Out and About
The Ugly Stick. Swinging wildly, as ETFs and other equity-based funds face redemption. Outflows. The stick swings wildly, and whatever it hits, goes lower. The stick has been hitting everything. Even the REITs. Even Utilities. Playing solid defense has perhaps merely softened the blows to what might be described as severe instead of truly catastrophic. They say that stocks always go higher. Stocks may be volatile at times, but on a long enough time line, they always go higher. That's simply because they always have, not because they have to. There is a chance that in a year or less, we may look back on these days on the chart, and have to think for a moment... "What was that? Oh, yeah.. I remember that."
There is also a chance that in a year, the planet may still be trying to find ways to work around spreading a coronavirus that, just going by the numbers that are available, does have a long enough timeline of its own. It appears that most who contract this ailment do indeed recover, but it also appears that folks who get sick, are sick for more than just a few days. The majority of those cases that have been confirmed have neither recovered, nor passed away.
In the U.S., equity markets finally started contracting last Thursday, so it's been six days of unrelenting downward pressure. As far as valuation is concerned, the S&P 500 in aggregate hit 19x forward-looking earnings last Wednesday. Most market watchers have felt that valuations had been a bit stretched for a while now, but maybe not quite as stretched as they appeared due to monetary or fiscal conditions.
Now, that the S&P 500 has contracted 12% in six days' time, 4.4% on Thursday alone, one might think equities would suddenly be more appropriately valued. Are they? We have heard from a bevy of high profile corporations such as Apple (AAPL) , Microsoft (MSFT) , Mastercard (MA) , and United Airlines (UAL) , among others. What investors are being told is that these firms will miss revenue expectations for the current quarter due to the impacts of the Covid-19 virus. These firms have not adjusted expectations to something quantifiable because they cannot.
The firms do not know. Wall Street's analysts do not know.
In his note to the firm's clients, David Kostin of Goldman Sachs discusses a worst-case scenario where both the shock to supply chains as well as reduced demand leave the S&P 500 with the potential for no earnings growth at all in 2020. Kostin even mentions the possibility of recession. Now, as fund holdings are liquidated, we see this dough, as it dwindles, turn into cash, and turn into sovereign debt holdings. The U.S. 10-year note pays just 1.18% as I write this note very early on Friday morning.
Some of this liquified cash is leaving the country. You have all seen the U.S. dollar index stumble around this week. You have seen strength in the euro. Did you think that was odd? This is not odd, this is foreign investors being forced to cash out in order to meet obligations at home, and having to convert U.S. dollars into their home currencies.
Is there a chance that the S&P 500 is still trading at elevated valuation metrics, even 12% lower? You bet your tail, there's a chance. Stocks may be even more overvalued. We just don't know, and we can't know. That is the issue right there. It's not just uncertainty in corporate financial performance, it's uncertainty in economic performance, and that could also become political. I would love to tell you that the worst is over, and there may be days that it feels that way. I just don't think it can be until there is more quantifiable data that can in turn be used to create something close to a definable expectation.
So it is that the VIX closed Thursday at two-year highs. So, it is that the CBOE Total Put/Call Ratio spiked up to 1.31 on Thursday, a third consecutive day at levels well above the 1.15 level that used to be taken by traders as the "all clear" in terms of contrarian sentiment. Trading volume has been enormous and growing daily. You all already know that. Losers have been beating winners by a rough 9 to 1 at both of New York's main exchanges.
In terms of speed, Thursday's 4.4% beat-down for the S&P 500 (4.6% for the Nasdaq Composite) were in percentage terms, the worst days since the year 2011. Both indices experienced their worst days ever in terms of points. Much is being made of the speed of this correction, and this has indeed been done in lightning fashion. I seem to remember a date that I will never forget though. October 19, 1987. U.S. equity markets took a 23% pasting that day, on very heavy volume. The indices were already in correction on that Monday morning, so this day is not being included in what you are hearing, but we have gotten through tougher short-term market conditions.
The key word there is "short-term." The markets came half way back on October 20 that year. There was give and take. There was no complete dearth of information regarding quarterly earnings performance. There was no "surprise" illness spreading around the planet. There was no shock to either supply or demand. The economy is far more global now, and thus far, far more vulnerable. In 1987, a localized virus could have been easier to contain.
Run for cover? Where? Not equities. Using SPDR Select Sector ETFs as yardstick, Consumer Staples (XLP) are -8.34%. the Staples are the S&P 500's top-performing sector. Let that sink in. Five-day performance of -8.34% is the best we have. Energy (XLE) is down 17.3%. Information Technology has seen a 13.78% meltdown, where neither semiconductors nor software offered investors any shelter from the other. Seven of eleven sectors are now off 11% or more over five days. Eight of eleven SPDR Select Sector ETF's have joined the S&P 500 below their own 200-day simple moving averages.
Not So Funny
I was going to say that its kind of funny that the vast majority of financial talking heads that do appear on TV have been telling investors not to panic. It's not so funny, and I will not claim to have told you to panic. I never panic myself, but I do respect what I call panic points, and that discipline has saved me a considerable amount of pain this week.
My point is that if an investor had indeed panicked early, and was now thinking about timing a re-entry of what had been sold, that investor would have beaten Wall Street... by a country mile. Point is that if I hear someone speaking broadly, without ever mentioning certain stocks or trades, I devalue their opinions immediately. I also find them less useful if they sell financial services for a larger firm, because I know that their opinions have been run through a legal department first. Just be careful out there. You already know that a diverse market exposure includes a certain level of safe haven assets, and you already know that nothing tamps down portfolio volatility better than an elevated cash position.
On Thursday, Chicago Fed Pres. Charles Evans indicated that the Fed is indeed monitoring any economic impact from the spread of this Covid-19 virus. Evans apparently feels that it is too early to think about reducing forecasts for U.S. economic growth. I don't know... I would probably take the rising number of U.S. multinational corporations that have already warned as a hint. I would probably understand that the rest of the S&P 500 probably has to line up and do the same. I would probably understand that a vast number of industries are going to go through something awful that will lead to a reduction in hours worked. I would probably make some attempt to see some of this coming.
According to the Wall Street Journal, Evans said "We're monitoring very closely and if we see something that does require an adjustment, I'm confident we would give that all the consideration it needs."
Well, thank you very much for showing up for work today. Play our game. Everyone leaves with a prize. This kind of drivel makes me sick. From a central banker who has been more dovish in less trying times. Forget equity markets. The 3-month / 10-year Treasury yield spread is considered the most reliable indicator of economic contraction that we have for a reason. The velocity of money is sacred, and must be defended to the best of our ability. Do lower interest rates at the short end do much to cure a virus? No. Do they maybe keep a few businesses from failing, or preserve payrolls that may come under pressure? Yes. Do they potentially work toward flattening the yield curve? Yes.
Trying times require policy makers to be anticipatory. Courageous aggression. To be data-dependent means that you are already too late. It means that you have failed when others counted on you. It means that you simply do not understand. Unacceptable is the word that comes to mind. The FOMC needs to convene this weekend. Waiting until March 18 is not an option. NOT an option!
Took off some Lockheed Martin (LMT) , as well as Nvidia (NVDA) , both at still large profits due to panic point violations. Started adding the Nvidia back in the overnight session at a discount. Looking to do the same with LMT. Have also been adding Amazon (AMZN) in overnight trade here in the low-to-mid-$1800s, after day-trading that name regularly this week. Adding to existing longs in Merck (MRK) , Disney (DIS) and CVS Health (CVS) . Currently long both Peloton (PTON) and Gilead Sciences (GILD) for trades. Seagate Technology (STX) was finally jettisoned on Thursday.
Economics (All Times Eastern)
08:30 - Personal Income (Jan): Expecting 0.3% m/m, Last 0.2% m/m.
08:30 - Consumer Spending (Jan): Expecting 0.3% m/m, Last 0.3% m/m.
08:30 - PCE Price Index (Jan): Expecting 1.7% y/y, Last 1.6% y/y.
08:30 - Core PCE Price Index (Jan): Expecting 1.7% y/y, Last 1.6% y/y.
08:30 - Goods Trade Balance (Jan-adv): Last $-68.67B.
08:30 - Wholesale Inventories (Jan-adv): Last -0.2% m/m.
09:45 - Chicago PMI (Feb): Expecting 45.8, Last 42.9.
10:00 - U of M Consumer Sentiment (Feb-F): Flashed 100.9.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 679.
The Fed (All Times Eastern)
09:15 - Speaker: St. Louis Fed Pres. James Bullard.