Hello. Stocks are posting gains even as much of the world enters a coronavirus lockdown, while Washington debates stimulus measures and investors watch for signs that central bank actions are having an effect. I’m James Willhite, with Tuesday’s markets update.
Futures are up. Coronavirus infections in the U.S. are continuing to rise sharply, but China said it would soon ease the lockdown in Wuhan—and some of the hard-hit region’s Starbucks locations have reopened. Manufacturing data and new-home sales are due this morning, and all are expected to register drops. And in an echo of the financial crisis, mortgage firms are bracing for a wave of missed payments.
Meanwhile, our Sarah Toy explains why one particular investment is taking the oil crash especially hard.
Markets in a Minute
The Oil Crash Is Hitting This Investment Hard
By Sarah Toy, markets reporter
The plunge in crude-oil prices is sending shock waves through closed-end funds tracking the energy sector, highlighting how the market turmoil is hitting products popular with ordinary investors seeking to boost returns during the long bull market.
Shares of the Goldman Sachs MLP and Energy Renaissance Fund have fallen 78% this month, while shares of the Kayne Anderson MLP/Midstream Investment Co. and the Kayne Anderson Midstream/Energy Fund Inc. have fallen 74%, respectively. Shares of the Tortoise Energy Infrastructure Corp. and the Tortoise Midstream Energy Fund Inc. have lost more than 80% of their value.
A closed-end fund is similar to a mutual fund, but its shares trade on an exchange. A professional manager oversees the fund’s holdings, deciding what to buy and sell. Unlike mutual funds, closed-end funds issue a fixed number of shares, after which capital rarely flows in or out of the fund. Also unlike mutual funds, they tend to use leverage to juice their payouts—borrowing at short-term interest rates and investing the proceeds in longer-term securities that pay higher returns.
That is a tactic that makes them attractive to investors when things go well, but one that can also amplify losses when markets sour. There are laws that cap the funds’ leverage, so when the value of their underlying securities falls, they often need to reduce their leverage by selling assets, as they cannot easily raise capital by issuing new shares.
That is what is happening now: As crude prices have plummeted, hurting shares of energy companies and the market value of the funds’ holdings, several have been forced to reduce their leverage by selling securities. That has cut down on the amount of money available to pay investors, which likely will lead to funds cutting their distributions, asset managers say.
“The life blood of a closed-end fund is its yield,” said Erik Herzfeld, president of Thomas J. Herzfeld Advisors, a boutique asset manager focusing on closed-end funds. “The last thing they want is to cut their dividend—that’s what keeps people invested in them.”
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- U.S. cotton growers were just clawing back from a tough year in which the U.S.-China trade war sent prices plummeting. Now the coronavirus pandemic has set them back again. Cotton futures on the Intercontinental Exchange were trading at their lowest levels since 2010 on Friday, with the most-active futures contract trading down 2.3%, to just below 54 cents a pound. Since the start of the year, they have shrunk by 23%.
- Apple’s market capitalization closed below $1 trillion Monday, leaving its longtime rival Microsoft as the only U.S. company left in the trillion-dollar club. However, it’s shares were up 5% premarket Tuesday, a rise that would bring its market cap back over the $1 trillion mark.
- On this day in 2008, JPMorgan CEO Jamie Dimon raised his firm’s bid for Bear Stearns to $10 a share, or $1.2 billion, to quell objections to the deal. Bear had been worth about $20 billion at the start of 2007.
IHS Markit’s preliminary U.S. manufacturing index for March, due at 9:45 a.m. ET, is expected to sink to 42.5 from 50.7 at the end of February and the services index is expected to drop to 42 from 49.4.
U.S. new-home sales for February, due at 10 a.m., are expected to inch down to 757,000 from 764,000 a month earlier.
The Richmond Fed’s manufacturing survey for March, also due at 10 a.m., is expected to fall to minus-12.5 from minus-2 a month earlier.
The Bank of Japan releases minutes from its Jan. 20-21 meeting at 7:50 p.m.
I’m scared. That’s a reason to buy. The true contrarian only buys when it makes him feel physically sick to press the buy key. At the moment our columnist not only feels sick at the idea but wants to disinfect the keyboard before using it. Does that mean it’s time to buy?
Jeff Bezos and other corporate executives sold shares just in time. Corporate executives and officers spared themselves $1.9 billion in paper losses by selling a total of $9.2 billion in shares as the pandemic loomed over the stock market, a Wall Street Journal analysis shows.
Goldman Sachs stepped in to shore up two money funds. Goldman intervened to shore up two of its money-market mutual funds after the Fed created a backstop to stem investor redemptions from the products.
Bond markets are embracing the Federal Reserve’s latest debt-buying programs. Treasury yields and some corporate borrowing costs fell as investors digested a broad array of moves from the Federal Reserve to calm the nation’s debt markets.
The coronavirus is sparking a hiring spree for nearly 500,000 jobs at big retailers. Walmart, Amazon.com and CVS are among about a dozen large companies looking to hire nearly half a million Americans in coming weeks, a spree that would mark a major shift of the U.S. workforce from smaller businesses that have cut staff to survive the coronavirus.
Bond ETFs are flashing warning signs of a mismatch. The bond exchange-traded funds of BlackRock, Vanguard and others traded at historic discounts to the net asset value of their underlying assets as the coronavirus pandemic roiled markets.
The federal government moved to protect apartment owners and tenants. Financially strapped apartment landlords with government-backed mortgages can avoid foreclosure if they don’t evict tenants, the Federal Housing Finance Agency said Monday.
A San Francisco pension fund called on companies to lend coronavirus support. The fund is calling on major corporations to lend their resources, manufacturing capabilities and distribution networks to help fight the coronavirus, and to publicly report the actions they take.
What We’ve Heard on the Street
Stocks to Watch
General Electric: GE’s jet-engine business will lay off about 10% of its U.S. workforce, or about 2,500 employees, one of the first major layoffs by a big American manufacturer as the coronavirus pandemic slows the economy.
Twitter: The company warned its financial performance would fall short this quarter as the coronavirus pandemic depresses advertising spending, an indicator social-media platforms may not be able to quickly translate increased user engagement during the global health crisis into financial gain.