Fla-La Land

Social Distancing - Anna Maria Style

I have tried to enjoy my remaining time on idyllic Anna Maria Island, but I find myself increasingly nervous about the prospects for any semblance of containment. Pictured above is a blissfully ignorant crowd of March Breakers, intent on getting their money's worth of fun in the sun. At the 'Ugly Grouper' restaurant, one of our go-tos for lunch, tables have been packed all week, reflecting the ignorant bravado of care-free holiday-makers.

This behaviour is a direct reflection of Americans' credo - "Life, Liberty and the Pursuit of Happiness'. They, of all people globally, have never liked taking direction from government. And given the stock market's poor reaction to President Trump's last two press conferences, they aren't likely to now.

This probably means a wider spread and higher incidence rate of the Corona Virus in the U.S. than should be the case. We just need to accept that human behaviour is hard coded. We are not rational beings, and old habits die hard. Unfortunately 'social distancing' sounds a lot like socialism to many right wing Americans.

The market flush yesterday was a necessary precondition to finding a bottom. While disorderly, the market mechanisms provided sufficient liquidity for the mad dash for cash. As all asset classes except U.S. treasuries sold down, the capitulation phase is now here. Sentiment, is collapsing to a much needed wash out.

The Fed is being vilified for its 'shoot first and asking questions later' rate cut that 'failed'. I don't believe they were deluded into thinking that was all that was needed. Their actions to instantly reduce administered rates to zero is the ultimate "pushing on a string" (strain?) and they know it. However, it is just a precursor to the next moves they need to make. There will be more targeted liquidity provision in the short term credit markets, especially in commercial paper and interbank funding.

That of course is just keeping the plumbing of financial markets working. Drawing on the lessons of the 2008 money market collapse, triaging this critical sector of the financial system is a priority. The stock and bond markets are dependent on orderly operation of these markets. Bring on a Fed sponsored Commercial Paper Purchase Facility!

Fiscal policy will take center stage now, with a bill this week relaxing payroll taxes. More will be needed. Financial open heart massage, in the form of direct-to-consumer stimulus payments, are being contemplated. Combined with corporate bail-outs of travel and leisure companies, a more direct approach to government support will likely follow the initial tentative approaches.

Financially we will get through this. Most likely we are at some sort of 'max panic' level given the 'Vix' reading in the 80s. The percent of stocks below the 200 day moving average will be the first indicator to watch. (Chart Below)

This chart has reached levels only seen after the 1987 and 2008 panics. These levels were precursors to a recovery phase as fewer stocks made new lows and stronger stocks began to be accumulated. Unfortunately, the 'external low' of the broad averages remains ahead of us. Weaken by the demand destruction and caught in a negative feed-back loop of closures, consumer facing and industrial companies are unlikely to have seen their worst yet.

As to the deeper cyclical stocks, asset values are of little importance in a period of decidedly negative commodity price momentum. But as I like to say - there is plenty of $65 oil but not nearly enough at $25. The same can be said for many commodities as short-term oversupply swamps long run average cost curves. But since "the last barrel prices all the rest", there could be further downside. But CNQ is trading at 25 cents on the asset value dollar. Really?

But if we get through this within less than a year, many stock prices of commodity companies will have seen their generational lows. The harm being done to capacity additions stemming from drastically reduced cap-ex, inevitably will support valuations. This year it will be cheaper to look for copper on Bay Street than in Chile.

The internal lows are now in. By that I mean, a bottoming process can now begin. Sorting out sustainable balance sheets and dividend payers will soon start sequentially cementing the lows for those lucky few companies with pricing power in a weak economy - like utilities and pipelines.

For the rest, I'd wait a bit longer. These markets are for those with deep pockets and short memories.

So the thing to remember at times like these is there have always been times like these. I've seen them before and, perversely, I hope to see them again. That presupposes a long life ahead of me. I'd like that.

Stay safe and keep the faith.

Risk Model: 0/5 - Risk Off

It can't get any more emphatic that this. The damage done will take time to repair. With the XUI 25% below the now falling 200 DMA, there is snap-back potential, but that is more like gambling than investing. It would use a 50% RSI level as a place to sell now. Technical indicators are most helpful after established trends have been in place for a period of time.

The blow-out of 3-Month Vol is impressive, having matched the 2008 levels. (below). After the GFC mess it took a year to calm down. The Model will likely be slow getting back in to buy mode.