The BAN Report: PPP Update / The Resilient US Economy / Frothy Stock Market? / 70s Redux? / Working from Home Survey

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PPP Update

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This week, the SBA released its new interim final rule regarding revisions to the PPP program – a direct result of the new law signed by the President earlier this week. A few changes of note:

• “Covered period” of the PPP loan now ends on December 31, 2020, as opposed to June 30, 2020.  The “loan forgiveness covered period” is now the 24-week period after the loan was funded, although you can still elect to keep it at the current 8-week period if your loan was made prior to June 5.

• The maturity of these loans can be extended to 5 years for loans made prior to June 5, and all loans thereafter will be 5 years.     We think few lenders will want to extend the maturity of these low-yielding 1% loans.

• Eligible loan forgiveness can now be used easier for non-payroll costs, as the non-payroll threshold was raised from 25% to 40%

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Despite these changes, PPP originations have pretty much stopped for most lenders.  While there are exceptions, many firms seeking these loans now are not the pick of the litter.    Approximately $130 billion in PPP loans have not been used.

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As of Tuesday, more than $130 billion was left in the fund, known as the Paycheck Protection Program. Even more striking was the fact that on many days last month, more money was being returned than borrowed, according to data from the Small Business Administration, which is overseeing the program — highlighting its messy execution and confusing rules that deterred some small businesses from using the money.

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Thousands of companies that got loans have sent the money back, according to lenders. For some owners, the program’s terms were too restrictive; for others, the criteria for loan forgiveness was too murky. Some public companies that received these loans returned them after a public outcry, and in the initial rush, some borrowers accidentally got duplicate loans that they, too, returned.

But obstacles remain. The program’s chaotic execution has “chilled the willingness of many small businesses to even apply for loans during the second round of P.P.P. funding, and has caused many businesses to return disbursed loans out of fear of doing something wrong,” Tony Wilkinson, the chief executive of the National Association of Government Guaranteed Lenders, a trade group, said last week at a hearing of the Pandemic Response Accountability Committee, an oversight group.

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To be fair, no one really had a good idea of the demand of this program.   In the initial round, we estimate that perhaps 50% of applications got processed, and no one quite knew if the additional allocation would be sufficient.   And, this program clearly played a role in the turnaround of the unemployment rate last month.

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Finally, there is a business of selling your PPP loans. The reason many lenders are selling these loans is they don’t necessarily have the back office, resources, or energy to process the forgiveness, and do not want to be stuck with a portfolio of low-yielding loans.   Please give us a call if interested, as we have close relationships with many market participants.

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The Resilient US Economy

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Due to a number of factors (thank you dentists!), the US unemployment rate dramatically shifted in May, falling to 13.3% after many predicted it would rise to almost 20%.

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Certainly, it's good news that 2.5 million Americans returned to work last month — a clear sign the economy is rebounding faster, and sooner, than most experts predicted. Now for the bad news. 

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First, the virus hindered the Labor Department in compiling its monthly employment report, with the agency pointing to a 15 percentage point decline in the number of worker responses to its jobs survey. 

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Second, the nation's headline unemployment rate, now at 13.3%, is likely considerably higher than the official tally suggests. That's the worst number since records first started being kept in 1948.

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The reason for the discrepancy: Many workers may have been misclassified as employed when they should have been categorized as unemployed, the Labor Department explained. That's due to one of the defining characteristics of the current economic downturn: Employers that have furloughed millions of workers but plan on rehiring those employees once business regains momentum as states ease their shutdowns. 

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While the unemployment picture is improving, most economists believe that the recovery won’t truly start until next quarter.

 A monthly Wall Street Journal survey found that more than two-thirds of economists, 68.4%, expect the economic recovery to start in the third quarter. Just over a fifth, 22.8%, said it already began in the current, second quarter. The U.S. entered a recession in February, the National Bureau of Economic Research determined this week.

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Business and academic economists polled in the survey expect gross domestic product to shrink 5.9% this year, measured from the fourth quarter of 2019, a slight improvement from the 6.6% contraction economists predicted in last month’s survey. They also expect, on average, that the unemployment rate will be slightly lower by December, 9.6%, compared with last month’s forecast of 11.4%.

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In the June survey, 69% of economists said they expect the recovery to be shaped like a “swoosh.” So named because it recalls the Nike logo, it suggests a large drop followed by a gradual recovery. That was broadly unchanged from May.

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Some have expressed concern that the encouraging jobs report will discourage further stimulus.  In the absence of further stimulus action, there will be negative stimulus ahead of us, which be a headwind to the tailwind of the economy re-opening.    The negative stimulus includes: the roughly 2 months of payroll cost savings of PPP is running out, moratoriums on evictions and foreclosures end this month, many borrowers will need to begin making loan payments as deferrals end, and elevated unemployment insurance runs out in July.    We think this is healthy, as stimulus cannot go on forever, providing it doesn’t thwart the economic recovery.   But, we need to avoid the mistakes of Japan in the 90s by letting market forces work, which sometimes involve realizing failure.   If the restaurant re-opens under new ownership at a lower rent with a borrower at a lower basis, that restaurant has a better chance of succeeding.   The cycle of banks deferring loan payments to landlords deferring rent can’t go on forever.

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The Fed though is expected to keep low rates through 2022.

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In new projections released Wednesday, all 17 officials who participate in the rate-setting meetings said they expect to hold rates near zero next year, and 15 of them projected rates would stay there through 2022.

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“We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates,” said Mr. Powell.

Between an accommodative Federal Reserve and the benefits of the economy re-opening, the economy should be able to withstand the negative stimulus, but there will be some significant challenges ahead.

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Frothy Stock Market?

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The US stock market has been on quite a run lately before a significant drop today.    First off, the stock market is sometimes divorced from the current reality, and often shrugs off events that shake the nation, such as the pandemic and the civil unrest caused by the killing of George Floyd.

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Teetering on a constitutional precipice, the country faces catastrophic unemployment, grave trade tensions and a deep recession. And no one needs reminding that the world has been stricken by a coronavirus pandemic that has already killed more than 380,000 people, more than 106,000 of them in the United States.

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Yet there is a glaring exception to all this gloom: the stock market. It has been absolutely fabulous! In fact, by some measures, the American market has never been better.

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Consider these remarkable statistics from Bespoke Investment Group. Through June 3 — the 50 trading days since the market’s coronavirus low on March 23 — the S&P 500 gained 39.3 percent. That was the best 50-day performance since comparable records began in 1952.

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The market is focused, as always, on one paramount concern: profit. That may well be repulsive in a moment of intense and widespread human suffering, but it is consistent.

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Many retail investors, flush with stimulus cash & reduced discretionary spending, have been pouring money into the stock market.    And some have even dove into bankrupt companies, sending their shares soaring.

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To get a slice of one of the market’s most epic rallies, investors are snapping up stocks everywhere including shares in bankrupt companies, which in theory will be worth nothing.

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Hertz, Whiting Petroleum, Pier 1 and J.C. Penney, which all declared bankruptcy amid the pandemic, saw their shares surging at least 70% each in Monday’s trading alone, some of which more than doubling. Imminent bankruptcy filers Chesapeake Energy and California Resources also skyrocketed from a few pennies to a couple of dollars in a matter of days. 

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In many of these cases, the bonds are trading at deep discounts. Chesapeake’s bonds are trading in the high single digits, for example, which implies the common stock is essentially worthless. In a bankruptcy filing, if the bondholders take a haircut the stockholders get nothing.   This is basic business school economics that some speculators don’t seem to understand.   The other factor is it becomes extremely difficult to short distressed stocks, so you’re actually taking away some downward pressure on the stock when a Bankruptcy filing and/or a possible de-listing occurs.

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70s Redux?

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In the 1970s, many downtowns emptied out as many workers and companies fled major cities for the suburbs.    There is a possibility that we could be repeating this phenomenon, although we repeat it is way too early to tell.   Asking people how they feel about living in New York City now is like asking someone how they feel about Florida after a major hurricane.   Harris did a poll that suggested a preference for less density.

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39% of urban dwellers said the COVID-19 crisis has prompted them to consider leaving for a less crowded place, according to the survey of 2,050 U.S. adults from April 25-27,

• 18- to-34-year-olds were more likely than other age groups to say they’re considering a move.

• Urban residents (43%) were more likely than suburban (26%) and rural (21%) residents to report having recently browsed real estate websites for homes or apartments to rent or buy, per the survey.

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But the lure of the city is great and, while many have left, some are having second thoughts.

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Some are hiding out in their weekend homes, while others are emptying their wallets on Airbnbs or crashing on their parents’ couches. Some left the five boroughs in early March, before the coronavirus upended life and protests filled the streets; many more decamped for less-dense locales in the months that followed, during the peak of pandemic pandemonium.

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The nerve-racking — even identity-defining — debate about whether to stay or go is taking place online, too. A Facebook group called Into the Unknown launched in April as a forum for people “who have decided or are considering — willingly or otherwise — to join the exodus from NYC.” Its more than 4,500 members dissect the topic daily.

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Anecdotally, we are hearing suburban homes in Chicago area are attracting heavy interest, especially from city residents. If working from home becomes a way of life for many Americans, than there is less need to work closer to your office. But, most downtown office space is under long-term leases, so companies cannot just pick up and leave for the suburbs. We think that you will see some suburban growth at the expense of their neighboring cities. But, people may feel differently if they still have to commute into a major city and traffic returns to pre-COVID levels. Like most things surrounding COVID-19, no one knows anything!

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Working From Home Survey

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We are interested in how organization are functioning as employees work from home.    Please fill out this brief survey and we will share the results next week.   It should take no more than 3 minutes.

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Additionally, we are transitioning to a new platform for the BAN Report. We expect that to begin next week. Please make sure you check your spam folders and designate the new sender as “not spam” or select the “never send to spam” option.