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Authored by Bill Blain via MorningPorridge.com,

Buy Dips or Sell Rally?

 

“The Renaissance took place in an era of chaos and plague”

After yesterday’s sea of red, stock prices are green again. Phew…! Everyone breathe easy and buy the dip? Does that mean we forget yesterday’s cataclysm of clichés: “carnage”, “bottomless”, “rampant uncertainty”, “volatility storm”, and some unimaginative analyst even opined it was a “perfect storm”? Forget the fact Italy has gone into a countrywide lockdown – the market is apparently confident promises of further easing, relief packages, and even Donald Trump reversing from his earlier “Virus is Fake News” calling for payroll tax cuts and industrial sector bailouts, means everything will be “tickety-boo”. 

Bollchocks to that! 

First, you can’t spend and promise yourself out of a natural disaster, and second, yesterday’s crash was entirely predictable.  

We know the virus is spreading, and likely to turn Pandemic, and we knew the Saudi/Russia axis was wobbly. As the virus takes hold, the fear levels will continue to rise. Yesterday was a new chapter where all the negative aspects of the unfolding exogenous shock narrative were suddenly amplified by an oil shock. They reinforced each other to create a Black Monday that’s worth putting in the history books. But, it isn’t over yet. In fact, I suspect its still only beginning. 

Contagion has swept through the whole market.

It’s not just stocks and oil. Corporate bonds are now as illiquid as set concrete, while dealers aren’t able to find bids for corporate bond ETFs. We’ve all suspected ETF liquidity would be thin – but this is the first time liquidity has really been tested in recent years. I confidently predict massive liquidity failure will trigger further unintended consequences – especially when retail starts trying to exit daily liquidity funds. Who will be the first to Gate a fund? How embarrassing.  

However, this market crisis feels very unlike previous crashes. It seems to be happening in slow motion. I’ve worked through all the big ones since 1987 (although the great Perp Disaster of 1986 was my very first experience of market meltdown). This morning I’m looking at the wreckage from yesterday and thinking the Oil Shock aspect is probably done and dusted. (We will still have to see what happens to Shale producers – but that likely puts a floor on the market.) A falling out between Russia and Saudi was always on the cards as both chase different strategic objectives. The instability enveloping Saudi leader Prince MBS is a repeating factor. Does that mean it’s time to pile into oil stocks after they took a particularly heavy beating y’day? Or should we wait to see what the Virus does next? 

That depends on your read of current market events:

A) Is the current volatility just a reaction to the unexpected Coronavirus shock, with the strong likelihood positive market direction will be restored once the authorities have “sorted-it-out”?

or

B) Is this the first act in a spectacular Götterdämmerung of an overlong bull market, as the virus signals the collapse of an overpriced stock bubble, fuelled by foolishly low interest rates which could now trigger secondary corporate and even sovereign debt corrections?

Your answer to the above determines whether you buy the dips or sell the rallies. 

As Italy shows, there is plenty of virus pain to come. Yesterday’s oil crash would have been a massive over-reaction in a normal market, but as the current virus narrative shows increasing transmission and rising infection clusters – these will keep everything on edge for longer. Even when we see signs transmission rates are under control, we’ll still have to figure just how deep the damage has gone in terms of corporate leverage, supply chains and default contagion.

There is lots of news about how China cracked contagion through its authoritarian containment efforts. These can’t be replicated in the West. And we don’t actually know theses measures have worked in China – yet. As workers start to return to work, the authorities are clearly nervous about the Virus erupting again. 

At the moment I suspect most governments are making lots of public noise about their Coronavirus contingency planning, but are praying for Spring and warmer weather to put the threat to sleep – for a while. They are gambling on the weather! If it pays off it will give them till the autumn to get a new vaccine in place – it will be tight. Try this from the Torygraph – How long will we have to wait for a coronavirus vaccine? And we can pretty much guarantee (from the observed behaviour of previous Covids) that it will be back.   

Today the Coronavirus is generating the market moving stories. Tomorrow – when it comes – will be about the longer-term consequences. Tourism has effectively died across Asia – which could prove critical for global growth for years. This is not going to be a here today, forgotten tomorrow narrative. 

If you want a different take on just what a global reset this may be, try this from my old chum David Murrin: When Denial Is Swamped by Reality (If you need access to his site, tell his bot “Bill sent you.”

And if you still think the Coronavirus story is hype and overjuiced by the media, read some of the stories coming out of Italian hospitals suddenly swamped by patients needed urgent ventilation and intervention because they can’t breathe and their internal organs are going into toxic shock. Italian Hospitals short of beds as coronavirus death toll jumps. This isn’t anything like the flu. For the 20% of patients who get it bad.. they are getting it very bad indeed. 

The big Virus story this morning will be news President Trump proposing to bail out airlines and shale oil producers. He’s heading along the right lines – these will be major business sector contagion vectors for economic damage if/when we start to see a run of defaults. A slew of shale defaults will increase the lockdown in corporate bonds. Fiscal handouts will certainly be more effective than trying to reanimate the economy through rate cuts. (As one talking head said: rate cuts aren’t going to get people flying again..) However, his powers to enact fiscal spends are limited. 

Trump could still prove a critical aspect of the unfolding Coronavirus narrative. He was dismissing it as Fake News a few days ago. Let’s see what happens if we get clusters of infections create mini-Italys across the US, triggering too-late containment efforts, panic buying and health pressures. I suspect small-town hospitals across the UK and US are likely to be swamped. I was reading a critical issue in China to predict the severity of infection has been blood-pressure. That’s not great for small-town America or the UK! 

We could even see the next few weeks influence the November election. Coronavirus may be a slightly worse flu – but Americans are unlikey to forgive Trump if America proves unprepared and the blame is laid at his door – unless he persaudes his supporters it was Joe Biden’s doing!  

From a market perspective, keep looking. There are definitely opportunities out there. And I’m still thinking about the oil majors. Maybe… just maybe this is a moment..

Back in 2015, after the price of oil cratered after Saudi Arabia decimated OPEC during the 2014 Thanksgiving massacre, US shale companies scramble to slash dividend and capital spending in order to preserve liquidity in a time when virtually nobody was cash flow positive with oil trading in the $30. The result, was a capex contraction and eventually, a manufacturing recession which swept across the US.

Fast forward 5 years when the Saudis have done it again, only this time US shale companies and other majors are wasting no time to conserve cash, and moments ago Occidental, whose stock has gotten crushed in the past few months…

… became the first US major to announced it was slashing its dividend from 79 cents to just 11 cents, a record low…

… and more importantly, cutting CapEx. From the press release:

cidental Petroleum Corporation (NYSE:OXY) announced today that its Board of Directors approved a reduction in the company’s quarterly dividend to $0.11 per share from $0.79 per share, effective July 2020. The company also announced it will reduce 2020 capital spending to between $3.5 billion and $3.7 billion from $5.2 billion to $5.4 billion and will implement additional operating and corporate cost reductions.

“Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt,” said Vicki Hollub, Occidental’s President and Chief Executive Officer. “These actions lower our cash flow breakeven level to the low $30s WTI, excluding the benefit of our hedges, positioning us to succeed in a low commodity price environment.”

And as all other US E&PS rush to follow in OXY’s footsteps, and capital spending grinds to a halt, the next manufacturing recession has officially begun, courtesy of Saudi Arabia.

All we can say is: get used to stories like this. And while we’re not going to document every single time coronavirus panic takes hold of what would otherwise be normal daily situations, we do think people should prepare to see more of it.  

A commercial flight that was heading from Colorado to Newark, New Jersey had to be diverted to Denver on Monday after several passengers “became disruptive,” according to CBS Philly.

The uproar on the plane was caused by a passenger who was coughing and sneezing. With coronavirus fears running rampant, the people seated around the passenger became concerned and eventually disruptive enough that the captain of the flight decided to ground the plane. 

The passengers on Flight 1562 heading to Newark “failed to follow crew members’ instructions,” which forced the diversion of the plane. Upon landing in Denver, the plane was met with police and the disruptive passengers were removed. 

The incident is an example of growing public concern about the coronavirus. The number of such incidents will likely grow, as we are starting to already see. Just yesterday, for instance, we wrote about the first potential coronavirus-related hate crime after a man wearing a surgical mask stabbed an Asian man in Brooklyn more than a dozen times. 

United Airlines commented that the “sick” passenger in question was only just “suffering from allergies”. The person was screened on the plane for a fever and was allowed to continue the flight. 

 

Authored by Lakshman Achuthan and Anirvan Banerji via CNN Business,

Fearing the US economy would fall into a recession due to the coronavirus, the Fed pushed through an emergency rate cut for the first time since the 2008 financial crisis. Yet, our research shows that the US economy came into this epidemic in more resilient cyclical shape than the Fed — and most economists — realize. This rate cut could do more harm than good.

What they may not appreciate is that an economy isn’t always susceptible to shocks. Rather, it needs to be in a cyclical “window of vulnerability” for a negative shock to tip it into recession.

Hurricane Katrina devastated New Orleans and the Gulf Coast in the summer of 2005 and also caused significant damage to the regional and national economy. But it didn’t trigger a US recession. Nor did Japan’s December 1941 attack on Pearl Harbor, which occurred before ramped-up wartime spending boosted the economy. The reason was that — as indicated by reliable leading indexes we’ve long monitored — the US economy was not in a recessionary window of vulnerability on either of those occasions and could, therefore, weather those shocks.

Going into the coronavirus crisis, the dozen-plus key leading indexes we monitor told us that the US economy wasn’t in a window of vulnerability. Therefore, the shock of the epidemic hitting US shores wasn’t going to tip the economy into a recession.

Importantly, housing — a critical driver of the economy — had already been strengthening, partly because mortgage rates were already near record lows before the rate cut. We didn’t need even lower mortgage rates, which followed the rate cut, to shore it up.

Separately, manufacturing is actually in a better cyclical position than most realize. In the United States, the purchasing managers indexes, which many economists see as a timely proxy for industrial growth, are still holding above last year’s lows, despite the supply chain disruptions caused by the coronavirus.

Paradoxically, the US industrial sector has lucked out in another way. Most don’t appreciate that the US industrial downturn through last year left a number of industries with bloated inventories of raw materials and in-process goods, as well as overstocks of finished goods.

This is why manufacturing is mostly okay for now. Of course, that won’t remain the case if the supply chain disruptions keep going for months due to the coronavirus and those excess inventories become seriously depleted.

Separately, the US-China trade war may also have helped by persuading manufacturers to move supply chains out of China. That is currently cushioning the impact of the supply chain disruptions, buying us a little time before manufacturing gets seriously hit.

Services could be more vulnerable to the coronavirus threat. This is because many service-sector activities may be curbed by government and private firms shutting down workplaces as a precautionary measure. Moreover, discretionary spending — especially on services that involve human contact — will be hurt by people’s fears of being infected by the virus.

Of course, such damage could last longer if people have doubts about official pronouncements. Here, trust is the key. Otherwise, the hit to the economy can drag on for months on end — and that could be recessionary.

The point remains that none of these potential problems can be solved by a Fed rate cut.

One might say that the Fed had no choice, having been boxed in by the markets. But Fed Chairman Jerome Powell has plainly said that it’s ultimately up to others — primarily medical professionals and, secondarily, fiscal policymakers — to solve the real problem.

It’s really about putting in place pandemic subsidies and administrative and fiscal support to keep business going. For example, South Korea, in the crosshairs of the coronavirus crisis, didn’t cut rates to prop up the stock market, but is helping out small- to medium-sized businesses struggling to pay wages and providing child care subsidies.

Going into this epidemic, the US economy was not particularly vulnerable to recession and, despite all of the drama in the markets, it still isn’t. But when our forward-looking indexes, including several high-frequency indicators, signal that we’re moving into a recessionary window of vulnerability, the Fed will need to act.

Unfortunately, last week’s Fed rate cut used up precious ammunition that it will need when recession — rather than a market correction — truly threatens. Our interest rates are now moving closer to zero, sending us down a similar path as Japan, which, despite negative interest rates and the Bank of Japan repeatedly purchasing massive amounts of both stocks and bonds, is now in its fifth recession since 2008.

That’s what “Japanification” looks like: slow growth with repeated recessionary episodes. And the Fed has just stepped on the gas on the road to Japanification.

Democratic presidential frontrunner Joe Biden had a meltdown on Tuesday, telling a Detroit autoworker “You’re full of shit!” when he was accused of “actively trying to end our Second Amendment Right.”

“I support the Second Amendment,” said Biden, adding in an incoherent ramble: “The Second Amendment – just like right now, if you yell “fire,” that’s not free speech… From the very beginning, I have a shotgun, I have a 20-gauge, I have a 12-gauge, my sons hunt. Guess what, you’re not allowed to own any weapon.”

“I’m not taking your gun away, at all,” Biden continued – to which the man interjects “You were on video saying you were going to take our guns away,” to which Biden replies “I did not say that.”

You did! It’s in a viral video!” the man volleys back.

Then Biden says “Wait, wait, wait, wait, I’ll take your AR-14s” – a gun which doesn’t exist.

Watch:

“Don’t be such a horse’s ass,” @JoeBiden says after the man continued to yell at him.

— Bo Erickson CBS (@BoKnowsNews) March 10, 2020

Hilarious.

People are probably fine with Biden switching his platform to grabbing AR-14s. I don’t think people will complain much.

— Erielle Davidson (@politicalelle) March 10, 2020

Meanwhile, Biden did threaten to take your guns.

Yes, Biden has promised to “Ban the manufacture and sale of assault weapons and high-capacity magazines” if electedhttps://t.co/xUMRg7ce5f

— Charlie Spiering (@charliespiering) March 10, 2020

And he wants to put Beto O’Rourke in charge of it.

Joe Biden says Beto “Hell Yes, We’re Going to Take Your AR-15” O’Rourke will “take care of the gun problem” for him.

Don’t be fooled: Joe Biden isn’t any less radical than the rest of them. pic.twitter.com/tVpGCMmy9n

— Steve Scalise (@SteveScalise) March 3, 2020

Perhaps this explains why Joe received some unexpected pushback on his designs. 

“Trump! Trump! Trump! Trump! Trump! Trump!”

Detroit auto workers shouted their support for President @realDonaldTrump during Joe Biden’s plant visit. pic.twitter.com/AxvasJCFCR

— Trump War Room – Text EMPOWER to 88022 (@TrumpWarRoom) March 10, 2020

US equity markets have tumbled back into the red for the day – after briefly touching limit-up levels overnight. The driver appears to be a loss of faith (or hope) that fiscal stimulus is coming anytime soon.

Everything is red but Small Caps notably underperforming…

And Treasury yields are rolling over…

Notably, as Bloomberg details, prior to Monday’s steep decline, the S&P 500 had plunged by 5% or more to start the week on nine occasions since 1955.

On each of the following Tuesdays, the benchmark bounced back by 2% or more, data compiled by Bloomberg show.

So… if we close red after yesterday’s collapse, that would be unprecedented in market history.

President Trump surprised his staff by announcing the details of an economic package set to be unveiled Tuesday in response to chaotic markets that have been rocked by the impacts of coronavirus and an escalating oil price war, according to Bloomberg, citing ‘people familiar with the matter.’

As outlined by Trump in remarks Monday, the proposal will likely include a payroll tax cut and a short-term expansion of paid sick leave, according to the people, who described the proposal on condition of anonymity ahead of its planned release.

Trump’s administration had been working on potential stimulus measures for about 10 days but were unprepared to provide details this quickly, the people said. –Bloomberg

Stocks plunged over 7.5% on Monday, the worst day on Wall Street since the financial crisis (and worst since 1987 intra-day) which saw credit and funding markets start to show signs of extreme stress. This has put Trump under increased pressure to act on concerns that COVID-19 will trigger a recession.

Trump has also been blaming the Federal Reserve – slamming them as “pathetic” and “slow” in Tuesday morning tweets, adding “The Federal Reserve must be a leader, not a very late follower, which it has been!”

Our pathetic, slow moving Federal Reserve, headed by Jay Powell, who raised rates too fast and lowered too late, should get our Fed Rate down to the levels of our competitor nations. They now have as much as a two point advantage, with even bigger currency help. Also, stimulate!

— Donald J. Trump (@realDonaldTrump) March 10, 2020

The Federal Reserve must be a leader, not a very late follower, which it has been!

— Donald J. Trump (@realDonaldTrump) March 10, 2020

House Democrats, meanwhile, are set to hear from two economists on Wednesday for input as lawmakers consider a fiscal package in response to the coronavirus impact. Both have called for immediate action, with Harvard’s Jason Furman advocating for approximately $350 billion in aid.