Thursday, March 26, 2020

This Evening's Log Entry

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

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:

Today was the third day of what I’ll call the oversold, end-of-initial-deleveraging (in financial markets), rebalancing, short-covering, stimulus rally. 

Looking at technical levels, we’re approaching the first typical bear market retracement level (38.2%), which is right at 2,650; almost got there today. If the S&P makes it through, 2,790 is the next spot technicians will be eyeing.

Now, having, by most appearances -- via unlimited QE -- stemmed the initial financial market liquidity crisis, we have the real economy stage to contend with. And that’s huge when we consider the horrific data to come.

Any attempt to couch present conditions, and the prospects for markets going forward in any fundamentally positive light would be utterly ludicrous.

So why then the huge rally in stocks? While, as I did above, I can cite the oversoldness of the market (which was huge), portfolio rebalancing (which is huge), shorts caught off guard, and the notion that stimulus (which is/will continue to be huge [although, caveat to follow]) attracts buyers as key factors, regardless of those justifications, this is precisely the playbook virtually every bear market has followed since the beginning of time.

Beyond this, and the other sharp rallies to come, the markets (equity, debt, currency, commodity) are going to have to contend with a stretch of abysmal data, virtually zero corporate cash flows across multiple sectors, a second-wave liquidity crisis among foreign holders of dollar-denominated debt, and, with regard to equities, the absence (via mandate or lack of capital) of the buyer (actually, the only net buyer of stocks the past 11 years) that kept the market humming throughout the entire previous bull market -- that being the companies themselves via share buybacks (heavily-leveraged share buybacks in too many cases).

With regard to the international rush to dollars (to service the debt referenced above), there’s been a momentary collective sigh of relief that’s being reflected in a dramatic rebound in cross currency basis swaps (EUR and GBP in particular) -- which were completely blowing out until the Fed opened up the dollar swap lines.





Considering, per last night’s note (excerpt below), the sheer enormity of the global demand for dollars, as well as the coming hit to US GDP, the historic hugeness of the coming stimulus, frankly, isn’t huge enough. 

"In terms of what ultimately the largest stimulus measures ever brought to bear means in the grander scheme of things; $2 trillion, plus the multiple trillions the Fed is pouring in, sounds huge, but we have to consider it within the context of $14 trillion of dollar denominated debt outside the U.S. ($25 trillion when you add in off-balance sheet numbers), unfunded liabilities into the future to the tune of another $100 trillion (i.e., phenomenally huge demand for dollars), and, considering that Goldman and Morgan Stanley predict a hit to Q2 GDP as high as -30%, well, suffice to say that -- along with the now wide-open swap lines -- there’ll be more stimulus measures coming in the months ahead."

Clearly, the latest market moves reflect the technical factors referenced above, the albeit temporary relief in currency and credit markets, and the buy-the-dip herd impulse. 

I.e., I don’t suspect that the market is nearly finished discounting the historic economic challenges governments, corporations, and consumers the world over will face going forward...

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