Update 85: Stock Market-Good News-One Week Closer
March 20, 2020 OPINION & OBSERVATIONS
Well..the Good News is we are week closer to getting to finding a turning point! We are going to give you a review and a preview of what we see right now in stocks, bonds, dollar, gold, crude oil ect.. No need to go over the obvious with you…but if you want me to describe what has happened in two words it would be “Redemption Run”. While we all have seen the hoarding of toilet paper and pasta; we look only to the stock and bond market to see what they are doing with their portfolios..they are hoarding cash! Hey this redemption run was warned by us months ago (albeit not with this unfettered speed) but these ETF’s being sold as proxies for sectors with underlying non-liquid assets and the public piling trillions of $$$ in for 11 years was not going to end well…and it hasn’t. REVIEW We felt the rally above 3050 S&P was suspect as no GDP & earnings growth occurred by rather a stretch in valuations….if it doesn’t make sense it won’t last. Now the consumer is 70% of economic growth and he was spending a lot and working in a service economy. Companies took their tax cut and spent it on buybacks to “manage balance sheets”. The next move was to go after the debt market by offering yield hungry investors low yielding bonds & badly collateralized loans. This leveraged their companies (60 billion for some 45 Bill $$ for airlines). What did they do with the proceeds?..you guessed it…they bought more of their own stock. This artificially bid up stocks to a level that when the first interruption came the stock and bond markets have fallen like dominos. Why not….most people and companies cannot handle a one month interruption in their cash flows and rather then getting ahead of this in Jan..we’re looking for masks in March. We have seen unreal order imbalances (sells) in Bonds & Stocks because 11 years of people plowing in (particularly the post tax cut overvaluation run) has no buyers on the other side. Margin calls, forced liquidations and a stampede to cash. It’s a liquidity crisis we discussed in these updates for a long time before social distancing became the norm. The Fed is trying to be the bid in everything right now and that smells like 2008…although in 2008 it was homeowners and the banks in the mud…this time every hourly & tip earner, 401K, bondholder, travel & leisure & most every citizen is in the mud…so to make a case that the damage has the potential to be more pervasive is not far fetched. It’s an across the board Redemption Run with an unknown destination. We have our best guess-we will share our opinion.
Some various thoughts with an opinion….many dislocations..bank stocks trade behind tangible book value…10 day implied volatility most since 1929-2008 1987 all bad times…revenues collapsing in some sectors like airlines -80%+ and we saw that occur in China ass Adidas said revenues fell 85% YOY…dividends in many cases may be on the chopping block…Transports & Russell have declined to 2016 levels which may mean more to come for S&P….China got back going in 8-10 weeks but the virus was somewhat regionally contained and they have a manufacturing economy while the virus is in 2 very populated areas (California-New York) and we are a service economy needing consumer discretionary purchases to grow….the Dec 2018 2350 level S&P was touted as support but today we closed under that level and futures hit 2260 at the low. Lock downs in NY & CA was not welcome news and quadruple witching today saw 23 million option expire and volume explode…..VIX has hit 85 a few times this week but has faded by late week/maybe drop further next week?.. and must come down if we are to find a low…..some closed end funds and mutual funds are trading well below their NAV which is evidence of the non liquid nature & order imbalances….RECESSION talk…some say the 3 month Treasury vs the 30 yr Treasury is the one to watch for inversion to forecast a recession..well that inverted in June 2019…so some said a recession in 2020 would take place (they look right)…..some say the recession began in Feb 2020 (can we argue?)…..we have heard it will be hard & fast and last about a year. Who knows?…but right now we are in the same ballpark based on what we see…humility & flexibility can go along way in avoiding trouble….LEVELS..we are looking for the 50% correction of the move from 2008 low (S&P 667) to the 2020 highs (about 3400 S&P) which is the 2000-2050 area or a Fibonacci retracement of 61.8% which is about S&P 1700…numbers coming out potentially very ugly (Thurs unemployment estimates average 2-2.5 million-astonishing) and the Q1 & Q2 earnings, PMI’s, GDP numbers more than likely will be cringe worthy. Some quant guys are saying that we should focus on potential positive returns in 2021 and some say remember to be greedy when people are fearful and be fearful when people are greedy. We will be a lot more comfortable when we hear them rollback two words “Social Distancing”…..but here’s some potential things on our shopping list…..growth was the leader before and it may lead us out (5g, Cloud-Edge computing, Cyber Security, consumer discretionary, communications)….dislocations like transports (UPS UNP)…energy (XOM CVX)….usual suspects MSFT AMZN AAPL the Semis, GOOG….discounted brands (GM HD TJX TGT SBUX NKE MCD JPM JNJ V) and many more…..a reversion to the mean could rally to SP 2550 (10 day M/A)…
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We will give our opinion and best guess…Again…not a real surprise here when you consider the lack of liquidity in these instruments for mass liquidations (redemption runs) which is exactly what we spoke of here in these updates for a long time. The Fed is adding enormous liquidity and will have to continue to do so. They are now buying Munis and commercial paper and maybe corporates before long. They want to help money market funds honor the buck and state and local municipalities are looking for block grants and a bid. Now investors who were hungry for yield and save money for a rainy day…well it’s raining. Look around at it all…some closed end funds & mutual funds trading at a discount to NAV….bank debt in the 4-6% range for short intermediate & long maturities…..look at the debt of the dividend aristocrats…if they can raise and pay dividends maybe they can afford their coupons….convertible bonds paying 4%+ and have a stock purchase kicker could be interesting..you gotta do your homework but the yields are getting juicy..in fact the spread between various levels of corporates is now at levels where they have been only 10% of the time historically…..preferred have gotten nailed..maybe some are worth a look..we are entering what has been a value zone as far as yields and price .but…CAVEAT EMPTOR….a value zone is often not a great timing tool….so with this big of a redemption run & the unknown of how long the virus lasts…and how consumer behavior will be affected….the RISK is elevated…so…like stocks or anything else..do your homework…and be aware that volatility could be significant as we are approaching levels last scene in 2011 with the Sovereign debt crisis and we don’t know in 2008 crash levels could still be a possibility…securitized & asset backed debt are of concerns and some say we are trading 80 cents on the dollar and sometimes that number can go to 50-60 cents on the dollar if things turn really south. Spreads seem stretched but who’s to say where stretch ends/defaults begin. During ’08 crash the Fed had 5+% to work with and now they have about none so look for an explosion in the balance sheet as we go from 20% of GDP up toward our pals in Europe & Japan that have huge ratios. TLT still looks like it could have seen a generational top at 180. It may be because the massive Fed liquidity response will surprise people and send yields up as the panic into Treasuries seemed to reek of capitulation.
Well worldwide providing liquidity id on as Abe & La Garde & Merkel-Macron all sound as if there is no limit to what they are prepared to do. Some of the international markets have gone to or surpassed the 2016 levels so if things stabilize they may offer an interesting diversification value. Since 17 Trillion or whatever of negative yielding debt is absurd but real; our thoughts do not revolve around any interest in their debt.
We’ve had a pretty good read on the dollar as our belief has been that we were in a trading range of about 100-95 which lasted for a long time with some bounces therein. We did state that a move above 100 could bring in a dollar stampede (not unlike our thoughts that a move over 145 TLT would bring in a buying stampede to Treasuries) which so far ha occurred. Will it last?…well our yield advantage is certainly on it’s way out the window and our “strongest economy ” ever was built on buybacks on borrowed money & overvaluation. But; the Dollar is the one-eyed man in the valley of the blind.Three lovely places to live with beautiful scenery which recently saw their currencies approach 50 cents are New Zealand, Australia & South Africa. If fiscal comes out of Germany & UK…..keep an eye on the BP & Euro.
Biggest week up and down that pretty much the market has ever seen. Russia won’t be black mailed by Saudis (they usually do the blackmailing) and Saudis yanked their money out of oil when they sold ARAMCO during that phony engineered rally to 66 which collapsed once that money was in their house. NOW….it’s all about market share and what better way than to make your competitors go broke. Russia thinks they can play ball in Saudis league but we believe they can’t. Our understanding is Russia needs 40 bucks or better to make money and Saudi can take it out of the ground at 3 bucks and make money at ARAMCO at 15 bucks pre-dividend. The math doesn’t seem to favor Putin whose country depends on oil for 70% of it’s revenue….so Saudi wants market share and kill the sand business (Canada & the shale business (USA). The idea of pumping thru May seems to coincide with a hopeful summer driving season. Trump may get involved..why wait? Our guess is the big boys XOM & CVX to come out the other side as winners. We look for crude to possibly trade to 15-20 bucks but not last…reversion trade took you to 28-29 (10 day M/A) and now back in the soup on sub 20.
We have been all over the Gold story since the breakout above 1350 the move the 1580 resistance (2012 lows were resistance) to the holding of support at 1450 to the run to the Tudor Jones target at 1700 to the current pullback fueled by worldwide asset deflation. Wow..so now what? well our view is that when they are done bailing out the worldwide stock & bond markets with currency expansion beyond your wildest dreams that paper currency skepticism & possible inflation (Treasury debt blow off) could bring the bulls back to the market. Reversion rallies have been limited (1560 10 day M/A) and support is 1450-1400 & breakout point 1350. We have blown out speculators leverage players but may have more work to do in the weeks/months ahead….if we break 1300-1200….then deflation won. It was reported an option player bought a spread on June Gold for 10,000 oz looking for 1900 + by expiration..$6.4 mill bet…if 1900+ at exp. = $100 Mill. Good Luck on that one…..Silver really wiped out the longs and is trying to bounce but the business breakdown hurt this industrial metal even more than the Gold. We said the copper had to hold 250 and if not 200-220 you go..where that’s where we’re at…waiting for China to reengage and buy.
Soybeans & others
Commodities on balance beaten down with the economic meltdown…no restaurants open so cattle prices hurt and some California farmers say they are hurting. Corn, Wheat Soybeans all caught a bid this week..as we have stated we felt the planting & growing season may provide some news that could finally get these markets moving above some fairly sturdy resistance.The Vanguard Commodity Strategy Fund has sold off more than 20%+ from it’s highs so read the prospectus if you want to learn more.
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