MORE BUSINESS BLUES


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Detroit’s auto companies tentatively plan to resume limited vehicle production on 18 May, about two months after shutting down assembly lines during the virus pandemic.
The date was agreed on through talks among Ford, Fiat Chrysler, General Motors, the United Auto Workers union, and Michigan governor Gretchen Whitmer.
The union insisted on delaying reopening the plants in early May as originally planned, saying that more time was needed to design safety protocols for assembly-line workers.
Ford has not firmly committed to the May date, saying it still is assessing its’ supply chain’s ability to provide parts and designing safety measures that comport with government health guidelines.
TREND FORECAST: As we have written since the beginning of the COVID War, auto sales, both for old cars and new, will dramatically fall, as will prices. Thus, resuming vehicle production will simply add more product to an already oversaturated market.
 And, as we reported in the Trends Journal throughout 2019, auto sales were falling across the globe… especially in China, India, and Europe.
Auto Loan Industry Running on Empty
Late-paying auto loans among big banks increased by 7.5 percent by the end of the first quarter while late credit-card payments rose only 3.5 percent, Autonomous Research reported.
Banks attribute the rise in late payments to the fact that car payments are larger than credit cards’ minimum payments and, therefore, harder for cash-poor households to make.
Delinquent auto loans were on the rise before the crisis, reaching 4.9 percent at the end of last year, 38 percent higher than their quarterly average since 2003.
Sales of used cars also are slumping.
The number of used-car auctions fell by more than half, according to J.D. Power, which expects used-car prices to be down by as much as 16 percent during the second quarter and 4 to 6 percent for the year.
Airlines Will Jettison Planes, Routes
American Airlines, Delta, Southwest, and United are planning to become smaller in the months ahead after losing billions of dollars in this year’s first quarter.
American lost about $2.2 billion in the year’s first three months and is eating up about $70 million a day in fixed costs. American’s revenue dropped 20 percent to $5.5 billion during the period.
About 39,000 of the carrier’s employees have retired or taken unpaid leave.
American has said it has cut 80 percent of its flights for April and May and 70 percent for June, and it is starting with a “clean sheet” to plot next year’s schedules. The airline will have about 100 fewer planes in 2021 than it had planned.
Delta, Southwest, and United are mulling similar moves.
United reported losing $1.7 billion in the quarter, the largest quarterly drop in 12 years.
TREND FORECAST: With the “New ABnormal” forcing flyers to wear face masks, and making up rules to keep them socially distanced in a non-socially distanced environment, the joy of flying, long gone for decades, will become extremely less joyous.
Airline travel, already down 95 percent from a year ago, will not rebound. As evidenced by billionaire Warren Buffet’s bailout of airline stock last week, the worst is yet to come for the airline industry and all business related to it.
J.Crew Group Goes Bankrupt
J.Crew Group has filed for Chapter 11 bankruptcy, becoming the first major U.S. retail chain to go bust during the economic lockdown.
The company owns the preppy J.Crew and hip-casual Madewell clothing lines and operates about 500 stores.
The company has struggled with $1.7 billion in debt and has now negotiated with its creditors to convert about $1.65 billion of the debt into ownership stakes in the company.
J.Crew Group lost about $200 million during its last two operating years but doubled its earnings to $250 million in the most recent year on sales of $2.5 billion, indicating that a turnaround might have been possible if the virus pandemic and subsequent economic lockdown had not struck.
Popular, denim-focused brand Madewell was slated for an initial public stock offering in March, but the offering was scrapped after Crew’s creditors balked as the pandemic spread.
Madewell’s sales grew 10 percent in the most recent operating year while J.Crew stores’ sales sagged by 1 percent.
Crew had hoped that spinning off Madewell would clear enough debt to keep the remaining company solvent. Now Madewell will remain part of J.Crew Group.
“We will continue all day-to-day operations,” said Jan Singer, J.Crew Group’s CEO, adding the company expects to emerge from bankruptcy as a profitable entity.
Analysts have placed several other chains on a bankruptcy watch, including Gap, J.C. Penney, and Neiman Marcus.
Crew now adds its name to the list of retail chains bought by private equity firms and then driven into bankruptcy, including Payless Shoes, Sports Authority, and Toys “R” Us.
Media Companies: More Users, Less Revenue
Millions of people idling at home are flocking to Facebook to stay in contact with friends and family. But the social media platform’s revenues are plunging.
As much as 40 percent of Facebook’s ad revenues come from small businesses, millions of which are shuttered by government order. These businesses’ ad spending could fall by half during this year’s second quarter, according to Brian Nowak at Morgan Stanley.
Similarly, Comcast has signed more new users during this year’s first quarter than in any quarter since 2008.
The company’s cable TV, internet, and phone services collected $14.9 billion in revenue during the period, a rise of 4.5 percent year on year.
But Comcast also owns the Universal movie studio and theme parks, which lost 23 and 32 percent, respectively, during the first three months of this year.
Theaters and theme parks closed early in the lockdown and are likely to be among the last categories of businesses that will draw large numbers of visitors when they reopen.
Overall, Comcast’s first-quarter profit was $2.15 billion, 40 percent below the same period in 2019.
Twitter reported its number of daily users rose 9 percent during the quarter just ended, to 166 million, slightly beating analysts’ expectations.
But the company posted an $8.4 million loss for the period, compared to $191 million in profit a year earlier, as cash-strapped advertisers canceled ad buys.
Twitter’s ad sales rely heavily on events and product launches, both of which have virtually disappeared during the economy’s lockdown.
Twitter’s stock price fell 7.7 percent on 30 April after the news was released.
TREND FORECAST: As COVID pandemonium panic recedes and new top stories – be they geopolitical tensions, The Presidential Reality Show®, or new O.J. Simpson stories contrived by money hungry Presstitutes to drive business – major media viewership will continue its long decline.
As for advertising, short on cash and struggling to survive, companies will dramatically cut advertising budgets while looking for new avenues, new messages, and new environments to spend less and sell more.
McDonald’s Isn’t Lovin’ It
McDonald’s reports same-store sales declined 3.4 percent during the first three months of this year, including a 22-percent tailspin in March, as the company closed restaurants across Europe and the U.S.
Overall sales were $4.7 billion, 6 percent lower than a year previous, and the profit of $1.1 billion was off 17 percent.
Sales of breakfasts have plunged during the lockdown; many people who bought food on their way to work are now not commuting.
“Getting back that breakfast business will be critical for us,” said Chris Kepczinski, McDonald’s CEO.
The average sale has grown because people are pooling orders, the company reported, but it has canceled all-day breakfast and limited menu selections at many restaurants.
McDonald’s is finding that some franchise owners are considering making permanent a more limited menu to fill orders faster and hike profits, the company said.
“The world is going to look different coming out of this crisis,” Kepczinski noted, “and we expect many of those changes are going to be permanent.”
The company has stopped buying back its own stock and has canceled $1 billion in discretionary capital spending.
Processed Foods Make a Comeback
The Kellogg Co. reported sales increased 8 percent during the year’s first quarter, compared with that in 2019. The gains extended to its cereal division, which has been losing customers for years.
Kraft Heinz’s sales rose 6.2 percent during the period.
Both companies have been seeing consumers migrate away from processed foods and toward niche brands offering fresher foods with fewer additives.
Now “consumers are coming back to big brands,” said Miguel Patricio, Kraft Heinz’s CEO. “In times of uncertainty, they want to experiment less with new brands.”
PUBLISHER’S NOTE: It’s not the need for familiarity that’s driving consumers back to processed foods. Americans are junk food junkies. Stuck in lockdowns and not going out, they are eating the same low quality products they gobble down at fast food outlets … but of a different flavor.
 Also, while it’s true boxed and processed foods tend to be cheaper than fresher fare and, with 30 million Americans out of work and others on reduced hours and pay, and cheap food is the bottom line for millions of American households, eating healthy and cooking from scratch is not overly expensive.
New Corporate Bond Issues Flood the Market
To help cover fixed operating costs during the economic shutdown, Ford Motor Co., Seaworld Entertainment, and several other large corporations issued a total of $28 billion in new bonds between 13 April and 1 May, the fourth-largest two-week total on record.
Companies also are undertaking new bonded debt to build up cash against the second quarter’s expected disastrous economy, analysts say.
Even bonds rated below investment-grade – so-called “junk bonds” – are becoming more attractive to speculators now that the Fed will buy high-grade junk.
On 14 February, interest rates on these riskier bonds were about 3.4 points above the treasury rate. The premium speculators charge for taking the risk of buying the bonds grew to 11 points by 23 March. By 27 April, the spread had fallen to 7.7, low enough that the companies’ bonds were again able to find buyers.
Ford Motor’s bond rating collapsed last month when it shuttered its production plants. On 24 March, some of the company’s bonds were trading at 62 cents on the dollar.
After the Fed announced it would buy junk bonds, Ford’s debt skyrocketed to values around 90 cents on the dollar.
The company has since issued about $8 billion in new debt, the largest junk-bond issue on record.
Ford says it eats up $5 billion a month in fixed costs while vehicle production is shut down.
The bond market’s giddiness has not been tempered by analysts’ expectations that a larger-than-usual number of companies will default on these debts.
The market is pricing in a default rate of 7.4 percent over the next 12 months, according to a model developed by CreditSights, an analysis firm.
Moody’s Investors Service, however, forecasts a 12-percent default rate by 2021 and a 13-percent rate by the end of next March. Goldman Sachs’ analysis reflects Moody’s, pegging the default at 13 percent by the end of this year.

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