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Friday, April 3, 2020

It is bad — no, it is ugly — with 6.6 million individuals filing for unemployment on top of the week prior of 3.3 million. The monthly nonfarm payrolls report was anticlimactic, reporting a loss of 701,000 jobs with the unemployment rate rising to 4.38%; but we know that almost certainly, this will be far uglier for the April report in early May. The March ISM Manufacturing headline reading dropped only by a point, but the new-orders component dropped by seven points. Where the manufacturing hit really showed up, however, was in the Dallas Federal Reserve manufacturing report, which plummeted to -70. Dallas is the epicenter of the disaster in the oil patch — more on this later. The coronavirus is wreaking havoc on the United States and our friends overseas in the most horrific ways that I have witnessed in my lifetime. So yes, it is ugly, uglier that imaginable a few short months ago.

But there is good news too. Yes, we know that the U.S. government, states, municipalities and especially our first responders are all in. if you are not directly impacted, then find a way to help. I discussed the other day that the United States is a “petro-country,” as the #1 provider of energy in the world. The precipitous drop in oil prices is crushing the entire U.S. economy, but especially our friends in West Texas. This afternoon President Trump is meeting with U.S. oil executives to discuss how to best assist in raising the price of oil. Oil had a record rally on Thursday and is up substantially today on the supposition that Saudi Arabia and Russia will cut oil production by at least 10 million barrels per day. That is good news indeed for our petro-economy.

Today also begins “small-business bailouts,” especially important for our restaurants. It doesn’t seem like the banks are quite ready today, but we expect they will be soon. Hang on, restaurants, we need you. Yes, there are massive numbers of $1,200 checks going to individuals, but it is equally, if not more, important that small businesses stay open and their employees stay connected to their businesses. In my view, the U.S. economy is small business writ large.

Given these concerns the financial markets would seem to take a back seat, but I feel the need to comment on them. Warren Buffet once said, “Be fearful when others are greedy and greedy when others are fearful.” There’s no shortage of fear right now: for 1Q20 the Dow Jones Industrial Average was down the most ever and the S&P 500 was down the most since 1938. It may be difficult to see the current situation as an opportunity to “buy low,” but it might make sense to think of it from that perspective.

Tuesday, March 31, 2020

The first quarter of 2020 just may be the worst quarter in history when factoring in loss of life, loss of jobs, loss of wealth as the global economy didn’t screech to a halt — it crashed into a wall. Here is the infamy side what happened in the first quarter, mostly in March:

  • The coronavirus that started in China was officially declared a pandemic by the WHO
  • Businesses across the country implemented draconian social distancing with gargantuan impacts throughout America, particularly on New York City, California, General Motors and the oil industry
  • The Federal Reserve Bank of St. Louis projected Monday that job losses would reach 47 million and unemployment would rise to 32 percent
  • The Dow Jones Industrial Average plummeted 20% for the quarter and WTI crude oil crashed by two-thirds, from $61.30 to $20.23 per barrel

The responses by the U.S. federal government and Federal Reserve — the glory side — have been of gargantuan measure to offset the pain and suffering:

  • The $2 trillion CARES Act is the largest single injection of cash into the U.S. economy in history
  • Coordinated central bank actions to enhance U.S. dollar liquidity are serving as a backstop to ease strains in global funding markets, which is helping both domestic and overseas businesses
  • The Federal Reserve is supporting critical market functions — facilitating the flow of credit to businesses, consumers, employers and municipalities
  • The Fed’s Commercial Paper Funding Facility (CPFF) will buy three-month bonds from companies to help those firms retain workers and handle operating costs amidst an anticipated nosedive of consumer spending

Many Wall Street strategists have an East Coast-centric view and miss the devastating impact that low oil prices have on our economy. We don’t live in the 1970s anymore; low oil prices hurt the U.S. economy much more since we became a “petro-country,” a net exporter of oil much like Saudi Arabia and Russia. Petro economies like ours are desperately seeking out demand since (a) oil drilling can’t be turned off easily and (b) storage capacity is fast running out. A potential solution to help American oil would be to place a $20 tariff on all imported oil, which would siphon off demand from Russia, for example, so that U.S. demand would be supplied instead from West Texas. America will be just fine.

Friday, March 27, 2020

“The Dow Jones Industrial Average and the S&P 500 just posted the best three-day rally in nearly 90 years while the S&P 500 is on track for the best week since 1938,” reports CNBC on Thursday’s market close. The bond market, which had been the only source of positive returns through early March, succumbed to the rampant indiscriminate selling but rebounded significantly this week. Credit goes to massive intervention from both the Federal Reserve in its “whatever it takes” moment and the Senate, which finally passed its own massive stimulus bill. With this astounding reversal, the technicians say we are no longer in a bear market.

Notwithstanding the U.S. government’s historic response, in my view, we are only in the “second wave” of the bear market. The wave concept of bear markets comes from my own “battles in the trenches”; there are three waves, described as follows:

  • Wave 1: Surprise. The markets rallied into the new year, faltered towards the end of January, rallied through mid-February, and then got hit hard two consecutive sell-off days. Note: Bear markets give warnings.
  • Wave 2: Shock and Awe. March roared like a lion with ruthless, bunched down-days: March 5, -3.4%; March 6, -1.7%; March 9, -7.6%; March 11, -4.9% March 12, -9.5%. There was no time to run, no time to hide.
  • Wave 3: Capitulation. This is the point where normally rational investors panic. We haven’t come to this wave yet, and we may not reach it. It is ugly, and it we do not want to see this.

I believe there are more reasons than not to expect that will we experience the third wave. If so, the past few days have been a bear market rally. The United States has a $20 trillion annual economy, so each quarter on average produces $5 trillion of gross domestic product. The government stimulus, while massive, does not make up for all potentially lost GDP. A cure for coronavirus might stop the economic contraction – if deployed soon. The U.S. is the number one economy in the world and needs to get back to work as soon as safely possible.

Tuesday, March 24, 2020

I have received so many questions through my web page that I thought it helpful to share some of them with all advisors. Below are two of the most frequently asked questions:

How Long Do Bear Markets Typically Last?

I read this question as “How long will this 2020 bear market last?” There are no typical bear markets — they tend to be “black swans,” different from anything we ever seen, imagined or prepared for in the past. The coronavirus is our first global pandemic since the Spanish flu in 1918, which lasted around two years and cost 50 million lives. As of March 24, the Johns Hopkins CSSE site reported 396,249 cases of coronavirus and 17,241 deaths worldwide. We don’t have 1,000 P/E tech stocks as we saw in 1999; we don’t have a broken financial system caused by a collapsing real estate market, such as we witnessed leading up to 2008.

What we have today is a draconian, albeit necessary, response to slow the spread of the virus. That response is shutting down large swaths of the global economy, most immediately impacting the global service economy. The good news is the massive and unprecedented policy response by the Federal Reserve and U.S. Treasury, as well as central banks around the globe, to support financial markets. We look forward hopefully to a massive fiscal policy response from Congress by the time this is published. This bear market is the fastest-moving on record; may it also prove to be the shortest-lived on record.

What is U.S. Corporate Earnings Growth for the S&P 500?

U.S. corporate earnings growth for the S&P 500 depends on which quarter you are talking about:

  • Reporting for 4Q19 earnings is essentially complete, with 498 of 500 companies reporting; bottom-line earnings growth is 3.1%, with top-line revenue growth of 5.8%. This is actual earnings growth, not estimates that are subject to revision and often wrong.
  • The first quarter of 2020 ends on March 31 and reporting begins around mid-April. Wall Street analysts’ consensus “estimate” currently is slightly negative at -1.3%. My estimate is that 1Q20 earnings growth will be -10% or worse. Company results will be reported from April through June, so actual 1Q20 earnings growth for the S&P 500 will not be known definitively until near the end of the second quarter.

To ask me a question, please visit my website here. Scroll to the bottom right of the page to find the “Ask a Question” box and click on the “ASK” button to send an email directly to me. Please keep the questions coming and we appreciate all you do in this difficult time.

Thursday, March 19, 2020

I have managed portfolios through many raging bear markets, including the Long-Term Capital Management crisis of 1998, the 2000 “tech wreck,” 9-11 terrorism, the 2008 Great Recession and now the 2020 coronavirus pandemic. This bear market was so fast and furious this time it put markets and the global economy in a state of “shock and awe.” It is unsettling for everyone in our business, but as my manager reminded me this morning “our clients trust in us not to waiver.” We truly are all in this together, and we should rely on each other because “this too shall pass.” I thought of the following since I heard it live – well on TV. In 1989, President Ronald Reagan gave his farewell address to the nation. In it, Ronald Reagan defined America as “the shining city upon a hill.” Here is an excerpt:

“I've spoken of the shining city all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind, it was a tall proud city built on rocks stronger than oceans, wind-swept, God blessed, and teeming with people of all kinds living in harmony and peace — a city with free ports that hummed with commerce and creativity, and if there had to be city walls, the walls had doors, and the doors were open to anyone with the will and the heart to get here.”

In 1989 we still had “pay phones” we had recently gone through the 1987 market crash; the first real estate crash was soon to ensue; we have had more than three wars since then and we are at the height of economic prosperity going into 2020. Then the coronavirus slams into America and the world. Is it a war? No. Are we asking our young and brightest to fight and possibly perish? No. Are we being asked to stay inside on the couch? Yes. Are our children in the most exciting time of their life in high school, college and at peak of the sports season when told it’s all cancelled? Yes. President Kennedy said also “Ask not what your country can do for you but what you can do for your country.” My recommendation is help someone in need. Help a lot of people and the euphoria may be better than winning a championship.

In closing, the heroes in this story are our front-line medical people — help them — buy pizza. It is the private economy, including our biotech firms, pharmaceutical firms that will find a cure by our best and brightest scientists and doctors. Our service economy needs our help as our friends and family in this sector have no income immediately. Maybe this could be a time that our country is unified in a common goal to get Americans back to work. America is the shining city on a hill. We can do this.

Tuesday, March 17, 2020

Special Guest Blogger: Tim Kearney

Markets are digesting the swift-moving — and sometimes conflicting — news about the coronavirus: local government responses to quell its spread, treatment efforts and economic countermeasures from the federal government and Federal Reserve. It’s important to remember that the regular data flow is useful to gauge how the economy was going into this situation, but much has changed since those data were recorded. It’s the overall government response that will drive events over the next four to six weeks.

Since whole industries will see major drops in production, by definition, the economy will go into a recession: the data from China give us our first glimpse of this effect. Given that scenario, the economy’s real interest rate has fallen and hence bond yields are down, appropriately. That drop in the real rate means that the Fed was right to move quickly, to keep up. The Fed also is marshalling its resources as lender of last resort to shore up the short-term credit markets, including actions that appear to be putting cash into people’s hands. That is a very good move.

In the interim, businesses are likely to hoard labor and access credit lines. When it becomes clear that this will be a temporary setback — as China and South Korea appear to be showing — then the markets and economy can stage comebacks. Meanwhile, monitor the economic data, the virologists and the government for clues of what to expect.

Thursday, March 12, 2020

Christine Lagarde, chairman of the European Central Bank, was center stage this morning and failed to bring confidence back into the markets. The ECB is not alone, as our own U.S. Federal Reserve has also failed to inspire confidence. I am not criticizing either central bank, rather these are just the facts as I witness the markets in a global meltdown. For the second time in as many weeks, U.S. stocks triggered their circuit breakers, halting trading as the markets opened. Let me review what I see as the relevant actions happening in real-time:

  • The Coronavirus is the problem, and there is no cure at this time. It spreads very fast and experts have stated that it is 10 times more deadly than the regular flu.
  • The virus initiated in the Chinese city of Wuhan, part of Hubei Province, and in January 60 million people were quarantined – simply unimaginable here in the U.S.
  • With Wuhan as the manufacturing hub of the global economy, the mass quarantine created a severe supply-side shock.
  • In late January the U.S. shut down travel from China to the U.S. and soon after grounded all air travel between the two countries. This was not taken seriously by the markets, but should have been.
  • The Coronavirus’ spread to Europe was fast and furious, hitting Italy especially hard. Italy and Europe in general were hardly ready for it.
  • The demand-side shock was evident when crude oil collapsed to the low $30s, which was triggered when Saudi Arabia and Russia decided not to support prices by cutting output.
  • This past Wednesday, the World Health Organization (WHO) finally categorized the Coronavirus as a pandemic. CNN reported the following:
    • “There are 118,000 cases, more than 4,000 deaths, the agency said, and the virus has found a foothold on every continent except for Antarctica.”
    • "We have never before seen a pandemic sparked by a coronavirus. And we have never before seen a pandemic that can be controlled at the same time," WHO Director-General Tedros Adhanom Ghebreyesus said Wednesday.
  • In his Wednesday 9 pm address, President Trump responded to the declared pandemic by, among other things, restricting all travel from Europe, which to say the least was not received well.
  • Now back to the ECB. Chairman Lagarde seemed to have a Mario Draghi “whatever it takes” moment, but did not cut interest rates further. Markets greeted this with somewhat less than “Shock and Awe”.
  • Lagarde criticized the European Union for not yet implementing fiscal stimulus.
  • Meanwhile, the Federal Reserve made a surprise Fed Funds rate cut of 50 basis points before its regularly scheduled March 18th meeting. This intra-meeting policy change has not been used since the 2008 Great Recession.
  • This Federal Reserve surprise cut was initially not received well by the markets. There is high expectation of another 50 basis point cut at its March 18th meeting.
  • The U.S. has effectively implemented fiscal pro-growth economic stimulus, but will also be on the hook for doing outright fiscal stimulus. If these actions are not permanent expect little impact.

Action Plan

  • My anecdotal evidence is that once broad markets drop 20% or more clients will indiscriminately sell: According to Prospect Theory, “Clients hate losses twice as much as they like gains”
  • Financial Advisors should expect this and plan carefully for each of their clients on how best to accommodate requests without causing long term damage to their wealth once markets recover – and markets will recover.
  • Communicate with your clients proactively - do not wait for them to call you.
  • Review your risk control and portfolio construction policies and make a plan for dealing with these inevitable Bear Markets.

In summary, I have managed through multiple Bear markets and I will tell you that this is not over. Please review your clients portfolios for “risky” equity and credit exposure as these will be hit the hardest.

Please contact me here.

Friday, March 6, 2020

The Federal Reserve cut interest rates 50 basis points (bp) before its scheduled March 18 meeting. The last time the Fed felt compelled to enact a 50-bp cut between meetings was on October 8, 2008, shortly after the Lehman Brothers collapse had resulted in a global market meltdown — certainly not an encouraging comparison. The Dow Jones Industrial Average had a record 5% daily gain on Monday and followed that with a nearly 1,200-point rise on Wednesday. Surely, this means the worst is over, right? Maybe not. Prices have moved up and down thousands of points in the past few weeks, which tells me the market is confused and reacting to the latest news. Let’s look at this from a 50,000-foot level.

The world is a big place, so I focus on the “Big Three” to C-U-E me into what drives two-thirds of the global economy. C — China has been virtually shut down for two months; as the world’s manufacturing hub for technology and pharmaceuticals, this is a serious shock to the global supply chain. U — the United States is the sole economic powerhouse, but its manufacturing sector was in contraction for five months before its latest ISM report inched into expansion with a 50.1 reading. E — Europe faces multiple challenges: the coronavirus outbreak puts France and Italy at risk of recession, and Germany has real problems in its manufacturing sector. But that is not all, because there is also a demand problem now. No one is traveling, international events are being cancelled, and the all-important business traveler is staying home. Shipping is at a standstill, further hurting the supply chain; countries are shutting down schools — all of them.

What matters is bottom-line corporate earnings growth, preferably supported by top-line revenue growth. At this point, both FactSet and Refinitiv analysts’ consensus estimates for 1Q20 are positive. The market seems to want to believe it but the global economy, not so much.

Tuesday, March 3, 2020

Special Guest Blogger: Tim Kearney

Uncertainty has taken hold and uncertainty generates volatility. The extent of the coronavirus’ spread is not known at this time. What seems clear right now is that the disease is somewhat like the flu — especially dangerous for the elderly and people with compromised immune systems. The mortality rate appears to be low for those less than 29 years old and high for the those older than 79. While this knowledge may perhaps be encouraging, it’s not a point from which to declare: Pandemic Over! We still need to be cautious.

Adding to the uncertainty measure is the response from the major political players. The G-7 today promised to be vigilant, a bit short of immediate action. Generating more uncertainty, the communique didn’t outline what next steps might look like. From a pure policy standpoint, this is the correct position to take: they should not promise to do A if, when the time comes, B is what’s appropriate. The markets are likely to remain volatile but in the end the fundamentals will count most. And as the Federal Reserve showed yesterday morning, policy action is a fundamental. The Fed’s rate cut is likely to be followed by supportive actions from other central banks.

Thursday, February 27, 2020

Two weeks ago, I asked whether the novel coronavirus was more like a geopolitical event or a “black swan,” an unpredictable, outlier event that can disrupt the normal functioning of markets. Thursday’s CNBC headlines were not encouraging: “…We have gone from a record close to a correction in ten days…” “…This is the worst week since the great financial crisis…” “…This is the fastest move from a high to a correction since World War II…” Given the recent stock market downturn and widespread disruption of the global supply chain, the verdict is in — the coronavirus is a black swan.

While the U.S. Federal Reserve is unlikely to respond quickly to the coronavirus threat, analysts expect other central banks to enact interest rate cuts; but cold water was thrown on that expectation when the Bank of Korea chose to not lower rates at its February meeting. Meanwhile, the virus continues to spread: South America, until now the lone region seemingly spared, just reported its first case. Reportedly, a northern Californian, who had no apparent contact trough travel or other explainable reasons, has contracted the virus.

The important question now is: how long will this last? There is indication that warm weather — spring is near — will have a weakening effect on the coronavirus as it does on its cousin the common flu. Contrary to popular belief, central banks have plenty of firepower to encourage spending and investing; in other words, the virus’ market impact could pass quickly.

Advisors, this is a time to trust in your plan: do not take rash actions during this extreme event. The good news is that investors have not lost money unless they act to close their positions. We all knew that bear markets, black swans, geopolitical events and volatility would happen with increasing frequency. If you have an inordinate amount of anxiety with your plan, then after the disruption has passed it may be a good time for self-reflection, and evaluation or adjustment of your risk control process.


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