Update 88: Stock Market-Fed Prop Up
April 10,2020 OPINION & OBSERVATIONS
THIS WEEK..Never a dull moment huh?….This week we saw stock indices have the biggest UPMOVE in DECADES & we had the Fed “Seize the Bond Market” on the same day that 6.6 million souls said they had no job bringing the total to 17 million jobless. It appears Dodd Frank (restrictions-accountability- transparency) has been thrown out the window as banks, the Fed and the Treasury have elected to “make it up as we go along.” LAST WEEK..we told you that if we broke above 2640 we could test the 2790-2850 area (50% retracement & breakdown point) which is exactly what we did. The rally was led by junk (big moves in virus epicenter stocks-hotels-rental cars-restaurants-airlines-oil–cruise lines) which suggests short covering. Remember algos & the like love to press the side that LACKS volume (buying). At 3400 S&P; with the A/D line screaming exhaustion and LEVERAGE + ETF participation at a record levels without increased earnings the stage was set to press the sell side. Now plug in a virus & shelter in place…TIMBER!….we said here many weeks ago that no dealer/market maker is going to buy bonds or stocks but the FED must come in and be the BID…again EXACTLY what has happened……then you get a wiped out market that fell the FASTEST ever that gets way under the long term moving averages (oversold) and the vulnerable LACK of volume short term (selling) so they press it up to get short cover buys…revert toward the mean…exactly what we see now. WHERE DO WE GO NOW?…Our best guess is either toward the 2930-3020 area (61.8% retracement -200 day M/A) or retest breakout point 2640 (we just did) or 2450-2550 area pullback lows. If we blow out 2450; that opens a retest of 2200 or even 2050-1700 worst case. Many still believe (Bill Gates for one) that the Fed does not own a magic wand and the consumer & restart without a vaccine/drug remains murky. Are we worried?…maybe we should be….the world is over leveraged big time and Central Banks are prescribing “unlimited “debt to “solve” the crisis which to any 3rd grader sound stupid. WHO’S IN CHARGE?…we have Mr. Trump who has said that now is the time to slap as much debt (LEVERAGE) as possible on our nation with rates low. Mr Mnuchin is a HEDGE FUND guy who has worked with George Soros-Eddie Lampert (college roommates) also has invested in Trump projects/used offshore accounts. He invested in films like the X-Men franchise & Avatar. He indicated he & the admin want to build wages & get job security for the working man (they missed that boat when the 40% corporate tax cut went to buy backs not WAGES). Mr. Powell came to government as venture capitalist & private equity guy. Why are these guys down in Washington taking these low paying government jobs? There is a lot of long term decisions being made by risk taking speculative guys who may not be around next year. This is the perfect group to run the debt up & create short term asset bubbles followed by more crashes. We just saw it happen to ETF’s recently and maybe next happens to the DEBT MARKET. If we see either Inflation/Growth or Dollar weakness starts a redemption run on trillions & trillions of debt. Dealers must buy into that environment & we just saw they won’t do it. The FED/Treasury is obscuring the real value of debt & equities and doing all they can to get asset values to jump before the election with total disregard for consequences in a “great experiment.” They say they want to take a “snapshot” of the world before March & make everybody “whole” again. Our view is rather than taking public money & making stock & bond market risk takers whole (1% of the population) with bailouts; let them TAKE their losses or hold onto THEIR losses recover…and simply ask every citizen for their 2019 W-2’s and write them a check & refund lost income. These bridge loans will be bridges to nowhere if revenues and cash flows do not recover. RISK..too slow to get the PPP money/companies say better deal to cut staff.
Questions??…email us @ [email protected]
Stock Market
As we said the up move this week was of no surprise as we were way under moving averages and the FED announced their buying binge. The high beta portfolio we are focused on (VGT VCR SMH MGK VYM) still seems to be a reasonable basket to look toward when a legitimate sustained advance materializes (VIX 20-30 range) as the VIX in the 40’s still suggests 3%+ moves up or down may still be in the cards. To say the jury is still out is an understatement as we may see over 20 million claims and GDP drops in the 30%+ neighborhood. Earnings/guidance coming out of SBUX this week was sobering and restaurants & airlines say revenues down as much as 90%. THIS WEEK we get earnings from banks (may be ok as who do you think traded all that stock at the lows & traded that distressed debt which snapped back)….also health care JNJ UNH ABT plus oil SLB and Transports JBH & Kansas City Southern. A taste of what’s happening but not exhaustive. At the end of the day (after the Fed distortion clears) we will have to valuate companies on some metric. We will be looking at the Schiller Cape Ratio which was at 43 now 24 and still suggests relatively overpriced stocks. It takes the price divided by the average earnings over a 10 yr period to smooth them out over o variety of economic periods. Also we will consider book value which is calculated ass the difference between a company’s total assets and total liabilities and it is this metric that some use to conclude many banking stocks are cheap On the international markets… Brazil & Mexico had 20% & 10% Latin American bounces….while in Europe Germany rallied 30% France & UK 20% Italy & Spain 10%……In Asia & Pacific 10% jumps for Taiwan Hong Kong Singapore 20% for China Japan India Korea Australia…could there be a further bounce to come before reality sets in??
Questions??? email us @ [email protected]
Bond Market
This is really where the action was this week as Powell & Mnuchin shred the rule book on money & credit & correct allocation of resources. EVERYBODY NEEDS MONEY….from the individuals & small business, money markets, corporate of all investment grades, ETF’s, Munis (states-cities-counties), private equity ect. and it looks our public money will provide it. We got 3 New “FACILITIES” or a nice way of circumventing the Rules of Fed. #1 MUNICIPAL LIQUIDITY FACILITY ……is needed because state, cities, counties have mandates on balance budgets (would be nice if Federal Govt had it) so they have seen revenues from taxes ect. fall off a cliff. So it’s either cut services or the Fed ponies up with short term (24 month) help to bridge the gap. Another bridge to nowhere as these municipalities have unfunded pension liabilities to choke a race horse…so some say they will be slow to re-open economy and then get in line for a bailout while all this free money is floating around and bet the Fed/Treasury in an election year will play ball. #2 PRIMARY-SECONDARY MARKET CORPORATE CREDIT FACILITY….this one really widens the goal posts as now sub investment grade is on the table and who knows where it ends (they just fired Mr. Fine who was supposed to oversee proper allocation & the Fed can leverage what has been authorized. Junk Bonds and ETF”s ect are now in play thru these “funneled” programs Sure there are some parameters but do you trust them at this point? The MARKETS responded like Tom Hanks in Cast Away when he saw a plane….very short got blown out and short term debt on some of the banks went to NEGATIVE yields!. HYG & JNK: 2 high yield etf’s jumped 10%+ and many of the collapsed PIMCO funds came to life (Fed guy Clarida used to work there)…. At last glance; the bid ask spreads remained wide so after the FED sugar high & shorts cover…obscured prices give way to real values. #3 TEMPORARY ASSET BACKED SECURITIES LOAN FACILITY…..Here the FED is now a player in commercial asset backed mortgages, top rated tranches CLO’s, certain CMBS’s (helps insurance companies) and Apollo Global Management made a plea to get assistance & supposedly floating a $500 million offering.(they had extensive loan business with Jared Kushner’s family business…..again a lot of awfully wealthy guys working in low paying govt jobs). FED balance sheet goes from $4 trillion to $ 10 trillion–120 days as we LEVERAGE America/Revenues later? VMBS actually sold off. On our radar VWLUX VWEAX VWOB VCIT VCLT all were bid up on gaps higher.
US DOLLAR
This is getting very interesting. Our range has been about 100-95 on the DXY and we saw a breakout to 103 followed by a vicious pull back to 98. Now we have a tighter range of 101 and 98 that may not have along lifespan and could help us with the next important direction in the currency markets. The Japanese Yen & the Euro are trading right around where their 50 day & 200 day moving averages converge and with a sustained rally could spell TURNING point for the Dollar….jury still out. The other currencies like the BP A$ C$ still look like dead cat bounces but could join the party if a party is to be thrown at all…is the Fed wanting a weak $$?
Crude Oil
Another one we have been all over as oil shares looked very bombed out to us (XOM 30 CVX 50 area) and they ran as oil went up 50% best since 1986. The Trump deal & Russia & Saudis making nice at the OPEC meeting appears to have been a disappointment ass we warned last week the deal seemed flimsy and the principals untrustworthy. The failure of prices to take out 30 area on a retest was a tell and the sugar high was bound to fade as the reality of supplies and the demand decline reared its ugly head. Longer term; Our view is that demand has a potential for a V shaped recovery (must travel in some way) while supplies may be rather L shaped which could make for a move to fill the gap between 35-40 and maybe see in the 50’s in 2021 especially if the B-52 money being dropped globally returns us to a normalized usage level. Monitor the lows/monitor restart.
Gold Silver Copper
The FED giveaway Thursday was met with big buying in the Gold & Silver as NEM which many feel is best in class for the yellow metal has about doubled from it’s 52 week lows and made 52 week highs on Thurs..Gold futures broke above 1700 last week but spot Gold lags under 1700…some say it is because the cash market is not being used as much due to scarcity (coins have historically huge premiums) so traders are using futures. As we said a month or so ago there was a trader who put up about $6 Mill looking for 1900 to make a max of 100 Mill…of course lose it all if it fails…ouch! SSo where we stand is base positions area hold but GDX still not making new high (30-32 area) and spot sub 1700 and old highs 1900 area intact. IF we take out 1900 (8% above futures) then the door to unknown highs could get open BUT if this thing fails up here the exit door will get really crowded. Sure it looks good no question but we’ve seen some hot blazes turn into smoke & ash..we got our core. Silver is entering the tougher zone ass 50/200 day M/A’s are at 16-16.50 areas…so if we jump above them and ever take out 19-21 neighborhood…the upside possible big….lots of paper currency being printed globally….Copper popped 10-15% but we need a recovery & 2.50+.
Soybeans Soy Oil
Some say supply chains could be disrupted & we’ve said the planting & growing season may hold the key to volatility. We have been moving away from the 8.50 level which we see ass constructive and Bean oil prices have risen away from the 25.75 area…still a lot of big resistance above and while our gut feels that under the right circumstances $8 beans could break to 9 or 10 rather than 7 or 8…..our gut is not price evidence…so we will monitor.
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