Pro Perspectives 4/1/20

April 1, 2020

As we enter the month of April, we'll begin seeing data to reflect the abrupt stoppage of the economy. 

It's going to be ugly. 

The big one to kick it off will be the employment report on Friday morning.  That's why stocks started the month lower. 

To be sure, the media will make a big deal about big, record-setting numbers.  Stocks will swing around in the early stages of these data reports. But remember, the losses reflected in the coming data have already been offset by intervention from the Fed, the Treasury and Congress — intervention that replaces more than a quarter of U.S. economic output.  

On that note, there's a big difference between the current situation and the Global Financial Crisis.  During the GFC, we watched the dominoes fall for well more than a year, before we knew how policymakers would respond.  For some time, we didn't know if they would act.  We didn't know what tools they could use.  We didn't know how far they could go.  But when they (and other global policymakers) went all-in, with 'whatever it takes' that has forever changed the landscape.  

With this crisis, there has been (and remains) a big 'unknown' on the human welfare front.  But there has, all along, been an important 'known.'  We knew policymakers would do whatever it takes.  And they responded quickly, and erred on the side of overreacting. That's very positive. That's important perspective, as the ugly economic data rolls in, reflecting an unprecedented stoppage in the economy. 

The most important data and news will continue to be on the health crisis front (not on the backward looking economic data).  And the mitigation efforts continue to look encouraging, as testing has increased, and the daily new cases declined in today's report, for the first time since the testing ramp (24,742 to 22,613).     
 

Pro Perspectives 3/31/20

March 31, 2020

Over the past couple of weeks, the Fed has addressed broken financial markets, and ensured stability of the financial system. Congress and the White House have backstopped the American consumer and American businesses.  And there is a discernible game plan launched to fight the healthcare crisis. 

What hasn't been addressed?  The oil industry. 

While the haymakers were flying at Washington early this month, Russia took the opportunity to land a sucker punch, by refusing work with OPEC to stabilize global oil prices.  OPEC retaliated by opening the spigot on oil production.  Oil prices plunged, as deep and at a faster rate than we saw in the Global Financial Crisis.  

This is a familiar strategy.  OPEC tried this back in 2014, in an attempt to kill off the emerging threat of U.S. energy independence (i.e. to bankrupt the U.S. shale industry by forcing prices well below where they could produce profitably).  To an extent it worked. More than 100 small oil-related companies in the U.S. filed for bankruptcy from 2014-2016.

This time around, Russia is the main culprit.  They know, even with nearly $6 trillion of stimulus ready to deploy, mass bankruptcies would damage the economy and financial system – and at the worst time.  And equally as important, in a time when global relations aren't so good, it creates U.S. weakness/competitive disadvantage in a wartime scenario.   That said, Trump needs to keep these companies up and running.  And bailouts aren't palatable.  

With that, it is reported that Putin has agreed to talks on stabilizing the energy markets. 

This is a game of chicken.  Russia and the Saudis, both highly dependent on oil revenues, have a big price to pay, if it plays out too long.  Back in 2016, the oil producing countries nearly killed their own economies in the process of trying to kill the U.S. shale industry. 

So, in effort to drive oil prices higher, to salvage oil revenues, they had to flip the switch in late 2016, cutting production for the first time since 2008.  And they did so, in a market that was already undersupplied.  And in a world where demand has been underestimated, and growing.  With that, oil bounced aggressively — from $26 in early 2016, to as high as $77 by late 2018. 

This time around, it may be in the global oil market, where we discover where the international players truly stand on this pandemic: together or opportunistically apart.  
 

Pro Perspectives 3/30/20

March 30, 2020

As we end the month of March, April is expected to be the worst of the health crisis. 

As for the economy, the backstops are in place to hold us over for about three months.  The economy was on path to hit about $22 trillion of output this year.  If we combine the $2.2 trillion relief package from Capitol Hill with the Fed’s liquidity injections, guarantees and lending power, the sum of intervention is said to be north of $6 trillion.  That replaces more than a quarter of economic output.  

With that, stocks have bounced aggressively, and will likely find a level shortly where volatility subsides, and a (relative) holding pattern will commence.

Then it boils down to whether expectations will be beat, meet or missed (disappointed) on the health crisis front.   On that note, we talked on Friday about the potential for a positive surprise to come this week.

This week we should start hearing stories coming out of New York about the efficacy of hydroxychloroquine – a treatment option for Covid-19. 

Tragically, this has become highly politicized since Trump mentioned it, which means half of the country has immediately dismissed it. 

Let’s look at the facts:  It’s an FDA approved drug for the treatment of Malaria. The FDA authorized “off label” use for it last Tuesday, enabling doctors to treat coronavirus patients with it.  There is an “in vitro” study from Chinese researchers in early February that showed the stop of progression of coronavirus in cells that were already infected, and showed the prevention of infection in pre-virus cells.  And there are small studies from both China and France showing efficacy.  Additionally, we have heard along the way from China, South Korea and Europe of success stories.  And we are hearing more and more success stories in U.S. hospitalized patients. 

So, New York will be the litmus test, as they are running an 1,100 patient clinical trial, and they are more broadly administering it as a treatment as of last week.  From the studies, the treatment period, from inception to virus free, was between four and six days.  So we should be hearing soon, at least “anecdotal” evidence from the NY cases.  Again, this “treatment” scenario has not been a focus for markets.  We could get a positive surprise.  

Now, while stocks have bounced aggressively, with nuclear-level global policy intervention, we haven’t seen the inflation bets bubble up just yet.  We will likely need some signal from the health crisis, that a light at the end of the tunnel exists (i.e. a viable path to normalcy).  

Until then, gold remains contained in the mid $1600s, under the highs of the year.  Copper prices remain weak.  And oil prices traded to new 18-year lows today. 

Trump was due to have a call today with Putin today, in attempt to bring Russia and OPEC to the table to reverse the oil price collapse.  

This comes as we've nearly matched the plunge in oil prices from the Global Financial Crisis – but it’s taken just half the time.
 
Special Invitation:
 
In the past week, money moved out of mutual funds and into cash in the highest amounts on record.  Meanwhile, billionaire Bill Ackman was putting over $2 billion to work.  Legendary value investor, Bill Miller, was buying.  He called it one of the top five buying opportunities of his lifetime.  The best investor of all-time, billionaire Carl Icahn, was adding to two stocks we own in my Billionaire's Portfolio.  And one of the big investors we followed into a beaten down airline, has added more to his stake. In addition, he was setting up a new $3 billion fund, just to load up on the hardest hit stocks in this crisis.

With this last anecdote in mind, most people that are willing to buy stocks in this environment, tend to feel more comfortable buying big cap brands/ industry leaders at a discount (Amex, Coca Cola, Goldman Sachs, Walmart). 

But the best investors are on the hunt for companies they are confident can survive, but are the most beaten down. That's the formula for huge returns.  In our Billionaire's Portfolio, we have a perfect list that meets that criteria — transformed companies that have been thrown out with the bathwater.  

With this portfolio, we should expect to do multiples of what broader stocks do on the rebound, just as we did in 2016 (bouncing more than 40 percentage points from the lows that year, and finishing almost three times better than the S&P 500 on the year). 
 
 

Pro Perspectives 3/27/20

March 27, 2020

As we’ve discussed, here in my daily Pro Perspectives notes, historically major turning points in markets are associated with some sort of intervention.  And markets can turn well before there is clarity on the outcome (the coronavirus, in this case).  

We now have the nuclear bomb of intervention.  Both the Fed and the government are in ‘whatever it takes’ mode.  Government aid has already surpassed $3 trillion, with more to come.  And the Fed expanded it's balance sheet by a trillion dollars in a week, with more to come. 

With that from yesterday's highs to Monday's lows, the S&P 500 had jumped 20%.  But at down 35% (the max drawdown in stocks to this point), we will need a 54% gain to return to the February highs. 

As we end the week, let's take a look at the most important chart of the week, U.S. yields.  

Remember, we talked about this last week, as the most important market in the world. 

As the Fed cut rates to zero and launched QE, money should have moved IN to the Treasury market, pushing market rates on the 10-year government bond down, toward zero.  Instead, rates went into reverse and ran up as high as 1.30%.  That was a flashing emergency signal that there was serious trouble in the bond market.  And that became the battle ground for the Fed. 

But as we discussed, it's a battle that they have the tools to win.  They have the printing press.  They can buy as many Treasuries as they need to, to push yields back down.  And that's what they did.  The Fed fixed the bond market this week, by become a buyer of corporate bonds, municipal bonds and an unlimited buyer of Treasuries.

As you can see in the chart above, the 10-year yield closed today at 68 basis points.  So, financial markets seem to be function properly now. 

Global policymakers have thrown the kitchen sink at the crisis, all vowing to do 'whatever it takes.'  The bottom should be in for stocks, unless there is an uglier negative surprise (on the health crisis front) than anyone, at this stage, could imagine (i.e. another black swan). 

And as discussed yesterday, we have the chance to see a positive surprise on the health crisis front as early as Monday, as we should start hearing reports out of New York on the performance of Hydroxychloroquine, a treatment option for Covid-19 — the use of which began in New York hospitals this past week.  
 

Pro Perspectives 3/26/20

March 26, 2020

Stocks continue to rally as the U.S. government and the Fed have followed through on the promise to do "whatever it takes" to ensure the solvency and liquidity to keep banks, companies, small business and individuals whole, through this economic disruption.

With those actions, the bridge is in place to fill the void (for the most part) in the economy, temporarily.  "Temporary" is the assumption everyone has to make, because the alternative is armageddon-esque.

Among the many scenarios that can make it temporary, the best-case scenario is an effective treatment for the virus.  Even better, a prophylaxis.

On that note, as of Tuesday of this week, the FDA approved the "off-label" use of chloroquine (and hydroxychloroquine) for treatment of Covid-19 — i.e. doctors around the country can now prescribe it.  And as of Tuesday, New York City, the current hot spot of the virus, has been using it, and tracking results in a clinical trial.   

There have been a couple of trials that have made the rounds in the media in recent weeks on Chloroquine, notably one in China and one in France.  Both showed efficacy (but not trials that meet FDA standards).  And there is an "in vitro" study from Chinese researchers in early February that showed the stop of progression of the virus in cells that were already infected, and showed the prevention of infection in pre-virus cells.  

With that, by early next week, maybe Monday, we should start hearing stories coming out of New York about the efficacy of this drug. If we hear success stories, people virus free, it would put a floor under sentiment.  It would establish a viable path to a return to normalcy.  And that would take the worst-case scenario off of the table.  That would be a turning point in this crisis.  

If so, we would have a path to resolution (at least treatment as a bridge until a vaccine comes to market).  And for markets, that would come simultaneously with a tsunami of stimulus. 

 

We will see.  Bottom line:  We should keep an eye out for any reports coming out of New York over the weekend. 

Pro Perspectives 3/25/20

March 25, 2020

As Congress continues to move toward a formal approval on a $2 trillion economic relief package, stocks continued to climb today. 

That shouldn't be too surprising.  Remember, as we've discussed in recent days, both the Fed and the U.S. government (through stimulus) are becoming stakeholders in the stock market.  The Fed, through corporate bond ETFs.  And the government, likely through equity stakes (or options on equity) in airlines. 

Speaking of the Fed's influence on stocks:  Let's revisit what Ben Bernanke – former Fed Chair, and the architect of the Fed's emergency policy response to the Global Financial Crisis – said about QE and stocks. 

When the Fed announced QE2 in late 2010, Bernanke penned a column for the Washington Post, titled, Aiding the Economy:  What the Fed Did and Why. 

In it, he wrote this about QE1:  "This approach eased financial conditions … Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." 

In short, as Bernanke acknowledged in the above, and more explicitly as he continued doing lengthy interviews to answer critics of QE, QE tends to make stocks go up – which is an intended consequence. 

Now, we heard from Bernanke last week, in an op-ed that he and Janet Yellen penned for the Financial Times, where they recommended that the Fed buy corporate bonds (a market that was becoming very ugly and threatening to financial stability).  
  
The corporate bond market bottomed a day after.  And the Fed complied on Monday, announcing they would buy corporate bonds. 

On Monday afternoon, we looked at the corporate bond ETF, LQD, as an easy way to follow the Fed tsunami.  Here's an updated look at the chart. It has already retraced 70% of the decline.  

Staying with the Bernanke theme today.  We heard from him again this morning, in an interview on CNBC.  We he speaks, it's a good idea to listen.  As a well-respected expert on the Great Depression, he was asked how this current situations compares? 
 
The good news:  He said it didn't. 
 
He compared it to a natural disaster.  That said, he agreed with the policy measures taken (monetary and fiscal), but emphasized the importance of executing on the health care strategy (slow the spread, identify treatments, find a vaccine).  Assuming that the threat begins to clear in the summer months, he was optimistic on an economic bounce back. 
 

Pro Perspectives 3/24/20

March 24, 2020

We still don't have an economic package from Congress, but we know it will be very, very large.  And markets are responding. 

Let's talk about why. 

As we discussed yesterday, the Fed is "all-in" pledging to backstop anything and everything by printing unlimited dollars.  With those dollars, among many assets, they are now buying bond tracking ETFs (i.e. they are now in the stock market).  Add to that the government is looking to infuse cash into failing industries by taking equity stakes (i.e. the government will now be in the stock market).  

No wonder, stocks had their best day since 1933.  Not to be outdone, in the spirit of central bank and central government intervention in the stock market, the Nikkei has risen 25% in just two days.  As we discussed yesterday, the Japanese stock market is familiar terrain for the Bank of Japan.

Who’s next in line?  Probably the ECB stepping in to put a floor under European stocks. 

 
Make no mistake, with global governments and central banks following the "print and backstop everything/everyone policies" we have explicit devaluations of currencies.  That makes it a “buy everything” market.
 

This is the global "debt monetization" event people thought we were witnessing during the Global Financial Crisis (GFC).  The difference?  In the GFC, people thought the result of the Fed's actions would be hyperinflationary, and therefore a defacto debt and currency devauation.  It didn't happen.  When you give people money in a debt crisis, they hoard it.  With that, we didn't get hyperinflation, instead we got a deflationary bust. 

The Virus War is the opposite.  Never has there been a more applicable environment to inflate away the value of everything (in the medium term) to keep the economy (the world) intact (in the near term).  It's the only option. 

Again, as we discussed yesterday, this is a brew for massive inflation when we come out on the other side of the virus.  That means, just as people are wanting to hold cash, it's the worst place to be.  The early evidence:  Almost everything (all global assets) was up today. 

With this backdrop, the first place you look, as a preservation of buying power:  gold.  We talked about this yesterday.  Gold was up almost 5% again today. And it's just getting started.  How do you play it?  You can buy a gold ETF.  GLD is the most widely traded gold tracking ETF – easy to buy, and tracks the underlying well.  
 

Pro Perspectives 3/23/20

March 23, 2020

As we await a massive relief/stimulus package from Congress, whatever holes were left in the Fed’s response were filled this morning. 

They promised to buy treasuries with no limits on the amount.  They also announced they would be buying corporate bonds AND ETFs that are tied to the performance of corporate bonds. 

 
As we discussed last week, in the Fed’s massive Sunday night action, where they slashed rates to zero and started a big bond buying program, they didn’t address the troubled commercial paper and corporate bond market, which started to bite them early last week.  Now they’ve backstopped each. 
 
The good news, as of Friday, it began to look as if the Fed was getting the Treasury market under control.  A 10-year government bond yield rising toward 1.30% on Thursday, after the Fed slashed the Fed Funds rate to zero, was a scary message that the most important market in the world had no buyers.  Today, the 10-year traded as low at 71 basis points.  So, again, it looks like the Fed now has this under control.  That’s a big deal (very good news for the function of financial markets and the economy). 

Something to note on the new moves made by the Fed this morning: With the addition of bond ETFs, the Fed is now explicitly in the stock market.

Japan started buying ETFs back in 2013, as part of their QE program.  They went on to triple the initial amount, and then double that amount.  The Nikkei did this along the way …

The BOJ now owns 80% of the Japanese ETF market, and close to half of the Japanese government bond market. 

Unlike Japan, the Fed doesn’t have the authority to buy ETFs that track any asset class (yet).  But if you want to follow the Fed money into the bond ETF market.  The LQD is the highest volume corporate bond ETF.  It was up 7.5% today. 
So, this is what “whatever it takes” looks like when the U.S. economy comes to a halt.  They backstop everything.

Combine this, with a $2 trillion fiscal package — that comes with cash drops to the American public and small businesses, and will likely come with the U.S government supplying cash to major corporations (namely airlines) for exchange for equity stakes — and you have: 1) the government explicitly involved in propping up the stock market, and 2) a brew for massive inflation when we come out on the other side of the virus. 

As we’ve discussed, historical turning points for stocks tend to come with some form of intervention.  With the approval by Congress of this relief/stimulus package, this will be the motherload of all interventions. 

With global governments and central banks following the “print and backstop everything/everyone policies” we have explicit devaluations of currencies.  That is fuel for gold. 

On that note, here’s an excerpt from my note last week:  “As the world’s central banks are printing money and governments are rolling out massive deficit spending programs, gold should be moving higher like a rocketship.  Yet it’s down 13% since last Monday.  Let’s keep in mind that the Fed has the printing press, and won’t lose the battle in the bond market.  In the very near future, the Fed will probably have the 10-year yield where they want it (maybe at 30-40 basis points), and be in complete control of the yield curve.   It may take that observation to turn around the price of gold.  When it does, we could see gold much, much higher (maybe $2,500ish).” 

 

We are indeed seeing the Fed gain control of the Treasury market.  And gold has indeed started to move.  It was up over 5% today, and I suspect it’s just getting started.  

 
If you have any comments or feedback, I’d love to hear from you:  You can email me at properspectivesdaily@gmail.com.

Pro Perspectives 3/20/20

March 20, 2020

We've talked in recent days about the troubling U.S. Treasury market.  This is the most important market in the world, and it has been broken since last week.

So as we watch the back and forth in stocks, and follow the ebb and flow of the virus, it's the bond market that is most important right now for stocks (and the global financial system).  

As we've discussed, in a world of fear and uncertainty, global capital historically flows into the U.S. Treasury market (buys U.S. government bonds), the deepest, most liquid market in the world.  Why? If you're a Russian billionaire or an Asian sovereign wealth fund, when the world appears to be imploding, you have the best chance of seeing your money again by betting on the full faith and credit of the U.S. federal government. 

That said, over the past two weeks, as the global crisis heightened, bond prices have been going down, not up, and that has driven U.S. government bond yields up (as you can see in the chart) — which has been a flashing red emergency signal. 

In a time when the Fed is trying to force borrowing rates down, the Treasury market is doing the opposite for things like mortgage rates.  You can see in this next chart, with the Fed now at zero on the Fed Funds rate, mortgages should be going for 2.5%, if not 2.25%.  The average this week was 3.74%.  
What has caused this disconnect in the bond market?  As we've discussed this week, a lot of that has to do with 1) blow up of a few hedge funds, and the subsequent liquidations of positions that had been working for them (i.e. forced selling of their long bond positions), and 2) global central banks have been desperately selling Treasuries to meet the demand for U.S. dollars from their financial insitutions. 

The Fed went to work on this problem last week, and threw more at it Sunday night, and even more this week — to combat a U.S. Treasury market that was lacking buyers.  Remember, the Fed has the printing press, so this is a battle they will win.  

The good news, with the behavior yields today, they may have won the battle.  Yields finish the day back below 1%, and down 40 basis points on the day from the highs – settling at 88 basis points.  This should be a very good signal for markets coming into next week.

 
If you have any comments or feedback, I’d love to hear from you:  You can email me at properspectivesdaily@gmail.com.

Pro Perspectives 3/19/20

March 19, 2020

As you know, we’ve had a massive monetary and fiscal response to this crisis, globally in an attempt to thwart an economic crisis.  That response continues to get bigger, and more global. 

And for the past week, the White House has been executing on a gameplan to moderate, if not contain the healthcare crisis. For markets and society, we’ve had a significant “rate of change” in the situation (from no plan, to a plan with hope).  We’ve gone from “nothing” to “something.”  That’s good news. 

What hasn’t been addressed publicly has been the encouraging treatment options for the virus.  This is likely by design, as they’ve been campaigning to build enough concern among the population, so that they comply with recommendations to “lay low.”  But today, the President, along the FDA Commissioner, finally let the public in on some treatments that have been shown favorable results (anecdotally and in testing) in reducing the impact of the virus and increasing recovery times. 

This is intelligence that has been shared on Twitter for at least the past month, by epidemiologists, virologists and doctors on the front lines. 

Perhaps the most interesting, with lowest barrier to entry, is a drug called Hyroxychloroquine (a malaria and rheumatiod arthritis drug).  And it was the first potential option Trump mentioned today.  It’s an FDA approved drug, but not yet for the treatment of coronavirus.  The FDA is currently looking at the trials. 

On that note, importantly, the bar for FDA approval is significantly lowered for serious rare diseases that have little-to-no treatment options. They look at safety. They look at efficacy (does it work?). By rule, the FDA must give a lot of flexibility on the latter (i.e. if it’s safe, they are inclined to approve it).  And given the long history of the drug, the understand the safety already.  It is considered to be safe, but dosage is critical to the safety, which the FDA is studying now.  Expect this to get approved quickly for use in the U.S. 

It has been used in China, South Korea, Japan and in Europe, with anecdotal success.  And there is research being produced on it, almost daily.  

This is good news for markets.  At this stage, to put a floor in sentiment, we just need to see a viable path to a return to normalcy (regardless of how long).  That takes the worst case scenario off of the table.  These treatment options would offer that. 

In the meantime, the Fed needs to, and continues to, fix broken markets.  They had to step in and backstop money market funds last night (as they did in the financial crisis).  They are continuing to battle to stabilize the Treasury market.  And, in doing so, they had to reopen dollar swap lines with central banks around the world today.

Here’s what that means: The Fed agreed to give foreign central banks U.S. dollars at a determined exchange rate for the currency of the respective foreign counterpart. And when the swap ends, the two central banks simply repay the same quantity of currency back. There’s no exchange rate risk and no impact on the demand for currency in the open market. 

This dollar liquidity solution was a very key step in repairing stress in the global financial system back in the GFC.  When the credit crisis was at its peak, banks around the world were hesitant to do any short-term lending with other banks. As a result foreign bank-to-bank lending rates for dollars, the world’s primary business currency, shot up. That restricted access to dollar borrowing and pushed a lot of consumer interest rates higher in the U.S. and abroad. 

By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world. And removed the fear associated with having limited access to U.S. dollars. This should be a big step, for the Fed, in resolving the issue of rising market interest rates (namely the U.S. 10 year yield).

 
For readers of Pro Perspectives:  If for any reason you are not getting my emails (as from time to time, getting emails to inboxes can be challenging), you can always find my daily notes here.