2020 US Markets Tracking and Actionables
- Market Timing Actions
- THEORY of Market timing --- xfr ---
- 2020-2021 Long Term View as of Aug-Oct 2020
- Developed exUS risky - ,Europe,Japan too expensive
- EM INTL @Deep Lows Select Foreign Cos - as US
- Expect volatility with little meltup or upside
- Hope for Vaccine - introduction not working is good enough
- Valuations to remain super high - Narrow FAANGT
- Fed Stimulus and Liquidity High
- Rates to be low LONG as Fed is "Flexible" View on Inflation
- Disconnect GDP crash and Market - Look forward to 2021
- FOMO HERD Piling in at top
- 2020 H1 as of May 2020
- Timing the 2020 Market - 2800 strong support, 16.5x pe, EY=6%
- Flat/Inverse Yield Curve => Recession coming in 2020 or 2021
- Corporate debt becoming untenable => Buybacks slow down => Stocks stagnate
- -ive Little Upside as Market valuations very high - Buffet % of GDP metric
- +ive Interest rates are low - EY6% at PE=16 vs 10yr T<2%
- ETFs, Passive risk - goes up big, down big
- Black Swan Risks
- ---- Economic Trends 2020 Tracking
- Sector Trends and 2020 Tracking
- 2020 Tracking by Time
- Q4 2020 Outlook - Crash after Biden wins?
- --- Q3 2020 Outlook - No Sell in May, June stagnates, Covid-19 Second Save 20+ states to reclose
- Fed buys corporate bonds - to push rates down, boost $ 0.5 - 1.5+T
- Lots of Rent-defaulters
- Reversal at June end of Mar super rally
- Fed is Pooped out
- China Softpedals, no global boycott, after Ladakh India Skirmish kills 20+35 soldiers
- DISMAL Earnings Q1, Q2'2020
- --- Q2 2020 - March 20 Crash worst Mkt Log
- ISSUE: Retest lows - or is 2240 S&P the bottom on Fed/USGov $6T+ stimulus
- SSUE: Massive Unemployment! GDP falls -20%
- ISSUE: Reopening - GDP vs Deaths? 27 states eg Texas reopened May 1
- Apr 13 Too Sharp V-Rebound - Short Squeeze
- Mar-Apr 2020 What did the Fed and US Govts do to fight Covid-19?
- Lows Mar 23 2020 hit a low 34% below
- ---- Q1 2020 Jan-Feb - Outlook and Possible White Swans
- CoronaVirus likely to get worse faster
- Euphoria - MELT UP provision - double up!
- China Manages tide over Disruption - end of Mandate of Heaven
Market Timing Actions
ACT: One or Two 2020 Mini-Crashes regardless of who wins
Market to hurt when Federal/Fed stops pumping money
Watch for Second GDP Dip in US/EU as stimulus fatigue hits
- WFC,etc. to cut 10% staff - could be 10,000-30,000 jobs
- Airlines to cut 30% staff, reduce to 50% flights in Oct 2020 as $25b bailout expires
- Democrats will NOT put out stimulus checks $1200/head and $600/wk - 2x income
ACT: "Medium" dip Oct just to hurt Trump - not as bad as Mar 2020
ACT: Nov-Dec 2020 crash - Market whines to get fed
- Repeat of 2018 Dec, sharp V in Jan but out 1 month deferred
- Smart money may get out earlier to avoid crowd, but MFs Window dressing
ACT: ST-Bonds/ Cash 50%+ Park
SHV, CMF, BSV, JPST for 2%+ income
JPMorgan Ultra-Short Income ETF (JPST)
Invests in diversified portfolio of short-term, U.S. dollar-denominated investment-grade fixed and floating-rate corporate and structured debt while actively managing credit and duration exposure. 30-day SEC yield of 2.81% with a duration of 0.51 years and competitively priced at 18bps. Captures 97% of the yield of Bloomberg Barclays Aggregate Bond Index with only 8% of the duration. In a flat to inverted yield curve environment, you are not being compensated to take on interest rate risk in the form of duration- you can use this ETF to play the short end of the curve and still collect an attractive yield. Provides a way to “be paid to wait” while equity and fixed income markets face headline volatility.
ACT: Summer Crash DID NOT HAPPEN- Delayed Sell in May
- Fed WHATEVER end Mar'2020 has had market going straight up since!
PKJ predicted - A combination of factors including "make money from next crash", Deep State/China/Liberals may all have combine with an incentive to let the market crash this summer.
ACT: Accumulate Gold over time
USD rules - stick to VTI,BND,VXUS, some VNQ
THEORY of Market timing --- xfr ---
BTFD TONS ARE Waiting around
- "I Just want another market crash so I can buy again! "
Just Hold for 3rd Time Recovery
- After 3 crashes, everyone knows to HOLD and market will recover on Fed Put - Who cares if the bottom falls out, it will be back in a few years anyway.
AGILITY IS HARD TO DO!
- Get tactical instead of long only. The market has already shown us that it doesn't need fundamentals, so why would that be the basis for support in a sell-off?
Nearly everyone agrees that the current market is totally overvalued. And yet we all keep participating because we believe that when the bubble finally bursts we'll be able to get out safely. In reality, many will be stuck with positions that will take years to recover or they'll be forced to sell for pennies on the dollar.
SOLUTION: Keep flexible Trailing stop losses - tighten TSL when SERIOUS!
DCA vs Market timing
2020-2021 Long Term View as of Aug-Oct 2020
Developed exUS risky - ,Europe,Japan too expensive
EM INTL @Deep Lows Select Foreign Cos - as US
Expect volatility with little meltup or upside
EXPECT steep and swift retreats are growing more likely – like we saw in December and May.
Volatility to continue through September and perhaps October depending on where the president comes down on China
Hope for Vaccine - introduction not working is good enough
Valuations to remain super high - Narrow FAANGT
- FAANG at 25% of total market, P/S 10x
- Apple at $2T is 10x
Tesla stock split pushes it over $2000.
Buffet Wilshire 5000/GDP over 1.7
- Even 2021 ie Forward S&P 500 P/E is in the 100th percentile.
* SRC and current: https://fred.stlouisfed.org/graph/?g=qLC
Fed Stimulus and Liquidity High
The disconnect is thanks in large part to the Federal Reserve’s commitment to pumping cash into the system.
“The amount of the liquidity that’s been added to this economy is there. It’s not going to be withdrawn by the Fed because unemployment is going to remain high,” he said. “So I think there’s room really for both tech/value to go up in 2021, even though we finally might get a turn towards value.” - Siegel
Car crash will inevitably occur at the junction of Main St. and Wall St. Hundreds of thousands of small businesses have closed up shop, millions are unemployed, bankruptcies are through the roof, the banks are on the hook for billions of loans that are currently in forbearance and will eventually default amid Washington gridlock and a highly contested and possibly disputed Presidential election.
Buffett is SELLING not buying right now.
Rates to be low LONG as Fed is "Flexible" View on Inflation
Basically Fed is saying it doesn't care about TRUE INFLATION - money printing is NOT trickling down to the little people; in fact, a lot of them can't pay the rent.
Inflation is just not happening - at least as measured by govt CPI - it remains very high in education, stocks, bonds, housing, health care and food. But oil, entertainment, etc. are off massively.
Sooner or later, inflation will start to go up, bonds will plunge and equities will crash.
Disconnect GDP crash and Market - Look forward to 2021
Today’s investor knows a thing or two about effortless money, as the disconnect between the market highs and the reality of the devastated economy has never been more pronounced.
FOMO HERD Piling in at top
‘They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.’ Buffett 2000 on cashing in dot-comm peak
2020 H1 as of May 2020
BTFD - Be OPPORTUNISTIC - keep cash handy - happens QUICKLY
Market timing is a sucker’s game.
We are in for bouts of volatility, both up and down. Stick to asset allocation and risk for clients and let them know that we are monitoring the economic and market levels very closely. We want to scale new cash and cash from sidelines in as the market approaches these levels.
Shift to Consumer Discount from Premium
The consumer needs to perceive value.
With high employment and wage growth, together with good consumer confidence, we’re still positive on consumer spending for discretionary goods, and believe the upcoming holiday season could see a 5% gain.
Stay on short-intermediate as NIRP will invert
In fixed income, avoid locking in rates for too long. Stay at the short to intermediate end of the curve for bond allocations, high quality.
Remain Widely Diversified
Global diversification is more important than ever – no one wins a trade war, but there are one-off winners and losers as supply chains are adapted to help manage cost. For example, soybean tariffs hurt US farmers but helped Brazilian farmers.
Hard to BTFD when everyone wants a redo of Dec'18-Jan'19 crash
Timing the 2020 Market - 2800 strong support, 16.5x pe, EY=6%
Street estimate for '19 SPY earnings of $170 * 16.5x PE = 2805
Flat/Inverse Yield Curve => Recession coming in 2020 or 2021
- However this won't happen immediately and that we have some time to take measured decisions.
Corporate debt becoming untenable => Buybacks slow down => Stocks stagnate
-ive Little Upside as Market valuations very high - Buffet % of GDP metric
We see broader markets near all time highs and volatility drifting down.
The market is being driven primarily by three variables: global trade/growth numbers, the productivity of US/China trade talks, and Fed actions. We believe the market (especially in the US) is already priced, assuming these factors will have neutral to positive outcomes in the near-term.
+ive Interest rates are low - EY6% at PE=16 vs 10yr T<2%
The gaping disparity in valuations between stocks (5.3% Op.Earn/4.7% A.R.Earn Yields) and bonds (1.68% Yield) will likely keep typical market downturns from becoming large magnitude (-20% to -50%) declines.
Global flight to safety is keeping a lid on rates. Reflection of sentiment and expectations for slower global growth going forward.
ETFs, Passive risk - goes up big, down big
JP Morgan reports 60% of equities are held in ETFs or index funds and another 20% is held in quantitative funds. This move to letting machines run your investments is scary, since it does not involve any fundamental research.
Contrarianism => We have continued to see a big move away for active management into passive management and that usually means the next wave will be in active management.
Roughly 70% of the trading on the NYSE is from ETF trading and computer-driven/programmatic trading (commonly referred to as “algos.”) While many hedge fund managers believe they have the secret sauce, in reality, many use similar factors and essentially trade trends. Think risk on and risk off. Certainly the inversion is one of those factors, weakness in financials, etc.
Black Swan Risks
---- Economic Trends 2020 Tracking
SMEs closing forever, PPE doesn't help jobs as Hospitality/Restaurants empty
QE infinity - 10T Fed Balance
Since 2008 that government interventions, regulatory overkill, QE Infinity and ZIPR will have massive and painful consequences. When it comes down to financial assets – liquid listed stocks and bonds, the result is now clearly visible financial asset stagflation: financial assets cost much more and return far less.
ZIRP, Negative Real yields hurt savers, Retirees
Money flowed into assets esp stock model away from near ZIRP bonds, etc. But interest rates are down ACROSS THE BOARD. This really hurts savers and retirees.
A stock that cost $1 dollar in 2010 and made $1 in profit costs $10 today, but still makes $1 in profit. A bond that yield (or is it yielded?) 10% in 2010 makes 0.8% today.
University staff in the UK are furious. They are threatening to strike because their gold-plated final salary schemes are at risk. The USS faces a £20 bln funding gap – which will require universities and staff to significantly increase contributions to maintain its pension provision.
Sector Trends and 2020 Tracking
Consumer Staples, Discretionary, E-Commerce Booming
Consumer behaviour shifts as they nest at home, they have excess cash in pocket due to liberal stimulus and UE so they make deliberate decisions to prioritise quality over price.
Amazon boxes piled up in trash as it hikes revenues to near $90 bln is pretty impressive.
As 6-month heatmap (as of July 31, 2020) shows the top half sectors - big tech and health and consumer all doing great, but the industrials, energy, materials even utilities did bad.
Big Tech blowout Results
July 2020 despite Congress probes, FB ad bans, and a 33% annualized GDP decline in Q2, there has been stunning success of the Big Four Tech giants – beating expectations and proving themselves largely impervious to the Cornonavirus coming back in a second wave.
BRAND AD CYCLICAL CUTS or BOYCOTTS DID NOT AFFECT BIG TECH! A lots of firms deliberately cut advertising spending early in the crisis but smart companies went out and spent more to boost their profile and sales in front of US consumers amid Covid19 nesting. Increased revenue at Facebook which grow 11%!
AAPL not only "deferred" Mar sales ie NO SLOWDOWN but 11% bump as it sold more Macs, iPads and selling phones right through – especially its cheaper ones in China – boosting sales by 35% at a time when competitors like Samsung saw sales decline 14%.
2020 Tracking by Time
Q4 2020 Outlook - Crash after Biden wins?
--- Q3 2020 Outlook - No Sell in May, June stagnates, Covid-19 Second Save 20+ states to reclose
Fed buys corporate bonds - to push rates down, boost $ 0.5 - 1.5+T
Lots of Rent-defaulters
43 m rental housing units end'2019
- Rose sharply from 34m in 2005 - as lots of owned homes converted to hedge-fund owned rentals
- Gradual population rise from 26m rental units in 1975
- Not being able to afford to buy a home was the biggest reason renters gave when asked why they didn’t currently own a home
20-28m people could get Homeless due to evictions by Sep'20 - or one-third of US households 2020
- 19% unable to pay anything on rents/mortgages in June, another 13% paid only a portion
- those most likely to miss their payments were younger, low-income, or renters
- unemployment benefits expiring - FED/US govt have hit limits on deficit ability
- eviction bans and moratoriums that deferred rent payments are being lifted by local governments
- evictions hearings are still proceeding – but on Zoom
- Republicans want to encourage going back to jobs, so "PPE" benefits to SMEs conditional on reopening
Real estate Market is HOT in many areas like SFO esp. in suburbs, as supply is down, as sales/demand is still up on low interest rates.
Reversal at June end of Mar super rally
- First an early june market hit resistance convincingly, then tried bounce back to hit lower resistance then took a dive as Covid-19 cases reemerged.
Fed is Pooped out
- unemployment benefits expiring - FED/US govt have hit limits on deficit ability
China Softpedals, no global boycott, after Ladakh India Skirmish kills 20+35 soldiers
DISMAL Earnings Q1, Q2'2020
Earnings going bad, Companies draining credit lines, cut dividends, no buybacks
--- Q2 2020 - March 20 Crash worst Mkt Log
ISSUE: Retest lows - or is 2240 S&P the bottom on Fed/USGov $6T+ stimulus
SSUE: Massive Unemployment! GDP falls -20%
- Unemployment not at 11%… but a depression-level 21%:
The BLS reported that the U.S. employed workforce stood at about 152 million in February. With 32 million claiming unemployment, that’s an unemployment rate of 21%. .. But official gave 11% by ignoring the 14.3 million contract/gig workers who are currently drawing emergency Federal unemployment via Pandemic Unemployment Assistance (PUA), and the 936,000 in the Pandemic Emergency Unemployment Compensation (PEUC) program.
Underemployment is ignored. As SMEs cut back hours to avoid furloughs - the
Previously full-time workers who have had their hours cut to part-time aren’t counted in unemployment statistics, even though their employment status has changed for the worse.
Millions of business owners themselves often don't draw salaries or pay UE - so don't qualify or apply for UE benefits.
ISSUE: Reopening - GDP vs Deaths? 27 states eg Texas reopened May 1
Trump said HE has authority to reopen the economy, even though most think it is a state subject - this is particularly relevant on major states like NY.
New York Gov. Andrew Cuomo said Monday the worst may be over “if we continue to be smart” - indicating ongoing lockdowns are important.
Dr Fauci perhaps under pressure from Trump said 4/12/20 that parts of the country may start to reopen next month.
ISSUE: Lockdowns, PPEs, Testing, Deaths
Confirmed cases in the U.S. now total more than 560,000, more than any other country in the world, according to Johns Hopkins University. New York state accounts for more than 190,000 of those cases. The death count in the U.S. from the virus is more than 22,000.
However Dr Fauci said he was cautiously optimistic that the outbreak was slowing down in the U.S.
Apr 13 Too Sharp V-Rebound - Short Squeeze
Covid flattening as deaths much less than predicted earlier
Second week in April, strong weekly gains of 13% in both Dow and S&P500 came in large part because of an apparent improvement in the U.S. coronavirus outlook along with massive stimulus from the Federal Reserve.
Wild Swings daily
- Short Squeeze
Mar-Apr 2020 What did the Fed and US Govts do to fight Covid-19?
The 2 emergency cuts are as severely done as in 2008 crisis - what does Fed know that we don't?
Lows Mar 23 2020 hit a low 34% below
---- Q1 2020 Jan-Feb - Outlook and Possible White Swans
CoronaVirus likely to get worse faster
- Spread outside China not going to be stopped like full might of China behind
Euphoria - MELT UP provision - double up!
HFTs, Macro and quants/CTAs are trend-following quants that trade futures contracts and commodity options are sprinting to chase the market’s upward momentum is giving rise to a systematic market melt-up. But these guys are VERY agile and will jump out faster than you can!
China Manages tide over Disruption - end of Mandate of Heaven
To the Chinese, it cannot be a coincidence that their country is simultaneously experiencing a massive swine flu outbreak, a severe bird flu, a coronavirus epidemic, political unrest in Hong Kong, the re-election of Taiwan’s pro-independence president, blocking sales of Huawei/ZTE, and opposition to technical semiconductor or aircraft engine sales to China, and stepped-up U.S. naval operations in the East and South China Seas. They feel that the macho tone of China leaders may backfire.