As we stare into still one more futures abyss, at what point do we simply say, okay, this period doesn't count? At what point do we look at balance sheets and say we should pick these stocks or avoid those stocks because they can't withstand a prolonged downturn?
I want to explore a concept that I have been loath to consider because I think it is always vital to keep the markets open.
Consider this, though. Our markets used to be the place where companies, both new and used, so to speak, can raise capital. It's been since the Great Recession that we have seen many underwritings of already public companies although we have seen insider selling secondaries from time to time.
Sure, we have some IPOs, but very few of late and when they have come of late, you tend to get a lot more SmileDirectClubs (SDC) and Caspers (CSPR) than you get Crowdstrikes (CRWD) or Zoom Videos (ZM) .
That's okay. Even better, it shows there is so much liquidity sloshing around that we could be able to withstand a pretty long, sustained downturn as certainly seems to be the case.
So, here's the question: If the stock markets aren't needed to raise capital then all we would be doing is facilitating the selling of stocks for the people who need cash now or fear that the companies they are owners of can't withstand the downturn.
That's certainly a possibility for many companies. However, that's not the case for the vast majority of companies at all. Many companies have almost no economic sensitivity. Others have no choice but to be open. Still others perform vital functions to help other businesses.
So, in that sense you have to wonder why they have to open at all? Think about the Chinese. Wuhan hit and burgeoned into a national crisis during the closing of their stock markets for the Lunar New Year. The markets stopped trading on Jan. 23 and didn't reopen until February 3. That was a fortunate time to be closed and it gave the authorities breathing room.
It also created opportunity. If you bought the bottom when the market re-opened you made ten percent on your money in just a few days. The breath-catch worked. You had no way of knowing when you bought that day if the virus peaked but, at the same time, it was worth the risk.
Our problem is that we remain open for trading and we are a largely indexed stock market. That means you have to believe that every day until the cases peak, you can expect the market will go down punctuated by days like Friday when you got the biggest one-day gain, a gain that happened so swiftly that few could avail themselves of it. That was obviously, of course, the right thing to do, but you couldn't be sure and even if you were getting down there at 3:50 was no mean feat.
If we were to remain closed until the virus peak is reached and then we re-open the stocks of most companies would most likely be up. Some non-essential companies related to travel and leisure may have actually needed life support quickly. But if you leave open the stock, say, of Southwest Airlines (LUV) , it might go to the single digits while it waits for a bailout but if we were to ride this closure out until the virus peaks and the Treasury gives them lifelines then it is entirely possible that you want to buy, not sell.
I am now thinking that it would be wise to do it this way. I say that because if we do flatten the curve then it is possible to slow the public health crisis, which we know is a ticking time bomb, and keep the stocks themselves from suggesting bankruptcy as was the case in 2007 to many otherwise solvent companies.
Let's use the worst-case scenario. Let's say this is August of 1918 and we are on the verge of the worst pandemic in our nation's history. The disease peaked in October after 550,000 people died. It did peak, though.
We don't know how Covid-19 works. But if it works likes the Spanish flu it might burn through society in three or four months. Plus, we know some very good companies are working on anti-virals. If they have success it could be a miracle recovery.
These circumstances cut, at least to me, to staying long as much as you can while maintaining a considerable cash position, and selling a nice chunk into short squeezes like Fridays because we are likely NOT going to close. That may turn out to be a shame because trillions might be saved. I'd rather have the latter happen, but if it doesn't we will be ready for the former for certain.