My Favourite Martian

The Scene: Aurion Capital Boardroom, March 9, 2009.

The Players: Three PMs and a Perma-Bear Investment Strategist.

The Plot: Strategy discussion about markets turns into heated shouting match.

The Final Scene: The exasperated PM says "the only thing not priced into these markets is Martians with ray guns." ... and he walks out of the meeting.

The market makes its final low that day and recovers 80% within a year..

Fast forward to March 2020.

Will the retired PM have the guts to make the same call?

You bet!

Buy this market with both hands! - but only after washing them!

Remember, it's the only store in the world when everything is on sale, people run out the door.

The valuation argument is easy now. Stocks are yielding more than 2.5X U.S.Treasury bonds. The juicy yields being offered on stocks like Financials, Utilities and Reits are very attractive. The PE ratio on 'normalized' earnings is somewhere in the mid teens. The breathtakingly rapid expansion of risk premiums has priced in the worst case scenario - unless you believe in Martians. Just rebalancing the normal 60/40 asset mix should put a bid to this market.

The lack of a positive catalyst is not a reason wait, just as the lack of selling catalyst in early February was not a reason to buy. The expression that comes to mind - "they never ring a bell at the bottom" - has never been more true. But perhaps yesterday's low volume, last hour dry-heave collapse on news of the congressional impasse was a small "ding".

Is all the bad news out? Hardly. Are the second level effects of the massive bailout by governments without financial consequence? Dream on. Will investors ever trust the stock market again? Grudgingly.

Some companies - mostly non-strategic small caps- won't survive. But the major technology leaders are already showing relative strength. AMZN, NFLX and INTC in particular seem have bottomed. Direct assistance for struggling companies is being marshaled. And most importantly, credit markets have received a massive 'FED put'.

All this is to say that I don't believe we are out of the woods yet. But the 'second derivative' effect is now at play. News from Wuhan and Milan are showing us the way forward - if you believe the data. The virus acquisition rates have seemingly peaked in China and started slowing in Italy. Today investors are latching on this 'good' news.

The most time compressed bear market in history has come at us seemingly out of the blue. But rate of change of the rate of change is going negative. Markets beginning to stabilize and the fraught process of looking over the valley has started.

And what a valley it will be. Unemployment will explode tenfold this quarter. Mortgage and Credit card default will be the norm rather than the exception. And government debt levels as a percent of GDP will rise to nosebleed levels.

Aiding today's risk-on feeling is a backsliding in the economic shut-down trend. Just 48 hours after isolation calls peaked, the lessening of restrictions is being put on the table. Trump is already trying to marginalize his medical advisors in order to push for a quick economic restart.

The FED has done its part. I can't help but think Jerome Powell has been in constant contact with Ben Bernanke, reviewing the 2008-09 playbook on what worked and what didn't. Maybe that's the only good to come out of that dark and uncertain environment.

Now the fiscal fix is shaping up in Washington after some initial politicking. A massive cash infusion - an economic 'ventilator' - is being constructed as we speak. This looks to be a good first pass at nursing the economy back to health.

I can say one thing with certainty: I don't know if this is the "bottom". Tony Dwyer of Canaccord - who along with Mohammed El-Erian have been prescient, is saying the first rally off the lows is likely to be "tested". But I do know that I have avoided at least 2/3rds of the losses of the average bear market in my trading account and some stocks have seen their lows.. Being 100% cash doesn't make sense now. It is time to start covering that bet - carefully.

I am basically an optimist at heart. It has served me well in the forty odd years that I have followed the markets. I've owned Dome Petroleum, Nortel, Bre-X and countless other flame outs and blow ups. I've been long and wrong during at east 7 major market sell-offs. I've looked into the heart of the bear enough to know this feeling.

For those with spare risk tolerances I say: buy this market - just be careful how you do it. Only high quality segments with solid pricing power and fortress balance sheets are eligible. The Financials, Utilities and select Technology stocks fit the bill.

Just be sure to send me a quick text if you see a large disc shaped object in the sky.

Risk Model: 0/5 - Risk Off

Yah, I know what this means. I'm going against the model.

The numbers are horrible.

The RSI is 27 against a buy range of 45 - 60.

The XIU is 30% below the 200 dma in a range of 95 - 110%.

The 3mo VIX is 56 vs a buy level of 21.

The Copper/Gold is dropping like a stone.

The AAII Sentiment should bounce this week but remain in a sell mode - especially if the initial bounce starts to fade today..

The major bottoms always look like this. So any call to buy this market is risky. The false bottom in the fourth quarter of 2008 felt like this. If the backtracking from a virus shutdown now being priced into the market itself backfires and infection rates re-accelerate later this summer, today's bounce will have been premature.

Stay well and invest carefully.