This Week in Barrons: 3-1-2020:
Who’s going to the summer Olympics in Tokyo?
I just talked to a friend who flew in from LAX. He told me face masks are now the airport norm. Passengers were wiping down the armrests and tray tables, and during the flight they announced that the 1st person in the U.S. died. How long until public places start shutting down? How long before concerts and even the summer Olympics are canceled? All those venues have employees, who will be suddenly laid off and will have no money to buy anything. 70% of our economy is consumer spending, and when people don’t buy anything – the economy suffers. People won’t be able to meet expenses. They will start hoarding supplies, because in the New America – it’s every person for themselves and there aren’t enough supplies to even service the sick.
First it was in China, then Italy and Korea. We were told that it couldn’t happen here, so we turned a blind eye to science. Washington leadership thinks that if we can get the stock market back up – everything will be fine, but most people have no savings. Soon people will not be able to pay their mortgage/rent, and food will become a priority. The homeless problem will increase, and uncovered medical costs will skyrocket because of the uninsured and the underinsured. Everybody will stop travelling and stay home. Heck, we’re already holding sporting events in empty venues. I have no idea where it all ends. Whether a few thousand people get infected and only a handful die, or whether millions pass away. We don’t know, but we know that everyone’s afraid. Going broke is one thing – dying is quite another.
First it was in China, then Italy and Korea. We were told that it couldn’t happen here, so we turned a blind eye to science. Washington leadership thinks that if we can get the stock market back up – everything will be fine, but most people have no savings. Soon people will not be able to pay their mortgage/rent, and food will become a priority. The homeless problem will increase, and uncovered medical costs will skyrocket because of the uninsured and the underinsured. Everybody will stop travelling and stay home. Heck, we’re already holding sporting events in empty venues. I have no idea where it all ends. Whether a few thousand people get infected and only a handful die, or whether millions pass away. We don’t know, but we know that everyone’s afraid. Going broke is one thing – dying is quite another.
The Market: …
The charts warned us that last week was coming. As HL said: “Unless you only own the Nasdaq, your stock portfolio is now flat for the last 12 months.” Trump sure wasted a lot of time and tweets bragging about how great his stock market was. I don’t know how bad the markets will get. Everyone’s talking about a bounce, but we all know that bounce will be sold into – eventually. We really have two problems: (a) first is that people are getting sick and dying – and that is obviously our first concern. (b) The second issue is that virtually every supply chain around the world has been crippled. Everything from auto parts to pharmaceuticals has people wondering where and when they can obtain the basic necessities.
I believe that the market's reaction over the past week has several components to it. First, when people get spooked – they panic. Some of the wicked selling we've seen is a mild panic. But I think the bulk of the selling is NOT from panic, but rather from understanding that for every drug / widget that doesn't get shipped – the velocity of money decreases. The velocity of money has been falling for several years. That means money has been ‘changing hands’ less frequently than before. When the velocity slows down it means that people are holding onto money, instead of spending it. That's obviously NOT what the FED wants. And nothing slows down the velocity of money more than having some money to spend – but nothing to buy. I remember a banner on a vape shop: “Pot will get you through times of no money. But money will NOT get you through times of no pot.” So, markets aren’t falling due to an anticipated Zombie apocalypse. They’re falling because there’s not enough product out there for money to buy.
Which brings up the FED. In the past 2 days, several FED heads have hinted that they wouldn't be against making a move. Former FED officials have actually come out and suggested an aggressive rate cut. The common thinking is that ahead of the Asian market open on Sunday, the global Central banks will announce a coordinated policy response. That fits perfectly into a market that has faded 13%, and that the FED can blame on something other than itself. I have a hunch that this coordinated rate cut may come on Monday morning, and with that markets will spurt higher. BUT IT WILL NOT LAST.
The Virus will not have gone away and the next big announcement of an outbreak in a major city, will have people rushing to the exits again. Monetary policy, such as cutting rates, is NOT going to fill stadiums or movie theatres again. And don’t forget, the FED has been lessening the amount of Repo they've been doing. Instead of $90 to $100B per day – they’re down to $58 to $70B. Now, if they keep lowering Repos and don't cut rates – panic selling will commence.
The ONLY way this market recovers, is if we have solid proof that the virus is not spreading, and/or we find that the death rate is overstated. Until then, the risks are still to the downside, and the path of least resistance is down. My best guess is that we are headed into a recession because of the slowdown. Some money is hiding out in bonds but a lot of it is in cash. Last week we had the largest spike in the Volatility index – ever. You’re certainly welcome to begin to nibble on stocks, but unless they’re vaccine related (NVAX) just know that you’re trying to catch a falling knife.
Info Bits:
- Put your back Intuit: The creator of TurboTax and QuickBooks is adding to its portfolio of popular financial products with a deal to buy Credit Karma for $7B.
- Domino’s tastes better when you DIY: Domino’s Pizza global sales jumped 8% last quarter. It's expanding its GPS-pizza tracking on orders rather than partnering with delivery apps. Customer takeout is 50% of Domino's orders, and that’s more profitable than delivery.
- Don't hate the player: Shares of Warren Buffett's legendary holding company Berkshire Hathaway rose 11% in 2019. Not bad, until you compare that with the S&P 500 which jumped 31.5% - almost triple the return of Buffett's baby.
- eBay is exploring the sale of its $10B classified-ads business.
- Expedia is laying off about 3,000 employees because nobody’s traveling.
- Juul is halting sales in Indonesia because it can’t stop retailers from selling its high-nicotine e-cigarettes to young people.
- “Markets take the stairs up, and the elevator down.” Sellers are in control and nobody has a clue when the selling might end.
- Bob Iger (Disney CEO) stepped down effective immediately.
- Instacart… has probably misclassified the majority of its California workforce – according to a San Diego judge. It’s a critical first step in enforcing the AB5 law.
- Apple… travel restrictions to China will impede this fall’s iPhone release.
- Amazon… rolled out its checkout-free “Go” technology at a 10,000-square-foot grocery store in Seattle. It uses cameras, shelf sensors, and software to enable shoppers to walk out without stopping to pay.
- Sorry Gatorade… new studies found that electrolytes don’t help as much as you thought.
- Goldman says 0% earnings growth in 2020… for combined U.S. companies. This is a dramatic departure from consensus estimates.
- Stephen Colbert said: “This is the greatest crisis of the Trump presidency, and Trump’s response was: ‘Mike Pence – you take it.’”
Crypto Bytes:
“I haven’t seen white people go at it that hard since khakis were on sale at Banana Republic.” … Trevor Noah
- Silently Paying: Ripple has given MoneyGram more than $11m in the past half year for: “Successfully developing and bringing liquidity to foreign exchange markets facilitated by Ripple’s blockchain.”
- Oh Canada: Timothy Lane, Deputy Governor at The Bank of Canada said: “The Bank of Canada will not issue our own digital currency unless (of course) a competitor such as Libra really takes off.” Don’t cha just love politicians?
- Dorsey’s doubling down… because nearly half the revenue on Square's Cash App came from Bitcoin in the fourth quarter of 2019. Mr. Dorsey (Square’s CEO) said: "The peer-to-peer transfers network continues to be our best acquisition channel."
- ETF now stands for = EXCHANGE TRADED FAIL: Once again the SEC rejected a bid for a bitcoin-based exchange-traded fund arguing that the bitcoin market is not sufficiently resistant to market manipulation. Why don’t we apply those same standards to the DOW, S&P, NASDAQ, and gold ‘n silver – unless you think JPM’s paper naked shorting of an entire market is legal?
- Coronavirus even hits the crypto-markets… leading some analysts to question whether crypto might serve as a safe haven from financial panic.
- Jimmy Kimmel asked: “Why is Mike Pence in charge of the coronavirus task force? What is his plan to stop the virus - abstinence?”
Last Week:
Monday: It appears that everyone is waking up to the FACT that the coronavirus is spreading and killing people – and that supply chains are breaking all over the world. CNBC has already brought out Mr. Buffet to tell us: "Hey if you liked Apple yesterday, you'll like it more on sale. Today, I’ll be buying not selling." Unfortunately FED rate cuts will NOT put people on airplanes or into restaurants. When the SHTF, people panic because there’s no food or medicine. The new normal ‘broker speak’ will be: "Companies will miss earnings, but don't sell their stock because it wasn't their fault – it was the virus. Just keep holding for the long term." That may work, until the US and/or Europe get over run, like China. At that point, my guess is that they will freeze the markets / shut ‘em down. After all:
- Cruise lines are sinking like the Titanic without Kate Winslet.
- Ford Motor Company is like a bad accident that we can't take our eyes off of.
- The Energy Sector ETF (XLE) is the worst house in a bad neighborhood.
Tuesday: Just this morning someone (JPM) decided that it would be a good idea to dump $3B of paper gold shorts into the market, smacking gold in the head. Once again our banksters do blatant "in your face"manipulation, but our regulators just look the other way. Honestly, I think that there’s more downside to come because it's hard to have a higher market when the companies are closed due to the virus. Factually:
- Our FED did $78B in Repos last night and the S&P is still red.
- Subprime credit card delinquencies have spikes to record highs – surpassing the financial-crisis peak.
- The CDC just said that we have a “Very strong chance of seeing an extremely serious outbreak of the coronavirus in the United States.”
Wednesday: Today we went from being up 416 to down -125. I'm at a loss for words. My feeling is that this market has more downside. I think I'm going to buy some DOG (the inverse ETF for the DOW) along with some DIA puts – so that I have some downside skin in the game.
Thursday: We’re seeing new record lows for 10-Yr US Treasury notes yielding 1.28%. Japan just closed ALL schools, colleges and high schools from now until spring. You don't get record lows in Treasuries and closed schools – if everything is fine. So what happens now? I suspect another day of wicked volatility. My big push has been that supply problems are the issue. This morning Microsoft came out to warn that revenues are going to miss the target because they can't get parts. This will spread, and EVERY company with lousy earnings is going to blame the virus for it. We're going to be down 10% (correction levels) on the S&P and DOW if we close this low. I still feel that the FED will allow a 10 - 12% fade, and then do something to manage the fall.
Friday: Risk happens quickly. Just 10 sessions ago, the DOW was at an all-time high. Last week, things got wobbly, but we were only down about 200 points on the week. This week we have peeled off 4,200+ points in 5 sessions. I don’t think that the selling is over. The big hope now is that the FED comes out this weekend with a rate cut. Will it work? Heck no. Rate cuts don't kill viruses. They don’t put people back on planes and in stores. They don’t even make products appear on shelves. When the markets pop on a rate cut – FADE IT because it won't hold.
Weed:
The above is a partial list of states where recreational marijuana is on the ballot.
- Studies show marijuana use is rising sharply among seniors over 65. Kids proceed with caution when you eat those cookies at grandma’s house.
- UK sets CBD guidance: The FSA recommends no more than 70mg of CBD a day (about 28 drops of 5% CBD) unless under medical direction.
- Canadian cannabis sales… reached new highs in December.
- Montana’s medical cannabis program… posted year-over-year, double-digit patient count growth in January.
- Vermont… just passed an adult-use cannabis bill that is headed to the governor.
- Canadian cannabis consumers have grown… by 17% YoY, and cannabis ‘acceptors’ have grown by 34% YoY.
- Trump’s 2021 Budget calls for… the removal of a state’s ability to regulate its own cannabis business outside the federal government’s interference.
Next Week: Can the FED save us or should we welcome Mr. Bear Market?
What a week! We had a 7 standard deviation move this past week – thoroughly devastating markets, trading firms, and long term investors. This was the worst week in more than 10 years for the S&P 500 which fell 11.5% over 5 sessions. Not only did stocks get crushed but treasury bond yields made all-time lows, energy fell 16%, financials fell 13%, tech fell 11% - all amidst a burgeoning global coronavirus panic. Can the Fed save us or is this the start of a much longer bear market? As I said, it would not surprise me to see Chairman Powell do a surprise rate cut before the markets open on Monday morning. I think you FADE this – as there’s more SELLING to come.
Looking at the numbers, the expected move in the S&Ps (SPX) for this past week was $54. The actual move was north of $380. We started the week with the S&Ps at $3,337 and ended with them near $2,954. Again, that’s a 7 standard deviation move. That move is impossible to predict and if you did – everyone would have said you were crazy. We’ve talked for the past 3 months about how we are beginning to breach the expected move regularly, and how this would end badly. Last week I wrote: “The expected moves within the S&P are projecting extreme risk as options markets are failing to accurately handicap expectations.”
But what happens from this point forward? Next week’s expected move is $182.29, which brings our ‘Gravity Points’ back into play. ‘Gravity Points’ that are areas of risk defined by major derivative firms. For the S&Ps (SPX) they are located at: 2,983, 2,911, 2,843, 2,811, 2,731, and 2,682 – and will act as support & resistance. On Friday, we adhered to these gravity point levels – centering around 2,911 and on the upside bouncing off of 2,983 and on the downside 2,843.
We know that Chairman Powell will cut FED rates by 50 basis points; however, I believe that the extremes of selling are far from over. Therefore:
1. Do NOT bank on a rally (a bounce) – because that’s not safe in a market like this. Define your risk using in/out spreads or at minimum a directional call or put spread. DO NOT: sell premium OR buy naked directional options in this market.
2. The path to a global growth slowdown is paved … with gold? A lot of our global growth concerns existed prior to the virus. The Bank of Japan has clearly stated that 2% growth is nowhere in sight, and therefore they will dive deeper into negative interest rates. Germany continues to deliver recessionary news.
3. Expect a lot more companies warning about earnings and revenue shortfalls.
4. Stock buybacks may rapidly disappear due to corporate capital constraints. Companies are going to start running short of cash. The energy sector is down 25% YTD, and the oil and gas sector is down 35% YTD. They’re trying to figure out how to keep the lights on – much less how to do stock buybacks. Even the utility sector that was up 11% YTD is now DOWN 3% YTD. There are no stock buybacks coming there – which removes a main element of support from the market. Apple and Google may have the cash to support their own stocks – but the vast majority will not.
5. Retail fund redemptions have begun. Many 401k’s are being cashed-out and kept in cash – where people can keep an eye on it. We know this because the XLP (consumer staples) normally does well in downturns, and virtually every 401k out there holds the ETF. But XLP fell by 11% this week – and the funds did not flow in to bonds. People are running scared.
6. Watch the financial ETF (XLF), because that’s where the bag of risk lies. It’s poised at $26.50 – where any movement higher or lower will impact the market.
7. Watch the VIX and the ‘bottom’ of the market. In 2008, the VIX spiked in November of 2008 and the market bottomed on March 9th, 2009 – 5 months later. Therefore (VIX spikes like we saw on Friday) are virtually never indicative of market bottoms – but rather predictors of what is to come. Under normal conditions, volatility will calm back down and sell-side activity will continue at a more gradual pace.
Can the FED save this marketplace? Well, a FED 50-basis point cut is now fully priced into the market. And by the April 29th FED meeting, the market place is pricing in a 75 basis point reduction. We are going back to ZERO – and maybe lower. I don’t believe that cutting rates will help at all – given the COVID-19 virus on the horizon. What we are very likely to see is: if the FED does cut early … this market could SELL into it. That move is called: “Turning your back on the FED.” At that point the FED loses control, and the marketplace becomes infinitely more volatile. When everyone realizes that interest rates have no bearing on a company’s outcome – then all bets are off and the S&P (SPY) that is currently around 296 could easily be at 200. That’s exactly where is was when Trump came into office 4 years ago.
There is one very alarming area – GOLD. For decades, in times of worry people bought gold. Gold was down $54 on Friday which leads me to believe that gold was being sold because people HAD TO SELL gold to cover debts. Firms sell gold to pay very serious debts such as: margin calls and/or if the firm itself is on the verge of collapse. Gold collapsing by $54 is a sign that one or many major baking concerns could be in trouble.
Tips: Be ready to play the: ‘Bounce and Fade’ this week or next.
HINT: In the coming days watch for major sector rotation between energy (XLE), utilities (XLU), consumer staples (XLP) and home builders (XLB). Watch for:
1. A bounce and fade trade on any of these but especially on the XOP in the coming days. Think about selling the March 13th and the March 20th - $14.5 Put spread and/or buying the March 27th and April 3rd$18 Call spread.
2. Also watch NVAX and any of the virus vaccination companies.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $1.34 / in @ $3.07),
- First Majestic Silver (AG = $7.54 / in @ 10.50),
- Canopy Growth Corp (CGC = $18.78 / in @ $22.17),
- DRD Gold (DRD = $6.10 / in @ $4.20),
- GBTC Bitcoin (GBTC = $9.85 / in @ $10.01),
- NVAX (NVAX = $16.00 / in @ $7.24),
- Pan American Silver (PAAS = $19.80 / in @ $18.00),
- Real Estate ETF (XLRE = $36.79 / in @ $39.05),
- Utility Index (XLU = $62.18 / in @ $67.10)
Crypto:
- Bitcoin (BTC = $8,500),
- Ethereum (ETH = $215),
- Bitcoin Cash (BCH = $310)
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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Until next week – be safe.
R.F. Culbertson
