Update 84: Stock Market-Exposed
March 14 2020 OPINION & OBSERVATIONS
WOW!….last month after seeing the market as overpriced overvalued and over leveraged…we felt a pullback on the S&P toward the 200 day moving about 3000 made sense but always felt that the market cap to GDP ratio was very elevated and maybe explained why Buffett was sitting on so much cash. Well..we now see why. Some realities have reared their ugly heads like the fact that the tax cut that went to corporations was used not for capital expenditures/higher wages/ pay down debt but rather to buy backs of stock creating as a way to redirect attention away from slowing GDP/Revenues/profits and earnings to simply stock prices which everybody loves when they rise….also with the Fed dropping rates so low then forced people further out on the risk spectrum into Bonds (leveraged loans-high yield-junk-emerging markets ect) wherein some companies took those proceeds and bought more of their own stock…that’s a lot of temporary buying. The problem is you need more buying to sustain prices (the public-hedge funds retirement plans ect were all in) at lofty levels not based on fundamental strength but rather some may say creative accounting. When the virus hit China; I was listening to Paul Tudor Jones’s interview in Davos where he said this virus was serious and he would be very concerned to be long stocks. This was followed by China shutting down cities and businesses (supply chains) and announcing a PMI number of 35 (below 50 is contracting) which was followed Japan Q4 GDP contracting by 7+%…bad #’s. The market has gone through many numbers like a knife through butter because liquidity has dried up as no one knows what GDP 3’s will be and earnings so how can you valuate stocks & bonds with any confidence. The Transportation Average and the Russell (DJTA & RUT or IWM) failed to confirm the new highs (topped in 2018) and have now taken out the Dec 2018 levels and approached 2016 levels before rebounding on Friday. On the positive side; it has been reported that insiders bought more stock in the first 2 weeks of March than anytime in 9 yrs and there has been a panic by many into money market funds and the selling volume has been huge. We are very oversold technically and some say the public stops panicking when governments start panicky…well worldwide governments willing to throw cash at this thing has zoomed thru the roof. BUT we needed Central banks not to drop interest rates (European loan demand collapsed) but be the buyer of last resort of bonds and stocks as the corporations who were buying their own stock/the public and institutions were nowhere to be found (liquidity). On the negative side is the unknown and consumer psyche when the flu fades (hopefully) and there we look to China. It took 4-8 weeks after quarantines for people to go back to work and stores to re-open. Adidas CEO was saying Q1 saw an 85% decline in revenues Y/O/Y and that now it has been slow to recover because buying athletic shoes are not first on consumers mind once things reopen. We re hoping that the panic we see in consumer here (going to cash in stocks/buying up all the water & toilet paper they can find/and governments willing to print- lend-forgive “whatever it takes without limit” is a sign that we will stabilize markets & fend off this flu virus and come out the other side by Q3 or Q4. The unknowns of credit downgrades, credit defaults, repricing re-valuating markets that were way overvalued (market cap to GDP) is of greater concern and frankly no one knows the outcome and only a fool would say. The market’s overvaluation leverage complacency liquidity was exposed. Questions..contact us at [email protected]
Where to start?….Europe & Asia were both in a slowdown (recession?) BEFORE we got hit by this virus and GDP in the USA wasn’t looking good. We seem to be in a bit of a lock down worldwide and conventional thinking is that the virus is transitory (gone by summer) and then free credit and stimulus puts us right back on the bicycle with the consumer back at it again…maybe?….certainly many companies we watch are on sale MSFT, AAPL, AMZN, GOOG,JPM, C, WFC, BAC, PRU,BX,GS MS UPS,DIS, SBUX, HD, NVDA,ADM, , UNH, JNJ, AMGN, ABBV,COST, and many many more. Plus; we see many of the dividend aristocrats have been on the chopping block. Finally some of the closed end funds are trading at a substantial discount to NAV due in part to liquidity issues. The sell off (ETF-Index related) has been indiscriminate and therefore stock selection ss very interesting due to some stronger companies were dumped out with the truly troubled ones.Having said that combined with some of the aforementioned points; there is a lot of unknowns and ass the old adage says “when the tides change you see who’s swimming naked” which is very apropos we believe for the current market. So our best guess/hope is as follows…..the VIX is at 57 and hit 77 this week (the highest since the crash)…we don’t believe it will go in a straight line to the 15-20 zone of stable bullishness. But IF things stabilize relatively quickly ; then the idea of a trading range to work off the excess volatility in the VIX makes sense with the ceiling of the top coming in at ballpark 2875-3050 (basically coincides with the 10 & 20 day moving averages) and the floor down at 2300-2400 where the recent and Dec 2018 lows come in….yes that’s big but we’re coming off 77 VIX, a global shutdown, and a consumer panic. The next zone under that is the high low for 2016 which is ballpark 1800-2200 which I am sure the Fed & the administration will fight tooth & nail. Our big worry is that prices of the Dow Transports & the Russell 2000 went into levels not seen since 2016 last week when they were on their lows and the Transports & Russell were good indicators for questioning the Oct-Feb S&P rally so we would be foolish not to give that fact appropriate weight. Indexes in Europe, Asia & Emerging Markets have revisited 2016 as well..
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Another one of those where do we start?….well let’s start by opining on the lack of liquidity in high yield, leveraged loans, investment grade, munis and treasuries which was astounding. As we said for a very long time; ETF and passive investing works on the way up but if everyone wants out at the same time there may not be much of a bid on the other side. For those of us that thought investors were reaching into the toilet to get yield..those fears came home to roost. HYG traded behind NAV last week and to levels not seen since 2016 which was another ominous sign that triggered big intervention by the FED as spreads on our best credit (Treasuries) blew out. Everything from short-intermediate-long term paper was getting sold and lines of credit by Hilton, Wynn & Boeing certainly didn’t boost confidence. Munis were sold as state solvency was of concern and leveraged loans, asset backed loans, and others lost their bis as spreads exploded. Can you blame them? The ability to determine what’s backing the loans was questioned plus hedging costs for payment risk zoomed. Also CECL was a concern as banks may have to reassess the status of borrowers of existing loans and change the risk level of their outstanding book. The new isssue markets have been kind of frozen here and abroad..another sign of worry. Now it looks like full scale panic by worldwide governments that state they are prepared to give, loan, forgive and whatever else needed to halt the liquidity crisis and while they seem 2-4 weeks late…better late than never….all is on table. Closed end funds are trading at big discounts to their NAV’s but can you trust NAV’s where the bid is questionable? Big week this week Mon China retail sales & G7 meets Tues USA retail sales/industrial production Wed Fed cuts (most say 100 basis points) but if the follow the lead of ECB no cuts more QE ….bridge loans could zoom with cash cut off. So where to look when all is on sale? How about short term & longer term investment grade, high quality munis, preferreds to name 3 right off the bat. Now if we are to stabilize here and the virus is transitory; this bargain hunting in stocks and bonds may be reasonable; however if we’re to revisit 2016 levels like some indexes/bond sectors have done then caveat emptor. The Bond Market was exposed for its liquidity, covenants & leverage risks.
Questions contact us at [email protected]
As we have said for about 2 years; the index has been range bound at about 9950 and 95…we peeked out of both sides temporarily and both times it lead to big changes of direction (100 led to 94.5/and 94.5 led us back toward 99…lots of volatility within a range. Now maintaining above 98 and blowing out 100 could lead us to a Dollar stampede however our yield advantage should be out the window this week and our economics don’t look so rosy now (whose does?). So as we’ve said the Dollar could be the one eyed man in the valley of the blind (yen-slow GDP/VAT tax/236 debt to GDP & the Euro has negative rates and a commissioner not talking savior like (that could change). In fact; our opinion i the Fed balance sheet is about to explode as USA debt to GDP around 20% pales in comparison to Europe 40% and Japan over 100% and this was BEFORE the printing binge we’ll see soon In our view; this is where the Fed will and should come into play…expand the balance sheet/leave some room to cut further when & if loan demand materializes and spend your targeted money where it’s needed…providing a bid in stocks & bonds to calm everyone…makes sense we could see better prices by the end of month before the March statements go out/avoid panic.
Sounds like a broken record….but this is the second punch to the gut (the virus is the other) that served ass the match to light the flame. Well…when the Russians & Saudis want to fight…they really go at it huh? Russia wants to kill the shale producers (probably so does Saudi) and as we told you forb months..after Saudi dumped the 2.5 Trillion in Aramaco when they pushed oil to 66…no need to sustain prices after that …they just got their money out ($2.5 Trill)….but a good time to mess up USA oil and eliminate competition. This was tried in 2016 during the last growth scare and all it did was make the industry more efficient and send everything up. Now you’ve got the majors some of which have huge bank rolls to buy shale guys at pennies on the dollar and consolidate the industry. While there is still a chance for sub 20 levels temporarily; our view is the bigger guys XOM CVX HESS and others may come out of this and could be something to look into at 50% + discounts from highs in some cases…still looking for 47% oil energy share.Market share wars where you both lose tend to get resolved & Trump is supposed adding to the strategic reserves. Lower gas prices..consumer ++
Gold Silver Copper
As we’ve been saying Gold broke into a bull run when it broke above 1350 and Paul Tudor Jones early on quoted a 1700 price target. Well it did all that and then it entered into the Show Me state….meaning we wanted to see GDX get above and maintain 30 (now at 2016 prices) and wanted Silver to get above 19-21 per oz to reinforce the bull as stories like record retail sales of Gold coins started hitting the tape. When deleveraging happens in stocks and bonds occur (big time last week)..some say that’s Deflationary and leads to a strong dollar…double whammy for Gold & Silver (which always lagged evidence the Gold-Silver ratio)….Gold saw it’s biggest drop in a very long time and Silver was no slouch falling at twice the rate of Gold. Now the 1350-1450 area which was support before is a line in the sand and maybe if the Governments can stabilize the equities and debt markets…the conversation will turn from deflation/recession to paper currency madness Copper was trying to hold the 2.50 area as China is trying to stabilize (cases shrinking/normalcy returning) which we believe is imperative for a copper run to higher levels later on…otherwise into the 2-220 soup we may go.
Many ags were under pressure like everything else. We look to the planting and growing seasons and stabilization of financial markets to see if we can get the news needed to overcome resistance at 950-100 area although it seems China may use Wheat as their US crop buy while taking advantage of the currency/economic collapse in Brazil to grab beans at a bargain.
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