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Circuit breaker limits today

Level 1 – S&P must fall 7% – 191.90 pts

Level 2 – S&P must fall 13% – 356.38 pts

Level 3 – S&P must fall 20% –548.28 pts.

Stocks got smashed on Wednesday – the Dow falling 1464 pts or 5.8%, the S&P fell 140 pts or 4.9%, the Nasdaq lost 392 pts or 4.7%. The Russell gave up 86 pts or 6.4%, taking the Russell further into bear market territory as that index is now off 26% from its high established back on January 17th. The Dow is now in bear market territory slipping just below the 20%-mark yesterday afternoon, while the S&P and Nasdaq sit on the brink. The WHO (World Health Org) formally calling the crisis a global pandemic – really? Yesterday they did this? And the markets got crushed – as the action basically said: “Thanks – you are a day late and a dollar short!”

The selling has been vicious for sure… again. Sophisticated and complex ETFs are only adding to the pressure – as the market sells off. Illiquid ETFs that use complex strategies to try and create yield are now imploding. With one touch of the sell button – the market gets sprayed with sell orders indiscriminately. Bids get cancelled leaving massive voids in pricing, causing the indexes to spiral out of control. Good names, good companies getting caught up in the drama – and as fast as the market went up – seeing some names up 60% – 80% over the past year. We see how fast that can all turn. And while the indexes are now down 20% from the highs – there are individual names down even more as the indiscriminate selling takes hold. What we see is that more of the complex ETF’s that promise everything deliver nothing but chaos when the pressure rises…

Word that Trump was to address the nation last night only causing more angst as speculation rose about what he was about to say. What was he about to propose and is money really going to “fix” this crisis?

Many of the big investment banks now calling for the end of the bull market: JPM, GS, etc. at the top of the list. Yesterday CNBC featured David Kostin (GS fame) to address investors with the GS thought process, and it wasn’t pretty. They continue to call for tougher days ahead – citing 2450 as the target before this selloff is finished. 2450 would represent another 10% decline from current levels – which would essentially mean a 30% decline from the top. But – there is a bright spot in all of this, they are also calling for S&P 3200 by year end!

JPM analysts calling for the S&P to hit 2300 before the wound heals, taking the multiple to 15x earnings, and those earnings are expected to get slashed – as estimates of $176 become $154. That would produce an S&P target of 2310…(15 x 154). Remember – current multiples were near 18x earnings of $176 which would produce an S&P of 3168 – but with interest rates so low – the market had no place to go but up – taking us to nearly 3400 as even the Ivy league analysts were left speechless. And then… China unleashes Corona…

Which now brings up all of the monetary stimulus of the past 12 years, artificially low rates, and massive bond buying programs. How come that wasn’t stopping the bleed? In fact – has all of this stimulus been one of the driving factors in the speed and depth of this latest selloff? Had we allowed it to drag on for too long? I think the answer to that is an emphatic YES. But let’s not go there right now…

Last week – the FED made a panicked emergency 50 bps cut last week to attempt to slow the selloff taking US rates to 1% – and it is expected that they are about to make another one this week, which doesn’t appear to make any sense at all. Yesterday the BoE slashed rates as well. The ECB – (European Central Bank) led by Christine Legarde – told the world that this current crisis is reminiscent of the GFC (Great Financial Crisis) – not helpful at all…

And this is now a far different picture than what so many had expected and leaves us to wonder – what is really happening? Is this really a virus “event” or is it a reaction to the 12 years of monetary stimulus careening out of control?

As this virus took hold – global markets began to pull back – as speculation rose about the virus’ origin. China – at the epicenter of this crisis – unable to control the spread – soon saw Asia under assault. The incubation period of two weeks allowed for flights to and from China to ports of entry around the globe allowed for the virus to escape Asia and enter nearly every country on the planet. Testing was slow at first – leaving many to suspect that the number of people infected was lower than reported – but as the testing expanded – more and more people got diagnosed and this is now causing more panic. We’ve all seen what happened next: Whole countries quarantining themselves to try and halt the advance – with little success – and now the US is getting hit. While the number of cases in America remains relatively low – 1200 – the expectation is that we are about to get slammed as testing expands across the country.   Cities like NY, Chicago, Boston, LA, Miami etc… all on high alert. All kinds of gatherings being cancelled, St Patrick’s day parades, talk shows, sporting events etc. Last night we heard the financial services industry has decided to close the CME – the world’s largest financial derivatives exchange as of Friday evening, leaving one to wonder – who is next? That would be – Tom Hanks and his wife Rita – who are in Australia and revealed last night that they are both infected and remain in isolation. Ok, and that means what exactly? Does it change the story or does it just make it more dramatic? 

Last night, Donny addressed the nation, introducing a range of proposals that apparently the market and the algos didn’t like. What the market wanted to hear was the word “bailout” for every industry affected. Think airlines, travel and leisure, consumer discretionary, tech etc. Once it became clear that there weren’t any bailouts being offered – the algos went into temper tantrum mode and sold off hard, hitting limit down once again. Stocks in Asia closing substantially lower. James Cho – chief market strategist for HSBC private banking in Southeast Asia had this to say to CNBC’s Street Signs Asia:

“Policy measures, particularly fiscal policy or even interest rate cuts, do not address directly to these issues. You really need coordinated health policies and health authorities to actually stem this, contain this rise in COVID-19 cases.”

And that is true. This is not a financial issue as much as a health issue. This is an event – not a macro change in outlook.

Japan – 4.4%, Hong Kong -3.6%, China – 1.39% and ASX -7.36%

European markets are in sell off mode as well, all down more than 5% as the day dawns. It’s more of the same, more virus worries, more social distancing, more of the pendulum swinging too far left. The selling is indiscriminate. But you can’t get in the way right now.

FTSE – 5.8%, CAC 40 – 5.9%, DAX – 5.9%, EUROSTOXX -5.7%, SPAIN -6% and ITALY -5.3%.

US futures – are limit down… again, suggesting a 5% drop at least. Get ready for the circuit breakers to get elected once again. The issue this time is: will we get the second circuit breaker to get elected – markets down 13%? Trump’s speech doing little to calm the markets – again because he didn’t use the word bailout – but he did ban travel from Europe.

The technology will continue to send the markets lower until the panic subsides. If you are invested now and have a long term view – do not sell here, because once this is over – the snapback will be just as quick. If you have money to invest – you can sit back and be patient. Again, take a look at what you own and take a look at where they are trading. Does it make sense to add here or does it feel like you can wait? Sticking to the long term plan and NOT panicking is always the best option.

Oil is off again today. As that market continues to thrash around after Monday’s huge break. That – like equities – needs to find stability and until we get more clarity on what’s next with OPEC and Russia. We can’t define proper pricing for oil, and oil in the low $30s is not good for the US or US High Yield debt. That presents a whole set of new problems for the markets. Currently – oil is down $1.77 at $31.21, as it tries to find support. The longer it stays here – the more risk there is for defaults and if that happens – expect more selling to hit the markets.

The S&P closed at 2741 – We have broken the December 2018 support level of 2765. That sets us up to test the lows of 2018 – which is 2350. That is another 14% move lower. So hold on – because as the US infections spike – expect the tone to be more negative. This is not the time to go to sleep.   

Take good care.

Kp

Soup is always good for what ails you…

For this you need: Zucchini, carrots, onion, celery, potatoes, green beans, plum tomatoes, baby spinach leaves, olive oil, s&p, broth – (Chicken, beef or vegetable – whichever you prefer), Arborio rice – (or ditalini pasta), fresh basil and fresh grated parmegiana cheese.

So this is a great dish – easy to make, not heavy, gluten free, always helpful when you are trying to diet. – Fills you up without feeling stuffed.

Begin by heating up some olive oil in a large pot – add the sliced carrots, celery, onion – sauté for 5 mins or so. Now add the beans – cut into bite size pieces, and potatoes –also diced into bite size pieces. Allow to cook for another 3 mins or so.

Now take the plum tomatoes – cut in half and take the core (seeds) out. Dice into bite size pieces also – add to the pot. Now add the broth – add enough that you have covered everything in the pot by about an inch or so. Season with s&p – cover and reduce heat to simmer. Allow to cook for a couple of hours.  Keep your eyes on it. Add more broth if needed.

Now – make a decision – are you using rice or pasta? If you want rice – do not use more than 1 cup – otherwise it grows and sucks up all the soup, if you are using pasta – only use about half a box of ditalini – same reason – it sucks up the soup. (You can always add more broth or even water if it sucks it up.)

Add the spinach now and the rice or pasta. If using rice – it will need to cook for another 20 mins or so. If using pasta – it will be done in 8 mins or so.

Remove from heat – add the chopped basil, taste for seasoning and let it cool a bit.

Serve in bowls with a drizzle of olive oil and fresh grated cheese. 

Buon Appetito.