This Week in Barrons: 3-22-2020:
Calm Back Down…
My wife will tell you, I’ve been unintentionally practicing social distancing my entire life. Last weekend the FED took rates to zero but the S&P futures still opened limit down. It’s never good for the FED when you hit them with your best shot and it doesn’t work. It’s what a corporate CEO must feel like when he’s fired, and his company’s stock goes up on the announcement. I think this past month will forever change traditional investing. I think passive investing is on life support, and all of the active investors are suddenly playing ‘Texas Hold-Um’ with 150m passives ready to hit the panic button.
Panic loves company, but calm is the practical, efficient, rational alternative. If you’re on a crowded plane and one person is freaking out about turbulence, the episode will be subdued. If however, six people are freaking out – it could spread and overtake the rest of the plane. Panic requires reinforcements in order to spread.
Calm is a dampening agent, and is not nearly as effective at spreading itself as panic. Therefore, we need to expand our efforts creating environments of calm, because calm can’t compete with panic when it comes to expansion. Twitter has been engineered to penalize calm and amplify panic. Although 50 years of watching 3 dominant TV networks wasn’t ideal, the combination of oligopoly and the FCC meant that none of the networks spread panic. They weren’t built for it. When cable news showed up, they discovered that panic was a great way to make a profit. Calm tends to make things better, while panic spreads anger, fear and greed.
If calm is indeed the way forward, then we need to: (a) improve our filtering of incoming information, (b) stay off twitter, (c) bring real work back into our lives, and (d) understand that being up-to-date on the news requires only 5 minutes per day. With change becoming a constant, we have a real shot at making things better. Factually, meetings are the most hated part of everyone’s work day. They last too long, occur too often, and bore and annoy most attendees. Most can be replaced by a memo, or should be replaced by a conversation. A conversation involves listening and talking (but mostly listening). It expresses openness, access, and humanity. Conversations allow everyone to be heard, and generate their own interest – because after you speak you’re normally focused on the response. Here’s the punchline. Try and remain calm during these stressful times. And when you congregate, allow it to be remembered via conversation and engagement – instead of something that could have been conveyed via memo + video. Change doesn’t require you or time, but it does require: education, connection, and a conversation.
The Market: …
It’s always darkest before the DAWN. So is D-A-W-N the new investing strategy where: D = Domino’s Pizza, A = Activision for video games, W = Walmart for toilet paper and Ramen noodles, and N = Netflix to stream your content? The news will get worse from here, but its ability to shock us will diminish. Stocks will eventually stop going down every time bad news hits. Be prepared for news surrounding the contagion’s spread and even the death rate. Also be prepared for how bad the March economic numbers are going to be. It’s highly doubtful that anything turns sharply higher in April, based on the fact that nearly everything has been canceled other than walking the dog and surfing the web. Exceptions include: Kroger, Costco, Amazon, Target, CVS, Walgreens, Walmart and maybe Home Depot – because the nesting business is booming. But as bad as the news will be, its ability to shock us will diminish. We are not going to have a 75 VIX for 6 straight months.
Nobody knows where the bottom is. The major indices are all down close to or more than 30% with the Russell 2000 approaching 40%. Boeing continues to get smoked – dropping 23.85% in a day – over 60% YTD. MGM was down 33% in a day, and Norwegian Cruise Lines is down 81% YTD. U.S. airliners are asking the government for as much as $50B in bail-out assistance. Things are so bad we can’t even mount a counter trend bounce for 2-days in a row. ”This time it’s different.”
The unemployment numbers have the potential to quickly match those from the Great Depression. Factually: the U.S. has about 165m people working and about 5.8m (3.5%) unemployed. The most recent survey numbers are showing unemployment running around 18%. Ohio’s unemployment claims are rising 800% week-over-week. There is an explosion in people searching Google for “unemployment benefits”. In the U.S. over 2m people applied for unemployment in the last 2 days. New Jersey is showing a 12X increase and Connecticut an 8X rise in claims. The second year of the Great Depression saw 8.7% unemployment, which would only be a 2.4X increase from our February numbers. I think we could see those types of numbers by the end of Q2. In the third year of the Great Depression there was 16% unemployment, which would be 4.5X from our February numbers. Treasury Secretary Steve Mnuchin told politicians that if the U.S. doesn’t act soon, we could see 20% unemployment numbers quickly. Deutsche Bank expects: “The mother of all recessions. We anticipate quarterly declines in GDP growth that will substantially exceed anything previously recorded going back to at least World War II.”
The unemployment numbers have the potential to quickly match those from the Great Depression. Factually: the U.S. has about 165m people working and about 5.8m (3.5%) unemployed. The most recent survey numbers are showing unemployment running around 18%. Ohio’s unemployment claims are rising 800% week-over-week. There is an explosion in people searching Google for “unemployment benefits”. In the U.S. over 2m people applied for unemployment in the last 2 days. New Jersey is showing a 12X increase and Connecticut an 8X rise in claims. The second year of the Great Depression saw 8.7% unemployment, which would only be a 2.4X increase from our February numbers. I think we could see those types of numbers by the end of Q2. In the third year of the Great Depression there was 16% unemployment, which would be 4.5X from our February numbers. Treasury Secretary Steve Mnuchin told politicians that if the U.S. doesn’t act soon, we could see 20% unemployment numbers quickly. Deutsche Bank expects: “The mother of all recessions. We anticipate quarterly declines in GDP growth that will substantially exceed anything previously recorded going back to at least World War II.”
If there is any silver lining here, the chart above shows the ‘snap-back’ rally that will ensue – based upon today’s percentage drop – pushed out over the next 1 to 20 years. For example, if our markets fall 30% this year – after the market bottoms we will have earned back 14% in Yr. 1. That’s why it’s so important to stay in the game – at least a little bit.
Info Bits:
- The breakup between Tom Brady and the Pats feels personal: This week the 6-time Super Bowl QB ended his 20-year career with the only NFL team he's ever played for – the New England Patriots. He’s saying $30m ‘Hellos’ to the Tampa Bay Buccaneers this week.
- Uber began a hiring freeze… but investors wonder how both Uber and Lyft can survive if we remain locked down – stopping the spread of Covid-19.
- Testing delays have set back the U.S. response. Data suggests that about 125 people per million have been tested – far fewer than any other country. Obviously there’s a reason for that, and it’s not a lack of test kits.
- China’s economy may have shrunk in Q1… for the first time since 1976. This is an ominous sign for the rest of the world.
- The energy sector remains profoundly weak: It’s a combination of the game of chicken Russia and Saudi Arabia are playing, and the global economic slowdown caused by the coronavirus.
- Facebook is stepping up… as it announced that it will be offering $100B in cash grants and ad credits to 30,000 small businesses.
- Boeing needs help… and they’re seeking access to $60B in public and private liquidity for the U.S. aerospace industry. Problem is – they can’t satisfy their creditors. Maybe you should have thought about that BEFORE taking out so much executive compensation / stock buyback program related debt?
- Oil continues to get decimated… down over 65% YTD.
- The US government is planning for 18 months… of a coronavirus pandemic – including multiple waves of illnesses.
- Buybacks: President Trump said he would be ok with forbidding stock buybacks for those accepting corporate bailouts. Is this Presidential sarcasm?
- Just Lovely Four esteemed US senators sold stock after attending a briefing on the coronavirus in February. Good grief. These are officials we elected to promote our best interests both domestically and abroad. I suspect they were more concerned with their own coffers than the public interest - duh.
- SoftBank = OneWeb… a satellite operator that has raised nearly $3B from SoftBank over its past two rounds, is considering filing for bankruptcy protection.
- "Teachers deserve to make a billion dollars a year." Shonda Rhimes said this after homeschooling her kids for a total of 1 hour and 11 minutes.
Crypto Bytes:
- Square is launching a bank in 2021. The U.S. FDIC gave Square (the payments startup) conditional approval for a bank charter to launch Square Financial Services, an Industrial Loan Company.
- Storj Labs’ blockchain-based cloud service is ready to store files and documents. “Decentralization improves security, privacy, and resiliency, while lowering costs,” said Ben Golub, Chair-person of Storj Labs.
- It's not all sunshine for crypto… as demand for BTC options on derivatives exchanges has dried up, even as price volatility reaches record highs.
- The Huobi exchange added a ‘circuit breaker’ in the aftermath of last week's cryptocurrency market crash. The new mechanism would halt all liquidations – where a trader's position is automatically closed – during periods when volatility starts to present a real risk for traders.
Last Week:
Monday: Our FED (from out of nowhere) cut rates to 0%, and announced they're buying at least $700B in Treasuries. This was amazing to me. They have an FOMC meeting on Wednesday, why not wait until then? If they were hoping to ‘goose’ the market higher – it didn’t work. On Friday, the President held a press conference with the leading heads of retail operations. The market loved what they were planning and we put in a 2K point gain. This morning, that will all be erased. The FED officially dared the markets to go into full-on panic mode. They've already announced $1.5 – 2T in Repos, and at least $700B in QE – so what’s next? I will use the crash to buy more gold, silver, miners, and more energy. Yes there's an oil war going on between Saudi Arabia and Russia – but oil is trading like no one's ever going to drive a car again. I want to buy XOP and KL at these insane levels.
Tuesday: Uncle Sam has been busy behind the scenes conjuring up massive bail-outs, and talking about sending everyone in the U.S. thousands of dollars, cheap loans, tax holidays – anything you can name. The market has been up between 480 and 1,000 points, but there is no V-style rebound brewing. I don't think that this is even the start of a multiday bounce, I see things I want to buy for a nice trade such as: PG, MU, VZ, and AMT – yet I’m waiting until we can string 2 ‘up-days’ together before I buy.
Wednesday: Last night they announced that the Primary Dealer Credit Facility would be able to use "equities"as collateral for loans. However, "the following equities would not be eligible: exchange traded funds (ETFs), unit investment trusts, mutual funds, rights and warrants." My question is, who declares what those equities are worth? Stock prices can go down, and at the extreme can go to ZERO. So why would you accept collateral that could go down by 40% in a month? In any case, the idea fell flat and we’re giving back all of yesterday’s gains. Since Feb 5th and 6th we haven't had two ‘up’ days in a row. With so much of our economy tied to the equity market, I thought the banksters would somehow be able to build a counter rally, even if it had no connection to the economy. On the economic front, the FEDs are still pondering giving everyone between $1,000 and $10,000. The problem is that while it would allow people to pay bills, it won't help production. You may have money to buy something, but will that ‘something’ be available to buy?
Three weeks back, we were flirting with DOW 30K. The lack of a real ‘V’ style rip higher, tells me that there's still more downside action to come. It’s getting to the point that comparisons to 1987 and 1929 are warranted. Today was the 4th trading day in 8 where the circuit breakers were activated – triggering a 15-minute halt in trading. Small caps, financials, and industries related to travel, energy, and discretionary spending are getting decimated.
Thursday: This morning initial jobless claims came out – rising by 70K to 281K. I expect those numbers to increase exponentially. Also the Philly FED Index fell FIFTY points from its last reading – to a negative 12.7. WOW. We’re going to hear more about the FED and bail outs, but we’ll also be hearing about more shut downs, and layoffs. Unfortunately, I think we're still going to see this market go lower. Even with the FED now being able to take stocks as collateral, they probably can't buy them up quickly enough to stop the bleeding.
Last night, word got out that a doctor in France combined Hydroxychloroquine (an anti-Malaria drug) and the common anti-biotic Azithromycin – to achieve a 100% cure of the coronavirus. Sure, the sample size was tiny and the side effects could be profound, but it’s a start. Let’s see if this leads to a rally that lasts longer than one day.
Friday: My rule is: before buying anything – I need to see 2 ‘up’ days in a row. Today is options expiration so it comes with its own volatility. Will the world want to go into the weekend long? In February, they sold every Friday, but in March they’ve been okay with going out green. There’s a ton of chatter out there about buying the bottom. If there’s any nibbling to be done, it should be around the energy sector – maybe an XOP or SLB. Unfortunately, we ended the day on the lows. What a week. The S&P closed down 15%, to have its worst week since October 2008.
Weed:
- Canopy Growth rolls out their first cannabis drink… which is Tweed Hounds-tooth Soda. They are planning 3 THC ready-to-drink beverages made via their distilled cannabis infusion process. Each contains 2 mg of THC and less than 1 mg of CBD.
- The Oglala Sioux Tribe has passed a referendum… to legalize medical and recreational cannabis on the Pine Ridge Reservation of South Dakota. They are the first tribe in the U.S. to legalize in a state where cannabis remains illegal. Plans do not call for production to occur on tribal land, setting up a potential conflict straight-away with state and federal authorities.
- Sorse Technology has taken a stake in Pascal Biosciences. Sorse’s water-soluble cannabinoid emulsion technology is used in numerous THC and CBD products. Pascal Biosciences is a cancer research company that is investigating the potential for cannabinoids in cancer immunotherapy treatments.
- New Age Beverages will divest their brand portfolio of… Aspen Pure, Bucha, Coco Libre, Marley, and Xing Tea.
- Recreational marijuana retailers saw a spike in sales… in recent days. It’s a definite sign that coronavirus is prompting consumers to stock up on products.
Next Week: Is this the Beginning – or the End?
It was a long week whether you were a trader or a watcher. We are in the 4th week of the most extreme volatility ever recorded in this market. The S&P lost 406 points on the week – once again exceeding its expected move of 227 points. Next week’s expected move is 228 points, but 9 out of the last 10 weeks the market has moved OUTSIDE it’s expected move – so who knows where it goes. We are down 29% year-to-date on the S&Ps (SPX). The Nasdaq (QQQ) is only down 21% YTD, but the Russell (IWM) is down 38% on a year-to-date basis. The market is definitely leaning bearish. We saw capital flow into the IWM today because it was only down 2.5% vs the market’s 4.5%.
The fact that we continue to move OUTSIDE the expected move tells me that we still have an inefficient market – where the actual market movement is exceeding the theoretical / predicted movement. One theory is, since Treasuries / Bonds have gone to zero – there’s nothing to balance-out the ‘other side’ of a diversified portfolio. In ‘normal’ times, bonds move inversely to stocks and that somewhat puts a floor on losses in a diversified portfolio. Now that Treasuries / Bonds are zero, there is no place left for them to go, and therefore portfolios move with equities – evoking more margin calls – causing more selling. Statistically speaking, we are now trading on the ‘fat tail’ side of the distribution curve – which is dangerous at best.
If you thought that volatility was calming down, I would hold that thought until this market closes 2 consecutive weeks within its expected move. I would not sell option premium until after that time. This market started coming apart at the seams (moving outside the expected move) back on January 13th – which was a good 5 weeks before the markets started collapsing. Now that we’re officially ‘off-the-rails’, I would expect to begin to see trading firms declare bankruptcy.
There is day-to-day confusion in the market internals. Between the bonds, the volatility (VIX), market correlations, emerging markets and even energy – the market is lacking consistency. For example we’ve had days this week where the bonds were selling off along with the S&Ps. On Friday, the VIX contracted while the S&Ps were plummeting – which made no sense until news came out that a proprietary (prop) trading firm in Chicago that was heavily trading the VIX – went under.
The pros are still trading volatility. A high reading on the VVIX is one over 110. We are currently sitting at 187. Trading firms are still buying volatility in the backdrop of a marketplace that is already down 30%. That tells me that the pros see more downside ahead.
Last week we saw capital rotate into emerging markets (EEM) and into the energy sector (XLE) which is down 57% YTD. For next week I’m watching:
- The consumer staples sector (XLP) which has broken to the downside, but has allowed Walmart and Costco to remain relatively unscathed. Mark my words, the bears are coming for WMT and COST.
- The technology sector (XLK) which hasn’t been hit hard enough just yet. To be specific, Apple and Microsoft are in everyone’s mutual fund, and when those funds liquidate – AAPL and MSFT will be sold along with them. In MSFT for example: buying the $140 April Put and selling the $135 April Put (an In/Out Put Spread) is a limited-risk way of playing this to the downside.
Don’t go out on any bottom-fishing expeditions just yet, because I think there’s more pain to come. With Friday's plunge to 19,173, our next area of support is 18,300 – but we’ve been slicing through supports like the proverbial hot knife through butter. I think that if we can get a sliver of good news, such as the spread of the virus is slowing – we’ll put in a hefty snap back rally. I'm convinced we had the start of one on Thursday and Friday, but then the bad news about New York City hit. Remember, the FEDs have taken the gloves off. They're doing $1T a day in Repos. They're buying corporate paper, doing QE, and have a back door to buy stocks. Can our FED make the market bounce sideways, or will real volume continue to force it downward? The only SAFE place to weather the storm is cash. But, if you must nibble, think SLB in oil and PAAS in silver / precious metals.
Tips:
I think:
- SELL any XLK (big tech) bounce.
- Watch the XLE rotation for a long play into SLB – energy has been annihilated.
- Mutual fund redemptions will force Apple and Microsoft lower.
Currently, spread pricing favors the ‘bears’. A typical $5 Put spread costs almost $1 less than its corresponding Call spread. For example: with MSFT sitting @ $137.50, the $135 to $140 Call spread costs $3.03 while the same $140 to $135 Put spread only costs $2.13. So, when I say short tech on big bounces – during the bounce buy an In-Out Put spread that’s 30-days out because: (a) the market hasn’t put in 2 up-days in forever, and (b) it’s less expensive (less risky) than the corresponding call spread.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $0.73 / in @ $3.07),
- First Majestic Silver (AG = $5.51 / in @ 10.50),
- Canopy Growth Corp (CGC = $11.83 / in @ $22.17),
- DRD Gold (DRD = $4.91 / in @ $4.20),
- GBTC Bitcoin (GBTC = $7.00 / in @ $10.01),
- NVAX (NVAX = $10.35 / in @ $7.24),
- Pan American Silver (PAAS = $11.77 / in @ $18.00),
- Real Estate ETF (XLRE = $27.16 / in @ $39.05),
- Utility Index (XLU = $47.82 / in @ $67.10)
- SPY = bought the July 2020 Strangle = $160 Put / $310 Call
Crypto:
- Bitcoin (BTC = $6,050),
- Ethereum (ETH = $125),
- Bitcoin Cash (BCH = $215)
Thoughts: The only element of consistency in my neighborhood is the never ending visits by the Amazon vans. AMZN’s been pummeled along with the rest of the market, but with everyone sitting around at home – AMZN could see a bump in sales. Earnings are coming on Apr 23, and AMZN’s implied volatility is high. A contrarian bull might see opportunity in AMZN, and look to take advantage of the high volatility. If you are bullish on AMZN, the short put vertical that’s long the 1680 put and short the 1690 put in the April monthly expiration is a bullish strategy that collects a credit 1/3 the width of its strikes, and has a 78% probability of making 50% of its max profit before expiring.
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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