| TAOST Wrap Week Ended Friday 27 March 2020 |
| Just think... “Wide diversification is only required when investors do not understand what they are doing.”
-- Warren Buffett |
| | Greetings Traders:
A lot to discuss, so let's get at it...
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Topic: Futures Open 27 March 2020
Time: Mar 29, 2020 06:00 PM Eastern Time (US and Canada)
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| Select Index, ETF & Stock Results From Friday 27 March 2020 |
| | In Sum
It was another week of information overload and governments scrambling to try and figure out how to “flatten the curve” regarding the spread of COVID-19. The uncertainty this virus is causing - globally - is at a scale heretofore unseen.
It certainly didn’t feel like it - especially after Friday’s weakness - but all major indices posted strong gains last week, with the Dow rising 12.8% for its biggest one-week gain since 1938, the S&P gaining 10.3% and Nasdaq adding 9%.
S&P 500 10.3%, Nasdaq 9% DJIA 12.8%
The Fed’s “whatever it takes” attitude continued last Monday when it announced a major expansion to its lending programs. It said that the purchases of Treasury and mortgage securities will now be essentially without limit and to those it added commercial mortgage-backed securities. It relaunched the crisis-era Term Asset-Backed Securities Lending Facility (TALF), under which it will lend money to investors to buy securities backed by small business, student and credit-card loans among others. It also moved to support large corporations by establishing facilities that will lend to investment-grade companies and buy high-grade corporate debt and U.S.-listed exchange-traded funds in the investment-grade corporate-bond market (with a max ownership of 20% of any one ETF and 10% of any individual corporate bond).
As a result, the Fed’s balance sheet expanded by more than $500B during the week (nearly twice the largest weekly expansion we saw during the financial crisis in 2008/09). Total assets held by the central bank are now greater than $5 trillion for the first time - equating to nearly 25% of GDP. That said, in comparison, the Bank of Japan holds assets worth more than 100% of the country’s GDP on its balance sheet (including corporate bonds and bond and equity ETFs) so some say the Fed has much more room to go if needed. As if Japan is the monetary model to which to aspire...
On Thursday, the leaders of the G20 held an emergency meeting and declared a commitment to inject over $5 trillion into the global economy and do “whatever it takes” to overcome this coronavirus pandemic.
And on Friday 45 signed a bipartisan $2 trillion economic relief plan to offer assistance to tens of millions of American households affected by COVID-19. The plan includes stimulus payments of up to $1,200 for individuals and $2,400 for married couples (with incomes of up to $75,000 and $150,00 respectively), $500B in funds to help various sectors of the economy affected during this time, $367B in loans to small businesses and $100B for the healthcare system. Given the damage that's happening on the other side, I don't think it will be enough.
The coronavirus outbreak has caused one of the largest collapses in business activity ever recorded. It’s still early days to see if all this stimulus will be enough to help people/ businesses weather the storm and ultimately stabilize the economy. St. Louis Fed President James Bullard expects an unprecedented 50% drop in GDP and sees the unemployment rate hitting 30% in the coming months. This week alone the Labor Department announced a record 3.3 million people filed for jobless claims (the previous weekly recored was 695,000 in 1982). And as bad as that number is, it doesn’t take into account many part-time, self-employed, and gig workers who are also losing work.
The number of infections has now topped 600,000 globally, and efforts to limit people’s movement to stop the spread of the virus is becoming ever more prevalent. The U.S. has now surpassed China and Italy to become the nation with the most confirmed cases (124,000) and New York City accounts for 30,000 of those and growing quickly. The number of new infections is what the market will watch for signs that we're nearing an end.
Next week, the Bureau of Labor Statistics releases its monthly jobs report. Analysts are expecting a loss of about 300,000 jobs for the month of March, but because of the timing of the reporting, the real damage probably doesn’t show up until the April or May reports. |
| | | The S&P500 saw a sharp bounce last week... as did the other major indices. But I think it's going to be short lived... |
| | | CNN Investor Sentiment [Fear & Greed Index] |
| Nice bounce for the week... Expect to see the gauge drop again.
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| | | Ditto the over time view...
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| | - The New York Times worked with epidemiologists to model what would happen to infection, hospitalization and death rates given different lengths of lockdown in the U.S. Turns out that, if 45 "reopens America" by Easter Sunday as he wants to do, the result would be "an explosion of infections, hospitalizations and deaths." Experts recommend extending the lockdown to a full month.
- While U.S. antitrust laws prevent a formal deal, the Texas regulator is considering curtailing output in America’s largest oil-producing state for the first time in decades.
- "The market for commercial real estate mortgage loans in the U.S. stands on the brink of collapse," according to Colony Capital Chairman Tom Barrack, with banks, mortgage REITs and other non-bank lenders now "at a precarious juncture." A meltdown of this magnitude "would have catastrophic follow-on effects across the American economy" if lenders and the government don't take prompt action. From the pages of talking your own book...
- A quarter of Americans who earn more than $150,000 a year don't have a savings account. Fed data shows that 40% of US households would not be able to come up with $400 for an emergency expense. If you've following me for any length of time, you've heard me say this... but it bears repeating.
- The Centers for Disease Control and Prevention has launched an online bot which people can use to decide what to do if they have potential coronavirus symptoms. The hope is the self-checker bot will act as a form of triage for increasingly strained healthcare services, as the number of recorded cases in the US surges past 46,000. Wow.
- S&P Global expects the default rate for high-yield bonds rise to 13% in the next year, more than quadruple the rate at the end of 2019.
- 45 continued to resist calls to use a federal wartime law to mandate the production of medical supplies because he said he is concerned about nationalizing American businesses. Update: I think he did this a little earlier... check the news.
- A new analysis by the hedge fund Bridgewater Associates estimates that American corporate revenue could fall by $4 trillion — yes, trillion — which the report says is “consistent with about two months of significant lockdown and a gradual recovery.”
- So far, some high-frequency data out of China suggest the country's economy is recovering. "Our baseline forecast suggests a meaningful rebound in Q2 and a decent recovery in H2, where we see demand as a bigger challenge than capacity in light of the worsening global outbreak and its cascading effects on asset prices and economic activity,” Barclays economist Jian Chang wrote. Hard to believe but ok...
- The Summer Olympics will be postponed for a year because of the coronavirus pandemic.
- Major U.S. carriers are prepping plans for a potential voluntary shutdown of passenger flights across the U.S. if air traffic controller staffing emergencies continue to crop up or demand falls much further, Dow Jones reports. Also on the table... the federal government could at some point halt all U.S. flights in an effort to deal with the pandemic. Air traffic is already at a minimal level, with the TSA reporting a drop of 80% on Sunday compared to the same day a year ago.
- U.S. Treasury yields on one-, two- and three-month maturities all turned negative late Monday, as investors continued to favor short-term debt that functions like cash.
- Chinese authorities are planning to lift the mass quarantine on the central province of Hubei, where the coronavirus first emerged last December. The news comes days after Hubei reported that new infections dropped to zero (if you can believe the statistics).
- All of India is going on a lockdown. Prime Minister Narendra Modi ordered “a total ban of coming out of your homes” in “every district, every lane, every village” for the next 21 days. It was unclear how people would reach essential services in the world’s second-most populous country.
- California Governor Gavin Newsom announced that four of the five big banks — Citigroup, JPMorgan Chase, U.S. Bank and Wells Fargo — along with almost 200 state-chartered banks and credit unions, had agreed to put off collection mortgage payments for up to 90 days from borrowers who can document they’ve been affected by the crisis.
- Bonds without investment-grade ratings plunged at their fastest pace in history in March. The specter of widespread corporate defaults in the coming months has caused a massive selloff in junk bonds around the world, as many debt-laden companies face the prospect of going weeks or months with virtually no revenue.
- Investors pulled $153 billion out of mutual funds and ETFs for the week ending March 18, the largest outflows ever, data from the Investment Company Institute showed. The outflows were more than eight times higher than the previous week when investors pulled $19 billion from mutual funds and ETFs that included bond, equity, hybrid and commodity funds.
- The ECB said it will not apply its self-imposed purchase limits (capped at 33% of each country's debt) on a €750B bond-buying scheme aimed at combating the coronavirus outbreak. Tensions already erupted into the open in September following Mario Draghi's last easing package, while German critics have repeatedly taken the ECB to court over the purchases.
- The collapse in oil demand will lead to a massive oil glut that not even a supply production freeze or cut from OPEC can rectify, according to Goldman Sachs, which predicts a 14M b/d surplus in Q2. "Any potential agreement between the U.S., Saudi and Russia to freeze or reduce output is too little too late. It would take months to impact inventories globally and would be dwarfed by the current demand losses." The firm sees Brent crude remaining near $20 a barrel next quarter, while West Texas Intermediate oil will likely fall well below that level as storage swells.
- 45 and Xi had a good phone call in which they pledged cooperation in the pandemic fight. "China has been through much & has developed a strong understanding of the Virus. We are working closely together. Much respect!” Trump tweeted after the call.
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| | | | | | Select Economic Announcements: |
| | | As always, make up your own mind and, more important, minimize your risk no matter what you do.
KIS,
The Trader
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