We’re Not At the Bottom Just Yet (3/15/20)
We're not at the bottom just yet.
Quick disclaimer:
1 - Do not take this as specific investment advice.
2- There are people far more technical and sophisticated in this space. The points below are simply meant to give context for where we are today and likely where things are headed over the next few weeks/months.
3 - No one on knows exactly what is going on right now and where this will situation will finish. Anybody who looks at complex/dynamic situations with complete certainty is an idiot. If a money manager tells you he/she has been correctly timing the market buys/ selloffs for any extended period of time, ask why they aren't managing all of the money in the world. No one has these answers!
We're not at the bottom just yet:
Take a look at this chart, which (with the red line on the left) shows the market drop in the past couple weeks, compared to the 2008/09 financial crisis:
We're early on in this cycle. 26 days to be exact.
The average Bull Market over the past 100 years lasts for 4.9 years. We’ve been bullish for >10 years. The average Bear Market lasts 1.4 years. We’re 26 days in. This has only just begun.
Current Dynamics at play, which has lead to market volatility the past month:
COVID-19
Markets hate uncertainty, and this is the ultimate form of uncertainty. Think about it, legitimately, no one on planet earth knows what is going on with this situation.
Regarding the virus
We don’t know how to cure it
We don’t know how to best test for it
No end in site. We're likely AT LEAST 12-18 months away from a vaccine. That mean that it'll likely subside during the summer months (in the US) and then be back with a vengeance for the start of Q4 (October, holiday season)
We do know that the number of affected in the US will BALLOON the next week/weeks. Fear will continue to rise until the number of new cases subsides. We're far from that point.
Regarding the economy
We don’t know how long people will be distancing
We don’t know how long these impacts will last
We DO know it’s going to have immediate impacts on some industries, (TRAVEL)
We DO know its going to have long term impacts on all industries
We don't have a ton of circumstances in history where no one knows the answer. Even in times of world war. Though one side wasn’t sure what the other side was going to do, at least the other side knew what they were going to do... Right now, absolutely no one has an answer.
Markets hate uncertainty, and this is the ultimate form of uncertainty.
Oil and Gas
The price of oil has fallen +/- 50% from the beginning of the year, dropping from about $60/barrel to about $30/barrel. (WTI Crude)
This is a massive industry globally, and any time that you have major price changes, there is going to be disruption, (way more-so than the cost of refueling your car at the pump)
Here is a short list of products that use some sort of oil and gas product
there are over 6000 items, this commodity impacts everything
Price being down that dramatically has an impact on everyone associated with the industry, particularly those people/companies who are US based.
Future Dynamics - yet to completely come into play
Earnings / Jobs / GDP
Company Earnings :
Earnings, for all industries, are going to come in lower than Wall Street Analysts were guessing. We have no idea how badly this will impact all industries and how severe of a hit we’re talking about
We have not seen any of these results yet. These calls will start to happen over the next few weeks.
Jobs
Unemployment will rise, immediately. It was so low for so long.
Already have seen a few travel companies downsize considerably. This is inevitable. It will spill over to other industries.
GDP
Will be impacted. Not sure exactly how badly, but it will be lower. This is a leading indicator for economic output and overall strength.
Corporate Debt Servicing
Think about your own mortgage or rent payments
If you lose your job for an extended period of time or have major cash flow issues, you cannot make these monthly payments, and trouble ensues
The exact same thing is going to happen to corporations, except the payments will be a lot larger, and have a much greater impact on a lot more people.
As an extreme example, look at Occidental Petroleum’s Acquisition of Anadarko Petroleum last year: Occidental paid $57 billion for APC. OXY was trading at about $45/share. As of Friday, Occidental’s market cap was 12.77B and trading at 14.26/share.
It gets difficult to make debt payments if the size of your company is cut in two thirds and your profitability is cut in half.
For other industries, its tough to keep paying employees if no one is going out and eating at bars, no one is flying domestically or internationally, etc.
These problems compound, quickly.
Stocks being traded at (arguably) a premium
We were in a ‘frothy’ situation, as the majority of the most popular stocks being bought and sold publicly on major indices were being traded anywhere from 16x-20x earnings.
The Trump Effect:
Like Trump or not, he is an incredible showman. Scott Adams refers to him as a Master Persuader.
Did you watch the full video the press conference on Friday afternoon? He had the CEO's of major, blue chip American companies up on stage with him, shaking hands, talking about the plans we're putting in place, and how we're working to make it through. (Walmart, CVS, Quest Diagnostics, etc).
There was very little actual substance, but that has been his brand this whole time, and frankly, (like it or not) it has worked. We saw a massive rally to end the day on Friday (him coming on at 3:30 EST was not an accident) for almost a 9% gain. Short term, great. Not sustainable though.
Trump is going to fight like hell to keep the market up. It’s an election year, and he’s based so much of his ethos on the market and economy at large
There will be more events/shows like Friday
The Executive arm (president) of the government will continue to push the Fed to lower rates/help however possible
As of this writing, FED cut rates to ZERO and will be pumping in $700 Billion in a stimulus package. Markets still down.
We’ll see a continued push for stimulus, Federal aid, additional resources, etc
Hopefully, politics aside, this helps our country, and our planet, both in the short term (to get over this unknown enemy we all currently face, COVID-19) and long term (remove some of the damn red tape that is draped all over the healthcare industry at large).
But, from a trading/stock market perspective, over the next weeks/months, the fundamentals and facts will catch up. History repeats, (reference the above charts)... And the stock market will go lower.
In the words of the Warren Buffet:
It's only when the tide goes out that you learn who has been swimming naked.
The tide is beginning to recede, and we’ve still got a way to go.
Please don’t read this and panic, but do properly align expectations. Misaligned expectations are the root of all disappointment.
Think of our current circumstance this way:
If this were a baseball game we're in the first or second inning. Get comfortable, make sure you have a some beer in the fridge, a few frozen pizzas and other nonperishable food stocked up for social distancing reasons, and extra toilet paper, cause we've got a lot of game left!
We're not at the bottom just yet.
Follow on Twitter for shorter thoughts and more updates @itschriskeith