Volatility Measures Calming Down, But Still Denote A High Level of Risk

The bulk of this evening's market notes are essentially more of the same, so I'll spare you all but the following on volatility. This is for those of you who like getting a bit deeper into the weeds:

Quote of the Day

Chatting with a client yesterday, he kicked off the conversation by mentioning that his colleagues have been talking about what a great time it is to buy stocks. He asked my opinion...

On Corporate Credit I Remain Concerned

As regular readers and clients know, I've been resoundingly bearish on corporate credit (junk in particular) for months. As I've stated ad nauseam from the beginning, a comeuppance in all things high yield during the next downturn (which is now) is what'll likely make the next recession/bear market (now) a rival to 2008's.

This Morning's Log Entries

7:22am

SPX, at the moment, has moved into the green after trading 1%+ lower early on. Per the pre-market note, traders are no doubt struggling with gaming what will be some of the worst data on record vs the largest stimulus efforts on record.

The Loss of a Tailwind

On multiple occasions herein since late last summer, when we became cautious on stocks, I've featured the data around the fuel share buybacks had supplied for the market, at, in too many instances, the expense of once-healthy balance sheets.

This Evening's Log Entry

Equities rallied 3.5% against not so rosy internals (ex: spx volume 22% below average, NYSE Up volume only 52% of total). I.e., while, based on price action alone, there remains an appetite for stocks, the internals today suggested that traders weren’t as hungry for them as they were last week.

Chart of the Day

Along with our own macro update from last Friday, this morning's release of the latest Dallas Fed Manufacturing Survey should give you a feel for why we can't get the least bit complacent here:

Quick Note on This Morning's Action

Equities rallying this morning, SPX +2%... Today ended a 3-Monday streak of limit-down futures. That, in and of itself, might encourage a few buyers. Could be that sellers are waiting to be sure qtr-end rebalancing’s through. 

How Wars Are Won

For the purposes of this morning's message let's think of bear markets as times of war (i.e., of potentially devastating risk) for investors.

Macro Update

I was tempted to skip this week's macro update, given how rapidly the data will deteriorate from here. So I'll just keep this one brief and to the point.

Today's Notes

Note: To the extent that I express my short-term outlook on markets, a sector or a commodity in my log entries, these are not to be the least bit construed as trade recommendations for the reader. They are, under present conditions in particular, subject to change without notice. What might appear to the reader as a viable trade idea today, could be something I'll do an about face on -- as new information presents itself -- tomorrow, with no prior warning. I share excerpts from my notes only when I deem them useful in terms of helping our clients maintain proper perspective.

After hours:

This week’s major rally was classic bear market action, in my view. Panicky deleveraging selloff, followed by the arrival of monetary and fiscal stimulus sparking a sharp rally -- aided by shorts getting caught offside -- that likely fails as the market begins to ponder what’s next. 

Ice Too Thin (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Quote of the Day: Reimagining Current Conditions

Going through our weekly macro exercise (dissecting every separate data point) this morning I was reminded of a quote I highlighted in Steven Strogatz captivating (well, so far, just started reading it) Infinite Powers: How Calculus Reveals the Secrets of the Universe.

This Evening's Log Entry

Here are my notes to self, and to you, this evening:

Headline of the Day: The Best 3-Day Surge Since.......

Forgive me for playing the party-pooper this week -- I mean, I honestly do welcome the rally. Thing is, per my recent messaging, it was absolutely to be expected. And, by the way, if history runs remotely true to form there'll be a bunch more before this particular bear market runs its course.

Quotes of the Day: The Fundamentals (lack thereof) Underlying the Market, And What This Week's Rally Tells You

Bloomberg's Heather Burke captures the fundamental issues underneath the current impressive rally:

Quick Note On This Morning's Action

Stocks are rallying hard this morning, against 3+ million in weekly jobless claims and what will likely turn out to be an underwhelming stimulus package.

This Evening's Log Entry

Here are my notes to self, and to you, this evening:

This Week's Message: Why We're Not Buying the Dips, or the Rallies

Well, it's been a nice, and welcome, couple of days in the stock market. Of course this came as no surprise to regular readers.

Quote of the Day: How "People Get Killed In Bear Markets"

Hedgeye's Keith McCullough was  preaching to our choir this morning:

This Evening's Log Entry

Here are the highlights from my notes to self this evening:

Corrected Headline of the Day

The few minutes between my posting our headline of the day and the close of trading had it literally missing the mark by 75 years.

Headline of the Day

If you at all struggle with our warnings herein about bear market rallies; on days like today, going forward (there'll be more), simply make note of the headline references to the last time the market saw a rally like that.

Quote of the Day: Public Service Announcement!

Bloomberg Asia analyst Garfield Reynolds echoes our messaging (on bear market rallies) herein:   emphasis mine...

From Last Night's Log Entry

My notes to self often get so technical and so into the minutia, and long (surprise surprise), that they're of little use, in their entirety, herein.

So I'm sharing two snippets from last night's log entry below just to give you the flavor of what I'm seeing and thinking about conditions in the very short-term (the last sentence being the most important):

Wait For It...

So this morning we woke to an announcement that the Fed will essentially print enough money to rescue virtually every institution, save for -- at this point anyway -- junk-rated corporations. S&P futures went from way down to way up instantly on that news. Only to see them careen back into the red just as the cash session was about to open.

Quote of the Day: Gravity

While discussing the Fed's huge move this morning, Hedgeye's Keith McCullough echoed our messaging herein; which is, we expect rallies, but -- for the time being -- of the ultimately (they might last awhile) unsustainable bear market variety:

This Evening's Log Entry: Reminiscent of TARP

The Senate couldn’t come to terms on $2 trillion in fiscal stimulus this afternoon, and while that’ll be the media’s narrative for why futures opened limit down, they -- via the “betting markets” -- had been nearly there all weekend.

Human Nature Always Rhymes

"Watching the world’s central bankers and finance officials grappling with the current situation—trying one thing after another to restore confidence, throwing everything they can at the problem, coping daily with unexpected and startling shifts in market sentiment—reinforces the lesson that there is no magic bullet or simple formula for dealing with financial panics. In trying to calm anxious investors and soothe skittish markets, central bankers are called upon to wrestle with some of the most elemental and unpredictable forces of mass psychology."

A Premature Notion

While as I continue to profess, I remain open to all possibilities, the popular (in some circles) notion that once we get more money flowing into the hands of market participants, amid what is an historic halting of economic activity, the equity market will miraculously rise and begin discounting a return to robust economic growth is, in my humble opinion, a most premature notion.

Macro Update

As you might suspect, our analysis continues to exhibit macro deterioration. And, as I know you suspect, the worst, alas, is yet to come...

Just the First Phase

Excerpt from my last evening log entry:

Quote of the Day

Bond strategist -- and respected analyst of all things Fed and credit markets -- George Goncalves echoes what you've been reading herein of late, regarding the "buy the dip?" question:

What's Behind The Whipsaws?

If the intraday ups and downs are making you dizzy (the Dow was up 200 points just minutes ago, down 230 as I type), know that the market these days is -- to no small degree -- being pushed around by, let's say, non-traditional, or mechanical (although humans do program the machines), forces.

Today's Log Entry

3/18/2020 Wednesday

All currencies fell against the dollar during the session today, and continue to as I type this evening: While the Fed is madly printing, other countries are aggressively printing their own currencies as well. And, clearly, the global demand for dollars is dwarfing the Fed’s attempts to suppress its rise. Thus, even the safe-haven short USD/JPY play, that has worked so well of late, has stopped working. This evening, for example, while U.S. equity futures are selling off by nearly 5%, the dollar is up 1% vs the yen. That is the complete opposite of what markets have grown accustomed to, until literally the past few days.

Bonus Quote of the Day

The following will be the essential narrative among the world's central banks for some time to come:

Quote of the Day, And a Short Video Commentary

Amid all of the present, and growing, chaos, Apple reminds us that there is indeed light at the end of the tunnel.

"Apple announces new iPad Pro with camera that can scan 3-D objects"

 Here's me sharing my thoughts on the latest:

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

This Week's Message: This Time Is Different

"This time is different" -- market sages like to say that, when it comes to investing, those are THE four most dangerous words in the English language.

Was Today Worth Writing Home About?

Today saw a strong snap-back rally after yesterday's beating. So -- apart from the whopping 6% move -- while I'll certainly take it, was today worth writing home about?

Where Are We In The Bear Market Cycle?

Here's Bloomberg macro analyst Cameron Crise's thoughtful take on where he believes we sit in what he views as the bear market cycle:

Quote of the Day

Hedgeye's Keith McCullough makes sense in his morning note (should sound familiar):

Fractals

Doing a little charting of past bear markets this evening -- history sometimes rhymes -- and thought I'd illustrate for you the fractal nature of markets. 

In Case You're Wondering

No doubt there'll be lots coming your way herein, as I absorb the latest macro news/data. 

In the meantime, I want to touch again on the "time to buy?" question.

Thoughts On What Happens Next (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Headline of the Day

Betting markets (we'll call them) -- a pre-pre-market, in a sense -- just a few minutes ago had the Dow opening down roughly 1,000 points come tomorrow morning.

Should We Buy the Dip? (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Quote of the Day: What Happened to Safe Havens Last Week?

The following from Bloomberg highlights the dynamic (forced liquidation) that we discussed herein that had, among other things, gold selling off last week -- counterintuitively:

Asset Allocation Update, And How To View Put Protection (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Quote of the Day: This Part of the Movie

This from Hedgeye Risk Management CEO Keith McCullough this morning speaks precisely to my comments on gold yesterday:

All Too Familiar -- And -- In The Words Of History's Greatest Trader

Today's, as I type, 3.4% rally in stocks is precisely what I virtually promised would occur (not the timing of course) in yesterday's video commentary. Having lived through several bear markets during my career I'm all too familiar with what are termed "bear market rallies."

Market Commentary (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Quick Commentary On This Morning's Action

As I type the major averages are trading down roughly 7% across the board.

While like many days of late this is no doubt unnerving, just know that this is what markets do when the realization that recession is near, or here, hits.

This Week's Message: Core Allocation Update

I was initially planning on making this week's message all about credit markets, but find myself in need of some extra time to sit with our current core mix of assets and determine to what extent, if any, rapidly evolving conditions warrant a bit of tweaking. 

Quick Note On The Latest

As I type the Dow's down ~1,000 points, S&P 500 is off  3.7% and the Nasdaq's down 3.3%. This comes after a huge promise-of-stimulus-induced rally yesterday.

Macro Update: Really Not Good!

This macro update is coming to you a bit late; catching up from a few days away from the office:

While -- for the past 20 weeks straight -- I've been able to for the most part characterize our weekly macro analysis as marginally negative, well, alas, that's no longer the case.

This Thing Called "Moral Hazard"

While, by definition, we're not at this point in recession, could it actually be that we're already looking at the taxpayer bailing out heavily-leveraged businesses?

THE Question!

Question from a blog subscriber (this, by the way, is THE question):

Hold Your Horses

As I type, just over an hour into today's session, the S&P 500 is up 2.27%, coming off of an initial 4%+ rally.

The Prevailing Bias

Today saw yet another of those recent "not-since-2008" trading sessions; this one being the worst of the current string.

Main Street Sentiment -- And -- This Evening's Rout In Futures Markets

Sunday 3/8/2020

Keeping you up to date as events unfold, and offering perspective where I can, as Nick and I are presently away from the office.

Here are essentially three brief blog posts in one.

5pm MST

A young man on the ski lift yesterday heard Nick and I talking about -- what else -- and chimed in and gave us a stock tip; "buy Tesla".

Wall Street's Surprising Confidence Explained

As I type this note, 9pm-ish on Saturday 3/7/2020, the news surrounding COVID-19 points to yet more pain for the stock market come Monday morning.

Quote of the Day: Be Aware

The following by Howard Marx speaks to why we began hedging portfolios during the 2nd half of last year, and why our asset mix is markedly different today than it had been throughout this entire bull market. 

This Week's Message: Highlights From The Week Thus Far

This is likely to be the last you'll hear from me till early next week: Heading out with the family to slide around on some snow for a few days. 

Ugly...

Here's from our first post this morning:

Q4 Earnings Update: The Setup Was There Pre-Virus

Yes, the coronavirus is indeed doing a number on the markets, not to mention the economy. But, remember, we were cautious long before the virus outbreak.

G7 and Central Bankers In Wait And See Mode -- Oh, Wait A Sec!

Here's from our note yesterday:

Quote of the Day: Inherent Dangers In The Current Setup

The following, by Howard Marx, speaks resoundingly to our assessment of -- and the dangers inherent in -- the present market environment:

This Morning's Log Entry

Readers keep in mind that the most important statement I make below is: 

"there are always multiple potential outcomes to any economic/market scenario -- and I'll absolutely keep an open mind"

While I present a sequence of events that may indeed unfold, I am in no way committed to the thesis. The economy and the markets are dynamic and so is our analysis. Conditions change, developments unfold and we adjust accordingly.

Can Central Banks Rescue the Economy From Coronavirus COVID-19? Or From Anything Else?

What will more central bank stimulus do for the economy?

Smart time to buy??

As some -- not me, mind you -- are suggesting, this may absolutely the best time to back up the truck and load up on growth stocks.

And let's say you do, and let's say you make a ton of money over the next few weeks.

Did you make a good investment?

Think of it in the context of this from my blog post earlier today:

"It's not at all wacky that amid what was arguably a slowly deteriorating global macro backdrop to begin with the COVID-19 threat would send stocks reeling. I.e., given the lock down in China, huge supply-chain issues, spread to other countries, travel restrictions, companies stepping up and lowering earnings guidance, and so on -- regardless of whether this morphs into the next bear market -- a strong selloff was/is the appropriate response."

Well, rest assured that "slowly" no longer characterizes the pace of present global macro deterioration.

Okay -- so what? Regardless of the state of general conditions, and of other things, if an investment made money it was a good investment, right??

Well, think of it in the context of my basketball analogy from 2018:

I play a lot of basketball, and, as my son and the dudes I play with will attest, I like to attempt three-pointers. In that success enhances the enjoyment of virtually any endeavor, I knew from the start (my late start [not surpassing the 5'5" mark till after highschool and, thus, being a wrestler during my formative years]) that if I was to score enough to justify my itchy trigger finger, I had to learn good shooting fundamentals. While I'm fully aware that 100% from the field is infinitely beyond my reach, I know that if I can stay in rhythm, if my form is sound and if I practice good shot selection, my odds of maintaining a respectable enough percentage to keep me from being the lowly last pick come time to select the teams increase dramatically.

Different players bring different talents to the game. There's a young man we play with, we'll call him Bartholomew (just in case he happens to stumble upon this blog post) who possesses exceptional ball handling ability and plays the point beautifully. Surprisingly, however, his outside shooting leaves much to be desired. So much so that when he launches a three his teammates cringe; hoping the ball finds nothing but air. Now why would his own teammates want Bart to miss his shot, in embarrassing fashion no less? Because they know that if he drains it, their odds of winning will decrease exponentially.

You see Bart believes that a shot that goes in has to be a good shot. Therefore, when he makes one he believes that he possesses the fundamental makings of a good shooter -- and good shooters shoot. So he shoots and he shoots and he shoots and, in reality not having mastered good shooting fundamentals, he misses and he misses and he misses and, alas, his team loses.

We can sum up basketball shooting as follows. There are:

1. Good shots that go in.
2. Good shots that miss.
3. Bad shots that miss.
4. Bad shots that go in.

#1's are great. #2's are fine, unavoidable, and possess a livable probability rate. #3's, while costly, are the most predictable and, therefore -- being costly -- should be readily avoided. #4's -- as explained above -- are an utter curse!

Here's my point:

We can sum up investing as follows. There are:

1. Good investments that make money.
2. Good investments that lose money.
3. Bad investments that lose money.
4. Bad investments that make money.

#1's are great. #2's are fine, unavoidable, and possess a livable probability rate. #3's, while costly, are the most predictable and, therefore -- being costly -- should be readily avoided. #4's: I can't think of a worst case scenario than a new investor hitting a #4 right out of the gate. The perverse feedback from that experience could absolutely send him or her to the poorhouse -- as he or she might think that he or she's discovered a high probability investing method and chalk up the subsequent string of losses to rotten luck. I.e., believing what are in reality #3's to be #2's. The emotional imprint from that early "success" may indeed last longer than his or her capital.

Unfortunately -- as I've observed over the years -- it's not just "new" investors who are capable of falling prey to #4s...

What's Wacky About This Market

It's not at all wacky that amid what was arguably a slowly deteriorating global macro backdrop to begin with the COVID-19 threat would send stocks reeling. I.e., given the lock down in China, huge supply-chain issues, spread to other countries, travel restrictions, companies stepping up and lowering earnings guidance, and so on -- regardless of whether this morphs into the next bear market -- a strong selloff was/is the appropriate response.