SPX - You Really Think $6 Trillion Can Save Us?
Updated
Three simple reasons why markets are still broken and why I lean towards the much higher probability of another move down despite FED stimulus:
1) Garbage prospects for equity earnings - earnings were terrible a long time before COVID-19 hit and this is way beyond a virus now:
-Earnings were terrible way before COVID-19
-Q4 2019 was the worst fall in EPS. growth since the 2008 Financial Crisis
-Unless governments miraculously open up the entire economy overnight, we now have the Q1 2020 earnings season coming up - hmmm...
2) $6 trillion of FED stimulus is highly disproportionate to the approx $70 trillion of value lost/being eroded:
-We'll start with more than $20 trillion of value that has been destroyed in global stocks
-Adding to it losses in all other assets (real-estate, credit, fixed income, etc.) this number is at least double equity losses: so another $40 trillion
-Adding to this: at least a $10 trillion global dollar shortage crisis (dollar shortage, forward dollars swaps and various other dollar liabilities)
- Total value destruction = 20T equities + 40T all other asset classes + 10T dollar shortage problems = approximately 70T of totally capital markets value destruction.
- You really think $6 trillion of FED stimulus and highly indebted governments can fix this tremendous mess?
3) The McClellan Oscillator has moved sharply from the most oversold levels to the most overbought levels
1) Garbage prospects for equity earnings - earnings were terrible a long time before COVID-19 hit and this is way beyond a virus now:
-Earnings were terrible way before COVID-19
-Q4 2019 was the worst fall in EPS. growth since the 2008 Financial Crisis
-Unless governments miraculously open up the entire economy overnight, we now have the Q1 2020 earnings season coming up - hmmm...
2) $6 trillion of FED stimulus is highly disproportionate to the approx $70 trillion of value lost/being eroded:
-We'll start with more than $20 trillion of value that has been destroyed in global stocks
-Adding to it losses in all other assets (real-estate, credit, fixed income, etc.) this number is at least double equity losses: so another $40 trillion
-Adding to this: at least a $10 trillion global dollar shortage crisis (dollar shortage, forward dollars swaps and various other dollar liabilities)
- Total value destruction = 20T equities + 40T all other asset classes + 10T dollar shortage problems = approximately 70T of totally capital markets value destruction.
- You really think $6 trillion of FED stimulus and highly indebted governments can fix this tremendous mess?
3) The McClellan Oscillator has moved sharply from the most oversold levels to the most overbought levels
Note
While my arrow down drawing skills may not be the most beautiful here on TV, I cannot see any other outcome than further eventual downside. While stocks are enjoying bear rallies, and the same addiction to FED money printing is creating more FOMO confidence, when I look at the macro-economic environment and the stock market (remember, the FED is helping the stock market NOT the economy), I cannot see any reason to believe this was the shortest bear market in history. In fact, the higher we go again, the more I see that this will be a long race to the downside and that won’t happen overnight, it will be long and ugly.The market bull’s addiction to the FED money printing machine was in full-swing way before COVID. Just look at the move in stocks after the repo crisis into mid-February this year, even though weaker Q4 2019 earnings had come out at the beginning of this year. All COVID did was pull the rug from under the artificially propped up economy and the global coordinated shutdown smashed the market down and exposed the majority of warning signs and broken pieces in the economy/markets:
- Falling corporate earnings
- Historically high equity valuations
- Stylish and bespoke short volatility strategies used for yield enhancement in an income starved world, where higher yield generation did not come free - participants accepted exposure to lop-sided downside risk in exchange for that yield.
- Equity valuations artificially propped up by financial engineering and accounting wizardry and record levels of buybacks
- Insane levels of corporate leverage,
- Decreasing global trade,
- A repo liquidity crisis;
- Absurd tech valuations inside the tech bubble part II (many recent IPOs come to mind and certain FANG+ stocks).
- Largest ever global debt to GDP levels
- The QE Infinity, soon to be buyer of all asset classes (stocks next most likely) FED.
As an update to this idea, I cannot justify any realistic reason to expect a broad recovery any time soon. Yes, there is lots of good news out there showing that COVID-19 trouble centers are experiencing a flattening of the morbidity curve, but it is important to remember there is still no real cure or a vaccine (a vaccine still needs to be tested, manufactured and distributed). So, we can expect a longer than anticipated lockdown or rotating lockdowns. With Q1 2020 earnings already started this week, I wouldn’t be surprised if we get equities repricing lower on a weaker than expected outlook across the board as early as next week. While many have taken advantage of the move up in the last few weeks, these bear rallies are, for a lack of better words, total nonsense. Trade carefully.
***none of this material is trading advice. I am sharing my personal thoughts and opinions only and you are responsible for your own due diligence, research, trades and profit/losses.***
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