April 4, 2020 (R.I.P. Martin Luther King Jr.) OPINION & OBSERVATIONS
Ok everybody we made it thru another turbulent week of news and price volatility. Everyone has a view of the truth so we will share ours now. First off; the unemployment, economy (GDP), earnings/dividends, balance sheets (consumer, corporate, federal, sovereign, state, local) are in very bad shape. We view the fastest drop in asset prices EVER to attributed to BOTH bad fundamentals and the virus exacerbating the unwind. FUNDAMENTALS-we did not have the “strongest economy in the history of the world” going into this drop. We had a 40% tax cut and an explosion of corporate debt that resulted in corporations getting a windfall of cash which it had never seen. The decision had to be made as to what to do with that cash and rather than spending it on capital expenditures (growing the business) or wages (you know the guys who do all the work)…..the decision was made to go with buying company stock (buybacks) with free cash flow & borrowed money. This was cheered by shareholders & Trump (although now he says he “thought” they would “do the right thing” and was always against buybacks??). Why not? The shareholders (401K’s) were soaring (as Trump says like a “rocket ship”), Trump could refer the DOW everyday as a barometer on well his “policies” were working..lest we forget also that corporate executives (insiders) bonuses & options were rainmakers. During this time earnings & GDP were moving at a pace far slower than stock prices (earnings manipulated because of less stock). Valuations went to the highly elevated levels in the last 6 months ending in Feb.. Unemployment went to 3.5% lowest since 1969 but the jobs paid like it was 1969! This “great” economy also produced Federal Deficits over $1 Trillion dollars in a late cycle expansion (Clinton’s economy in the late ’90’s was way stronger than Trump’s and was producing Federal Budget SURPLUS! The Federal Deficit is estimated at $3.7 Trillion this year and $3 Trillion next year. So we built a rally on buy backs that could not last, tremendous debt. Engineered Earnings (that were flat for 14 months) and low paying service jobs (sounds like a Straw House). Now we have a time out for our nation and the world (but Europe & Asia were already contracting BEFORE the virus). This “strongest economy in the world” now has 10 Million people unemployed (some say as much as 10 million more to come), possibly 15 million defaults on debts ranging from homes, auto, commercial,corporate, municipalities. We have read that 75% of Americans live paycheck to paycheck and consumer spending is about 70% of GDP (the spotlight is now directly shining on income inequality). SO WHAT’S THE PLAN? Well…if you have a debt crisis (cash flows cut/no money to make payments) you obviously want to respond to it by flooding the financial system with more & more debt…….. RIGHT??….Here comes the FED & the CARES Program & Disaster & Paycheck Protection Program & maybe soon the Main Street Lending Program. Now let’s get this straight…..govts, corporations, consumers, municipalities ect. are overloaded with debt and just got a huge “margin call” and rather than REDUCING debt we are tripling down (at least). These are essentially meant to be 2 month bridge loans…Good Idea? or backing a losing trade/throwing good $$ after bad $$?? The Fed balance sheet has ballooned toward $7 Trillion (was 75 Billion a day now cut to 50 Billion) and rates have been cut to zero….so what’s left is they’ve gotten together with Mnuchin/Congress to set up programs so they can funnel money & stay in compliance. Everyone’s in line for the money from consumers (told don’t pay bills for awhile) to corporations (airlines-Ford wants Cash for Clunkers Program) Municipalities (NY Debt downgraded & need $$ to make payments), Commercial/Apartments (want to forego payments & put arrears on the back of the loan)..even the Post Office is saying they’re upside down by June Sounds like system so built on debt (like a drug) is convulsing and a worldwide injection is being made regardless of consequence which like any drug can be effective on masking the underlying issue temporarily. The engineers behind the scenes pushing up money and credit and our national debt (like a rocket) are Trump, Mnuchin, and Powell….all temporary USA employees. In Atlantic City; Trump’s casinos made 4 trips to bankruptcy court, & he put comparatively little of his own money in it shifting debts to the casinos. As he says; he made money while investors & others did not. At the end of the day; HIGH Debts & LAGGING Revenues were insurmountable. Sound Familiar?…….We pray these tactics work and a rebound is in our futures; but our fear is we may end up holding hands singing “Put your make up on & fix your hair up pretty & Meet Me Tonight in Atlantic City”
Our take on the stock market technically is the S&P throw back rally that failed at 2640 area was about Fibonacci 38.2% retracement of the move from about 3400 to 2174. The move from the recent highs (2640 area) to the pullback lows this week (about 2460) is also about 38.2% which creates a short term window. Since the 36% decline we saw from the 3400 to 2174 occurred in such a rapid manner (deleveraging/forced-panic selling-liquidity crisis) …a degree of bad news has been factored in and the quick avalanche of liquidity & stimulus response creates a risk for the bears. Also; when you break that fast 2 things happen right off the bat….the VIX explodes (85) & the moving averages are way way above the market. Two other things can also occur which is the VIX can settle down and the moving averages can catch up to the prices. Sideways choppy action can achieve this objective and also a reversion toward the mean. If we can take out 2650 we would bet a move toward 2790 (50% retracement) or 2850 (breakdown point) with a max out at 2930 area (61.8%/50 day M/A)…. HOWEVER……….. if we take out 2450 & the horrific data and potential snags with the CARES/Disaster-Paycheck Program spooks the market….retests of the lows and acceleration toward 2000-1700 areas (50% -61.8%) could be back on the table. Earnings estimates of 1.75 on S&P to be cut…how much? multiplier? Some say be careful of piling into virus stocks (TDOC & ZM) while the possibility of PTON improving due to backlog of orders (gyms lose luster). We are watching for a high beta portfolio for risk should we come out of this AAPL MSFT AMZN GOOG FB BABA ABT ABBV QCOM NVDA CCI PHM MU AKAM CSCO INTC DIS SWKS CRM CRWD PANW or ETF’s ass VGT & SMH . We have read that spending on Cloud/Cyber Security expected to be a priority and strong while ad spending buy backs dividends not so much.
Questions…email us at [email protected]
Thanks to the Fed the money market accounts appear safe again while the IG, Govt. Mortgages and muni markets have found some footing with the latter still being a big question mark as the Fed can’t buy forever and these state & local bonds (particularly dependent on specific revenues/hospitals) may still be dicey. Hey guys…the system was frozen 2 weeks ago and the world is awash in debt..yes they have called off the dogs..we’re just not so sure the dogs have left the neighborhood. Our feeling is relatively short term duration Govt backed mortgages ( VMBS) may be a reasonable place to hide out while we see how many downgrades & defaults will be coming. Some of the numbers we read are frightening (15%-30%+ default rates) and the employment numbers (Bullard said 10-40%) and GDP falling (15-30%) ass revenues dry up and expenses pile up. Some improvement in the discount of income closed end funds but still trade behind NAV’s and many BBB’s already trading as junk with yields well into double digits expecting downgrades & selling from funds that must maintain investment grade bonds. REBALANCING is a key word in both stocks and bonds (fueled the EOM EOQ rally we saw in S&P) and may be a big factor in Q2 as well. Some say look toward debt issued by utilities, cable, telecom, towers, health care/pharma for value/ banks look juicy but low rates/recession pose a risk. Look for the Fed to be deliberative now to see how their efforts pan out.
While Bitcoin rallied as much as 70% off it’s recent lows; the Dollar Index has also rallied off its recent pullback settling above that 100 level. The badly hit Can $, Aus$ bounced a bit and may be helped by an oil price rise if it is sustainable. The economic news out of both countries stink but that is par for the course. There had been tremendous hoarding of dollars that hit a pause but the risk to the BP, EU, JY after there rallies have stalled is that both Europe & Japan were essentially in recession BEFORE the virus. Now they’re throwing tremendous debt on top of a shaky foundation. Brazil & Russian currencies (Brazil look like another new currency may be in the cards) are discounted. US Dollar remains the one eyed man-valley of the blind. Above 105…we could accelerate…otherwise range of 100-95 remains.
This week they called the dogs off the oil prices…or did they?? Trump tweeted about talks with two fighters (Russia & Saudis) and they agreed to go to neutral corners (OPEC meeting). Crude price jumped about 50% from the lows (best time since 1986) and 50 day/200 day M/A’s are about 39 & 51. Like stocks; when you throw a ball off the Empire State Building you get a bounce. We feel that could get you as far as 40 (50 day) to fill in the gap but because they’re storing oil in every boat from the Queen Mary to the SS Minow….a range of 20-35 may be best case as moving averages catch up with the prices. That’s not bad news for the bigs (XOM-CVX-COP-PSX) but maybe too late for shale & the OXY’s of the world (although their debt went from yielding 35% to “only” 18%). Hey if flying loses it’s luster then maybe demand for gasoline will spike..with these supplies we could drive to the moon. Is 10-20 off the table?? Maybe for now..need to see more cards.
The Tsunami of debt being thrown at the contraction (margin call) is beyond the imagination. The Big Question…will this be DEFLATIONARY or INFLATIONARY??..Well here’s our take…when you come out of these drops a couple of things tend to happen…a jump in GDP & a jump in inflation. If that’s the case then we would take out 1700 and open up the new high potential and beyond with the long term moving averages which are under the prices and rising continuing to to their thing HOWEVER we still are concerned with the failure to take out 1700 and the GDX failing to get above 30 and sustain the value. Why so concerned?? Because the road to big money goes thru those 2 towns and we are not certain we have not reached the point where DEBT is oppressive to GDP & Inflation…is it combustible?? So core positions continue to make sense and the retail popularity is a turnoff but the big level is 1450 pull back low…1700 highs…go with the flow. Silver is a different animal to Gold (witness Gold-Silver Ratio). It’s recent fall was 36% and so far hasn’t recovered half the drop. Miners like SILJ/PAAS got battered during the decline and 50-200 day M/A’s hover around 16-16.50 presently. A move thru that area coupled with Gold taking out 1700 would be very constructive and if we ever see a move over 19-21 we will be happy to don our Lone Ranger garb & shout hi yo Silver away…until then be cool. Copper is battered by economic decline & China slow to get back on the horse. Holding 2 bucks and getting above 2.50 needed as part of the repair phase and if you are a low term believer..FCX available in the 6 bucks range
Questions? email us at [email protected]
Soybeans Soybean Oil ect
Most ag prices appear to be either range bound or declining based on the economic downturn and the strong dollar. The sector seems to be waiting for what we are waiting for which is news coming out of the planting and growing season soon upon us and how we come out of this recession-like situation….without something to help us break thru resistance the path to big upside not currently there…like all of us…we welcome summer and fall
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