Archives for April 2020

Bulls Seizing the Moment – Junk Bonds Not

On Monday I wrote about the Lines in the Sand that were drawn for both bull and bear.  On Tuesday we saw the bulls celebrate with a breach to the upside that could not hold until the close. Today, the bulls are testing the upward bounds again, likely with very different results by the time the day ends.

What’s been eating at me lately is high yield bonds as you can see below. They were behaving “fine” until the Fed stepped almost three weeks ago and said they were going to buy junk bonds, something I deemed as outrageous. Since then, junk bonds have only gone down. While volatility has calmed since the announcement, price action has not been bullish. Maybe it’s nothing to worry about because the Fed and Treasury are dominating the markets now. However, I think this canary in the coal mine should be closely watched. It’s odd behavior.

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Bulls & Bears Draw Lines in the Sand

Stocks ended last week with a three day rally that looks to be built upon this morning. The major indices continue to trade in the range I outlined several weeks ago as the likely first bounce. What I did not envision was stocks getting into that range and then essentially going sideways. Historically, that has bullish implications.

The first chart below is the S&P 500 on a daily basis so you can see the first bounce range of between 1/2 and 2/3s of what was lost during the crash. If stocks ready to new post-crash highs, the upside target would then be 2950 to 3000.

The next chart is the same S&P 500 but on an hourly basis so you can see the short-term range depicted by the two horizontal, blue lines. It should be easier to break above than below the range, however we should be on guard that a false move is always possible, but especially so now.

Finally, crude oil is under attack again, but notice in the pre-market that the stock market is shrugging it off. I heard a Congressmen speak this morning about oil being very low for a long, long period of time and that sellers will come in anytime it rallies. While that may make intuitive sense, it also speaks volumes about the sentiment in oil. This is how bottoms are made, when no one thinks something can rally.

 

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Airlines Stocks Look Awful While Stock Market Risk Clearly Defined

Yesterday, I wrote about my anger and disgust regarding the airline  bailout. That won’t change anytime soon. Today, I want to look at the group and how they have been trading. Below you can see a chart of the airlines as represented by the JETS ETF. Besides declining 65% from high to low since the market’s peak, notice how little green is on the chart. Green days mean the closing price is that much higher than the opening price. Red means the opposite, the close was lower than the open.

Red days show that emotion ruled the opening but smarter minds prevailed by the close as the airlines closed lower since the open. That’s typically a sign of moving exiting a sector. Even since the bottom last month, we have only two green days, not exactly the pillar of strength.

Moreover, for all those hanging your hat on the notion that a government bailout will mean great things for the stock, think again. While a bailout might avoid Chapter 11 where many of them belong, I will argue that it will prevent the airlines from recovering anytime soon and perhaps not even by 2025 or 2030. Those that could survive should do so without aid and those that can’t should take advantage of the bankruptcy laws and file to reorganize without the debt overhang.

Finally for this update, I want to show you two charts below that I posted on Twitter yesterday. The first one shows the number of stocks going up on all days since the March 23 bottom. On most up days, we see 2000 stocks advancing, an extreme number.

Below is the opposite chart, stocks going down every day since early March. On down market days, we usually see at least 2000 stocks going down. In other words, the stock market has become an all or none proposition as the computer driven algorithms have completely dominated.

On Wednesday I concluded with my thought that the bulls were supposed to come back to work after a two-day, 1000 point decline. They did a nice job. Over the coming days the bulls need to keep going and close above last week’s high which is 24,300 in the Dow and 2880 in the S&P 500. Without doing that, there is downside risk to 22,500 and 2640 respectively.

Stay safe and healthy!

See you next week…

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Angry & Disgusted

Last week, the government announced a deal with the 10 major airlines in the U.S. for outright grants as well as low interest, long-term loans. The government gets very little in return. As you know, I have been imploring the government to do the unfathomable, the unthinkable since early March. Whatever number they had in mind for workers and small business, it wasn’t enough.

I also had the utmost confidence that Treasury Secretary, Steve Mnuchin, and Fed Chair, Jay Powell, would literally go nuclear to keep the markets functioning during the historic period of volatility and dislocations. Mnuchin certainly gets it and has been the single biggest hero in the economic effort.

With all those kudos, I think it is outrageous and disgusting that the airline industry is getting what amounts to a bailout. Yes, I know. Covid19 is no fault of their own nor their employees. However, and there is a huge “however”. Airlines have already been bailed out twice and have visited the bankruptcy courts many times.

Moreover, they collectively (and legally for that matter) decided to spend much of their free cash flow buying back their own stock which reduced the number of outstanding shares, therefore juicing earnings and the stock price. That benefited their shareholders, their employees and certainly their executive team who likely had a good supply of stock options.

Buying back stock has been around for decades and maybe even centuries. There is absolutely nothing wrong with it. During and after large stock declines, corporate buybacks have been essential at helping stabilize the stock and provide that constant buying pressure. In the case of the airlines which collectively lost money in every single decade except for the previous one, they must have really felt their oats. In an ultimate stroke of pure greed, the industry decided that after being perennial losers forever, it was time to enrich themselves after gouging customers and creating an unpleasant travel experience.

Why am I so outraged?

The airlines used their massive profits to buy back their own stock instead of building mission critical rainy day funds to help them through the next crisis which for them, is always around the corner. And today, the industry is whining and crying that they need help, yet another bailout. That’s unconscionable.

They don’t need another bailout. They need better behavior and corporate governance. Receiving billions and billions in grants rewards bad behavior. It’s yet another example of the moral hazard we condone in this country. Instead, the Treasury should have severely punished equity holders and wiped out executive stock options by taking large, non voting stakes in the airlines. Just like with AIG, the government could sell its shares in the public markets at a future opportune time and potentially realize enormous profits. I didn’t even mention how much money the government made from the TARP rescue plan for the banks where the government became equity holders in those businesses.

Finally, not every airline is in a financial position to survive as is. American Airlines has almost $40 billion in debt and spent roughly $12.50 billion buying back their stock. They may be the most egregious but they were not alone. Chapter 11 bankruptcy is there for a reason. Contrary to what the media and government want you to believe, it’s not like the airlines are closing up shop without a bailout. Chapter 11 allows a company to get relief from creditors and reorganize, usually wiping out the equity and turning debt holders into partial or all equity holders. It would also allow them to negotiate with the unions for better terms in exchange for ownership and possible board representation.

What is being done today is wrong and shameful. Enough is enough. Taxpayers deserve better.

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Oil Trades Below – Dow 40,000???

The oil market has made headlines this year and especially this week with crude oil trading negatively for the first time in history. Yes; you read that correctly. May crude oil closed at -$37 on Monday.

However, before you start running out to get paid to own oil, I put together this video to explain what is going on and if the retail investor can take advantage of the crash.

If you would rather read a short blog post about oil, here it is. I joined the good folks at Yahoo Finance for a segment that went viral where I discussed Dow 40,000.

Strategist Predicts Dow 40,000

A few weeks ago after I offered the three possible paths for the stock market, I followed up with a video on the subject which should be updated.

Finally, in case you didn’t catch the TD Ameritrade segment with some stock picks, here is that one too.

TD Network Segment 

The bulls are supposed to attempt a rally on Wednesday. Let’s see if it happens and if the major indices can close above Tuesday’s opening price.

Don’t forget about the various financial planning strategies and tips I have been offering.

Forgoing RMDs
Careful with mortgage rates
Tax loss selling
ROTH conversion

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RMDs Waived But Mortgage Rates Not Following Bond Market

Recently, I wrote about the April 15 tax filing date being extended to July 15 and the presumption that contributions earmarked for 2019 would also be extended. The IRS confirmed that this week. I also wrote about converting your Traditional IRA to a ROTH IRA, something everyone should consider. Additionally, the recently passed $2 trillion CARES Act did something that I do not believe has ever been done before. It waived the need for people over the age of 70 1/2 to take their Required Minimum Distributions (RMDs).

The IRS uses the previous year’s closing balance, 12/31, to calculate the next year’s RMDs. Because the 12/31 balances are likely to be significantly higher than current values because both stocks and bonds declined in tandem, the IRS seems to have felt it was unfair to give Americans the double whammy of withdrawing money in depleted accounts and leaving them with an inflated tax bill.

In any case, if you do not absolutely need to take your 2020 RMD, you should very carefully consider foregoing it and starting again in 2021. If you have already taken some or all of your 2020 RMD and it is within 60 days of that withdrawal, you can potentially redeposit that back into your IRA.

The bottom line is that if you have any questions or want to discuss this further, please let me know!

Finally, I am hearing from lots of people regarding refinancing their mortgages because they see short-term interest rates. Caveat emptor. Refinancer beware! Because of the stress in the financial system mortgage rates have actually risen over the past few weeks with the popular 30-year fixed around 4%. Given where the 10-year treasury note is, one would expect the 30-year fixed to be well under 3%. Banks simply have no interest in lending money for that long of a period at such low rates. They are now padding their profit margins on mortgages since many mortgages will be in forbearance or outright default.

Be careful taking out a mortgage or refinancing. Check out the 20 and 15-year fixed rate mortgages and even there, rates are a little bloated. I am happy to lend an impartial eye if you want to run the numbers you are receiving by me. I can also give you the names of some experienced and reputable mortgage professionals. Just know that you need not be in a hurry.

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Fill Your Cars, Top Your Tanks

As we enter a new week and “things” are calming ever so slightly incrementally, crude oil is the story of the overnight as the front month, May, expires and is in total collapse. This is not what it seems on the surface. Yes, crude oil is down sharply again, but the 30% crash has more to do with structure of the commodity contract than a real crash. I need to choose my words carefully and not overwhelm you with lingo.

Crude oil is a commodity and its contracts to buy and sell expire every month. It’s designed that way for producers to be able to hedge their production as well as consumers of crude to be able to buy large quantities in the future. When commodity contracts expire and roll on to the next trading month, the price rarely picks up where the last one left off. Sometimes, it is higher and sometimes it is lower. For those of you with more advanced knowledge, we know this as contango and backwardation.

Anyway, the May contract for crude oil expires now. Rumor has it there is very little storage available. Think about all those market participants who held the May contract, hoping to find storage. Now, they are seemingly dumping those May contracts on the market because they cannot physically take delivery. There’s no room to store the oil anywhere.

May crude oil is trading at $8 a barrel. June is $23 and July is $28. August is $29 and September is $30. The farther out you go, the more expensive crude oil is as there is an expectation of much higher prices as the economy rebounds. Be very careful reading too much into the media hysteria that crude oil is going to $0 or even negative. While it certainly could happen today for structural reasons, that’s not where the real market is.

The backdrop for crude is so negative that it may actually be a positive. It is very possible that oil tries to hammer out a low this week. That’s one big opportunity to watch for. Remember, while we love low oil prices as consumers, too low prices hammers our economy even more as so many of the new jobs created since 2009 have been in the domestic energy industry. Oil under $40 is basically unprofitable, not to mention that hundreds of billions in high yield bonds have the risk of default. So, we really need oil that is not too high, but not too low. Goldilocks.

And with this headline collapse in oil, stocks are looking solidly red to begin the week. However, after Friday’s somewhat manufactured afternoon surge, I won’t be surprised to see some or all of that gain given back. Semis really lagged although it’s fair to say that they have been really leading. Banks surged and they have been behaving poorly after earnings season began.

All in all a pullback in the stock market probably has the highest likelihood right here. I think we have roughly 25K on the upside for for the Dow and 22,500 on the downside. I know. That range is widely enough to fly a parked Boeing 767 through. But that’s what happens when volatility is elevated.

Speaking of volatility, the Volatility Index or VIX which usually moves inversely or opposite to the S&P 500 did not make a new low on Friday as stocks soared. That is another reason why the market may be a little tired and in need of some giveback.

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Dow 40,000 Coming But Rest of 2020 Likely Not A Layup

During the vast majority of the bull market from 2009 to 2020, I was always among the most bullish people giving forecasts. I always kidded my buddy Tony Dwyer, market strategist at Canaccord Genuity, that he was the second most bullish person in the industry. I fondly remember Joe Kernen of CNBC Squawk Box fame laughing when I called the Dow to go from 14,000 to 18,000. My 20,000 target was equally dismissed.

In late 2016, our model first opened up Dow 30,000 as likely before a major decline unfolded. That was universally dismissed as impossible because the economy just kept plodding along without enough juice in the growth. In hindsight, I should paid more attention to the fact that the model was unable to offer a subsequent higher target after Dow 30,000 like it has in the past. I just figured the model was late, not indicating anything.

Today, I am not nearly as bullish for the rest of 2020 as others although I do see higher prices on balance by the time the year ends. While I do see Dow 30,000 being hit in 2021, the path to get there isn’t likely to be as easy as we have previously seen.

Dow 40,000 also becomes possible in my work once Dow 30,000 is achieved. Now that’s something very positive on a long-term basis with even a chance at 50,000 a number of years out this decade.

After the market closed on Thursday, it was revealed that their main anti-viral for Covid was showing very promising anecdotal results. If this can significantly help avoid death and can be mass produced, we do have a real game changer among the more than 100 vaccines and therapeutics currently being tested. Stocks surged after hours as they awaited President Trump’s press conference to lay out his plan to reopen the economy. Knowing how Trump likes to pump up the market, especially on days when the economic news is bleak, I do not believe he will disappoint.

All this should lead to massively higher opening on Friday with the Dow up somewhere between 750 and 1250 points. Cheerleaders will be out in full force. I expect a chorus of “I knew this was coming”. Time for victory laps.

As much as I want to waive the flag and start chanting “USA, USA”, I don’t think tomorrow is the day. We will see how stocks trade, but my sense is that Friday may be more of a short-term selling opportunity than reason to go all in for a run to new highs.

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Bulls & Bears Both See Opportunity

Since the most recent rally began on April 2nd, here has the succession of up and down days. Up, down, up, down, up, up, down, up, down. We have not seen back to back down days, just like we never saw back to back up during the entire one month crash. Obviously, the current situation is on a much smaller scale. Wednesday was a down day and as I mentioned on CNBC on Tuesday, it looks like stocks may have hit a temporary ceiling. We will see if the bulls come right back to work on Thursday or if the bears are ready to make a stand and confirm a small pullback.

Below is the Dow Industrials and you can see the rally has paused at 24,000 which is roughly half way back to its highs from the lows. Many first rallies from a low often stop between 40% and 60%. My old blue, horizontal lines remain on the chart where I first thought the bounce would lead. Further upside by the bulls should lead to Dow 25,000.

 

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Bulls Make Big Progress But a Little Overdone

The bulls had quite the holiday-shortened week last, showing their best performance since 1974 and 1931. Both of those years were in the midst of very strong bear markets if you care. Clearly, what’s going today is without precedent. As I continue to mention, this is the first time in world history where the government shut down our own economy and induced the sharpest contraction ever from a high.

On Thursday, we learned that another 6.6 million Americans filed new jobless claims as states continue to play catch up. The previous week’s number was also unfathomable. Remember that regarding the markets, watch the reaction instead of the actual news. For two straight weeks, stocks rallied on the unthinkable news. That indicates a market pricing in the bad news and growing more comfortable with the economic fall.

Last Thursday on the news of the Fed coming in with yet another huge bazooka, stocks rallied. However, the NASDAQ 100 lagged badly and semiconductors were down. Banks on the other hand were up sharply and far outperforming the stock market. This combination is a short-term negative heading into the new week not to mention the fact that stocks have rallied sharply from the lows. Pulling back to upper blue line below or even slightly into the zone would not be unexpected.

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