In 30 Seconds or Less ….

Probably Not & Here’s Why

The Dow continues to rally after the best week since 1938. Have we really seen the bottom? Goldman & UBS are on record as saying Not Yet while JPM says Yes!

It would be the record for the fastest bottoming out as most downturns take months of ups & downs before finally finding the absolute bottom or nadir. The shortest on record was 3 months but the typical is 17 months. (David Kostin @Goldman) Since this is the fastest decline on record, it’s fair to expect this to be one of the quickest bounces back up. However, I don’t think the 23 days it took to fall apart is really our bottom yet.  I agree with many of Kostin’s points in today’s MarketWatch article and have added some of my own~

• New virus cases have not slowed yet. (That duration thing again.) The President’s extension of the Shelter-in-Place order has been extended until the end of April giving many of us and the market hope that this will be limited to a 2 to 3 month period. However, the % of new cases is still on the rise. More time is needed.

• Both Law Makers and the Fed have moved expeditiously to provide liquidity to the markets, states & local governments, payroll support to big & small companies, and direct support to American taxpayers. Again, more time is needed for the funds to actually get into the system.

• UBS notes “Selling Fatigue” has set in which means that investors and traders don’t respond so wildly to incremental bad news. They are simply numb to it as we all are. (MarketWatch) Goldman notes that their Investor Sentiment & Positioning Index doesn’t indicate it’s hit rock bottom, yet.   

• 50 US Corporations have suspended stock repurchase programs (MarketWatch) to conserve cash and the Federal Stimulus Package now known as CARES (Coronavirus Aid, Relief & Economic Securities Act) will block companies who tap into CAREs from stock repurchase programs (programs where a company buys back it’s on own stock to keep stock prices stable or up) and/or any other capital distributing program. A large part of equity demand in 2019 came from stock repurchase programs. Now, analysts have to figure out what new target pricing should be without that type of pricing support. Again, time is needed to figure it out!

Bottom line, for most of us staying the course is the right answer.  Yes, investors are making money shorting stocks and some investors are betting big that the bottom has been reached, they both could win big over different periods of time. And they may all go grey or lose their hair over the next 3 months.  For most of us, the risk of being wrong and losing more money far outweighs the potential upside of making money!

My grandfather was a remarkable bond trader in the market post-WWII. He always said “Never bet what you can’t afford to lose.”  I hear his voice quite loudly right now!

In the Weeds –

Betting against Science ~

On Squawk Box this morning, Jim Cramer said that selling short (selling stock you don’t have and expecting to buy it back in the future at a lower price) is a dangerous game right now as the traders are betting against science. 

What he’s saying is that the partnership of the medical community, scientists, government, and capitalism is a very powerful partnership that will drive real results quickly. We have already seen the FDA give an emergency approval to use an anti-malaria drug to fight the virus after a French study of 80 patients was released last week. It found that a combination of the anti-malaria drug and the antibiotic azithromycin reduced the severity and duration of the virus from 21+ days to 5 days in the hospital. (Dr. Oz news briefing)  Johnson & Johnson’s pharmaceutical arm Janssen is being underwritten by the US government to the tune of $456M to develop a COVID-19 vaccine. (Forbes) Yes, have you seen their stock price today?!?!? There is real money focused on solving this health crisis and quickly!   

Dividends Falling ~

As well-managed companies with solid cash positions move to conserve cash in this uncertainty, there are a growing number of companies that are suspending their dividends. Goldman predicts that dividends across the S&P will drop by 38% over the next 9 months through suspension, cuts or elimination of dividend programs. (Barrons) Just as you must monitor your cash, so must any business. Especially, when CEOs are coming out in the news assuring their employees that they will keep them on the payroll, they must have cash reserves.  And of course, there are other companies with high debt loads prior to this crisis that simply don’t have the cash any longer to pay dividends and are fighting to keep afloat. The dividend reductions go part and parcel with reductions in stock repurchase plans.

Record Corporate Drawdowns of Lines of Credit ~

Liquidity concerns remain as US Corporations set records in drawing down the credit lines ~ $162B from existing lines and another $26.1B in new lines since March 9^th. (Bloomberg) Many of the highest credit quality (most likely to repay their loans to the banks) companies are quietly being told not to access their lines of credit. These borrowers also pay the least in interest so they kill what little earnings are left to the banks in this 0% interest rate environment. Some companies like McDonald’s are going out to the market to set up new funding sources at higher costs to make sure they have cash on hand and keep their banking relationships intact.(Bloomberg) Why? Because banks are trying to appropriately manage their balance sheets. They have to put up capital when credit lines are being drawn down. They also have stress testing coming up when they demonstrate to their regulators that they have enough capital to continue operating. This is not the type of environment to raise more capital if they fall short.  Not to mention, they continue to get hammered in the stock market!

Margin Calls ~    

Margin calls (where borrowers have to put up more assets to cover the loan) continue to eat away at liquidity in financial companies, especially in the Mortgage Markets. A number of large lenders have suspended mortgage lending entirely and many have suspended lending except where they know they can sell their loans back to the government through Freddie Mac, Fannie Mae, Ginnie Mae, and Veterans Administration. The Fed through BlackRock has been actively buying Mortgage Backed Securities (MBS) to provide liquidity to the housing market. However, their activity has caused valuation challenges. Nor does it help the types of loans typically held in portfolio by hedge funds and REITs. We’ll get into more detail later in the week, today will be especially telling for this sector as there are a very high number of margin calls anticipated.  

What can we do?

As always, focus on staying healthy with social distancing, helping those in need within your community, enjoy Zoom Happy Hours with your friends & family, and be your amazing self!  We are leading our families and our teams calmly through this crisis!    #BeTheCalm #Leadership!!!

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Susie