Have we seen the bottom for stock markets? It is tempting to believe so after two days of fast action as investors have responded to the welcome sight of flatter coronavirus curves in Italy, Spain and Germany.
Some of the gains in individual stocks – those that had fallen the furthest – have been stunning. Speedy boarders could have made a 27% return in 48 hours by buying shares in easyJet first thing on Monday morning. In the same short period, Rolls-Royce, the engine-maker, gained 24%. Like easyJet, it was able to unveil a self-help strategy involving more borrowing.
Or try Carnival, the cruise ship company that seemed marooned and friendless at the end of last week: up 25% on Monday’s opening price and 43% on Friday’s closing level after raising fresh funding. Asos, the online fashion retailer, joined the club on Tuesday by saying it is close to raising more equity and debt.
What does it all mean? Very little, probably. There is a fear of missing the bounce in over-sold stocks, but it would be unwise to draw wider morals. Central banks and governments have made financing conditions easier – a big achievement – but the shape of the post-lockdown recovery remains anyone’s guess.
The V-shaped camp has adherents, but they are dwindling in number. The “corrugated” thesis – brief surges and relapses – is gaining ground, which would make sense if lockdowns are rolled back and then partially reimposed if fresh viral outbreaks occur. Take your pick.
History, though, says it’s far too soon to call the bottom for share prices, at least according to Bank of America’s analysts. They think it would be “unprecedented” since 1929 if the S&P 500, the main US index, “failed to re-test or even fall below” its low point on March 23 if recession arrives. Their point is that bear markets in stocks, when accompanied by recession on the ground, tend to last a while – about 11 months on average.
This time may be different, not least because most recessions aren’t caused by pandemics, but the current stock market still feels essentially directionless. The FTSE 100 has gained 5.3% in two days as global investors have focused on lower infection rates in many countries. That news is encouraging, but the jobless numbers are still horrendous and are likely to get worse. This mini-rally for share prices feels fragile.
Cineworld accepts a dose of realism
A dose of dividend realism has arrived at Cineworld, where the board has finally understood that distributing cash to shareholders is not a smart idea when you’re carrying debts of $3.5bn and the doors of all your 787 cinemas in 10 countries are shut.
Mooky Greidinger, Cineworld’s acquisition-hungry boss, was wedded to the divi three weeks ago. Since he and his family own 20% of the company, one could understand the desire for income. But the stance was obviously nonsensical. A final quarterly divi for 2019 worth $58m may be peanuts, or popcorn, in the context of the debt pile, but lenders prefer borrowers to be serious.
The $58m distribution has now been suspended, along with dividends for 2020 as Cineworld starts talking to banks about securing liquidity. For good measure, Mooky’s crew are donning hair shirts, relatively speaking, by deferring salaries and bonuses until the screen comes into focus.
One can see how Cineworld, which operates in 10 countries and owns the Picturehouse chain in the UK, could muddle through. Half its costs in a normal year are royalty payments to film studios; if no films are showing, there’s no payment. The company can also make use of governments’ furlough schemes and beg landlords to defer rents.
Yet Cineworld must also find a way to abandon its planned $2.1bn purchase of the Canadian chain Cineplex, a cash deal agreed before coronavirus and due to be funded entirely with debt.
The good news, of a sort, is that Cineplex’s share price sits at one-third of the supposed takeover price, suggesting the Toronto market thinks the deal is dead. But Cineworld still needs to get itself formally off the hook: wriggle and squirm if needs be.
After that, Greidinger needs to tame his debt-fuelled takeover ways permanently. Cineworld’s share price, up on Tuesday but down 70% this year, says that game is over.