A Long Way To The Bottom For Stocks

Based on the both historic price action of the two financial bubbles that have burst in the past twenty years and our favorite valuation metric — Market Capitalization-to-GDP or the Wilshire 5000 Index to Nominal GDP — stocks still have about 30-35 percent to fall before we believe the “bottom is near.”

Stock Market Valuation Is Still Higher Than Pre-GFC Peak

It is stunning that even after a 27 percent decline in the Wilshire 500, the U.S. stock market cap-to-GDP ratio is still above its pre-GFC (Great Financial Crisis) peak!

Where Is Value — A Market Cap-to-GDP of 77 Percent?

We don’t know, nor does anyone else, but a market cap-to-GDP of around 77 percent is in the neighborhood where stocks start to look cheap, in our opinion.   Caveat emptor, however, markets almost always overshoot.

Assuming a -5.0 percent Q2 contraction in nominal GDP, which is generous, and the bottom comes at the end June, the 2020 bear market decline in the Wilshire 5000 (use it as proxy for other indices)  from the Feb 19th closing high to a hypothetical June low would be between 50-55 percent, which is right in line of the recent bears.

Caveat Reader

We admit the above analysis could be very wrong and readers should take it simply for what it is, conjecture, along with every other analysis out there, by the way.  We could be wrong on the levels or the time frame or both.   Nobody. Knows. The. Future. 

Use Valuation Metrics As A Gas Gauge

The valuation metric has worked for us, and we compare it to a gas gauge to inform us that the tank is running low or high —  i.e, how much potential upside/downside there is in current prices — and not the exact spot where the market runs out of gas.   Trying to top-tick the high is a mug’s game, ask Issac Newton.

The higher the black line moves above past highs, the harder and more painful the fall, or a meaner regression to the mean.

Write that down, folks.

The question is have stock valuations “reached a permanently high plateau” as the famous economist, Irving Fisher, stated just a few weeks before Black Thursday 1929?

Believe it, if you wish.  After all, we now live in a culture and political environment where,

It’s not a lie if you believe it

To that, we say hogwash.  — GMM, Feb 17th (two days before peak S&P500)

Wilshire_GDP_March_17

Watch The Bond Market

Ugly price action in bonds.

Read our post from yesterday,  Some Perspective, for our view on what is driving bonds. The upshot is bonds are mispriced given the deluge of supply that is coming.   It is our, opinion that there are very few real long-term buyers of duration at sub-1 percent yields.

Watch this space, which is probably more important that the price action in stocks.

 

Seat Belts_Mar24

Shame on the stock pumpers.

Stay frosty, folks.

 

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Happy St. Patrick’s (Maweyn Succat) Day!

Blast From The Past (BFTP).

Originally Posted On 

Happy St. Patrick’s (Maweyn Succat) Day!

St. Patrick, Ireland, St. Patrick’s Day. Simple, right? The man wasn’t even Irish! He was actually born in Britain around the turn of the 4th century. At 16 years old, Irish raiders captured him in the midst of an attack on his family’s estate. The raiders then took him to Ireland and held him captive for six years. After escaping, he went back to England for religious training and was sent back to Ireland many years later as a missionary. St. Patrick was actually born Maewyn Succat, according to legend; he changed his name to Patricius, or Patrick, which derives from the Latin term for “father figure,” when he became a priest.  – Time

The Irish Comeback

Ireland has come a long way since this post, which was just after the European debt crisis.  The government just placed €1.03 billion of 10-year bonds in mid-February at a stunning yield of 0.85 percent.  The auction had a bid-to-cover of 2.24.

Yeah, got it, distorted due to ECB asset-buying program.  But still well below the Euro periphery bond yields.

Irealand

Though the Irish economy is slowing and there is much uncertainty around Brexit, still it’s been one helluva comeback,  and the Irish are a resilient bunch, now positioning themselves with U.S. and Canadian companies as the “only English-speaking common-law country in the whole of the European Union.”

Me “finks [sic]” part of the success was thumbing their nose and ignoring the advice and dictates of the Eurocrats in Brussels.

Plus, Ireland still has Bono and U2, Andrea and the rest of the Corrs, and the many, if not all the great people of Ireland, we love so much,  including my late grandmother and her side of the family.   That is the upside of being an American.  We are all mutts and can claim to be citizens of many cultures.  Don’t think POUTS has got the memo quite yet.

Rory

How great would be to see an Irishman win the PGA’s coveted Players Championship on St. Paddy’s Day?   Rory tees it up in today’s final round one back.

Getting long Rory as I write.  Pour me one in Dublin and Hollywood, CD in the wee hours tomorrow to celebrate!   You heard it here first.  Unleash the Leprechauns!

Rory

Source:  Golf Digest

Happy St. Patrick’s (Maweyn Succat) Day!

Originally Posted on 

In case you’re wondering,  Maweyn Succat was St. Patrick’s real name and he wasn’t even Irish!.   Click here for some great background and history of St. Patrick’s Day.

Go Paddy, Rory, Graeme, and Darren!

Happy St. Patrick’s Day!  Not too many green beers, folks!

By the way, there has been one huge bond rally in Ireland over the past year.

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“The European Union borders and the Schengen borders will be closed”

It’s becoming pretty clear to us that the world is going to look much different on the other side of this crisis.  Diminished global supply chains and more nationalism.  Slower growth and higher inflation.

Much will depend on the outcome of the November presidential election.

Macron’s full address for those who speak French

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“Lock Downs Do Work”

Six counties in the SF Bay Area ordered residents to “shelter in place.”

 

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Take The O’Shaughnessy Challenge

Still waiting for the dawn, the sun is coming up
The sun is coming up on the ocean
This love is like a drop in the ocean
This love is like a drop in the ocean

Yahweh, Yahweh
Always pain before a child is born
Yahweh, tell me now
Why the dark before the dawn? U2

Yes, it’s dark out there and, likely will get darker,  but its always darkest before the dawn.

We will get through this, folks.   At least, most of us will.

Take The O’Shaughnessy Challenge

Tired of the Doom & Gloom?   Take the O’Shaughnessy Challange.

We are honored that the Wall Street legend, Jimmy O‘ follows our site.

As a young trader on the Street, I was weaned on his classic book, What Works On Wall Street.   If you haven’t read it, run, don’t walk to buy it.

 

JOS

Jim retweeted a news story that we sent out earlier that Tom Hanks and, his wife Rita Wilson had been released from the hospital, and challenged his followers commit to disseminate some confirmed good news.

Tom Hanks

The Hollywood pair remain under quarantine in a rented home in Australia.

Tom Hanks and Rita Wilson, who have tested positive for the coronavirus (COVID-19), have left the hospital and are now continuing to self-isolate at a rented home in Australia.

Hanks’ rep confirmed to The Hollywood Reporter on Monday that the pair remain under quarantine in the home. — Hollywood Reporter

That is pretty damn good news, in our book. Hanks and Wilson are both 63-years-old, which puts them in the higher risk cohort group.

We’re not claiming it is going to turn the stock and bond market, but it could be the first big crack in the doom that has descended upon the world.   As one of my Twitter bros tweeted,

The Woody lives!

We. Are. Not. All. Gonna. Die

Now,  go take the O’Shaughnessy Challenge, find some good news to tweet or share with somebody, or in our comments.  You will feel much better.

We Take The Challenge

Here is our first, short and sweet.

The snow is falling softly on CK‘s Montana ranch.  What a great person and friend she is.

CK

Can’t confirm that’s her ranch but pretty sure it’s even better.

 

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Some Perspective

In our March 7th post,  Stages Of A Pandemic: Denial, Panic, Fear, and Rationality, we suspected the country was about to move from denial to panic over the coronavirus pandemic.   It sure did and infected the global markets in a big way leading to today’s massive monetary package from the Fed.

Clearly, Jay Powell has more information than most of us as they saw the markets seizing up and had to act.  Hopefully, they won’t be bailing out the bad actors and will allow the necessary debt restructurings and some equity holders to be wiped out to prevent the zombification of the economy.   It won’t be the end of the world.

Trouble In Treasury Land

Last Sunday we posted this,

Can the U.S. government finance its $1.2 trillion plus annual deficits with an entire yield curve at less than 1 percent?  

We seriously doubt it and the Fed is going to have to step-up big time with QE, non-QE, or let’s just call it for what it is, monetization.  – GMM

During last week,  bond/note auctions began to sputter, Treasury yields on the long-end spiked, and bid-offer spreads blew out.

Flying Blind

The only thing we are certain is that all of us, including the policymakers, are flying blind.  Much like a pilot trying to navigate an aircraft in a thick fog lacking credible flight instruments, which have been distorted by years of monetary and government intervention to prop up asset markets.  Most of the old trusted economic signals from financial markets are long gone.

What is fairly clear from the past week, at least to us, is that markets do not and will not finance the now expected $2-3 trillion annual USG budget deficit at the sub-1 percent fake interest rates and that the Fed will be forced to monetize much or maybe most of the shortfall.

To hear calls that Treasury should issue $5 trillion in 10-year bonds or refinance its debt with negative interest rates is probably the most absurd thing we have ever heard in our long journey in the financial markets.  WTF?

Yes, there are $10-20 trillion of fixed-income instruments marked at negative yields but don’t make the mistake of thinking that trillions of dollars trade at those levels or that trillions of dollars were bought at negative yields by market and price-sensitive players.

Yields are set by the marginal buyer.  And we suggest you get to know the marginal buyer of duration at close to zero yields — the momentum crowd, including the algos with zero context, haven flows, stock short-sellers using bonds as a proxy,  and the ultimate take-out sucker, the central banks.

Though there are holders of bonds at these yields,  we suspect governments cannot issue large down here without the central bank taking down a big portion of the issues, either directly or indirectly.   We believe the events of last week and the Fed’s action today confirmed it.

Running a pro-cyclical fiscal policy and boosting eficit spending over the past few years is going to prove to be a huge mistake.

Let’s move on.

The Coronavirus

The following charts bring some perspective.  That is, though COVID-19 is much more fatal and “not just the flu” we are not all going to die.

In fact, most of us who get infected won’t even require hospitalization.

The problem is the law of large numbers.

So many of us are going to be infected, even though a small proportion will need hospitalization, our healthcare system will be overwhelmed and fail.

That is why governments are locking down whole cities and governments.

Learn from Asia.

Test, trace, isolate and inform are keys to epidemic control – Bloomberg

Godspeed, brothers, and sisters.

Good night and good luck.

 

Not Just The Flu 

COVID_v_Flu

80 Percent Of Cases Should Be Mild

Hospitalization Rates

Are You Outraged Yet?

Testing

 

 

 

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China’s Industrial Output Plunges, GDP Headed For First Contraction On Record

China_Economic Activity_Mar16

China’s industrial output fell more than expected as the coronavirus shutdown factories, across the nation.  Industrial output fell13.5% in January and February from a year earlier, versus a median estimate for a 3% contraction. Retail sales fell 20.5% in the period, compared to a projected 4% fall. Fixed-asset investment dropped 24.5%, versus a forecast 2% decline. The unemployment rate jumped to 6.2%, the highest on record.

Gross domestic product is headed for a year-on-year contraction in the first quarter, its first since comparable data begins in 1989.   Source: Bloomberg

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Exponential Growth 2.0

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Meet Me In St. Louis Not On The Streets Of Philadelphia

Severity of Cases

Source: Shane Oliver  @ShaneOliverAMP

This is about as close as we will get to a pure lab experiment measuring the efficacy nonpharmaceutical interventions (NPIs) intended to reduce infectious contacts, folks.

The 1918 influenza pandemic resulted an estimated 500,000–675,000 deaths in the U.S. and 50–100 million deaths worldwide.

The intensity of the 1918 pandemic, whether assessed as total excess deaths, the rate of increase in the epidemic curve, or peak death rates, varied widely among U.S. cities. Cities also varied widely in their choice and timing of implementation of NPIs designed to reduce disease spread. Many cities closed schools, churches, theaters, dance halls, or other public accommodations; made influenza a notifiable disease; banned funerals or other public gatherings; or introduced isolation of sick persons. In some cases, these NPIs were put in place in the first days of epidemic spread in a city, whereas in other cases, they were introduced late or not at all.  — PNAS

Note how St. Louis flattened the death curve (not the infection curve) with aggressive action in banning public gatherings within a few days of the first cases being reported.  Philly was complacent, however, downplaying the threat and lagging in its policy response by just a few weeks more than St. Louis.  Two weeks!

The contrast of mortality outcomes between Philadelphia and St. Louis is particularly striking. The first cases of disease among civilians in Philadelphia were reported on September 17, 1918, but authorities downplayed their significance and allowed large public gatherings, notably a city-wide parade on September 28, 1918, to continue. School closures, bans on public gatherings, and other social distancing interventions were not implemented until October 3, when disease spread had already begun to overwhelm local medical and public health resources. In contrast, the first cases of disease among civilians in St. Louis were reported on October 5, and authorities moved rapidly to introduce a broad series of measures designed to promote social distancing, implementing these on October 7. The difference in response times between the two cities (≈14 days, when measured from the first reported cases) represents approximately three to five doubling times for an influenza epidemic. The costs of this delay appear to have been significant; by the time Philadelphia responded, it faced an epidemic considerably larger than the epidemic St. Louis faced. Philadelphia ultimately experienced a peak weekly excess pneumonia and influenza (P&I) death rate of 257/100,000 and a cumulative excess P&I death rate (CEPID) during the period September 8–December 28, 1918 (the study period) of 719/100,000. St. Louis, on the other hand, experienced a peak P&I death rate, while NPIs were in place, of 31/100,000 and had a CEPID during the study period of 347/100,000. Consistent with the predictions of modeling, the effect of the NPIs in St. Louis appear to have had a less-pronounced effect on CEPID than on peak death rates, and death rates were observed to climb after the NPIs were lifted in mid-November ().  — PNAS

Policy Failure

Here’s to hoping we are St. Louis and not  Philadelphia but our late start, dithering, and horrendous leadership, including misinformation and mixed messaging disseminated by the Administration almost surely condemns the nation as a whole to the fate of  The City of Brotherly Love  during the fall of 1918.

…Alex Azar [Secretary of Health and Human Services], he did go to the president in January. He did push past resistance from the president’s political aides to warn the president the new coronavirus could be a major problem. There were aides around Trump – Kellyanne Conway had some skepticism at times that this was something that needed to be a presidential priority.

But at the same time, Secretary Azar has not always given the president the worst-case scenario of what could happen. My understanding is he did not push to do aggressive additional testing in recent weeks, and that’s partly because more testing might have led to more cases being discovered of coronavirus outbreak, and the president had made clear – the lower the numbers on coronavirus, the better for the president, the better for his potential reelection this fall. — NPR

Upshot

Trust the scientists.  Though I  believe in miracles, and we are going to need a big one, but never bank one.

As the death toll rises and the economic carnage increases, there is going to be holy hell to pay come the November election.  

President Wilson And The 1918 Flu

Very eerie parallels of how President Woodrow Wilson handled the 1918 Flu.  See here.

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No Time For A Victory Lap

President Trump gave the market what it was looking for today with a laser focus on containing the coronavirus and enlisting the private sector in the battle.   No focus on the stock market during the entire presser, which is, ironically,  one of the reasons why stocks rallied so hard.

Good for him and good for all of us.

No Victory Laps, Please

Much too early to take a victory lap, however,  as it is about to get much darker over the next month.

The following is ridiculous as much as it is absurd and reveals the mentality of the White House.

One bounce after a 27 percent crash in 17 trading days doesn’t make a bull market, folks.

Update March 14

https://twitter.com/northmantrader/status/1238803846333374464?s=21

Here Is The Reality

Gonna get very dark in the next month.  Kristof is a true saint, in our book.

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