This is my method. There are many like it, but this one is mine. My method will allow me to navigate these trying times. I will. My method and I are the masters of our environment. I will keep my method clean and coherent, guarding against the ravages of market confusion. My method and I are the defenders not just of my portfolios, but by extension, my family who counts on me, and has no idea what they are up against. So, be it, until victory is established and normalcy returns. If it ever does. It will. (Inspired by the Rifleman's Creed)
Markets appear stable. Do we trust it? Can we trust it? Of course not. Fact is that I don't trust financial markets... ever. Never have. Not even when humans were in charge. Was I one of the dip buyers on Monday? You bet your tail. Again, of course. That was more of a trade on historical patterns than a bona-fide investment. However, these "trades" were made in stocks of companies that I don't mind being invested in, as a trader must always be willing to accept that every trade has the ability to become an investment, and every investment might end up only being a trade. Sound difficult? It's not. Really, its not.
One of my cardinal market rules. Trade within the environment provided. Incremental entry, incremental exit. Be a mercenary. Loyalty to your faith, family, and country. Loyalty to no stock. Shed a tear when you hear the anthem? Every stinkin' time. Shed a tear for large cap multi-national corporations? They will use you, either as an investor or an employee. Use them just the same way. Know the limit of one's own tolerance for every single name of interest. In currency, as a percentage of portfolio weighting, not in shares. That will get you in a jam every time. I like to enter (and exit) in eighths of my intended exposure, as I am an old floor trader, but do what works for you. If I am less sure, I do sixteenths. Its a method. Where did I put cash to work in a melt-down? Monday's adds were made in Salesforce (CRM) and Amazon (AMZN) ,and oh yes... BP plc (BP) . I did break the three day rule. Monday's initiations were made in Abbott Labs (ABT) , and Zoom Video (ZM) ... see I did finally get my price in Zoom (In fact I did better than my price.). Did I sell the Slack Technologies WORK to make room for Zoom? No. Think both might work. Besides, my cash levels were too high if the markets does the Tuesday morning Waltz.
Play The Game
Asian equity markets all took back about a percent on Tuesday. European equities took back for the most part, more than one percent. At least at the open, it's still early across the pond. Domestic equity index futures have followed along. WTI Crude is trading off of the lows created on Monday. Heck there's even some life in the yield curve as investors take profits out on the long end (and in gold as well). The 30 year bond currently yields well more than 1%. Huzzah.
Enjoy the relief. Given past market behavior, we see that the S&P 500 has suffered through a drop of 5% or more upon 10 occasions in its history and has experienced some kind of rebound on the following Tuesday all 10 times. In fact, the S&P 500 has gained at least 2.2% all 10 times. No chickens counted. I just know that if you've got a right-hander with a big wind-up on the hill, that I'm going to lean toward second base on the delivery. That's really why we bought the dip on Monday. Not because we are geniuses, and not because we think we are all old fashioned gunslingers, but because we are all "statistics guys" and we constantly work on figuring probabilities.
So, enjoy any rebound that we do see on Tuesday, but don't trust it. In this electronic age, markets move faster and price in potential events at speeds that still take many by surprise including this guy. What can you trust? I think we can trust Saudi Arabia and Russia are engaged in an oil price war that will harm U.S. shale, U.S. banks, and U.S. employment in the Fed's regional district of Dallas for starters. I think its safe to say the coronavirus, known as Covid-19, will continue to spread, slowing only as the weather warms and maybe not even then. Fear of contagion will continue to slow travel, recreation, and congregation. Confidence? One can be confident in the continuance and expansion in what we now call "social distancing." I've still got my dog.
What does that mean? I think it means (as markets rise in anticipation of either a fiscal or globally coordinated response) that the one thing we can all trust is that while equities have become perhaps properly valued (perhaps not?), there will be an elevated level of volatility across financial markets that has become the norm, and will remain the norm until the virus slows, and the Saudis, Russians and U.S. shale crowd decide that they can all exist on the same planet.
Until then, you may figure out where the bus stops are, but not how much gas the bus has in its tank. Count on nothing.
How It Gets Worse
The S&P 500 now trades below 16 times next year's earnings. Or is it 15 times? 14? Do I hear 14? Don't say you know. We can all do the math. Best case, pre-virus earnings estimates are useless. Let me know when you actually ringing of the register.
One does not have to look far to see just how quickly the velocity of money, which is sacred to any economy, can slow. Take the case of Italy, a G-7 nation, a western style democracy, deep, robust financial markets... under quarantine due to the spread of the virus and the pressure being placed on Italy's healthcare system. The whole nation. Italians have experienced nothing like this since the Second World War. Schools, Museums, Theaters? Closed. Sporting events? Even mortgage payments. Suspended. Travel to, from, or within Italy is now prohibited unless demonstrably necessary for the purposes of either work or health. There have been prison riots. Restaurants remain open under new restrictions. Bars must close at 6 pm, and guarantee customers a personal space of at least one meter. Sounds like fun, doesn't it? Actually, sounds impossible.
Think it can't happen here in the U.S.? You know what happens every time we think we're different, right? Don't do that. By the way, just in case you were wondering, according to Barron's, the U.S. listed companies with the highest exposure to the Italian economy would be International Gaming Technology (IGT) and Dana Incorporated (DAN) .
For us, the fact is that even should we as a nation escape at a lesser level of impact than some other nations, that some things have certainly shifted. Some of the negative impacts will be temporary, and some may not be. Think jobs in the oil patch. Think the entire "experiential economy"... you may be willing to go to a movie theater or a baseball game after this is over, but would anyone get on board a cruise ship any time soon? Even if all goes well, who can afford to even risk missing months from their job if just one person on the entire boat becomes ill? No thank you.
How It Gets Better
To be clear, I do not believe in "helicopter money", and I am certainly no 'Modern Monetary Theorist." Members of President Trump's administration talk up a targeted approach toward aiding industries most directly impacted by slowing economic activity. A payroll tax cut seems to make sense. Suspending late fees, or debt payments for the travel and hospitality industries would also make sense, but then some relief might have to offered to the lenders as well. Cheap loans for small businesses trying to make payroll? That brings us to those who force themselves to work when they are sick. We have all been that guy. I once went 11 years between sick days and did not take a single vacation day or less than a week for more than half of those years. Why? Because Wall Street was literally throwing people out the door and people were counting on me.
Today, hourly wage workers and those participating in the "gig economy" feel the same pressures. They have bills, and probably not much of a cushion in savings. These folks will go to work unless they can't get off of the floor. I do not believe in throwing a stimulus check at every American. Fiscal policy is already too loose and about to get looser. That said, there is going to have to be some kind of protection offered to this kind of worker and the kind of businesses that purchase their labor. The president has told us to expect something "major."
In the meantime, monetary policy is also loose, and likely to get looser. There will in all likelihood be some coordination among central bankers in this regard. In the U.S., the Fed does seem to understand its mission. The dual mandate calls for price stability and maximum sustainable employment. That calls for ample availability of short-term liquidity as well as every effort made to maintain the integrity of the Treasury yield curve. I like to bash the Fed when it seems to me that there is a broad misunderstanding at the central bank in regards to interpreting the economic environment. I can not at this point, make that complaint. They get it.
Good thing it's not tax season or anything. Oh, wash your hands and stop touching your face. What are you? Six?
Forget your Monday P/L. That was yesterday. Today we face a different pitcher, and we've seen this guy before. We can hit him, and he knows we can hit him. Let's get him early just in case they yank him in the early innings. (That means don't be afraid to take short-term profits if the intra-day chart tells you to.) The 3 month/10 year spread went out at +21 bps, the best we've seen since mid-January. This morning, that spread has run all the way to +36 bps, which is the widest it has been in 2020.
The CBOE Total Put Call Ratio reached a level of ugliness not seen since 2018, meaning that fear was in the air, as six of 11 sectors gave up more than 7%, and even the best performing sector (Staples) surrendered 4.35%.
Smells like a set-up to me. You know who can fight back? Check that. You know who will fight back. You, that's who. Now, make your at-bats count. This morning we take back what's ours. The music has started. Let us rock.
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (Feb): Expecting 103.8, Last 104.3.
08:55 - Redbook (Weekly): Last 5.9% y/y.
16:30 - API Oil Inventories (Weekly): Last +1.69M.
The Fed (All Times Eastern)
Fed Blackout Period March 7-19.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (DKS) (1.16)