Hey everyone. This week was clearly one for the records as the Corona Virus has now spread outside the walls of the Chinese Nation State and moved not only to nearby counties but over to Europe as well. Travel has been a big concern and the Airlines have been hit hard with Government officials indicating that even more restrictions could be implemented as needed. Here is my take on things as they continue to unfold;
Weekly Sound Bites:
• Fear gripped the markets as the pandemic fears moved from China to South Korea, Japan, Italy and Iran…I am sure more countries will follow…And hard factual data from China only combines the issues and fear of the unknown…and this past week we actually had two crashes; –Equities and Interest rates…US Treasuries with the longest maturities hit their lowest levels ever recorded coming in at 1.671% for the 30 Year Bond and 1.127% for the 10 Year Notes…and remember, the FEDs have set a goal of at least 10% for the 10 Yr. Treasury in its bid to drive higher inflation back into the markets…well, good luck with that one…already this past Friday Jerome Powell indicated they are standing ready and have the tools necessary to help the markets if needed…
• The market impact on this Corona Virus is more of an Income/Revenue one that a balance sheet one…the 2008-09 Financial Crisis saw the markets liquidity seize up and Central banks globally came to the rescue to shore up the effective balance sheets of the markets with Trillions of Dollars of stimulus…these fixes can be isolated, focused and applied in a systematic way and usually can bring great results…and back then the Feds had an interest rate starting point of about 5.14%…but with the current rates hovering around 1.12% there is not a lot they can do by lowering rates much further other than helping the overall mood in the markets…but the markets are already pricing in a 100% chance the Feds will cut the rates at their March meeting and almost a 50% chance of another rate cut in the summer…
• What could be more likely is to see the Fed also pump more QE to help pour more liquidity into the markets….but as I pointed out earlier, the Corona Virus is more a revenue issue than a balance sheet issue…the impact on corporate revenue from production shutdowns and supply chain issues is much harder to isolate and potential reductions in a panicked consumer spending could cause more downside action in the US Markets….Goldman Sachs has indicated that even if the S&P reported zero revenue growth for 2020 would put the PE Ratio at 18 given current price levels and while not cheap, it is not expensive either and remember that scenario leans more towards a worst case outcome…
• With limited data market technicians tend to go look at prior episodes of similar events to see how the markets responded and in looking at the SARs outbreak, we saw the markets break down over 14% but recovered the entire amount in less than 6 months…so most of these types of panics can expect a recovery but until the markets can better gage revised corporate revenue projections we’ll continue to see market price action chop and fear…and over 300 companies have already announced their revenue for 2020 will be reduced but many of them still do not the extinct of the reductions which of course causes more fear and the impact is clear; — sell first and ask questions later…many sectors will be effected, from Tech, Health Care, Travel, Consumer Goods and Apparel and Media and Entertainment…however, some tech has shined, like those that offer more stay-at-home type of solutions; –like Zoom (ZM), NFLX, OKTA, Peloton and others offering the business or consumer stay home options…
• On a brighter note, we are getting at levels where buyers will start to step in and corporate buybacks, which represented over 30% of all stocks purchased in 2019 have set another record this February as they are taking advantage of very low funding costs to acquire their stocks as a means to raise EPS…Citigroup is now trading at below its tangible book value which is the cost if the bank were to be liquidated…this will clearly increase the appetite of big money buyers..
Weekly Round-Up;
Don’t Be A Rat Brain Trader – Be the Red Strip Zebra !!
Trade Smart
hpb
