This Week in Barrons: 3-15-2020:
Coincidence – I don’t think so…
This market is a tilt-a-whirl wrapped in a rollercoaster – inside a hall of mirrors. We’d better get used to the ride. It looks like the coronavirus was the catalyst to our government’s printing presses colliding with low rates and stock buybacks – and add a dash oil prices collapsing and you have the script for the next John McClane / Die Hard movie. We’re already seeing the Banksters crying for more stimulus, and the regular suspects begging for bailouts. Didn’t we just make new market highs in February? Has everyone spent their winnings already? You really don’t think that it’s coincidence that we achieved a: dysfunctional oil, crypto, metals, and stock market ALL in the same week as this killer virus went global – do you? Do you think that it’s coincidence that the same group of countries who have successfully conspired to fix oil prices for over 50 years – just fell apart in the same week as the rest of these natural disasters?
The reason Saudi and Russia gave for pulling out and increasing production was that they FINALLY had enough of the U.S. shale oil industry. Really? You’re asking me to believe that it’s a coincidence that you’re causing an all-out energy war (the likes of which the world has never seen) because you don’t like the U.S. shale oil industry – in the same week as the coronavirus is declared a global pandemic?
Oil experts are forecasting a 50% drop in oil to $20/barrel. U.S. jobs in the oil and gas industry depend upon $40/barrel oil. Is it also coincidence that almost 10m of these jobs would be eliminated right before a Presidential election? So, if you wondered why the U.S. became a large buyer of oil on Friday, your answer is: Re-Election.
Changing gears: just this week companies all across the U.S. began to utter the words: ‘work-from-home’ – like it’s a real thing. Most people have no concept what those words mean together. Home is often viewed as a refuge from work. Your home is calming and safe, but where you work is hectic and tense. Home is long-term, and work is not. The working mindset is: head down, avoid responsibility, and look busy. The manager however needs increased productivity. How many of our managers have even been trained in remote team management? How many jobs don’t lend themselves to ‘work-from-home’. The best way to ‘work-from-home’ is to plan your own agenda, organize your own thoughts and deadlines, make bigger promises, show up more often, lead, connect, innovate, and ask yourself the hard questions. ‘Working-from-home’ requires everyone to be smarter in reacting and responding. It requires us to think about our actions and emotions before and after we send something. Initiating assignments is easy, but sticking to a plan and an agenda is now more difficult because of increased uncertainty. We’re in for a slog, but there will be an end to it. The tough part is coming back from ‘working from home’ – as it’s not a flip of a switch.
The Market: …
Global markets are plunging after an alliance between Russia and OPEC imploded, causing the worst one-day crash in crude oil prices in 30 years. Between energy markets and supply chain disruption, corporate earnings could decline by over 20% this year – which is both recession and soft-depression worthy. The stock markets are on their way to fully discounting the possibility of a recession. You can see that in the bond market where the 10-year Treasury yields are at record lows and falling. That’s a pretty clear window to what investors are thinking. If the pandemic causes employment gains to fall below 100,000/mo., unemployment will start to rise and that’s a recipe for an instant recession. People will sense a recession, and start to pull back. Businesses will see that, and will pull back as well. That’s how the vicious cycle begins. Economist Mark Zandi said: “If the pandemic is comparable to what the CDC seems to be suggesting, it will be tough to avoid a recession and potentially a soft depression.”
Most economists and analysts agree that earnings and revenue declines averaging 20% are realistic. We have not experienced a bear market crash since the Crash of 1929, but one wouldn’t shock me in the least. The FED’s rate cut was the right thing to do – as many loans are tied to Libor and T-bill rates, but I’m not sure our small to medium sized businesses are able to pay much of anything at this point. When you stop all retail traffic from entering an establishment, it’s tough to make that loan payment at the end of the month – no matter what the interest rate is. People are talking tax cuts and emergency payroll tax holidays, but that becomes a political football that is being tossed around in Washington D.C. A temporary payroll tax holiday is a tried and true fiscal stimulus that gets money to lower middle-income households quickly. We could also expand unemployment benefits, since many people may not be able to get to work.
Understand the ‘powers-that-be’ knew this was coming MONTHS ago. They realized that both commerce and profits were going to grind to a halt, and the proof was in the ‘Insider Sales’ numbers showing 70 sellers to each buyer. The economy has further to slow, but markets are NOT the same as the economy. Markets can be manipulated – economies not so much. It is possible that the economy falls further than the market.
One thing you can generally count on with the market, is that it will overshoot to both upside and downside. That means there are going to be pockets and sectors that have been beaten lower than their true ‘fair value’ such as gold and silver. If you think it's normal for gold and silver to be falling, at a time when the FED needs to print $1.5T to create liquidity in a broken system – you can stop reading now. It is not normal. It’s a coordinated attack. It's not normal for someone to come into a futures market at 3 am, and dump $3B in ‘illegal’ paper gold shorts. That's blatant manipulation. But, there's no better way to force investors NOT to hoard gold and silver, than to pound the snot out of it with paper shorts; thereby driving people into equities.
In my opinion, there's no question we're going to go from being in a recession – to being in a soft depression. We've been in a recession for quite some time, but all the FED’s money printing has masked it. At some point it will become clear that our FED’s policies didn’t work. Fiat currencies didn't work, and the system failed us. IF the plan was to crush the US economy, the virus and media have done their job.
Factually, the same sovereigns that are selling $3B in paper shorts on gold are secretly buying both gold and silver. Russia, China, the Central Banks and our FED have been wholesale buyers of the metals as of late. If you have NO metals, I would use the current pounding to get some.
Info Bits:
- The odds of a recession… now stand at 53% - the highest reading since the Great Recession of June 2009 and significantly higher than last month’s 24%.
- “All ashore who’s going ashore...” Carnival Cruise's stock has sunk 46% since mid-January, and now it has another coronavirus-infected ship.
- More than 25% of Italy’s population is on lockdown… due to COVID-19. COVID-19 is now in over 100 countries, with 300m children out of school.
- For a truly analog vacation… go to the Isle of Man where you are encouraged to lock your phones in a box. In my opinion, any vacation would be improved if it started with locking your phone in a box.
- PepsiCo acquires the energy drink Rockstar… $3.85B. Both companies have agreed on the sale, however, at what point do we look at big sugar like we look at big tobacco?
- Tesla is looking for places to build its Cybertruck: I was thinking wherever they filmed: “Mad Max: Fury Road” feels like a good fit.
- The President of the US Soccer Federation… resigned after claiming he “wouldn't pay women equally because being a male player requires more skill”.
- Bill Gates… has stepped down from the board of Microsoft (the company he co-founded in 1975) to spend more time on his philanthropic endeavors.
Crypto Bytes:
- Bitcoin got kicked in the ding-dong… as it fell over 37% last week. That was its biggest drop in seven years. This wiped out all gains for the year, and undermined the narrative that it was a safe-haven like bonds and gold.
- Lucky for us that it’s not just Bitcoin that’s falling… but bonds, gold, and other normally stable traditional markets as well. When in doubt – sell it all.
- Option volume records were smashed… last week in Bitcoin as investors scrambled to hedge their positions amid the sell-off.
- We-Work nah We-Wait… until the dust settles as New York’s surging coronavirus is forcing more cryptocurrency and blockchain companies to close their offices without warning and potentially abandon their employees.
- After Bitcoin’s collapse to $3,867… it retraced its losses and currently sits above $5,000. A new survey shows that cold, hard cash with a helping of government bonds is where people turn in the face of a global pandemic.
Last Week:
Monday: Minutes after the opening bell, the S&P dropped 7% causing the Level 1 circuit breaker to trigger, and stopping trading for 15 minutes. Trading then resumed and the S&P closed down 7.6% - it’s worst day since 2008. Oil, following the weekend news, dropped 24% - its worst day since 1991. The Russian ETF ERUS dropped 19.8%, and the Energy ETF XLE tested levels dating back to 2000 – down 43% on the year. The downside is not over. I’m expecting a dead cat rally, but the underlying credit problems, liquidity issues, and supply chain disruptions are NOT going to be fixed for a while. I believe that gold will move higher. Make no mistake, there's a war being waged right now against U.S. oil that includes Saudi, Russia, Iran and China. Factually, most of our oil and gas frackers cannot survive with oil under $40/barrel (it’s currently $32).
Tuesday: President Trump is expected to announce an economic stimulus plan this afternoon, meanwhile the FED is pumping an additional $1.5T into the financial system to ease stress on the markets. A newly released bank survey showed 49% of Americans living paycheck to paycheck. The survey also found that 53% of respondents do not have an emergency fund that covers at least three months of expenses. So the U.S. population could not withstand a major quarantine. The Oil War isn't over, and experts are expecting $23/barrel before all is said and done. Moments ago the FED announced that it had received its highest request for liquidity on record. Nothing says things are fine more than Banksters begging for money.
Wednesday: There were massive over-subscribed Repo injections last night. Aka - Banks wanting more liquidity than the FEDs are providing. The ‘Talking Heads’ are calling this is a buying opportunity, but at what level: DOW 20k or 15k? Until markets firm up, the easy move continues to be to the downside. The WHO just came out and declared the coronavirus a global pandemic. That headline smacked the market hard, and now we’re down 1,345. The biggest problem is that as they quarantine schools and prevent large gatherings – all commerce stops. The bottom line is that panic is causing huge disruptions and the market knows it. Next stop is the December 2018 panic low.
Thursday: This plunge is faster and deeper than any in history. After the first few thousand points down, I expected a rally – but I would have been smarter to liquidate my remaining holdings on that bounce. My guess was that we'd get a bit more gains before the bottom fell out. We didn't. But why aren’t gold and the miners doing well? The first reason is that some gold selling was required to offset their losses in their stock portfolio, but the real reason is because the Banksters are leaning on it. It wasn’t a week ago that $3B in paper gold hit the market for sale. That’s NOT selling from a mom-n-pop e-Trade account. That’s a sovereign group hoping to keep people from buying gold. The amount of short selling that has hit the miners is enormous and absurd. When the dust settles, all of these issues with fiat currencies, debts, and derivatives will come home to roost. And NO, it’s not normal for the FED to flood the credit markets with $150B in Repos every night. Buy gold on these dips. I have to believe that they'll put in a 2 or 3 thousand point bounce soon, and I’ll use that to get out of my remaining long positions. The FED just announced a $1.5T dollar Repo op. that did very little for the overall selling tone of this market. Even Bitcoin traded lower today. Who knows what’s a safe haven and/or a store of value at this point.
Friday: Okay, yesterday all heck broke loose despite the FED coming out and announcing $1.5T in new Repo operations. This is full blown QE-4, and the markets didn’t even respond. In fact, the DOW ended down 10% on Thursday. Markets generally ‘turn’ faster than the underlying economy – having me believe that the lows in the economy have NOT been seen yet. Day after day more and more events are cancelled. The NBA, NHL, and MLB have all paused their seasons. Cancellations like SXSW cause ripple effects like: hotel bookings, car rentals, eateries, advertising contracts, tv broadcasts, etc. This economy has a lot more pain coming, but the economy is NOT the market. I still believe that this market has more downside associated with it.
This morning I put on: an ‘out of the money’ Strangle in the SPY (the S&P proxy). Meaning, I bought July monthly, one-standard deviation out - $190 Puts and $320 Calls. With our current ‘inefficient’ market, a bounce is coming (maybe a 1% rate cut at the FED meeting on Wednesday) – which should make those calls worth selling. And then I’d have the Puts for the inevitable fall. If Monday looks good, I may dive into the DIAs and do the very same trade. The only way to safely play this market is via the ETF's.
Weed:
- Marijuana firm Tilray plans a $90m capital raise: You know that Tilray must be running out of cash to do a capital raise in the midst of this market turmoil Wow, I wonder who timed this offering?
- The Alabama Senate… passed a medical marijuana bill that would license 34 dispensaries across the state. It also permits a doctor’s patient to use MJ as treatment for 15 conditions.
Next Week: National Emergency for the Markets:
Whoo-Whoo … the Bear Market has arrived, as we have now corrected by over 20% year-to-date. In terms of what I’m looking for over the next week to 10 days:
- VIX… Last week the VIX (volatility index) had its 4th highest close on record. Previously when the VIX hit levels such as this – we bounced over 10% higher the next 1 to 2 days. And even though we bounced 9% on Friday, that bounce could extend through the FED’s Wednesday meeting.
- Bail-Out on rebounds … If you have a 401k or an IRA and you’re feeling stressed by the market’s actions, get out of your long positions on these ‘rip-your-face-off’ rallies. Take the opportunity to move into a money market account. Focus on bringing your risk more in line, and that often involves more cash.
- Coronavirus is just a catalyst… the crash in ETFs is as a result of low interest rates, stock buybacks, and our FED fueled fantasy. Boeing (see chart) actually took out a $13B loan to do corporate stock buybacks. Boeing is a major aircraft supplier with serious production issues with their largest product. Customers are cancelling orders – and Boeing is borrowing money to help out investors and executives with stock-option packages. Really? Talk about the tail wagging the dog. That is how backward our corporate thinking has become.
- The FED will try (and fail) to save our stressed markets. On the 18th, the FED will announce their interest rate modifications. Currently our FED’s interest rates run between 1% and 1.25%. There is a 67% chance that our FED will cut rates directly to zero on Wednesday, and in fact – that 1% move has been already priced into the market. Remember our FED previously cut rates 50bps just 2 weeks ago, and the market SOLD into it. The FED will also expand the Repo / QE program to over $5T – fully knowing the market ‘yawned’ at their last $1.5T announcement. The FED will do its part, but the coronavirus is sparking some pretty serious risk. With a biological weapon that was ‘accidentally’released upon the global population as a backdrop, how much can our FED actually do?
- There is FAR MORE trouble ahead. We could bounce all the way back up to the 300 level on the SPY. (a) The VVIX (the volatility of the volatility index) was HIGHER by almost 10.5% on Friday (see chart). That means that the pros are seeing a lot more pain coming and are buying Put options (hedges) to protect themselves. (b) The 33-day (April) volatility futures (/VX) barely moved lower even with Friday’s rally. (c) S&P earnings and revenue warnings are on the horizon, but have not hit yet. (d) Big Tech is NOT immune to a correction. Bear Markets touch everything and thus far both Apple (AAPL) and Microsoft (MSFT) have remained relatively unscathed (see chart). Both of these are in everyone’s 401k and in all pension funds, but have survived the downturn nicely. Bear Markets eventually hit ‘em all.
o A specific trade: MSFT’s earnings are not until late April. Assuming we continue to bounce early next week, I would buy the in-out Put spread – buying the April 20th $155 Put and selling the $152.50 Put for about $1.25 and therefore double my money prior to earnings.
- The SPX Expected Move increased by over 40%... over last week’s expected move. Last week the expected move in the SPX was $162, and we actually moved lower by $261. Next week the expected move is $227 – a 40% increase. Volatility isn’t going away any time soon. In order to gain back some expected move credibility, they have expanded their range by 40% which means we can SELL options premium again this week because it’s extremely possible that next week we will close INSIDE that $227 expected move on the SPX.
- Cash is STILL KING. Patience is key – because we are NOT there yet.
Tips: I think this market runs higher into the FED meeting on Wednesday.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $0.77 / in @ $3.07),
- First Majestic Silver (AG = $5.00 / in @ 10.50),
- Canopy Growth Corp (CGC = $10.94 / in @ $22.17),
- DRD Gold (DRD = $4.01 / in @ $4.20),
- GBTC Bitcoin (GBTC = $6.32 / in @ $10.01),
- NVAX (NVAX = $8.41 / in @ $7.24),
- Pan American Silver (PAAS = $13.79 / in @ $18.00),
- Real Estate ETF (XLRE = $35.31 / in @ $39.05),
- Utility Index (XLU = $57.67 / in @ $67.10)
- SPY Straddle … July … +$190 Put / +$320 Call
Crypto:
- Bitcoin (BTC = $5,350),
- Ethereum (ETH = $125),
- Bitcoin Cash (BCH = $175)
Thoughts: Your next 2 shorts are Microsoft = MSFT and Apple = AAPL. After all, it appears like the coronavirus won’t be leaving anytime soon. Between all of this alone time, our slowing economy, and Russia and Saudi Arabia dueling to see who can flood the world with more oil – the price of crude (/CL) is at its lowest price in over four years. Now, it’s tempting to be a contrarian, but there may be just too many things weighing on crude in the short term, and that might keep a lid on its price for a while. If you’re bearish on /CL, or think that it won’t be rallying much in the next few weeks, the short /CL call spread that’s short the $35.5 Call and long the $37.5 Call in the April expiration is a bearish strategy that collects a credit 1/3 the width of its strikes, and has a 70% probability of expiring worthless.
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
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