| TAOST Wrap Week Ended Friday 3 April 2020 |
| Just think... “Success in life is founded upon attention to the small things rather than to the large things; to the every day things nearest to us rather than to the things that are remote and uncommon.”
-- Booker T. Washington |
| | Greetings Traders:
Congratulations on making it through another week. I'm not given to grandiose proclamations, but I do want you guys to think about something.
I've been through several downturns in my market career at this point... I wasn't involved in the markets in 1987, but I did watch closely with great interest; 1998 when I thought Wall Street was going to rescind job offers [mine included]; 2000; 2001; 2008/9.
What did all of those downturns have in common?
It seemed the market would never go up again.
But it did.
And it will again this time... eventually. |
| Select Index, ETF & Stock Results From Friday 3 April 2020 |
| | The Story
S&P 500 -2%, Nasdaq -1.7% It may seem trivial to discuss the outlook for markets at a time when an increasing number of people around the world are coping with the coronavirus pandemic. But just as it was during the days that immediately followed the events of market collapses in 1987, 1998, 2000, 2001, and 2008/9, we must remain mindful of our long-term financial security and be prepared to take steps to secure said security. And it appears that the coming weeks in April may be very tough for markets generally and the U.S. stock market in particular.
No sooner did the new quarter get underway on the first trading day in April than the five-day respite that some were declaring "the new bull market" quickly ended with a thud. But in reality, the fate of the rally was already largely decided the previous Thursday, when the bounce peaked at 2637 and suddenly ran out of gas. The S&P 500 Index has been rolling over ever since.
Highlighting how weak the stock market remains today, the S&P 500 Index has now definitively stalled at a major test. This alone is a stark contrast to the resilient bull that so many investors came to know and love throughout the decade long post-crisis period. When the S&P 500 arrived last Thursday before last at its short-term 20-day moving average resistance, the rally abruptly failed. And after three days of fighting the good fight to hold onto gains, stocks on Wednesday appeared to have given it up to the downside with the first trading day of 2020 Q2.
The market remains understandably gripped by fear. It was a promising development back on Friday, March 20, when the VIX finally broke its staggering, Great Financial Crisis-reminiscent uptrend. But instead of descending back lower, the VIX has remained stubbornly elevated ever since. Yes, it’s current reading of 57.06 is discernibly better than its March 18 peak of 85.47, but we should not forget that we’ve had a sustainable reading over 50 only once before in the past three decades. Thus, the fact that we are still lingering at these historically high levels suggests, if anything, that U.S. stocks may be reloading for another sharp move to the downside in the coming days [see video].
By historical comparison, this does not look like the “V”-shaped bounce we saw after Christmas Eve in Q4 2018 and Q1 2019, when the VIX quickly descended back to the downside. Instead, what we're seeing today resembles the point in late October 2008 when a strong, nearly +20% bounce over six trading days sent the VIX back briefly below 50 before stocks rolled back over and plunged to new lows by mid-November.
I expect stocks to fall to lower lows in the coming weeks. The S&P 500 bottomed at 2191 last Monday, March 23. Using the progression of lower lows on the S&P 500 dating back to January 2018, the benchmark index might be expected to fall as far as below 2100 in the near term on any new push to the downside.
What about "fighting the Fed" you ask? I'd never ignore the fact that the Fed has not only unloaded its entire policy toolbox, but has effectively emptied out an entire hardware store’s worth of responses to this crisis. If it’s a question of “go big or go home”, the Fed has "gone huge". They may not technically be “all in”, as it could conceivably expand its balance sheet to infinity and beyond (not sure what the US dollar would look like at that point, but they are unbounded by rule or, apparently, reason)... They're definitely doing their best“whatever it takes” act. Nonetheless, it is important to remember that they are doing so not to attempt to spark a sustained economic recovery like they tried so many times in vain during the post crisis period. Instead, they are engaged in a desperate fight to buy some time for fiscal policy makers to act and for the virus to start to subside so that the economy can once again be unlocked.
It is also worth remembering that the Fed does not always win, at least not right away. For example, it took more than two years after the Fed started slashing interest rates during the bursting of the tech bubble in January 2001 before the stock market reached its last bottom in March 2003. And the stock market hadn’t even reached its final peak yet when the Fed started cutting interest rates in September 2008, yet it took a year and a half before stocks reached their final lows in March 2009.
Indeed, the monetary policy genie is out of the bottle. Now that the Fed is buying securities like munis and corporate bonds, anticipate that they will now be expected to always buy securities like munis and corporate bonds forever more (or until the current fiat currency regime comes to an end). But this time, and at least for the time being, the challenges remain bigger for the market than anything the Fed can do.
We’re still not truly doing “whatever it takes” by the way... The Fed is doing “whatever it takes”. And I would argue that fiscal policy makers in Washington are also doing some form of “whatever it takes”.
Unfortunately, one more important “whatever it takes” is still missing that is critically important in finally seeing us through this crisis. What’s missing? We still do not have a coordinated national “stay at home” response to the COVID-19 crisis. Yes... madness I agree.
Instead, states and municipalities have been left to make these decisions on their own, with vastly different policies and time frames across the country. As of April 1, thirty-seven states now have a state-wide “stay at home” order. This is up from nine roughly one week ago. Another eight states, including Missouri, Pennsylvania, and Texas, have “stay at home” orders in parts of the state. And five states still have no restrictions in place at this time. This is a problem, as we the people are effectively doing “some of what it takes”, but we’re still not doing “whatever it takes”. Just like the Fed had to go “unlimited QE plus” and Washington had to go “$2 trillion plus with more to come”, we will need to go “stay at home” nationally before it’s all said and done. And when I say “stay at home”, I mean really “stay at home” and not “stay at home except for going to the park to hang out with friends or play pick-up basketball on a nice spring day.”
Don’t get me wrong. I’m not saying that the “stay at home” policy response is an easy one. It is economically and psychologically crushing in many ways. And it’s a heck of a lot harder to do in the short term than the Fed hitting CTRL+P on the printing presses and Washington blowing out the deficit. But the longer we have different parts of the country coming to this “stay at home” decision on an ad hoc basis, and the longer we have certain parts of the country trying to continue as if everything is normal, the longer we will risk the ongoing spread of the virus, the longer it will take to finally start “flattening the curve”, and the greater the chance there is that we will face second-wave cases once “stay at home” orders are finally lifted at some point in the future. Trust me... With 2 sub teenage sons, I definitely don't say this lightly.
All of these consequences will prolong the negative impacts on the U.S. stock market in the days, weeks, and months ahead. In fact, it is the stuff that prolonged bear markets are made of.
Before closing, it is worthwhile to touch on the positive, as there are a number of good reasons for optimism on which investors will want to increasingly focus as this episode continues to unfold.
First, we will overcome this crisis. The rate of increase in new active cases in this country will eventually start to flatten. The number of new cases will subsequently start to decline. Eventually we will begin to see the light at the end of the tunnel like a number of other countries around the world are starting to today. The hardship that we are experiencing right now is tragic, but it fosters resilience and builds character. And resilience and character are things that have been sorely lacking across financial markets for a long time now.
Also, we will soon know a lot more than we do now. The true negative impact on the economy and the financial health of corporations is unimaginable right now. And as we progress through the month of April, the economic reports and corporate earnings announcement are going to undoubtedly be absolutely horrendous.
But over the next few tough weeks, what is currently unimaginable will increasingly become more conceivable. In short, we soon will start to have some data to work with to begin to understand the true impact of this crisis. Since we already know the data is going to be really bad, almost nothing should be shocking to investors outside of the periodic “exploring strategic alternatives” corporate announcement. But as we increasingly get this really bad data in hand, investors will have something to model and better understand the path we are actually on. And any lessening of uncertainty and increased visibility, even if it’s bad news, is dramatically better than the still largely unknown we are blindly sailing in right now. This is the stuff of eventual market bottoms.
Here's the bottom line... Expect lower lows in U.S. stocks in the coming weeks. And prepare for the fact that we are likely at the early stages of this new bear market episode that may continue for the coming months, if not years, before we reach a final bottom. We will overcome this crisis, but it is likely going to take a good deal of time before it’s all said and done.
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| | | Is the bounce all bounced out? We'll find out this week. |
| | DJI -- Dow Jones Industrial Average |
| | The DJIA looks unlikely to make it up to TAOST Magnet Zone |
| | | CNN Investor Sentiment [Fear & Greed Index] |
| I suspect this time next week we'll be lower again.
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| | | Time to retest the lows...
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| | Other Market Internals addressed in video below...
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| | - 45 said Tuesday that coronavirus deaths in the country could reach 240,000 and warned of "two very, very painful weeks" to come.
- A new study by Morgan Stanley estimates the U.S. deficit will total at least $3.7T in calendar year 2020 and an additional $3T in 2021, financed by the sale of Treasurys, largely to the Federal Reserve. If the economy shrinks this year, the fiscal deficit relative to the size of the economy could even approach 15% to 20% (those numbers haven't been seen since WWII).
- Global corporate bond issuance by some of the world's largest "investment grade" companies has surged to $244 billion so far in March—the largest move since a record sale of $252 billion last September. Those include companies from Berkshire Hathaway to Disney and Pfizer, and those issuances were picking up pace last week after massive government stimulus was unveiled.
- Mortgage firms are bracing for a wave of missed payments starting April 1, with an estimated $20B in monthly retail real estate loans due as early as this week. Many retailers and restaurants have already said they are not going to pay their April rents, which in turn poses a threat to the $3T commercial mortgage market. The Mortgage Bankers Association also warned Sunday that the U.S. housing market is "in danger of large-scale disruption" as lenders face margin calls due to the Fed's recent actions.
- An estimated $200 billion of emerging-market debt owed to China has gone unreported in official statistics in recent years. That hidden pile of debt threatens dozens of emerging-market countries as the global economy stalls and commodity prices tumble. The money is upending assumptions made by yield-hungry investors who have poured roughly $2 trillion into risky emerging markets over the past decade. When the tide goes out...
- Venture capital-backed startups will become eligible for some of the $350 billion in small business loans being guaranteed by the federal government, House Minority Leader Kevin McCarthy (R-Calif.) told the Axios Pro Rata Podcast on Thursday.
- OPEC is set to convene an emergency meeting. OPEC officials had called for a meeting on Monday to discuss global supply cuts, but discord between Saudi Arabia and Russia and a lack of commitment from U.S. companies about output cuts led to a delay. The group is now set for a virtual meeting on Thursday.
- Automakers will now only need to increase fuel economy by about 1.5 percent year-over-year, to achieve 40 miles per gallon (mpg) on average across their entire fleets by 2026. Currently, car companies have to improve fuel economy by about 5 percent year-over-year, to achieve 54 mpg on average by 2025. One way automakers could reach such ambitious fuel economy targets was by building electric, gasoline-hybrid, hydrogen fuel-cell, and other zero-emission vehicles. It is unclear if automakers will shift focus with 45’s rollback on emissions standards
- The Chinese government has embarked on a highly publicized campaign to provide vital medical supplies to European countries as they fight coronavirus outbreaks within their borders.
- China said manufacturing activity returned to expansion in March, with its official metric rising to 52.0. Economists had expected a reading of 45.0 after hitting a record low of 35.7 in February. If you believe this, I have some great untapped real estate i can sell you in South Florida.
- The average analyst forecast is calling for a 10 percent year-over-year decline for S&P 500 companies in the second quarter, according to FactSet. This would be the first double-digit percentage fall in earnings since 2009. At the start of the year, analysts thought earnings would grow 6 percent this quarter.
- Oil prices climbed over 30% on Thursday as traders were responding to 45's comments that Russia and Saudi Arabia could soon mend fences on oil supply policy.
- The SEC is giving public companies an extension on delivering their earnings, in a season that is "going to be anything but typical," according to Chairman Jay Clayton. Even with the extra time, the reports are likely to be unclear, with many companies opting to withdraw their guidance due to coronavirus uncertainty. Analysts are expecting S&P 500 earnings growth to decline 5.2% in Q1, according to FactSet, marking the largest year-over-year decline since the first quarter of 2016.
- Lenders will be able to exempt any holding in U.S. Treasury debt or deposits at the Fed from their calculations of supplementary leverage ratio, or SLR, a leverage restriction imposed on the largest U.S. banks. The move would help ease strains in the Treasury market, encourage lending and will stay in place until March 31, 2021. The SLR, which applies to institutions with more than $250B in assets, was put in place after the 2008 financial crisis that saw banks nearly collapse after a crisis in mortgage lending.
- The FBI processed a one-month record 3.7 million gun background checks — a figure that approximates gun sales. Last month included five of the top 10 days for background checks since the start of the National Instant Criminal Background Check System (NICS) in 1998 — 22 years ago.
- The financial crisis of 2008 brought huge waves of high profile bankruptcies—and the fall-out from coronavirus could be even worse. Across the U.S., bankruptcy lawyers are preparing for an "onslaught", and with government bailouts only helping some businesses, a better-prepared bankruptcy system may be the best option many companies have.
- Moody's Investors Service has lowered its outlook on U.S. corporate debt from stable to negative, saying that a coronavirus recession will result in rising default rates. "Government support will cushion the blow for some companies, but it is unlikely to prevent distress at businesses with less certain long-term viability," wrote Senior Credit Officer Edmond DeForest. The situation is especially troubling as non-financial corporate debt totaled $6.6T at the end of 2019, a 78% increase since the Great Recession ended in mid-2009.
- An international poll of more than 6,000 doctors released Thursday found that the antimalarial drug hydroxychloroquine was the most highly rated treatment for the novel coronavirus.
- On Friday, America launched its $350 billion bailout for small businesses, and already there is widespread skepticism that the program will run smoothly or be large enough to meet demand.
- Alcohol sales were up 55% in the week ending March 21, according to Nielsen, which measures consumer markets in addition to media. Spirits were up 75%, followed by wine up 66% and beer up 42%. Online alcohol sales were up 243%. I'm shocked... Truly...
- Gaming has boomed Twitch, Mixer, Caffeine and Discord, all new-age live-stream gaming platforms, posted their best revenue-generating month in March, according to Apptopia data.
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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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