"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger--but recognize the opportunity."
- President John F. Kennedy
Over the last month (and with markets appreciably higher) I had strenuously argued that speculation was running amok ( (SPCE) , etc.), market structure posed heightened risk (as ETFs and risk parity thrust everyone on the same side of the long/bullish boat), the underlying foundation of profit and economic growth was unsound, there was growing political and policy risks, and that the possible supply chain and demand implications of the coronavirus were being ignored.
Over the last 1 1/2 weeks, flowers and balloons have been replaced by pins and needles.
Prices (the S&P has fallen from 3393 to about 3080) and valuations (price earnings ratios are -9%) have been reset much lower in the face of concerns regarding the spread of coronavirus.
Though often viewed as a Perma Bear - I am not, as there is more contrarian and less perma bear in my investing DNA (which is governed by a calculator and a non consensus orientation).
There is a saying in Tibet that "tragedy should be utilized as a source of strength - no matter what sort of difficulties, how painful experience is, if we lose our hope, that's our real disaster."
So, let's examine the non consensus view - some reasons why I have started to do some buying:
* China has moved on. Coronavirus cases are down and its stock market is well off the lows. (Interestingly, today the China H share Index and the Hang Seng closed up on the day.) Will this be the blueprint for the rest of the world as well?
* When China sneezes... The last two major selloffs in U.S. equities were China-induced (devaluation fears and a trade war with the U.S.) - these proved to be great buying opportunities.
* A point of maximum fear? There are many examples of this - Dr Roubini in the Financial Times, Mohamed El-Erian on CNBC, etc. "This time is different." But will it be?
* Market structure systematics created a perfect storm. We entered into this selloff with CTAs near record long with a need to sell substantial sums of stocks if the market inflected. This has more or less been absorbed now.
* Corporate buyback bids could trump systematic supply at this point.
* Volatility has spiked and the market may be pricing "guaranteed" panic.
* Speculation is no longer running amok and the "everything bubble" has been pierced. Stocks like SPCE, downgraded by Credit Suisse this morning (and many others) are in free fall now - erasing much of the recent gains as speculators run to the hills.
* As discussed in yesterday's "After The Fall" and "Brokedown Palace", stocks are swiftly moving towards oversold as market and economic expectations have quickly soured.
* If the old narrative comes back - it looks more sold than ever with yield gap support (and a 10 year U.S. note yield of 1.31%) coupled with a President Trump reelection (despite Sanders' ascent) at the highest probability this year.
* If financial TV and "talking heads" are viewed as a contrary indicator - the confident Bulls of only 1-2 weeks ago have confidently reversed their bullish views and now see little opportunity to buy.(Reminding us of Divine Ms M's wonderful phrase, "Price has a way of changing sentiment.")
* At the lows last night, S&P futures were within one percent of the 200-day moving average. Could that 1:30 am print have been a successful test?
* As my friend Byron Wien likes to say, "Disasters have a way of not happening." It is also a good idea, for long term investors to consider another quote - this one from Berkshire Hathaway's Warren Buffett: "In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression, a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
* Finally, and most importantly, lower prices are the friend of the rational buyer. My calculus suggests that, for the first time since late 2018/early 2019, (statistically), the upside reward exceeds the downside risk - using a "fair market value" of 2850 and based on my projected (and most probable) 2020 S&P range of about 2900-3300. (Last night the (SPY) /S&P Index equivalents were about $306/3060). In S&P Index terms that produces upside of about 240 S&P points and downside of approximately 160 S&P points.
(This commentary originally appeared on Real Money Pro on February 27. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)
