CDC reopening guidelines and markets

For the past few days, we had discussed the many changes that we will all experience when the economy reopens in a post COVID situation. But for many of us, the severity may not have sunk in as it should.

So, we thought of picking on just one area of the economy – bars and restaurants. Last week, the CDC (Center for Disease Control) issued new guidelines for workplaces, restaurants and bars.

It says that bars and restaurants should not reopen until they can follow applicable state and local orders. The guideline says - they should protect people who are at higher risk for severe illness. They should follow social distancing and spacing of tables and stools. Encourage drive-thru, delivery and curb side pickup, limit party sizes and occupancy, avoid self-serve stations and restrict employee shared spaces. Employers should check staff for signs and symptoms of illness as they arrive for work.

The closing of eateries so far has been terminal for many places. In a recent survey, 4 out of 5 independent restaurants said they were unsure if they will be able to follow the guidelines and stay in business.

Restaurants work on very thin margin to stay in business to make some profits. Volume and turnover are key for them. Most of them make up for the lack of business on weekdays by full occupancy that turns over at least two or three times on a weekend.

Why do people go to a restaurant? Apart from enjoying good food, good wines or spirits, it is the ambience, togetherness, warmth of sharing with family, friends or business colleagues that brings us to a restaurant. If that is not being achieved why go at all?

Having said that there could still be demand but who will meet the supply. So, those businesses who cannot meet the guidelines of the authorities could be foreclosed and bought up by hedge funds or private equity investors at much lower prices and remodelled. Not a very promising outlook. Let’s turn to markets.

Equities

All the major indexes made modest rallies on Friday. The advance/decline was slightly positive in the NYSE with 1.28:1 and NYSE up volume was by 54.5% to a down volume of 45.5%. Total volume was the weakest for the week on Friday at 11.5 billion shares traded. For the week, the major indices lost between 1% to 3% for the week.

None of the above changes our outlook for the major trend. Internal wave structures are being played out. There is a possibility that the S&P 500 can rise to 2875 area in the coming days, but it should provide a good selling area.

Bonds

The sideways trading in bonds continue unabated. The rise to 182^15 on Friday must have met the top end of the range. A break below 178 should confirm to us the move down is under play.

Euro

The Euro is trading sideways on the 1.0800 handle, but the pressure is more for a break to the downside. We are looking for a test and break of the low at 1.0635 of Mar 22.

Gold

Looks like gold is playing up to our second scenario of a breakup. Market is extremely bullish on gold. Areas in between 1785 to 1805 should provide formidable resistance. The area coincides with three major highs. One in Nov 2011, then in Feb 2012 and in Oct 2012. Will see how this will play out.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.