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Stocks opened lower on Friday, down 550 pts and proceeded to go even lower notching losses of more than another 1,000 pts by 10 am, as the bottom appeared to be falling out of the market. By 10 am on Friday, we had witnessed the market lose more than 4,500 pts in less than one full week, as panic, hysteria and irrationality took control of the markets. Not just US markets, but global markets as well, algos hitting the sell button with abandon, while the same algos cancelled buyside interest, thus the complete collapse in prices. I mean let’s think about this for one minute, 4500 Dow points in one week. Essentially 1000 pts per day. I mean it’s almost comical and it is IRRATIONAL. And the sell-off in equities caused a run into treasuries, sending bond prices soaring and yields collapsing. The 10-year treasury ending the week at 1.127%! (that is NOT a typo)
Calls for massive central bank action filling the airwaves and hopes that the Fed would act caused a late day reversal (see below) in US markets in the final minutes of trade. Investors saw the algos surge 640 points as the bell rang leaving the indexes with losses but nothing near the losses they were. By the end of the day the Dow was down by 357 pts, the S&P lower by 24 pts, the Nasdaq actually went positive at +0.89 cents and the Russell gave up 21 pts.
FED decision – what’s next?
So, again I ask: What exactly will more rate cuts do to solve or control the spread of this virus? I’m not even sure that central bank action in China, the epi-center of this Pandemic, might be helpful. More easing by the ECB (European Central Bank), BoE (Bank of England), BoJ (Bank of Japan) or the FED is going to do what exactly? Is it going to cure the virus? Is it going to force people to fly around the world or jump on a cruise ship? Are you going to go out and buy things because the FED cuts rates by 25 or 50 bps as they attempt to stop the virus? Is a massive cut going to restore manufacturing, consumer demand, Industrial production, Capital Goods Orders? HELP ME – what am I missing? Reminder, US rates are already at 1.5% while consumer revolving credit remains at nearly 25%. (That segment NEVER moves lower). Mortgages should come down, but expect lending standards to rise because banks do NOT want to lend 30-year money at 3% – so if they stiffen the standards less people will qualify. Car prices? Sure – auto rates might come down, but expect auto prices to surge to make up for it. And negative rates in Europe, or Japan – are they going more negative? (And by the way, how has that worked for those countries?)
When did the FED become the CDC (Center for Disease Control)? It is absolutely ridiculous to think that a rate cut is going to do anything to stabilize the irrationality at this point, never mind slow or stop the spread of this virus. I mean, it is going to soothe investor psyche or in fact create even more panic? I would argue that it is NOT investors that are out of sync. I would argue that it is MORE the combination of high speed super computers (technology) coupled with complex algorithmic investment strategies that completely fail when the going gets tough and the world gets hit with a Black Swan event. This reminds me of Portfolio Insurance in October 87 and then the complete breakdown of the unregulated “mortgage products” (MBS, CDS, ABS, CMDOS, etc.) that FAILED when the global economy started to stall in 2007, creating the GFC (Great Financial Crisis) of 2007/2016. NOT that I am suggesting that we are about to go off the edge because I am NOT. (But let’s see what Goldy has to say next Sunday)
Because over the weekend guess who opened their mouth again?
You guessed it – our friends at Goldy (Goldman Sachs). Their analysis? Expect the FED to get (really) aggressive! They sent out a note on Sunday to the masses (as they “leaked it” on Friday afternoon – which might explain why the market rallied in the final 15 minutes of trade so that they could position themselves properly) detailing what they see next. In the note they “strongly suggest” that the FED will cut rates by 50 bps either before the March meeting (suggesting an EMERGENCY) or at the March meeting (suggesting a slightly less EMERGENCY) and then by another 50 bps by the end of the year, (coming in two more 25 bps cuts). I mean it’s like last Sunday when they published the “ZERO GROWTH” piece for all of 2020, sending markets further into a tailspin. After the beating they took on the prior Friday. Do you see the pattern? It’s uncanny (it’s always a coincidence). But remember, there are a lot of Goldman “people” at the FED and in the administration. More so than JPM, C or MS “people.” Just sayin’ it is food for thought.
Look, it is reminiscent of December 2018, selling begets more selling, weakness creates margin calls and that creates more selling, technical breaks create more selling, the lack of a short sale rule creates more selling, leveraged complex ETFs begin to blow up and a spike in volatility creates more angst. Remember, if you are a short term trader, you are having a field day, but if you are a long term investor, someone with a plan and a design and have a wealth manager that has anticipated these types of events, then you should not be worried. In fact, I would say you should be excited about the sale going on.
I mean dipping your toes in the water is ok. Do not jump all in, just stick to the plan. Look at your portfolio. Look at what you own already and see what’s gone on sale and scoop up a bit more! It’s called dollar cost averaging, and it works over the long term.
Overnight, markets in Asia surged with China leading the way up, adding 3.29%. This AFTER they reported HORRENDOUS economic numbers. On Saturday we learned that the “Official Purchasing Managers Index” fell to 35.7 in February versus the 50 reading in January! And the Markit/Caixin Manufacturing Purchasing Managers Index fell to 40.3 vs the expected 45.7. These are numbers reminiscent of the financial crisis (inflammatory). But remember, this is NOT the financial crisis at all. Businesses are restarting and while operations are below capacity, that is a temporary situation. It will all come back online. Other Asian markets rallied as news that the PBoC (People’s Bank of China) is ready to pump more stimulus into the economy. The BoJ (bank of Japan) following in their footsteps with Governor Kuroda saying:
“the BoJ will strive to stabilize markets and offer sufficient liquidity via market operations and asset purchases.”
All this feeding short term market psyche, and this caused a rush into equities suggesting that “technically” many of these markets were in a well oversold condition.
In Europe this morning, many of those markets are not following suit. The excitement over more rate cut’s ability to mitigate the economic impact of the virus being called into question. In other news – the UK and the EU are set to hold their first round of “Post BREXIT” (PB) discussions. The EU is ready to negotiate and offer a “substantial and ambitious” partnership with the UK. Recall that the UK has made a comprehensive free trade agreement a must have in these negotiation.
At 6:30 am, we see the FTSE +0.55%, CAC 40 – 0.25%, DAX – 0.38%, EUROSTOXX -0.27%, SPAIN 0.71% and ITALY -2.36% (think more corona outbreaks).
US Futures have been all over the map since last night, beginning the evening by falling 800 pts only to rally by 1500 pts taking the Dow futures to +500 only to see them fail once again as the sun rises. Currently US futures are DOWN. Dow – 300 pts, S&P lower by 30 pts, the Nasdaq -66 pts and the Russell off by 17 pts. 10-year treasuries about to go SUB 1%. It’s IRRATIONAL. Excitement over possible central bank action being called into question even as global economists who are becoming increasingly worried over global growth. NYC, Providence, RI and now Tampa, FL are all reporting cases of the virus. FL’s Governor DeSantis now calling it a STATEWIDE PUBLIC HEALTH EMERGENCY. What will Andrew (Cuomo) do?
Again – I would say this is completely IRRATIONAL behavior. But then again, the automation can only be as rational as the logic allows it to be. And when some of those leveraged complex investment products begin to fail, the logic says – BAIL! And BAIL is what they do at any price… with trading in sub-pennies – the logic says that there are a lot of pricing options – Yeah? Not, so much, because the logic also says that when the psyche changes – bids fade. That is what leaves the void in prices – which is why (once again) we see massive moves on the downside right at the opening as the day gets started. In the Treasury market the exact opposite happens. In line offers fade leaving a void is supply causing prices to spike and yields to fall (and conversely when the psyche is more positive – you’ll see massive UPSIDE moves in equities and DOWNSIDE in Treasuries from the start). We have no one to blame but ourselves. Regulators have bought into the idea that the technology makes it more efficient – (true). But what they fail to acknowledge is that complex, highly levered products cut both ways destroy confidence in the capital markets. And while the average retail investor is NOT in any of those products, we all get dragged down when they fail – because we all play in the same sandbox. Don’t even get me started…
I’ll say it again – an emergency rate cut will only ENDORSE the irrationality of market psyche and has the possibility of only fueling the flames of the sell off. Let’s not get carried away – the market was well OVERBOUGHT. The action of late leaves us at a forward P/E of 17 x right now… That ain’t so bad… Capisce?
Take good care.
And how appropriate for today… this sauce is simple to make and gets it anger from the red chili pepper… You can serve this with any type of pasta you want – but spaghetti or linguine is best.
You will need: olive oil, onion, garlic, red wine, sugar, crushed red pepper (or chili peppers if you want hot, hot, hot), lemon juice, oregano, s&p, crushed tomatoes, tomato paste and chopped parsley.
Bring a pot of salted water to a rolling boil
In a large pot (or deep sauté pan) on med-hi – heat up olive oil and garlic… sauté a bit – but do not burn – 3 mins or so… now add sliced onion and sauté until soft – like 5 mins more. Next – add ½ cup of red wine, ½ tbsp. of sugar, fresh squeezed lemon juice (about 1 tbsp.), oregano, bit of tomato paste and a 28 oz. can of kitchen ready crushed tomatoes (not in puree – just crushed tomatoes), crushed red pepper (or crushed chili pepper if you prefer) – bring to a boil and then reduce to simmer and cook for 15/20 mins…
Add the spaghetti to the boiling water and cook for 8 mins or until aldente – strain – reserving a mugful of the pasta water. Return pasta to pot and add back about ¼ cup of the pasta water to re-moisten. Stir… Now add pasta directly into the sauté pan with the sauce – toss well – add a handful or two of grated parmigiana cheese and serve immediately in warmed bowls. Enjoy with a nice bottle of Brunello di Montalcino. Always have extra cheese on the table for your guests.