The Arguments and Guesswork
There have and always will be bulls and bears in the market. Bulls who will proclaim why the market will go up from where it is and bears who will point to reasons why it will not. While these arguments still rage, perhaps never in the history of the markets have the most honest answers to the questions facing the economy and markets come down to three simple words:
We don’t know
We can hope, we can speculate, we can guess…but at the end we do not know what the immediate future looks like because there is so much we do not know about Covid-19 and how society will react to it in the coming months. For example:
How will humans eventually defeat Covid-19 (and we will), will it be a vaccine or through a rising number of people with antibodies and herd immunity? We don’t know.
Will we have to deal with a significant second wave of the virus in the fall once we flatten the curve and deal with it through social distancing in the first wave? We don’t know.
How will society react from a consumer behavior standpoint after society starts functioning at a basic level after the lockdown? We don’t know.
How long will immunity last after a person recovers from Covid-19? We don’t know.
Its clear at this point that government officials and health care officials are doing their best guesswork as well. A few weeks ago, parties were arguing whether we needed two, four or eight billion in the first stimulus bill. That quickly in the coming weeks would escalate to two trillion. Soon after there are now discussions of trillions and trillions more needed to prop up the economy. Health care officials one day say no masks. Now they are saying wear masks. Some health care officials say certain treatments might be helpful. Others are saying more research is needed. Guesswork can be informed, logical and based on science but that is what is occurring right now…guesswork.
This guesswork is going on in the stock market as well. Bulls and bears are making passionate arguments but that is what they are…arguments. In a world devoid of fundamental and economic data that is all we are left with.
However, in my opinion not all guesswork is created equally. Of course, that is a guess in and of itself, right? I will present the arguments from four different camps and leave it up to you to decide which guesswork you think is the best approach to the market currently. These four camps are:
Extreme BullsModerate Bulls (Full disclosure, this is where I currently reside)
Extreme Bullish Arguments
Not to bias you but some of the extreme bullish argument feel like it is based on entirely on hope. The type of hope you tell a child to make them feel that everything will be O.K. one day. At the extreme, the bullish extreme argument is this:
Two trillion dollars in stimulus and more coming.
Virus curve flattened by June.
Everyone will be back to work at that point and economy will rebound.
Another line of bullish argument in this camp is equally simplistic.
Price of stocks is cheaper than it was a few months ago.
he stock market is a good investment over time and so getting in at cheaper price levels is generally a smart move. All you must do is look at the charts since the beginning of time.
Some investors simply do not want, or are unwilling, to miss a rally if it occurs. If the “bottom is in” they do not want to be on the sidelines if it occurs.
A more sophisticated version of these overly simplistic arguments but still in the extreme bullish camp is:
The Fed and government will do whatever it takes to keep the economy afloat. There is no program they will not engage it and no amount of money they will not spend to fight the economic damage done by the virus. This essential creates a “protective put” on the market. There might be additional economic damage done by the virus but whatever damage done by the virus will be offset to some degree by the endless stimulus packages that will be undertaken on the federal level. The economy my be damaged, the virus may not be contained in the short-term, but the money spent will stabilize the markets.
Eventually (one way or another) we will defeat the virus
The “we don’t know” argument is granted. However, not knowing gives you the latitude to start getting in the market today if you believe in the underlying premise of stocks over the long-term being a good investment and that there is effectively “a put” on the market as a whole. In a vacuum of information on fundamentals, entering investments now is as intelligently calculated as not entering. This could be done with a cost-averaging strategy but starting to enter now is the play.
There is some appeal and logic to this more sophisticated approach for investors that buy into the general premise and are willing to sit through deeper selloffs that might occur. Deeper selloffs might even be welcomed by sophisticated extreme bulls who have an aggressive cost averaging down plan where they only have a small percentage of their capital is currently at work with a large amount of cash on the sidelines ready to put to work at different price levels.
I will grant, the simplicity of this approach is appealing. Of course, buy-and-hold arguments are always the simplest. Buy-and-hold types always love the “blue pill” (i.e. see Matrix). Federal stimulus keeps everything afloat, and everything gets better eventually. It isn’t a hard thesis to wrap your head around and saves buy-and-hold types the hard decisions many other investors will be forced with in the short term. I personally do not fall into this camp but damn there are times I wish I wasn’t a “red pill” kind of guy.
Quote of the Week:
Fed Kashkari’s was asked: “Can you characterize everything the Fed has done this past week as essentially flooding the system with money?” To which Kashkari responded simply: “Yes. There’s no end to our ability to do that.”
Moderate Bullish Arguments
This is my camp. At least for today. I mean when nobody knows anything right now it is easy to waffle back and forth depending on the information that comes out, right? I have my eye on the bearish arguments (many of which I feel are convincing) on when I pull the trigger, am attempting to exercise caution but moderate bulls such as myself agree with underlying premise that extreme bulls lay out:
There will be endless economic stimulus
The virus will be eventually contained
If those two premises are accepted, then it just becomes a matter of timing and how you approach this extremely complex environment. These approaches have two broad groups:
Individuals who essentially are in the extreme bullish camp but believe that lower prices will occur and that lows will be retested (W pattern potentially?) before stabilizing and moving up for good. At some point these moderate bulls become extreme bulls as they put there money to work. Some individuals here don’t have a specific price level but “will know it when they see it” while others do have a specific price level in which they feel comfortable entering (i.e. I don’t like Apple at $240 but I like it at $180). Timing the bottom is generally regarded “as a fool’s errand” but some will try. Others will simply enter in at set price levels at a discount with the same premise of Investing Thesis #1 as their rationale at that price level.
The other type of individual in this camp requires some level of confirmation before entering the market again. They are less interested in getting the best price and more interested in getting into a market with a healthy economy or signs that we are heading in that direction. The confirmation comes on some combination of:
Covid-19 being successfully dealt with
Earnings/Economic data bottoming out/getting better
Naturally, if the market goes straight up from here this investing group gets left behind (which is why FOMO is created) but the current unknown risks convince this group of investors that patience is warranted.
As mentioned, group one of the moderate bull camp eventually join the extreme bullish camp at different price levels. Group two is patiently awaiting confirmation. How the different bearish arguments play out will go a long way to determine when they will enter. The bearish arguments are plentiful.
New Headlines This Week
Goldman’s Oppenheimer weighs the bull and bear case, and his conclusion is clear: despite the scale of the policy support, which we agree is a necessary condition for markets to rebound, we think it is too early and the level and valuation of equity markets still too high.
Moderate bears do not believe the end of the world as we know it as coming end but do believe passionately that the balance of arguments are so tilted to the bearish side that downward pressure is not only possible, but likely. Unlike the bulls, which have a compact and unified thesis, the bears arguments are diverse. There isn’t a singular bearish argument…there are many. Some held more widely than others, and some more passionately argued than others. Here are summaries of different arguments that the bearish side has made in recent weeks with news headlines surrounding those arguments.
Bearish Argument #1 – Countries are Trending Towards More Social Distancing – Not Less
Original 15-day timelines are a fantasy of the past as countries across the globe are banning foreign visitors, closing borders, implementing extreme social distancing measures. Eventually countries will start to ease out of these measures but at this point the trend is strong in one direction. The longer this occurs, the broader the economic damage as many companies across the world are highly dependent on foreign sales for revenue and profits in a globalized economy.
To have any idea of when the economic shutdown might end, you first have to see a reversal of the social distancing trends which simply are not happening right now.
News – Trends We Saw Increase This Week with Examples
Travelers from foreign countries subjected to two weeks of mandatory quarantine (South Korea)
Punitive measures for individuals not adhering to social distance guidelines
According to a press release from the country’s Ministry of Health, Singaporeans who fail to maintain a distance of one meter from other people during “non-transient” public interactions can be fined 10,000 Singapore dollars ($6,985) or hit with 6 months in jail
Philippine President Rodrigo Duterte made it very clear on government media on April 1 that police will shoot any citizen defying the public health order to shelter-in-place.
Closing for Borders
Russia closed all borders and banned international flights
Citywide and National Quarantines
Moscow imposed a citywide quarantine starting March 30 until further notice for all residents regardless of their age, Mayor Sergey Sobyanin said in a statement. Residents will only be able to leave their houses to get urgent medical help, go to a nearby grocery store or pharmacy, and to walk their pets in the proximity of 100m from their residence. The exception will be made for essential workers.
Countries Increasingly Adding Items to the List of Closures
Australia closes playgrounds and outdoor areas: Prime Minister Scott Morrison has strengthened already tough social distancing laws in Australia, limiting all gatherings in public spaces to two people and shutting playgrounds and skate parks.
News This Week of Bullish Reversal of Social Distancing Guidelines
Denmark is becoming the first country outside Asia to do so, reasoning that the risks of a deep recession may now be more dangerous for Danish society than a second outbreak.
Iran’s President Hassan Rouhani said on Sunday that some of its restrictions imposed to slow down the spread of coronavirus will be eased in the coming days
Bearish Argument #2 – U.S. States Trending Towards More Social Distancing – Not Less
Same logic as with countries. The longer things stay closed; the more economic damage occurs with little knowledge of when the apex for the virus might occur.
News – Trends We Saw Increase This Week with Examples
States demanding all traveling into their state self-quarantining (Rhode Island, Maine, Vermont)
Texas Governor Greg Abbott on Sunday ordered all travelers entering Texas from Louisiana to enter a 14-day quarantine, now enforceable by state troopers.
Nationwide social distancing guidelines extended to April 30
Punitive measures enacted for violating social distancing policies
New York City residents who violate social distancing policies will receive a summons and fines ranging from $250 to $500
Maryland Gov. Larry Hogan issued a stay-at-home order for his state. Violating the order carries a penalty of up to a year in jail or a fine not to exceed $5,000.
Bearish Argument #3 We Do Not Know When the Peak Will Occur in Europe or How Long Things Will Consolidate
Europe is seen as a precursor to what we will experience in the United States as it is 11 t o14 days ahead of us. While there have been days that have given a ray of hope, those have been short-lived in countries such as Italy, Spain, France and Great Britain. Bears would say that until you see some semblance of a peak, guessing when one will occur sounds more like hope than science. In addition, once a peak occurs and no longer are going “north,” how long will the go “east” with high numbers for a prolonged period of time?
Trend Numbers in Parts of Europe New Cases/Deaths Per Day
March 22nd – 3272 – 391
March 23rd – 6368 – 539
March 24th – 6922 – 680
March 25th – 7457 – 656
March 26th – 8271 – 718
March 27th – 7933 – 773
March 28th – 7516 – 884
March 29th – 6875 – 821
March 30th – 7846 – 913
March 31st – 7967 – 748
April 1st – 8195 – 923
April 2nd – 7947 – 961
April 3rd – 7137 – 850
April 4th – 6939 – 749
March 22nd – 5560 – 651
March 23rd – 4789 – 601
March 24th – 5249 – 743
March 25th – 5210 – 683
March 26th – 6203 – 712
March 27th – 5909 – 919
March 28th – 5975 – 889
March 29th – 5217 – 756
March 30th – 4040 – 812
March 31st – 4053 – 837
April 1st – 4782– 727
April 2nd – 4668 – 760
April 3rd – 4585 – 766
April 4th – 4805 – 681
March 22nd – 1559 – 112
March 23rd – 3838 – 186
March 24th – 2448 – 240
March 25th – 2429 – 231
March 26th – 3922 – 365
March 27th – 3809 – 299
March 28th – 4611 – 311
March 29th – 2599 – 292
March 30th – 4376 – 418
March 31st – 7578 – 499
April 1st – 4861– 509
April 2nd – 2116 – 1365
April 3rd – 23,060– 1120
April 4th – 7788 – 1053
United Kingdom (Deaths Only)
Bearish Argument #4 We Do Not Know When the Peak Will Occur in the United States or How Long Things Will Consolidate
Testing is going up which takes some of the “scare” factor out of the huge confirmed case numbers coming in as we expected this, but we still do not know the extent of the problem. The country seems trending towards strict social isolation measures in parts of the country hardest hit while other sections “get back to work” after a certain amount of time passes (which is an unknown at this point). So many bulls are awaiting a slowing of virus cases and a peaking in the U.S. before entering positions. Bears would point that selling opportunities will be present until this occurs as totals get bigger and bigger. Bears would also point out that even after the peak the virus is likely to be around causing havoc on parts of economy and consumer behavior until a vaccine is found.
Trend Numbers in United States New Cases/Deaths Per Day
March 22nd – 9400 – 113
March 23rd – 10,189 – 141
March 24th – 11,075 – 225
March 25th – 13,355 – 247
March 26th – 17,224 – 268
March 27th – 18,691 – 407
March 28th – 19.452 – 525
March 29th – 19,913 – 363
March 30th – 20,353 – 573
March 31st – 24,752 – 912
April 1st – 26,473– 1,049
April 2nd – 29,874 – 974
April 3rd – 32,284 – 1.045
April 4th – 34,196 – 1,331
Bearish Argument #5 – The United States Peak Will Take Longer to Get to and Be More Prolonged than other Countries
Some bears argue that the peak will take longer to get to and be more prolonged than other countries because we simply have not taken social distancing as seriously as other countries. Remember simpler times when people questioned whether we would be like South Korea or Italy? Now the question is how much worse is it going to get here compared to Italy and the rest of Europe when we are not taking the same quarantine measures that those countries are taking. If a large segment of the population is not adhering to social distance guidelines, downplaying the seriousness of the virus and governments not enforcing the guidelines in place then it is a classic “apples to oranges” comparison to compare the United States to South Korea, China or Europe. The United States is on its own path and what we know about the virus at a minimum means a more prolonged time in which we “hang out” at the peak.
Bearish Argument #6 – The Economic Data Optics are Going to be Terrible
Bulls will shrug off any given point of data as being “priced in” but the totality of the economic data coming up is cumulatively going to weigh on market sentiment. One report, two reports, three reports…these can be shrugged off. At some point, enough punches will be thrown to send the market down as individuals lose hope on the magnitude of historically bad data. Extreme bears state that the data isn’t priced in and will be worse than expected by any models out there.
AutoNation says sales fell about 50% in last 2 weeks of March
Uber, Lyft Revenues Drop by Staggering 50% Due to Coronavirus Outbreak
Delta Passenger Volume Down 94% As It Burns $60MM Per Day; Buffett Dumps Delta, Southwest Shares
Walgreens Plunges After Warning on Slowing Sales, Foot Traffic, Sees “Less Discretionary Spending”
US Box Office Sales Collapse To Just $5,179; Was $204 Million During Same Period Last Year
There have been more immediate layoffs around the globe already than through the whole of the 2007-2009 crisis. UK Universal Credit Claims jumped by 1 mm people last week – UK unemployment is headed for double digits. Norway’s unemployment rate already hit 10.4%. Half a million German SME’s have applied for support to shorten worker hours. Danny Blanchflower, now of Dartmouth College, predicts 10 million Americans were put out of work in March.
Names like Volkswagen, Honda, Hyundai and Mazda all saw drops of over 40% for March.
Bearish Argument #7 – There is an Extremely High Risk of Premature Exit of Social Distance Guidelines Mitigating the Impact of the First Lockdown
The United States is restless. Huge segments of the population are calling on “Americans to get back to work.” When scientists call for a national lockdown to the virus, certain segments of the media refer to this as potential national suicide as it would destroy the economy. The Untied States has been unwilling to simply stay indoors for three weeks compounding the problem and this could be exacerbated by a societal revolt against social distancing measures.
Bears grant that if the entire country decided that no matter what we were going to “power through” the problem, build herd immunity and keep the economy running at all costs that this could be bullish for the markets. However, this would require:
Staying open no matter what in the face of horrific case and death numbers that would be constantly highlighted by the MSM.
All states in unison agreeing to this.
This seems like a big ask on both fronts.
Bearish Argument #8 – American and Western Societies Will Botch “Transition Strategies” Initially After the First Wave of the Virus
In a matter of weeks or months the United States and Western governments will start opening back up at a high level. The curve will have been successfully flattened, health care infrastructure and supplies will have been built up, total deaths/confirmed cases will be on the decline and people will start getting back to work. This will be the “transition phase” where public health experts say in order to deal with the virus we will need:
A strong public health architecture
Massive investments in a country’s capability to do surveillance, contact tracing, isolation and quarantine
Robust information system so people know what to do and where to go if they get sick
If these things do not occur what could happen is a cycle of lockdown, release, lockdown, release etc. This cycle would be devasting to extreme bullish arguments as even the first signs of another lockdown occurring after the first one lifting could send the markets cratering as investors lose hope of any short-term outcome to the situation. Bears would point that another cycle is likely to occur because:
Many governments will not be patient enough and will lift the initial social distancing extreme measures at the first signs that situation is somewhat better. This “somewhat better” state will be far short of what is needed to contain the virus. This will inevitably lead to the virus spreading at mass rates again.
Many Western cultures are resistant to the types of surveillance measures needed to successfully engage in the contract tracing and isolation that is needed. Once again, this will inevitably lead to the virus spreading at high levels again.
Culturally large segments of the population do not even view the current situation as something serious. Many to this day still state that this is little more than a worse version of the flu, a media conspiracy, that automobiles kill people and we don’t stop driving and many other sophomoric arguments that downplay the seriousness of the virus. With a high level of the population blatantly disregards the seriousness of the situation it is highly unlikely that a robust information system would even be adhered to at levels that are required to keep the virus at bay.
Even if a specific society decides to “power through” and say screw it, we are not locking down again, citing the economy cannot withstand another lockdown, consumer behavior will change so drastically that even an “open” economy will suffer at levels that are hard to comprehend. Certain industries will be on life support.
This bearish argument is not an argument on what the right policy should be in fighting the virus. It is not an argument about what “should” happen. It is an argument about what will happen from an objective third-party vantage point. The bears would state culturally we are simply not equipped to get it right the first time as the United States will be too resistant and impatient to the measures needed to successfully fight it in one attempt. To quote Winston Churchill, “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” Bears would point that this will be case here but getting it right eventually will cause the economy to suffer in far more drastic ways one way or another then if they simply had gotten it right the first time.
Bearish Argument #9 – Companies Will Not Hire Back at Numbers Until Virus Goes Away
Bears feel very strongly that companies will not hire back anywhere near levels that they had once layoffs began until they are bullish on the economic outlook. This likely could only occur when the fear of the virus escalating is eliminated. Even with stimulus, this results in many people unemployed creating a problematic scenario for any V shaped economic recovery.
News This Week:
Instead of Firing Everyone, Boeing Offers “Voluntary Buyouts” To Its Entire Workforce Of 161,000
Bearish Argument #10 – Economic Recovery Models Are Delusional and Will Continually Be Downgraded
In February, the general consensus among large investment banks and supranational entities was that there would be a one-time impact on GDP in the first quarter due to the impact of the coronavirus, followed by a stronger recovery in the form of V. The latest round of world growth reviews includes a reduction in growth estimates for the first and second quarters and a very modest recovery in the third and fourth quarters. Bears expect every forecast to be less bullish as time passes as these models overshoot on the optimistic side as the continually have.
If they do not overshoot to the positive side then it will increasingly paint a very bleak picture of what short-term economic numbers might look like and increase the length of how long it will take for the economy to fully recover from the impact of the virus.
News This Week:
Morgan Stanley now sees “a shallower rebound in 3Q, and we do not see activity returning to its pre-virus level until the end of 2021.” Finally, there is unemployment, which Morgan Stanley expects will peak at 28%
Global GDP growth est. cut to 0.4% from 3.3% at S&P Global Ratings
Goldman’s Haztius in a report titled “The Sudden Stop: A Deeper Trough, A Bigger Rebound” writes that he is “making further significant adjustments to our GDP and employment estimates. We now forecast real GDP growth of -9% in Q1 and -34% in Q2 in qoq annualized terms (vs. -6% and -24% previously) and see the unemployment rate rising to 15% by midyear (vs. 9% previously).”
Bearish Argument #11 – Oil Price War
The oil price situation would be a major bearish factor in any economic situation, let alone the one we find ourselves in. As oil forces rigs to close and companies to lay off workers, this adds to an already impacted economy. Generally these are high paying jobs and a prolonged price war in oil would be an impactful event even in good times. Even if Saudi Arabia, Russia and the United States come up with an agreement to cut production (a big if), the demand on oil due to the coronavirus is still massive. Simply put, the world is producing far more oil than it is using which will result in layoffs.
Oil News This Week
Bank of America expects to see the “steepest decline in global oil consumption ever recorded, with our base case reflecting a 12mn b/d drop in 2Q20 and a 4.5mn b/d contraction on average for the year” and on a net basis
U.S. pipeline operators have issued a warning to some oil producers operating in Texas: reduce production rates because storage is filling up, a Texas Railroad Commissioner said in a tweet. “Got word yesterday that some Texas producers are starting to get letters from shippers (pipelines) asking for oil production cuts because they are out of storage.”
Baker Hughes reports U.S. weekly active oil-rig count down 62 to 562
Vitol, the world’s largest independent oil trading company, has said that oil demand could slump as much as 20 million barrels per day (BPD) over the next few weeks, which would lead to an annual decline of 5 million BPD
Goldman Sachs said it expected March demand to be down 10.5 million BPD, followed by a further decline to 18.7 million BPD in April. The company noted that this deep plunge would be beyond the ability of OPEC to counteract: “A demand shock of this magnitude will overwhelm any supply response including any potential core-Organization of the Petroleum Exporting Countries output freeze or cut.”
Bearish Argument #12 – Changing Consumer Behavior
Even as stay-at-home restrictions are lifted some bears argue that you might see a dramatic shift in consumer behavior. At a minimum, some are more likely to save money and go out far less. The desire for no staple/higher priced items simply will not be there at previous levels. The “pent up demand” argument only holds water for these bears if the threat of the virus is eliminated. 92% are not going to go from avoiding large crowds to 0% avoiding large crowds overnight. This is not an ordinary event. Consumer behavior will change…it is only a question of how much and for how long.
Bearish Argument #13 – Retail/Commercial Property Upcoming Clash
Companies have started to inform landlords that they are not going to pay rent. While bears likely would grant that eventually the Fed will come and bail out the impacted parties, this gives one more thing for the market to worry about as these storylines become more common.
Bearish Argument #14 – Countries Previously Successful in Mitigation Attempts are Still Dealing with Clusters of New Infections
Bears point to the fact that countries that have been successful in early mitigation attempts are still dealing with spikes after the initial wave. While this is not crippling to an economy it does serve as a reminder that the virus is not going away despite how successful countries are at different stages. This could lead to some version of social distance measures, consumers at some level not spending/going out and companies hesitant to hire out of fear of an economy that is only running at a certain level of its normal function.
Bearish Argument #15 – Health Care Insurance Crisis
With records amounts of people filing for unemployment, there is concern that millions of Americans stand to lose their employer-sponsored health insurance when they might need it the most.
Bearish Argument #16 – Social Unrest
The shorter a lockdown exists the less likely a country is able to contain the virus. The longer a lockdown goes on, the more likely there will be social unrest resulting from the lockdown. Talk about a no-win situation. Social unrest, while not a dramatic economic impact, would tremendously weigh on market sentiment.
News This Week
Walking off the job and strikes could be the early beginnings of social unrest forming in the US. The Federation of Red Cross and Red Crescent Societies warned last Friday that riots and protests could hit major Western cities in the next several weeks.
High-end stores across the country have been boarding up their stores in anticipation of civil unrest
Bearish Argument #17 – Emerging Market Destabilization
Emerging Market economies were pummeled by dollar strength, are now about to be devasted by the global virus demand shock, and as virus countermeasures hits already unstable nations could well plunge into chaos. Not all economies and currencies are going to be able to print money endlessly without severe ramifications. The United States might be able to get away with it due to its status is the reserve currency but the impact on other countries doing the same could lead to the destabilization of the entire economic system of a country. If that happens…well it is not going to be pretty.
Bearish Argument #18 – State and Local Economic Revenues
Covid-19 is wrecking the economy, and this will be felt at the state and local level as well. With tax revenues taking a huge hit there is talk about the federal government giving direct assistance but bears ask a simple question. Can the federal government save everyone? How much money would that cost? Something must give.
Bearish Argument #19 – Suspension of Buybacks
Buybacks have longed been argued to be one of the biggest catalysts of the upwards price movements of the markets in recent years. There are statistics pointing that corporate buybacks have far exceeded demand from all other investor categories combined since 2010. As more and more companies are suspending buybacks this takes out a huge source of demand for stocks.
Goldman’s Buyback Desk: Companies Representing $190BN In Buybacks,
25% Of Total, Have Already Suspended Repurchases
Sysco Corp. says it is suspending its stock buyback program, reducing capex over coronavirus
Performance Food Group suspends stock repurchase program
Bearish Argument #20 – Fears of a Second Outbreak Will Hang Over the Market
There is widespread acknowledgement that a second outbreak of the virus in the fall is likely even after the first one is contained. This will be an anchor hanging over the market preventing any rally from being sustainable in the long-term until the virus is a distant memory.
News This Week
Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, told reporters that it is likely there will be another coronavirus outbreak in the fall.
Bearish Argument #21 – Credit Market Chaos
There has been a massive industrial scramble for cash over the last few weeks. Companies everywhere are looking to raise cash ironically adding to what almost everyone acknowledges as a ridiculously over leveraged environment. Credit downgrades and defaults are likely coming down the pipeline. Can the Fed magically make everything disappear? Possibly and they better hope so because if they cannot it would mean absolute chaos to all markets.
Extreme bears in this camp point several alarming talking points:
Non-financial corporate debt sits at just under $10 trillion, a record 47% of GDP.
One in six U.S. companies is now a zombie, meaning their interest expenses exceed their earnings before interest and taxes.
As of year-end 2019, the percentage of listed companies in the U.S. losing money over 12 months sat close to 40%.
In the 12 months to November, non-financial S&P 500 cash balances had declined by 11%, the largest percentage decline since at least 1980.
Bear Argument #22 – Supply Chain
Lost in the chaos is the original argument made at the start of this crisis – that in a world of increasing globalization, a break down of supply chains could cause severe stress to the system. Well now we aren’t just dealing with China but everyone else as well. How doesn’t this unquestionably impact everything? At a minimum it screws things up in the short term. In the long term it potentially will lead to more nationalism which will adversely impact companies bottom lines.
The supply chain worries also extend to worker safety issues. More and more individuals are concerned about the impact of workers in an environment that are tasked to keep the trains moving.
Bear Argument #23 – BTFD and FOMO Tell Us for Sure the Bottom Isn’t There
There is a high level of anxiety in traders out there to buy the dip. Perhaps even more are experiencing FOMO (fear of missing out) in fears of missing a huge rally to market to new market highs. Some bears would argue that this isn’t evidence of a bottom but to the contrary, it is evidence of a top. When these individuals get hit hard on the next downturn it will only lead to a huge second wave sell off. Bears argue that at real bear market bottoms, few are anxious to buy the bottom because sentiment is so overwhelmingly bearish. We aren’t close to that yet.
Extreme Bearish Arguments
Well getting into the depth of all of them would take another 5,000 words. Extreme bears fall into one of two camps:
They are convinced by so many of the general bearish arguments that not only do they believe the market is potentially heading lower…it is heading much, much lower.
Extreme scenarios playout. Some of these include:
Collapse of the dollar
Resetting of society
Massive mortgage defaults higher than the crisis in 2008/2009
Complete collapse of corporate credit
Massive consumer credit defaults on auto loans, credit cards etc.
Depression like conditions with massive levels of prolonged unemployment and GDP contraction
Crippling long-term deficits
Hyperinflation scenarios playing out
I need a good night’s sleep to keep up my health, so I am going to punt on analyzing these scenarios for another time. Needless to say, I am going to going into the naïve extreme bullish camp for at least one more day and address these after more sleep and rest allow me to analyze the probabilities of these nightmare scenarios playing out. For now, I will stay a cautious bull patiently finding solid opportunities at lower prices, betting on scenarios where the Fed and government come in and stabilize the economy while really, really smart people work on a vaccine. I hope I am right. If I am wrong some really, really bad scenarios are about to unfold.