Sunday, March 22, 2020

Thankfully the markets are not "no limit" poker tables

Quick Sunday night update. Futures opened at 6pm tonight and fell 5% by 6:04pm which triggers the limit circuit breakers and stops trading over night.

Is this Lehman/TARP Failure weekend 2.0?  It's hard to tell what the failure of the Congressional vote means for the markets.  The failed bailout vote in 2008 did lead to sharply lower equity prices but the wild swings were amplified when TARP was eventually passed. 

My principal concern is that lobbyists are driving this bill (again) and they are holding the threat of a market collapse over the heads of legislators.

A lobbyist of Adidas (the German shoe/sports equipment company) indicated he was asking for $3.5 billion tax break as part of the COVID19 bailout bill.  

That is one little example of the nonsense that will be rolled into this bill.  Every wish list item that corporations have wanted for the past 10 years will get rolled into a bill and you'll get the bill on April 15th for the next 40 years.

Yes, stocks are going to head lower if this bill is not passed, but I would argue that they may very well go lower anyway when people watch the US economy grind to a complete halt in the next 2 weeks.

To that point, we are getting some early estimates on GDP for Q2 2020.  I would caution you to take this estimate from Goldman Sachs with a grain of salt because in January Goldman said the US economy was "Recession-Proof", but they are now predicting a 24% decline in US GDP. Not 0.24%, not 2.4%....... 24%!

They are also predicting a historic bounce back in the third quarter and fourth quarters, but that implies that the impact is very short-lived (a prediction that is still up in the air).

Magically, when the markets opened and fell 5% they landed EXACTLY on the line that is drawn as support - 2175-2180 for the S&P 500. It's very possible that stocks bounce off that line (particularly if Congress passes a plan to give your tax dollars to various S&P 500 companies). However, every chance for a rally in this market has been crushed and the potential for a week of ugly headlines in the battle of COVID19 is very real.

These are not predictions but the next stops on the way down are 2100 for the S&P 500 and then 1800.  If it breaks 1800, well, let's just say the stock market is going to be the last thing we have to worry about if that happens. 

On the other side of the coin, the market and every dip buyer, sees the potential for a face ripping 20-30% rally in days with pauses at 2300,  2600 and 2800.  So, net/net that's a potential 1000 point or 30-50% swing up/down in the markets in coming weeks.  These are not markets for normal investors.

* The good news: I've been pleasantly surprised by the reaction of people in our area and around New York. I predicted more people would start gathering in violation of social distancing rules, but so far that's not been the case.  Ultimately, this is going to save the lives of fellow New Yorkers.

* The Bad: Despite the cute youtube videos of Italians singing off their balconies, another 800 Italians lost their battle with COVID19 on Saturday.  Right now New York City is losing roughly 1 person per hour, that might soar to 20/hour or 500+ per day in a week.  The strain this will put on our healthcare system is overwhelming.

* and the Ugly: There were two public policy drivers behind the exponential growth in deaths from the 1918 flu -
1) misinformation from the government and
2) widely varying approaches to containment across the US.

I won't address #1 but I think everyone can at least admit that our government has not had its finest hour over the past 2 months.

The response across the US has not been consistent and as a result we are like to see the virus emerge in various hot spots on a rolling basis for months.  This is not currently built into anyone's expectations.

If we get a Congressional package tomorrow I'll try take a look at the details.

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