The Stock Market - A daily diary

Good for you , Gamble.. I bet it feels good to have some cash on the sidelines.  I'm sure you'll have opportunities to put that to work in the near future.  

Well , we're done for the week, and I'm sure it sneaked up on a lot of people that the markets are closed for Good Friday.  I'll say it's a bit surprising that the markets traded up on the last day of a long weekend.  Wow, how market sentiment has shifted in recent weeks !    S&P just  had its best week since 1974, though it should have an asterisk at only 4 trading days, but we'll take it !  

Very good interview today on CNBC.  I wish the full interview were available, but the guy speaks about how the Fed would have been better served to pull everyone's W-2 from last year, and given them a year of income due to the pandemic.  The business of the Fed injecting lots of money into the stock & bond markets distorts prices, and the money doesn't filter down to where it is needed most in these times... In the people's hands.    That was his main point in the interview..   (I usually don't prop up these guys, but he speaks with a lot of clarity, and he's not a stock picker/analyst that has a narrow perspective). 

 I have to agree it might have been a better choice for the Fed if it could have been done this quickly and efficiently.  As it stands, there is no reality right now in the markets, because of the unprecedented amounts of money being thrown at it from the Fed.  He speaks openly about letting the airlines and "zombie companies" to fail in the interview, and openly (shockingly) saying people like him (hedge funds, VCs, etc.) don't need the money.  Send the money to where it is needed most.  

https://www.cnbc.com/2020/04/09/chamath-palihapitiya-us-needs-to-let-hedge-funds-billionaires-fail.html

OPEC+ just agreed to cut 10mbpd from the market for 2 months...    What a crazy development on a day that oil was up over +10% , only to give it up and fall -7.5%  on the day !!

Yeah the FED does not care about the consumer at all...their only care is the financial markets and the banks/institutions. For sure it would have been more efficient to give money to the end consumer but that would not save the margin calls and loans going south and the whole financial universe would correct as it should.

No the FED first tried to dip its toe into the market and give a freebie to banks and governments, that was not enough because the bad loans sink deep into the ugly part of the loan market so they had to go further and further and further with more and more and more money being thrown at the problem. The FED has gone so far off the path that it is almost as if they dont even care about their balance sheet or the precedence they are making by doing this. Every single time the FED keeps supporting the market, THAT becomes the standard and even though for the last six or seven years and longer there was no need for their support and the low rate environment they kept doing it anyway because the market is all they care about and any time they suggested reducing and returning to normalicy the markets flipped out and stopped them from doing so.

This road they are going down is even further than Japan has gone and it will take twenty years to undo this and barring some inflationary shock, rates will never be higher for decades. I am not suggesting increasing their book means inflation because it does not..currency values are a relative nature and unless the USD is alone in its actions then it will never go down remotely how the goofball gold bugs think it will. All other major economies are as bad or worse than ours with regards to central bank decisions so the USD will not implode.

Wall. Your last point is one I have been making here since this started. The USD is what everyone will want to be because everywhere else is worse. It's a sad state of affairs indeed. 

Rush. 10mbpd is NOTHING. All it does is avoid finding storage space for it. We are at record oversupply levels. Nothing solves the oil problem except getting the world moving again. Then this situation can at least help itself with consumption. 

Interesting markets this week. I'm baffled.

Wall, I had a feeling what I'd written about would strike a chord with you.   You've been pretty consistent in your criticism of the Fed , etc. and where the stock market should be if we didn't have all this Fed interference.  That guy I listened to on CNBC struck a similar vein , so I get where you are coming from.    What is scary is what the Fed is doing now is many times worse than what they did in the financial crisis of '08, and you even eluded to this in your response in them going off the path.   So we have backing of mortgage backed securities, purchases in the investment grade bond market, backing of banks, and now high yield (junk bond) market just on Friday.  Wow, talk about market distortion ?!  How is an investor supposed to know how to price an underlying stock or bond with so much interference/intervention.  I get what the Fed is doing to be the backstop of last resort, but wow, how do we ever disentangle ourselves from this mess !?  Giving a monthly check to each working individual might have been a better option, and would have helped eliminate the distortion of prices that we will see for several years into the future (several years if we're lucky). 

In some ways we could see the writing on the wall.  When the financial crisis hit in '08, interest rates were close to 5.5%, brought down to zero quickly, then non-traditional QE measures were introduced.  This time around, we started at a very low 1.5% if memory serves correct, brought down to zero quickly, and MUCH more non-traditional measures used to stem the crisis. 

I got you , but I'll take a win wherever I can get it.  At least we can get some help on the supply side of things if they can actually stick to this agreement.    The demand side of things is just as bad as trying to predict what earnings will be for a company this year.  Good luck.  Lol.  

In any event, Oil futures are looking good here before  Monday, so maybe we can build on some recent good performance in the oil patch.. 

Ive been beating down the FED for a decade on here, but it surely is an avalanche that nobody can stop. The FED cares only about the stock market and the banks but what is odd is how the hated Greenspam was the actual opposite. He was the last and only FED dope that tried to fight the stock market and said that valuations were lofty and he was attributed to the top of 2000 with his comments. Not a peep since from the others who followed him and in fact these FED guys are constantly pumping the market, its like a part of their job description to constantly come out and support the stock market. I dont get it. Valuations and ratios are so out of control and have been since 2010 or so and are far far worse than those 'Spam was yammering about but these guys say nothing. Its almost like the administration is dictating how these guys are being told they are to pump the market in public or they will lose their spots in the FED org chart...makes no sense.

Think about it though, if bond yields were 5% what would that do to stock valuations and how corps financed their buybacks and dividends to pump their stock price? If yields were 5% then corp borrowing rates would have to be higher, especially since high yield would be higher than bond yields and so the financial reason to float debt to reduce share float would not make sense..and thus the stock market would likely be half or what it is...especially given this mess right now. This virus mess is a shock that is similar to others we faced like in 2008 but with the FED flooring the market as they are and rates being so low already the impact has been so much less.

Oil is interesting, it opened at 22 today then bounced back and is 24...lots of action for how little it has been open tonight. I wish Trump cared less about the stock market and more about the lives of the citizens of this country...if he had not resisted taking action we would not be where we are right now. No question his focus is the markets and the way he called this a hoax and a ploy from the dems and ignored the loud warnings is abhorrent. And if he opens things back up soon it will be the end of his career,  we will relapse and he will foot 100% of the blame as he should.

So, the market (S&P500) has rocketed higher by almost 24% in just about 3 weeks.  Last week was a big advance with the S&P having its best week in almost 50 years.  This occurred on the same week our medical experts were saying in the week prior this was going to be our toughest week yet, our Pearl Harbor, our 9/11, etc. for a staggering amount of deaths. .. I almost get the impression the investment community was trying to be "clever", betting this was going to be the worst of the worst,  and buying stocks on the assumption that this was it..  

In reality as we've talked about, there are so many UNKNOWNs , it's not even funny.  We have both a medical crisis and an economic crisis on our hands, and solving the first one doesn't guarantee a quick recover of the second.

Stock futures are down at the moment, but if Monday doesn't end up being a big down day, I might plan on raising just a little cash for some later use.  I still think we'll retest the bottoms.  

For some context, markets fell -50% in the dot com boom, -56% in the financial crisis, and we are to believe that -34% will be our bear market decline in the China Virus Crisis ?  This doesn't pass the eye test on so many different levels.  These market participants are clapping like seals at the unconstrained Fed intervention and peak cases in NY (they hope).  I'm sorry , it just won't be that simple IMHO.  

 You are comparing Coronavirus to those other two financially?  This is because you think they would automatically have similar affects on the markets?

Why is that such  a radical position to you ?  Have you witnessed the long lines for food banks, unemployment figures,  etc .  The size and scale of the damage so far is unprecedented, .....  and still being written .   I hope I'm wrong , but you do have to pay attention to what is going on around you.   Context matters.

Not saying it is a ‘radical position’ at all.  Just surprised that you almost take it for granted that it will fall that much more. 

I think a good case can be made for the opposite viewpoint.  

I wrote a very long article the other day expressing that sentiment.  Of course, all articles and opinions like that have qualifiers, caveats, and a lot of what-ifs.  

This is mostly an exogenous recession.  Usually deflating of bubbles and getting rid of junk.  So far, overvalued equities and long-trending decliners have been hardest hit. 

Normally, recessions are endogenous.  In other words, caused by inside issues with the economy itself.  This is striking sectors based on the ability to generate profits while in lockdown mode — which is not related to past valuations or longterm outlooks. 

Dividend futures show half of what was expected just 6 months ago.  Larger crashes have had far smaller dividend declines. Two main reasons are:  pandemic is already showing much steeper decline in the short term cash flows than it is in hurting longterm prospects and regulations and bailout conditions look to have tighter restrictions on dividends. 

The two questions for stocks are how long and how deep the shutdown will be and what the economy looks like after the shutdown.  Dividend outlook relate to the former, but longterm investors will focus on the latter.  Dividend picture could clear up in a hurry and futures predict very sharp growth afterwards.  Usually stocks go down quickly and up slowly, but the dividend futures make this look as though the recovery could be as quick as the crash.  

Wars are the most similar events to this crash and, of course, the oil crisis. Since, this did not hit bubbles or senescent stocks disproportionately they may actually survive this.  

Obviously, the governmental intervention is/is going to be unprecedented.  

This is barely a top 10 crash since 1900.  But as of yet the actions to Great Depression were bigger as % of GDP — and that was really way after the crash (3-4 years).  

‘...it’s true people’s lives might be ruined by crashes, and death rates go up while in recessions, the alternative to the boom-and-bust appears to be stagnation, not increasing prosperity.  Dynamic, free economies are more disruptive than planned ones, but lead to longer life expectancies and richer lives,’

I think he is mostly correct.  People are also seeing the numbers predicted initially of this pandemic starting to be way lower — thankfully.  So, people are hopeful and the market will get back to the same things that were driving it up, because those things were not what caused the market to crash.  

There are for sure uncertainties — when will pandemic end and how long will shutdown suppress the economy.  

But a lot of indicators are starting to show that a recovery has started. 

“The severe indiscriminate selling we saw last week has abated,” he said, noting that nearly every asset class, including gold, UST bonds and stocks were being sold off.  

Another potential sign is the currency markets.  US:DXY declining. Fed has been aggressively making moves to lower cost of borrowing and increasing liquidity. 

Other things considered:  contraction in stocks trading at 52 week lows, decline in US:VIX, global markets looking better and commodity XX:BCOM all seem to be indicating the worst is over. 

Naturally, things could go bad again if things look to go opposite of indicators for sure. 

“...market went down quicker and should rebound quicker than the actual economy, but the opening up of the economy is going to take time...”

There is a lot of indication that the markets have taken into account — I would not say dismissed — some of the expected things that are going to come with the shutdown.  I think a lot of big investors expect the same things that were moving the economy to continue moving it. 

Some big names are pretty positive.  For example, Howard Marks says he is out buying. Carl Icahn has said he thinks markets could go down more, but he is buying. 

Most seem to feel that however painful this felt, it could have been much, much worse. 

Vanguard have said they are seeing massive inflows back into its equity ETFs. But BlackRock and State Street say they see more outflows.  But the speculation there is they are more used by short term traders, whereas, Vanguard is mainly longterm traders.  

Latest survey conducted by retail investors and savers show them being very bullish on the market. 

So, a lot of people, professional and casual, feel the market will come back soon and strong.  

If the crash had been more endemic to economic reasons — then I would be more inclined to see it dip more.

I am just of the notion that this pandemic was overblown and the numbers look better than predicted.  I think the investors feel this way.

I also think we were for sure due a correction and this was just a reason for the market to correct itself.

If the shutdown continues or the pandemic gets worse — of course things could go bad and stay bad for the markets.  I just see it the other way right now for a lot of reasons.  Whereas, I only see one reason for the market to go down.  But I admit that is a good reason — if it happens.  But I am hoping and investing that it won’t happen.

But I can see why you feel the way you do — the media is constantly refocusing you that way, even if you try to ignore them.  

But if it does go lower — stocks will just be on sale more. 

I'll start by saying Markets are supposed to be a forward looking indicator based on expected earnings for companies.  And The World is facing an  unprecedented amount of unknowns, not only on the medical side, but on the economic side.  This is not a time to be “chicken little.”  It is a time to reflect how far we’ve come in 3 weeks, while recognizing we haven’t addressed any of the unknowns.  The only thing we’ve addressed is a staggering amount of Fed intervention, and believe the money will filter down to the individuals in a timely manner.  And I’m sorry, a $1,200 check covers what % of an individual’s income ?  The response by our government is not going to where it is needed most.   This response so far in our markets is as though these people that are unemployed will be made whole again... and soon .  I just see lots of problems and fits and starts that will reflect perhaps our toughest days still lie ahead.  

And Whether this is an exogenous recession or not shouldn’t be the argument on how the recovery takes place.  I agree this isn’t your typical self-inflicted bear market based on typical economic excesses.  But exogenous or not , we have had a severe disruption to the global economy, and no one knows how soon or efficiently the markets will function once these lockdown measures are lifted.  How soon will people mingle in large gatherings ? How soon will workers be able to find jobs?  How soon will we find effective treatments (separate from a vaccine) for the Chinese Virus ?   How soon and effective will tracking/testing devices be made available to people?    Remember, we are not facing only an economic crisis, we are also facing a medical crisis.    That again is unprecedented in our lifetimes.  

We’ve already gone over these last two items in this thread.  To me, this is the holy grail as to when  we as a society start to begin some semblance of economic activity again… (1) Testing/Tracking of individuals, and (2) an effective treatment for those that get the Chinese Virus. 

Too many people are oversimplifying how we get ourselves out of this mess, and to believe the worst is behind us may be bit premature.  That is my argument.  UNPRECEDENTED & UNKNOWNS.  Those  are two words I keep coming back to … and that is not a good combination.  There are just TOO Many unknowns (and we haven’t learned anything more since market bottom in March , aside from the size of Fed’s Bazooka) for the market to have spiked the way it has the last 3 weeks.    Friday might have been  a good day to raise some cash (not all), but some… Time will tell..

To the first highlighted area, we did a fair amount of discussing this topic already.  People were WAAAY overleveraged in this market, and it took time for all these people to "unwind" all of their positions.  This included bitcoin, too..  

To inflows/outflows, the general public is usually quite terrible with  fund flows, and is usually a good contrarian indicator.  It will be interesting to see in the months ahead what this activity was in March & April.  

I think this last hightlighted area is where we just fundamentally disagree.   You are of the notion that this pandemic is overblown... and I am not... 

Rush. You are understanding why I went to 20% cash last week. I think it is prudent to make decisions based on what you personally believe. Having some cash is never a bad thing....especially now.

You may very well be right.  But as I pointed out many professionals feel the opposite.  Of course, as I mentioned, yes, there are always qualifiers with the unknown.  But as far as the markets I really think the keen folks are keying in.  

Yes some stocks are going to be hit very hard. But look at top 5 or so stocks — they are barely down YTD maybe 5% or so.  

At this point the UNKNOWNS simply are not scaring the investors.  Yes — they may get scared later.  But it is always the small guys that get scared.  They are the same guys that get out too late and get in too late.   That is just the way it is.  My point is, if you feel that the market is going to go way down more AND you wait on that to settle out — you may not ever get there.  Whether you like Buffet or not, he has a good point about being greedy when everyone else is scared.  

The inflows/outflows are the big money guys — not the average Joe.  There is no incentive for them to be on the sidelines — when, to them, there are good deals to be had.  

I agree — if the pandemic numbers had been what they originally predicted, sure it would have had a larger effect on the markets.  

You are correct also that the next couple of months will be telling.  But savvy guys already know that the numbers are going to be bad.  But they also realize that there are some solid places in the market to be.  I referenced a lot of that, in part, above. 

I think a key thing you point out is that this is a medical crisis — I am not sure this is going to pressure the market enough, for long enough.  Just because it is overhyped and investors realize this.  Yes, the market was due a correction and this pandemic for sure helped do that.  We shall see how the unemployment plays out.  I just don’t see how we can allow the shutdown to continue.  

But if we scare the government into forcing folks to stay home and not work — then all bets are off.

I know what you said last week.  I never understand why people insist on doing this.  

I get that your particular circumstances are different — as you explained — maybe you stand to be more concerned. 

But the average person should have a good emergency stash saved up.  The rest — that he has invested — he should not be pulling out when the market is down (or he thinks it is going down).  Why would a person do this, unless they have emergency that shows up?  If you have your monthly spending set up and plenty already set asides for emergencies — why take money that will potentially growth, with compound interest, and put into cash?  

For the reasoning to be sound to me, you have to see a BETTER place to put the money for investment.  Like depressed real estate, or whatever.  

Otherwise, what are you going to do with the cash?  You don’t need it — you should only be investing what you don’t need to normally live on plus an emergency.  

So, what is your plan?  Does it just make you feel more comfortable, knowing you have it on hand?

I think you should run the numbers on this and you would be surprised at what you find out.  

I get the feeling that you certainly don’t need the extra money on hand.  

Rush — some things you never forget.  I remember years ago a guy writing more or less the same thing after 2007-8-9 and when the QE was being implemented.  I looked and found the article, or what I think was most of it. I don’t expect you to read the whole article. So, I put some of the excerpts here.  Read them when you have time and tell me what you think?  It is always amazing to me, if you go back and look at any of the economic recessions, panics, etc. — you can almost always predict what each side will say.  Sometimes, a person will be right.  But wow — sometimes — can be flat-out wrong. 

Why the Market Is Not a Forward Looking Indicator

I’m sure there are plenty of investors who will scoff at the thesis of this article after reading the title. After all, in a free market economy the equity markets are supposed to reflect investors’ perception of future earnings. However, looking back over the past decade or so, it seems as if this has rarely been the case. Rather, equity markets are mean-reverting mechanisms that react to investors’ irrational levels of optimism or pessimism. Were markets correctly pricing future earnings in March 2000 or October 2007? What about in March of 2009? What about now?

Personally, my favorite take on QE2 was Jim Cramer’s reckless analysis on Thursday. My two favorite comments were “We're investing to make money, not make predictions about the economy.” and “If you can buy stocks that rally like they did today, because of this Bernanke plan, you can also sell those stocks after they've rallied.” Both of these comments are completely absurd. His audience is mostly amateur investors and frankly this is horrible advice.

My first concern is with the term “wealth effect”. It is not wealth creation. Rather, the prices of the assets you own increase because they are worth less in dollar terms. The hope that this will fool investors or businesses discredits their intelligence. Certainly major corporations are not this stupid. Most of them operate in many countries and are well aware of currency effects. Even individual investors should be somewhat aware of the inverse relationship between equities and the dollar, they have mentioned it on CNBC everyday for the last five months. If anything, the Fed may be able to fool amateur investors who take a more passive approach. However, this seems counterproductive to the necessary deleveraging most Americans are still going through.

After watching the markets hit two-year highs Friday, I decided to look a little deeper into the inverse relationship between equities and the dollar. What I found was fairly surprising. On June 9th, 2010, the Dollar Index futures hit a high of $88.91. They closed Friday at a low of $76.76. In the past five months, the price has dropped 13.7%. Over that same time period, the S&P 500 has moved from a close of $1055.69 on June 9th to a high of $1225.85. The rise in the S&P 500 over the same time period was 16.1%, pretty close to the decrease in the dollar. I decided to calculate what the S&P 500 would be worth today, based on the June 9th valuation of the dollar. The answer? $1057.91, only 0.002% higherthan 5 months ago when the recent rally began. This helps to emphasize my point that the “wealth effect” is merely an illusion and a lousy one at that. (I should note this is rough math.

My second concern with further quantitative easing actually pertains to its effect on the Americans who likely have no understanding of what the Fed is doing – low-income, underemployed, and unemployed Americans. This group of Americans is most accurately represented by the real unemployment rate, which most experts peg between 15% and 20%. For these individuals, the “wealth effect” is irrelevant. The majority are either dependent on unemployment benefits or living paycheck-to-paycheck.

Times are especially tough for this segment of the American population and those problems are about to be exacerbated by the rapid devaluation of the dollar. As I said earlier, a weaker dollar means dollar-denominated asset prices will increase on a relative basis. This increase includes the price of commodities like gas, food, clothing, etc.

Here is my understanding of the situation and why I think the Fed is playing a very dangerous game. The Fed is printing money to increase asset prices in the hope that people spend money they don’t really have to create jobs. While these jobs would be based on artificial demand, the hope is that lighting a spark would get the economy moving in the right direction and the demand will eventually fill in as people with new jobs begin to spend again. In the meantime, the Fed is racing rapidly increasing commodity prices that will eventually be passed on to the consumer. In the end, it all comes down to timing. In my opinion, the Fed is taking a very sizable risk in the hopes it can time this spark correctly. If it fails, as a nation we will have borrowed another $600 billion and will have little to show for it.

After watching the events of this past week unfold, I have turned decidedly bearish on the markets. In the past few days I have heard far too many comparisons to the 2000 tech bubble. Investors’ attitude seems to be if it keeps going up, why not buy it and sell at the top to make a quick buck? People are choosing to ignore the stagnant unemployment rate, the uptick in unemployment claims, inflation that is trailing Fed targets, weak GDP growth, and a host of other mediocre economic data. There are plenty of cliché sayings that seem appropriate right now, but my favorite is Warren Buffett’s classic idiom “be greedy when others are fearful and fearful when others are greedy”.

I think that is the gist of it.  But you can certainly see the parallels.  But as you say there are some things that are different — just like there always are.  Nothing is in a vacuum. Of course, we have been through flu outbreaks before and unemployment before.  But if the shutdown continues on — we may all have other things to worry about besides which direction the market is headed.  

Raiders. As bad as it was in 2008-9, for every industry outside of the banking sector, one could reasonably assign a forward p/e with a reliable model for the E component. I don't care what anyone says or predicts about the next two quarters because they can not possible know what that E component will be. Well....I suppose we can give the cruise industry a zero and airlines zero plus x so they will be slightly more predictable in a bad way, but 90% of the economy has an uncertain forward E component now more than in any previous bear market. 

This is the reason that I am VERY skeptical that the lows are in. This is the reason I went to 20% cash. No, I don't need the money. I am being a capitalist and trying to time the market with 20% of my portfolio. I might even buy the other 99% of the 1% of one BTC that I experimented with last month. I would love to have you try to talk me into it....or out of it.