"Patience is the companion of wisdom"
- Augustine of Hippo
You Know The Feeling
That awful feeling. For some, its that millisecond right after getting hit by a car. You're in the air, well above the vehicle, the driver's face horrified. You have no idea if you're injured, but you are about to find out. For others, it's that second or two just after being hit out on a swim, trying to convince your brain that it had to be driftwood, but where is the driftwood? How quickly can I make the shoreline? Still, for others, it may just be not knowing how to prepare for something outside of personal experience. Uncertainty. How awful?
President Trump addressed the nation on Wednesday evening. Judging by overnight market behavior, sentiment has not improved. Some of what we discussed in Market Recon on Wednesday morning was in the address in one way or another. My thought might be that we need to see a bit more aggression. The president did announce a 30 day ban on travel from most of Europe into the U.S. that will begin at 23:59 (ET?) this Friday night. The president stated that the IRS would be instructed to push out the traditional April 15th tax deadline, that the Small Business Administration would offer low interest loans to businesses faced with Covid-19 related disruption.
In addition, President Trump indicated that he would again ask Congress to get behind payroll tax relief, and that insurers had agreed to waive co-payments for treatment of this virus. Do any of those actions help the public in real time? I do think that the bridge loans will help keep people employed for longer. Payroll tax relief would also help there, but as it would exacerbate the national fiscal imbalance, is running into opposition from both sides of the legislative aisle.
The president did mention taking action that workers who are impacted by this virus either as patient or caregiver, could stay out of the workplace without facing immediate financial hardship. Detail was not offered beyond the fact that Congress would have to get on board. I find it difficult to imagine that any politician wishing to be re-elected would oppose such a measure.
On That Note
Later on Wednesday evening, the U.S. State Department issued a Level 3 Global Health Advisory. What this does is basically urge all Americans to avoid traveling abroad... to any other nation, without taking it to the level of an official ban. State is basically telling travelers that they could run into restrictions, limitations, and/or quarantines anywhere at any time. By the way, a total ban on cross-border travel is level 4.
Garryowen In Glory
For weeks now, conferences and trade shows have been either cancelled or postponed. Then it started to seep into the entertainment industry. Music festivals faded away. Concert tickets for popular artists started to show up on websites that resell such items for just a tiny fraction of face value.
Then, one of my sons yelled into my home office one second before it showed up on my screen... "Tom Hanks has the coronavirus." We all knew that somebody famous would eventually test positive. The first, or at least the first that I heard of would be celebrity actor Tom Hanks and his wife, Rita Wilson, on location in Australia.
Just a few minutes later, I yelled back out to my son... "The NBA just shut it down." What happened is a player, Rudy Gobert of the Utah Jazz, had tested positive. In Oklahoma City. The Utah Jazz as a team are being quarantined there, and the teams that the Jazz recently played... the Toronto Raptors, Detroit Pistons, Boston Celtics, New York Knicks, and Cleveland Cavaliers have all been told to self quarantine. The NBA was forced to suspend the season. For how long? One might ask the same question of the virus itself, or the impact upon business and the economy. Many cities are implementing size limits on crowds. That suddenly knocks the entertainment industry out of the park.
In direct answer to the question asked, for basketball fans, China does have a professional league. The Chinese Basketball Association shut it down in late January, and only now is trying to restart the season. Baseball? Opening Day not that far away. Wouldn't the Houston Astros love to get away with playing before crowds of zero on the road?
For me, I understand, but it will be difficult to not see the last remaining regiment of the Army of the Potomac's legendary "Irish Brigade" lead the way uptown from St. Patrick's Cathedral on March 17th. "Faugh a Ballagh"
What Came First?
The chicken or the egg? The bear market or the pandemic? I don't care much for labels. The truth is that you do not need 10% to call anything a correction, and you do not need 20% in order to call a market selloff a bear market. In fact, to me, a bear market as is a bull market is state of mind. A bear market withers, it erodes. The selloff? That's the first inning of a bear market from where I stand. It's the next eight innings that test individual resolve. Should the virus disappear in a matter of weeks, and waves of pent up demand scream into the global economy, then no... this would not be a bear market, even if the broad equity indices do fall much further.
That said, we have seen bear markets that last years. We have obviously seen very long bull markets that have lasted even longer. If the selloff leads to this change of sentiment that dampens the inner flame, well then... we find out just how tough we are. There are always "bull market traders" that we never hear from again. Every time.
The Storm Before The Storm
Yourself. Even if you wanted to, why count on anyone else? Social distancing? Embrace it. Lower quality of life... for a little while? Love it. Thrive in it. You can and you will. Don't want to? I will not hear that from you. You will confront whatever is thrown at you, and you will rise above. Better people have had it far worse, and don't you ever forget that.
All I ask is this... may suffering and pain pass over this house, but if it is so, that someone here must suffer, may that pain in its entirety begin and end with me, and if so, allow me to suffer in silence.
As the U.S. economy enters into an era of both decreased demand and reduced supply for both goods and services, what economists will focus on most will be the weekly number for Initial Jobless Claims, and the surveys that cover consumer sentiment. Labor markets have been and remain tight, and that may help for a little while. As several industries immediately go through something the likes of which they may have never anticipated, there will be an effort to estimate future needs which will include the labor force.
While companies engaged in travel, leisure, transportation, hospitality, and energy just to name a few, all go through this shock to demand, they may at first be slow to reduce headcount as labor has been difficult to find in recent years.
For the time being, earnings and earnings estimates are close to useless. Is the market trading at 16 times forward earnings, or is it 14? 12? Maybe performance is so poor that the market still trades at 19 times. It's all guess work. Like wading through a swamp in the jungle. You just do not know what's in the water with you, but you know something is. The same goes for the macro. Certainly we have to expect that the U.S. economy is in a state of contraction for Q2, and have to be mentally prepared for the possibility that this continues into Q3. That's a recession. How long? How deep? The slope of recovery? All unknowable.
For the second time this week, the Federal Reserve Bank has taken action meant to keep lines of liquidity fluid. Starting Thursday (today), the Fed will increase the maximum size of overnight repurchase operations to $175 billion from the $150 billion limit that had been set on Monday. This new size limit is expected to last through April 13th. My thought would be that this date is pushed out beyond whatever date the IRS finally decides upon as a tax deadline after the president's address last night.
The Fed will also carry on with two term repos a week capped at $45 billion, while implementing new one month repos with $50 billion limits. I have said before, and it is true, this Fed understands that the short-term mission is to keep the lines of liquidity running smoothly. Ultimately this falls under the mandate of Maximum Sustainable Employment, as will another cut made to the Fed Funds Rate on March 18th. Currently, Fed Funds Rate futures are pricing in a 67% probability of a full percentage point reduction at that time, and a 100% chance of a cut of at least 75 basis points. Actual QE meant to stimulate? There will at least be talk.
Whaddaya Do Now?
Heck, I don't know what you should do. For starters, you should be fully cognizant of your own tolerance for risk. Not knowing that, will get you hurt. This is how I have set up for this moment, and you already know much of it.
1) Elevated Cash Position.
2) Increased exposure to gold.
3) Increased exposure to bonds.
4) Narrowly focused equity book.
5) Three pronged approach.
What do I mean by a three-pronged approach? Well, how would you approach a dangerous situation? First instinct would be to attack directly, that's the virus play, while a killing zone is laid down from the flank. Those are your revenue producers... dividend stocks. You don't care that much about their day to day performance. Right now you care that they are there and that they pay shareholders on time. Thirdly, you have in reserve a rebound play. These are the growth names that may be taking it on the chin right now, but tend to lead later when nothing else will.
I like to pick one of these names. For me its been Amazon (AMZN) to day trade. This will not make performance across one's larger portfolios look all that much better, but it does indeed help with the self-esteem part of this whole thing to know that at least one's intra-day trades are working to reduce paper losses elsewhere.
My Favorite Name Right Now? Gilead Sciences (GILD)
My Least Favorite? Boeing (BA)
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 218K, Last 216K.
08:30 - PPI (Feb): Expecting 1.9% y/y, Last 2.1% y/y.
08:30 - Core PPI (Feb): Expecting 1.7% y/y, Last 1.7% y/y.
10:30 - Natural Gas Inventories (Weekly): Last -109B cf.
13:00 - Thirty Year Bond Auction: $16B.
The Fed (All Times Eastern)
Fed Blackout Period March 7-19.
Today's Earnings Highlights (Consensus EPS Expectations)