Scream if you want. This past summer, I took my first ride on Coney Island's famous Cyclone roller coaster. Hard to believe, really, given that I grew up here in New York, and have spent most of my life in these parts. Really, not that surprising though. Most New Yorkers have never really done "New York" things. It did feel, however ... overnight Sunday into Monday, that maybe I was going for another ride on that nearly century old wooden roller coaster. That Cyclone does throw you around. Certainly not as much as these markets do.
Equity index futures opened deep in the hole on Sunday in New York. A little later they would rally and a little later than that, rally hard. The range for Dow futures over a few hours would be greater than 1,000 points, for S&P futures, greater than 100. The hard news had been awful. The first coronavirus related death in the U.S. occurred on Saturday, and was quickly followed by a second. New York City, easily the nation's most heavily populated municipality, experienced its first confirmed case on Sunday. Just a few hours after the wild rally these futures would sell off just as hard, still with many hours left until they ring that bell at 11 Wall Street.
From the viewpoint of global economics, the CFLP (China Federation of Logistics & Purchasing) posted on Friday night (NY time) some of the worst looking PMI surveys that you'll ever see for February. Keeping in mind that for these surveys, the 50 level is the point between expansion and contraction, and anything even approaching the mid-40's is considered terrible. For February, these government surveys printed at a staggering 35.7 for the manufacturing base, down from 50.0 in January, and an incredible 29.6, down from 54.1 for the services side of the Chinese economy.
Global economies are suffering dual impact to both demand and supply across many markets. Real scarcity will raise its ugly head across not just world of finished goods, but from raw materials to health care (medicine) to any number of less than expected business lines, as the true costs of globalism are revealed.
This is why monetary and fiscal stimulus are being brought to the fore. I have been out in front of this issue as readers and viewers will note. There has been ample criticism of my view, as well as plenty of support. The naysayers have made the point... "What good will it do? Will it fix anything?" I understand that opinion, however, allow me to try to help develop this view a bit. As mentioned, these are times for emergency measures. Data dependency will not help here, because the economy is coming from a relative place of strength. The point already made is that there has been a shock to both sides of many markets. The imperative now is to grease the wheels of commerce as much as possible in order to prevent another shock... this one to labor markets as small to medium sized businesses could be forced to reduce payroll as the already mentioned scarcities hurt their businesses.
I have probably mentioned the velocity of money more in the past two weeks than I had since my school days, but from the vantage of economics, which is in short, nothing more than the measured human response to conditions of surplus and scarcity, this is a "velocity" story, and right now... if velocity is not supported at what will be a reduced level, it will crash completely. Remember my box? Remember the exponential impact of volume upon the size of a cube? That street runs two ways.
Not Really Coordinated
This is why I have led the call for an emergency reduction to be made to the Fed Funds Rate, and this is why I have led the call to maintain both overnight injections of liquidity into cash markets as well as the expansion of the Fed's balance sheet through aggressively purchasing the short end of the curve. Not because I love these policies (I hate them to be honest, I just hate to see people suffer more), but I would rather get ahead of the potential for severely negative human response. We can unwind emergency measures if the necessity for action abates.
The Bank of Japan took action overnight. BOJ Governor Haruhiko Kuroda mentioned the use of asset purchases in order to ensure ample liquidity. Several news outlets are reporting that the bank of Japan provoked the overnight swing through the injection of JY 101.4 billion into ETFs in that market. The Chinese government will now allow banks to delay the recognition of bad loans made to small businesses, and that move comes after already reducing lending rates, rents, and insurance payments whereas these businesses are concerned.
This has raised the ante around the world as rumors spread that the Federal Reserve, the Bank of England and the Reserve Bank of Australia were all considering taking action, while the Italian government indicated that there would be a fiscal response. For those keeping score, futures markets trading in Chicago went out on Friday pricing in a full 50 basis point cut being made to the FFR on (by?) March 18th, supporting the stance that I had taken. This was after dovish sounding comments made by the Fed's Jerome Powell impacted financial markets on Friday afternoon. These futures markets also went out pricing in additional 25 basis point reductions being made in both April, and July, with a 35% chance of yet another cut in December.
Why Be Aggressive?
To put it bluntly, we have already see the pain of acting in response to economic contraction. That story gets ugly. Acting once the horses leave the barn is to act once human suffering has become apparent. The economy was strong, but not "gangbusters" prior to the spread of this virus. Corporate earnings lagged in 2019. Even if supply chains can be rerouted, this will suppress margin. Over the span of seven business days, the S&P 500 went from trading at 19 times forward looking earnings to just 16.7 times (according to FactSet). The five year average for the S&P 500? 16.7 times. Algorithms? Yup.
Now, understand this. Nobody here. Not you, not me, and not the most accurate analysts on Wall Street have any idea what revenues, margins, or earnings are going to be this year. We can not know until we have a better picture of what happens going into and through the second quarter. The most stimulant thing that can happen now would be the revelation that this virus is indeed seasonal, like other coronavirsuses. Like influenza. That happens, and the U.S. catches a big break, that could allow certain biotechs like Gilead Services (GILD) , Moderna (MRNA) , or Inovio (INO) , and others to play catch-up by the time the virus reappears next season.
Back to real-time reality... Several major banks made the call last week... they do not expect to see large cap earnings growth in 2020. U.S. (global) equity, debt, commodity, and currency markets all had to be repriced without semiaccurate guidance.
Every major domestic equity index has surrendered at least 11%, and now come off their worst weeks since 2008. The Treasury yield curve remains horrendously inverted. The U.S. 10 year actually paid less than 1.04% at one point on Sunday night. About the only positive I see related to equity market net outflows has been the easing of U.S. dollar valuations. While in theory, that would be a positive, this very reason would be a distinct negative. As foreign investors have been forced to meet obligations at home, they are also forced to sell "haven" type holdings, and if those holdings are in the U.S., then U.S. dollars are ultimately converted into something else. You wondered why gold wiggled with equities last week?
What To Do?
I imagine most of you have already been taking action. As Wall Street prepares for both another violent week, as well as a future with a far lower ceiling for potential profit, headlines regarding Covid-19 will dominate news flow, as well as the flow of capital. Covid-19 matters more than the OPEC meetings scheduled for later this week, but will certainly impact these meetings. Covid-19 matters more than this Wednesday's Beige Book, or even "Jobs Day" this Friday, and Covid-19 matters more than Super Tuesday, though Super Tuesday might impact markets simultaneously.
Oh, one bright side that I failed to mention. Regularly doing my chart work on Sunday nights, the chore can become quite arduous. Having far fewer, and more narrowly focused positions allow for a less marathon-like session. Remember, nothing tamps down portfolio volatility better than cash, and if traders have respected their own panic points they are now flush with the stuff, having exited many positions (even at a loss) well above where they stand now.
The choices are individual. Where to redeploy? How aggressively? Personally, I'll stick to the three-pronged approach... the Rebound group, the Virus group, and the Revenue group that were discussed for TheStreet on Friday. I did, by the way, get around to adding both Clorox (CLX) , and Teladoc Health (TDOC) to the Virus group.
One more thing... working out in the garage is off to a pretty good start. Replacing spin class with actual running kind of stinks at my age, but hey... at least I'm kinda good at it.
Economics (All Times Eastern)
09:45 - Markit Manufacturing PMI (Feb-F): Flashed 50.8.
10:00 - ISM Manufacturing Index (Feb): Expecting 50.5, Last 50.9.
10:00 - Construction Spending (Jan): Expecting 0.6% m/m, Last -0.2% m/m.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (TLRY) (-.38)