or is there still the possibility that investors might be surprised at how bad things will likely get in the short-term, even with so much warning?
With visibility exceptionally low into what state government plans are beyond the next couple of weeks, predicting where we might be in early June in terms of opening up the economy is an impossible task. So how can we expect companies to guide even for just the second quarter, much less the year? Interestingly enough, despite the exceptionally low visibility, the SEC made a call last week for companies to be as transparent and realistic in their guidance and open in their disclosures as possible during the upcoming earnings season.
Berna Barshay on SEC guidelines
As corporate law firm Debevoise & Plimpton advised in a notice to clients last week:
On April 8, 2020, SEC Chair Clayton and Director, Division of Corporation Finance Hinman released a statement urging reporting companies that are preparing earnings disclosure to "provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning." Although the statement is not SEC guidance and creates no new or additional disclosure obligations, the statement offers a useful and timely reminder to reporting companies: Given the sudden economic and social disruption related to COVID-19, historical earnings information (especially financial statements) will likely be "substantially less relevant" in the upcoming earnings season.
While the SEC went on to acknowledge the difficulty of predicting the future at this juncture, they want companies to err on the side of disclosure. Expect a lot of questions not only about future earnings, but cash on hand, undrawn access to more cash on bank lines, and perhaps even debt covenants (a rare topic on earnings calls).
Overall, I think it's going to take Corporate America longer than investors think to dig out of severe the hole it's in, so I'm not a believer in the V-shaped recovery that's now built into stocks.
If I'm right, there will be some rude surprises in store for investors later this year, which will lead to the S&P 500 falling to around 2,000.
Best regards,
Whitney
