The frenzy in stock markets

The story (before the big rally on Friday):

The S&P 500 has returned 37.7% over the last 50 trading days, making it the benchmark index’s largest 50-day rally in history, according to LPL Financial.

And if history is any indication, there could be more gains ahead.

Looking at the other largest 50-day rallies, the firm found that stocks were higher 100% of the time six and 12 months later. The average 6-month return was 10.2%, while the average 1-year return was 17.3%.

The firm crunched the data going back to 1957, which is when the index moved to a 500-stock model. [Link]

Another piece of news:

Using data from the timesheet company Homebase, University of California professor Jesse Rothstein and colleagues have identified businesses that shut down and are now reopening in real time. “It’s giving us a sense that reopening has gone faster than I anticipated. I would not have guessed that such a large share of firms have reopened at this point.

The most recent update from Rothstein and his colleagues using the Homebase data shows that about half the businesses that did shut down have reopened. “Reopened firms had collectively regained over half of their baseline hours and nearly 60 percent of their baseline employment levels. Almost 90 percent of this reemployment came through rehiring employees who worked at the firms before they shut down, as opposed to new hires,” he said. [Link]

Another piece of news:

Whether deemed essential or not, workers are being pushed by public policy and financial necessity back into restaurants, bars, stores, offices, warehouses, work sites, and factories. [Link]

The reactions:

(1) The jobs report, as an aside, was again skewed by reporting irregularities. Not just that, the payroll pop seems to reflect businesses re-hiring so as to get the PPP loans switched to grants. So put away that champagne! [Link]

(2) The CBO took a butcher’s knife to the 10-year US GDP outlook — $16 TN hit from the pre-Covid baseline trajectory in nominal terms. But hey — buy stocks! The SPX should now be valued on helium per share. [Link]

(3) Just imagine that most regular forecast forward earnings in the S&P 500 of 100 dollars a share. That would mean that at current prices the valuation goes up over 30 times. This is pretty mad. It‘s just an example of how markets are manipulated by central banks through quantitative easing. It’s so extreme, such a grotesque distortion that it’s almost embarrassing. [Link]

The Last Second Half Dance

Below are recent comments from Park Aerospace’s CEO, Brian Shore (fiscal Q4 2020 earnings call). We’ve followed Park Aerospace and Mr. Shore for many years and have found him to be one of the most honest and straight-shooting CEOs within our possible buy list. We thought his comments on the second half recovery summarized what we’ve been hearing from many corporate executives—visibility is limited and second half results are far from certain.

“Q3 and Q4, just don’t know, there are so many variables. We don’t know about Q2 either. We’re guessing. I just want you to understand that…we could be wrong. Q3 and Q4, we’re not even going to guess because there’s so many considerations that could affect Q3 and Q4, like what happens to the aircraft industry. Does it start to get a little bit better? Is there a little bit of light at the end of the tunnel? I know, now there’s no light at the end of the tunnel. It’s kind of almost sad, and I shouldn’t say pathetic, but it doesn’t really reflect well on these analysts because next week, they’ll have light at the end of the tunnel. This week there’s no light at the end of the tunnel. So I guess, maybe that’s the lesson…don’t listen—don’t spend a lot of time listening to the analysts.”

Source: The Last Second Half Dance

Surreal global debt issuance data

Some of the eight U.S. investment-grade companies that brought bond sales Thursday helped tip year-to-date supply past $1 trillion at the fastest rate ever. European borrowers passed 900 billion euros ($991 billion) on Wednesday, two months earlier than in 2019, and got up to 921.5 billion euros with Thursday’s haul.

Issuance has been rampant since the Federal Reserve and European Central Bank each announced programs to buy corporate bonds in March, enticing borrowers to tap the market at a frantic pace. Credit risk has eased with additional fiscal stimulus, especially from the European Union Wednesday.That’s helped encourage riskier debt sales, including those from hotel chain Marriott International Inc., borrowing in the U.S. market for the second time Thursday in as many months.

Several European banks including Commerzbank AG and Credit Agricole SA sold so-called Tier 2 bonds, a kind of lower-grade debt issued by financial firms.

In Asia, dollar bond sales for the month are at $23.5 billion, putting the region on track for the busiest May ever, even amid mounting geopolitical tensions with China. [Link]

Deflationary bust, first and inflationary bust later

Extracts from an interview Louis Gave had with NZZ.CH (ht: Jesse Felder twitter handle):

Things have value for two reasons, either because they are productive, or because they are rare. Today, governments tell us to stay at home, while at the same time central banks are printing money like never before. In this environment, it’s pretty hard to be productive. So the money ends up flowing towards things that are rare.

Our economies are like super optimized athletes that have just received a big hit. How quickly can they be back on their feet? My fear is it will take longer than many market participants think. I’m not so optimistic that in a year’s time we’ll be back to normal.

The system is rigged, we’re going to make sure that asset prices will never fall, and we’re just going to print more money. Over time, that’s a terrible message. It kills growth and productivity. [Link]

This following point requires separate exposition

If I am a BBB issuer in the US, and the Fed will buy my paper almost regardless, why would I ever go to a bank to borrow money again? Those are unintended consequences. They may have solved the immediate crisis, but they planted the seed for another problem down the road.

See this comment, from another article:

“The reason why U.S. investment grade companies are able to issue at such scale is primarily that the Fed announced plans to buy corporate bonds in the primary and secondary markets. That turned everyone else into a buyer – before the Fed has bought a single bond,” Hans Mikkelsen, head of high grade credit strategy at Bank of America, wrote, ahead of Powell’s remarks. [Link]

Individual investors with time on hand, working from home, with zero commissions, have piled on to the market [Link]. Investors Intelligence Bulls now 46.6. Highest since late Feb. [Link]

What’s undeniable, though, is that retail’s fingerprints have been all over the rebound, raising questions over whether or not a true capitulation ever happened…..

…. At Charles Schwab, clients opened a record 609,000 new brokerage accounts, with almost half of them created in March alone. The firm saw 27 of its 30 most-active trading days ever, including every session in March, Schwab said. Omaha, Nebraska-based TD Ameritrade observed record trading, account openings and net new assets of $45 billion –about 60% of which came from retail clients, as opposed to institutions. [Link]

It is a different (and delightful irony) story that the investment strategist at Charles Schwab has this to say about what is facing the market and the economy:

“We really are in uncharted territory,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “We have a monster mash-up of the Great Depression in size, the crash of 1987 in speed, and 9-11 attack in terms of fear.” [Link]

Back to Louis Gave:

What do we know for sure? Well, we know that pretty much the entire Western world is going through a monetary and fiscal expansion like never before. Basically, they are introducing universal basic income financed by Modern Monetary Theory. UBI funded by MMT: That’s a game changer. [Link]

I agree with him. Eventually, this ought to be inflationary. But, when does the ‘eventually’ arrive? Good question. This chart shows that it might be a while. Do we have to pass through the ‘deflationary bust’ first like in Japan before we get to the inflationary bust of the Seventies? In other words, to borrow from Albert Edwards, the ‘Ice Age’ may not be over yet.


What else?

Gold. Gold has been outperforming pretty much every asset class since January 2018. This outperformance makes sense, given the current fiscal and monetary policy. A third very visible trend is the structural outperformance of technology. Again, you have to distinguish between tech for consumers and for corporates. The outperformance of tech for consumers makes sense to me. We all sit at home, order Amazon packages and play video games. I’m willing to go along with that. [Link]

On European Equities:

European equities underperformed on the way up and underperformed on the way down. That’s terrible. European banks continue to plunge to new lows. This is never a healthy sign for an economy. For an economy and a financial market to prosper, you need a healthy financial sector. It’s your beating heart. The reality is Europe has decided that in order to save the Euro, negative interest rates are necessary all over Europe. That’s killing the financial system. As long as we have negative interest rates in Europe, we can’t have a healthy financial system. And without a healthy financial system, I don’t see how Europe can ever hope to outperform. Sure, there are some good individual companies in Europe. But as a whole, the market sucks. [Link]

Copper is a germ killer:

Another good attribute of copper: Germs don’t like it. Germs stay on iron and other metals, but not on copper. So we might see that countries that can afford it will use more copper for things such as door handles, hospital doors and so on. This is what happened after the Spanish Flu: We started putting copper everywhere, which is why Art Deco looks so cool, because it has copper everywhere. That actually came out of the Spanish Flu and the knowledge that copper is a germ killer. [Link]

Powell’s mission accomplished

“The signaling effect of what the Fed is doing is powerful,” said Jack Janasiewicz, a portfolio manager at Natixis Advisors. “It was enough to shift sentiment, and when we start to feel better about things, we start buying. Worst-case scenario, if things really fall apart, the Fed will step in.” [Link]

this is quite funny – the last sentence:

“If they now provide a significant amount of support to get those firms that were heavily leveraged through this, everybody will assume that they will do it next time,” said William English, the former director of the Division of Monetary Affairs at the Fed Board who is now a professor at the Yale School of Management. “They will have to be clear that they are only doing this with gritted teeth.” [Link]

From the Wall Street Journal:

sales of so-called structured products geared toward individual investors—including bets on stocks repackaged into bonds—hit a decade high in March. [Link]

Many analysts and traders said they have been struck by the extent to which some of these markets appear on the road to recovering their full health, just weeks after trading was frozen with the news that many jurisdictions across the U.S. had imposed stay-at-home orders and similar measures. [Link]


The nation’s largest used-car retailer, CarMax Inc., successfully priced bonds a week later.

Enrique Mayor-Mora, chief financial officer of CarMax, said the company was “pleased with investor demand,” which allowed it to sell more debt than it had originally planned.

The heavy interest comes even though the market has grown riskier in light of the coronavirus pandemic. Subprime auto debt including some of Santander’s is backed by some of the riskiest borrowers with typically lower credit scores.

Santander recently disclosed that there was a sharp uptick in the number of people seeking payment extensions on their auto loans. About 7.5% of the loans backing its debt had received a payment extension in March, up from roughly 1% in February, according to JPMorgan. [Link]

They are back:

Issuance of structured products geared toward individual investors hit a decade high in March, the most volatile month in the stock market’s history, according to industry publication Prospect News. [Link]

Goldman’s V-shaped recovery

In the U.S., the headline unemployment rate should hit 15% “and even this understates the severity of the situation” as many workers will be sidelined and not looking for jobs amid an anticipated reopening of the economy. That will accompany a GDP decline in the U.S. of 11% from a year ago and 34% on a quarterly basis, both numbers also considerably worse than anything seen during the financial crisis in 2008…..

…. He forecasts third-quarter growth to be up 19% from the Q2 plunge followed by another 12% jump in the final three months of the year. [Link]

This is on the stock market (S&P 500):

The Fed and Congress have precluded the prospect of a complete economic collapse. Reduced “left tail” risk translated into a higher P/E multiple.” This takeover of capital markets means that Goldman’s “previous near-term downside of 2000 is no longer likely” even as its “year-end S&P 500 target remains 3000 (+8%). [Link]

This is from Lance Roberts of Real Investment Advice:

However, the chart below shows the most current estimates as of April 2020. As you can see, earnings are expected to decline from Q4-2019 levels of $139.47 to $136.18 and $131.09, respectively in Q1 and Q2 of 2020. That is a decline of -2.3% in Q1 and a total decline of -6% in Q2….

… In 2008, without an economic shutdown, S&P 500 earnings fell from $84.92 to $6.86. That is a decline of 92% from the peak, and earnings did not fully recover until 3-years later in Q3-2011.

Or in 2000, during the “ crash,” earnings fell from $53.70 to $24.69, or a decline of 54%. Earnings did not fully recover until 4-years later in Q2-2004. [Link]

Another perspective:

In a recent issue of the New England Journal of Medicine, Harvey Fineberg  writes that the corona   pandemic   would persist over a longer time frame than one would like to think. According to Fineberg   economic recovery  in COVID 19 affected countries will stretch even farther in time. [Link]

Professor David Robinson of the Fuqua School of Business @ Duke University:

Most small business owners are “massively under-diversified,” Robinson said, because a lot of their wealth is tied up in their businesses. This becomes more problematic when you consider that a quarter of new businesses in the economy are also started by people age 55 and over who are going to need their retirement savings in the near future, Robinson said, and those retirement investments have already taken a huge hit as a result of COVID-19, just in our first couple of months dealing with what is likely to be a long battle ahead. [Link]

From the Wall Street Journal Editorial, in a different context, however:

Contrast that with the Fed’s new Main Street Lending Program, which these columns have pushed. This is aimed at middle-market companies from zero to 10,000 employees and up to $2.5 billion in 2019 annual revenue. These companies are the backbone of the U.S. economy, typically well managed, with modest leverage. They need liquidity because banks won’t lend to them now and the government has eliminated their customers.

Yet the details make us wonder if the Fed really wants anyone to take up the offer. The Fed will accept comments on the program until April 16, which means it probably can’t launch until May 1, and money might not start flowing for weeks after that. By then many of these companies will be going bust. [Link]

Nicholas Bloom at Stanford University has this to say on the prospects for recovery:

Not only will this downturn be worse than what followed the financial crisis of 2008, he says, it could rival the Great Depression.

“People may end up calling this the Greater Depression,” Bloom says. “I think the drop will be comparable to the Depression. The only question is about the rate of recovery.”….

….. But Bloom says the aftershocks of the pandemic — what he calls the “second moment” shock — could greatly inhibit that rebound. The most immediate aftershock is likely to be an extended bout of uncertainty and risk avoidance. Having just experienced a jaw-dropping downturn, Bloom says, businesses are likely to remain cautious for much longer than usual about ambitious new projects. Consumers are likely to be wary too, especially those who lost a big share of their earnings in 2020….

“As recently as the middle of March, I thought we would probably experience a V-shaped recovery and bounce back relatively quickly,” Bloom says. “I don’t think that now.” [Link]

My point is not to say that doomsday-ers are right and that optimists are wrong. The problem with the sell-side is the joint-hypothesis problem: is it a conviction call or a conveniently self-serving call.

Was Bare talk a contrarian indicator?

This article on the drying up of liquidity in some of the most liquid contracts – S&P 500 Futures and US Treasury – was published on March 24th 2020. Has the situation improved? Materially?

One of the headline beneath the above article caught my attention: ‘Investors wonder if coronavirus will shatter calm?’ dated 24th January 2020. Well, they have their answer now.

A bit of tooting my own horn. In September 2019, I had written that there were straws in the wind that called for caution on the part of investors. On January 6, 2020, I had almost thrown in the towel on my views because the bull market had shown no signs of flagging. Not that I turned bullish. Over my dead body. But, I had capitulated, in a way. That must have been a warning to other investors in a way. The market peaked soon thereafter.

This article says that Blackrock warned of the mother of all bubbles in financial markets. It was published in November 2019. Even now, people conveniently forget this and blame the virus for sending all assets off the cliff. That is far from the truth. Coming into 2020, they were perched on the precipice. They were poised to fall. The virus was just the straw that was needed.

As I had written in a recent column for Mint, the IMF’s Global Financial Stability Report for October 2019 contained a lot of warnings. Of course, the Fund refused to call out the culprit. The culprit was the monetary policy solution to the crisis of 2008 that has now created the crisis of 2020.

The scale of financial leverage (debt) that has been built up since 2008 as the consequence of the policy response to a crisis caused by the buildup of leverage (yes, that may sound insane but that is what global policymakers did) is so huge that central banks may no longer be in control.

Lastly, two weeks ago I wrote that the world should be wary of smoking the China pipe again. In that column, I mentioned that the West’s economic travails this time around too is not going to leave China stronger but more vulnerable because its economic growth model is still export-dependent. This article in Bloomberg/Quint (I hope you can access it) reinforces that point.