Act II: COVID Crisis

The throes of a bear market are upon us and it is now apparent to everyone that the equity markets have completed a multi-year uptrend. Perhaps you are aware that this top was inevitable or maybe you think it is a temporary stain that will be wiped away once a vaccine is created. Market cycles are inevitable and they always end with a crash once the market awakens to the bag they are holding. Unfortunately, it took a virus to pop this bubble so once again for the third time in 20 years we have an unprecedented circumstance surrounding a major market top.

So, what happens next? As I write this post, I am reading that the stimulus package being negotiated in the Senate is worth $2T (10% of GDP) according to Larry Kudlow (WH Economic Advisor) so the rescue packages will keep coming. Is this short-term good and long-term bad? Exploding deficits create a conondrum for this situation as the stimulus is needed to keep the economy afloat but the longer term effects are higher interest rates, taxes and inflation – you can read more about this economic concept HERE.

Economists debate the long-term effects of spending policies but it is all how things are managed after the crisis abates. If Congress is business friendly in the recovery period, they can use the private sector to restore growth and lower unemployment. This would make the spending efforts well worth the money, however, this phase likely for won’t happen until 2021 or beyond.

In the meantime, the markets are pricing in the dramatic drop in growth and increased credit risk as many companies will have difficulty re-paying their debt. Earnings reports are two weeks away where the reality of an economy being halted will be front and center.

As you can see in the chart below, the S&P is searching for a support level and may have lost one on Friday. The Fibonacci grid I have drawn shows re-tracement levels where stocks typically find support and signs of a reversal. The 38.2% level aligns perfectly with the December 2018 low which is a significant pivot in the chart. If you remember, this is when the Fed began to lower interest and signal the end to their very short-lived tightening cycle. Unfortunately, this level did not hold on Friday which opens up the door to the next two lower retracement levels. An ugly technical picture, for sure.

If we look at the same set-up for the tech heavy NASDAQ, we see that its 38.2% still has a bit more to go in the coming sessions.

And the Dow Jones Index may be foreshadowing the next move for the S&P 500 and NASDAQ. You can see below that it has sliced through its 38.2% with no signs of a reversal.

It will continue to be a very difficult trading environment as the market does not know how to price a systemic halt to economic activity. Expect more programs and interventions from central banks and governments until the stock market stabilizes.

Chart of the Week!

Economic & Central Banking Snippets 

  • The Fed cut interest rates last Sunday by a full percentage point, returning it to a range of 0 to 0.25%. Also, the Fed said that it would increase its holdings of Treasury securities by at least $500 billion and its holdings of government mortgage-backed securities by at least $200 billion “over coming months.”
  • The Federal Reserve announced on Tuesday that it would begin buying commercial paper through a facility first used during the 2008 financial crisis, marking its latest effort to prop up dysfunctional financial markets. The commercial paper market is a crucial source of funds for companies looking to raise cash for short-term needs. Analysts at Bank of America said last week that the market had become “frozen”, as a rise in demand for cash collided with a pull back from the market by money market funds — one of the biggest buyers of commercial paper.
  • The White House wants to send checks to Americans in the next two weeks as part of a new stimulus package to limit the damage to the US economy from the coronavirus outbreak, Steven Mnuchin, the US Treasury secretary, said. The request marks a shift by the White House towards a more aggressive economic policy response as the disease has forced the closure of schools, bars, restaurants and manufacturing plants across the country. (FT)
  • The Federal Reserve said it would relaunch a crisis-era facility that allows large financial institutions access to short-term loans. The Primary Dealer Credit Facility, originally established in 2008, will seek to tamp down strains in funding markets by expanding loans to the 24 largest financial institutions known as primary dealers, which function as the Fed’s exclusive counterparties when trading in financial markets. (WSJ)
  • The new Bank of England governor, Andrew Bailey, said on Wednesday the central bank was willing to pump unlimited quantities of money into the economy via its new commercial paper facility. Speaking to journalists on a conference call, Mr Bailey said it was not yet time to shut financial markets because they had not lost their integrity and their ability to price. “I don’t think we’re there at all,” Mr Bailey said. (FT)
  • Initial jobless claims totaled 281k for the week ended March 14th, up 70k on the week. This is just the beginning of what will be a large and unfortunate rush for unemployment benefits. (Boock Report).
  • The US Federal Reserve is broadening the swap lines it has set up to boost US dollar funding markets to include arrangements with additional countries including large emerging markets such as Brazil and Mexico as well as European nations including Denmark and Sweden. (FT)
  • The European Central Bank announced a new €750 billion bond-buying program aimed at shielding the eurozone economy. The move signals the bank’s determination to defend Southern European governments whose debt has come under pressure from investors. (WSJ)
  • The Bank of England has unveiled an emergency interest rate cut for the second time in just over a week, trimming its main bank rate by 15 basis points to 0.1 per cent. In a special meeting on Thursday, the Monetary Policy Committee also voted to increase its bond buying programme by £200bn to a total of £645bn. (FT)
  • The Federal Reserve has stepped in to support the US municipal bond market in its latest effort this week to shield the economy and markets from the impact of the coronavirus pandemic. Having already slashed interest rates, lined up an $700bn bond-buying program and set up dollar swap lines with a clutch of other central banks around the world, the Fed said on Friday that it would expand a program to support local-government financing through a lending facility for money market mutual funds. (FT)
  • Germany is set to abandon six years of fiscal restraint with a blowout budget designed to save its economy from the coronavirus pandemic and protect thousands of businesses from imminent ruin. Angela Merkel’s cabinet is meeting on Monday to approve new borrowing of €356bn — equivalent to nearly 10% of Germany’s gross domestic product — marking a new era in fiscal policy and a radical departure from Berlin’s long-held aversion to debt.

Macro Snippets

  • JPMorgan, Goldman Sachs and Bank of America will tap the Fed’s discount window along with five other big banks to reassure smaller firms they can do the same without stigma. Citigroup, Wells Fargo, Morgan Stanley, Bank of New York Mellon and State Street will do the same. (Investopedia)
  • GM and Ford are in talks with the White House to build ventilators as shortages are expected. The automakers are halting all vehicle production in North America. Tesla‘s Elon Musk has also tweeted his readiness to make ventilators. In France, luxury brand LVMH is producing hand sanitizing gel for Paris hospitals. (Investopedia)
  • Occidental Petroleum was downgraded to junk by Moody’s because of its high debt load incurred by the $37 billion acquisition of Anadarko. CEO Vicki Hollub warned employees “aggressive steps” were coming on top of the recent move to slash its dividend for the first time in 30 years. (Investopedia)
  • Amazon will hire 100,000 more delivery and warehouse workers in the U.S. to meet the surge in demand. The company is also spending over $350 million to hike hourly pay in the U.S., Britain and many EU countries. (Investopedia)
  • Nordstrom is the latest retailer to shut stores across the U.S. and Canada. The company has withdrawn its 2020 guidance after it saw a “broad-based deceleration in customer demand” in March.  (Investopedia)
  • Developing countries will see their income from oil and gas fall by 50% to 85% in 2020 if current market conditions continue, according to the IEA. In a joint statement, the IEA Executive Director and OPEC Secretary General warned that public sector spending in areas such as healthcare and education will be affected as a result. (Investopedia)
  • Marriott International, the world’s largest hotel company with nearly 1.4 million rooms world-wide, said it is starting to furlough what it expects will be tens of thousands of employees as it ramps up hotel closings across the globe. The company began shutting down some of its managed properties last week, a Marriott spokeswoman said. The employees at these properties won’t be paid while on furlough but the bulk will continue to receive health-care benefits, she said. Marriott is also trimming staff through furloughs at properties that are still operating. (WSJ)
  • Regeneron said it aims to have doses of a potential drug for COVID-19 ready to start human clinical trials by early summer. The approach involves creating antibodies to the virus that could be used to treat the disease and to prevent it, Regeneron said in a statement Tuesday. Shares of REGN rose 11.5% today, hitting a 52-week high. (Investopedia)
  • The global banking industry is demanding regulators relax or delay a raft of post-crisis rules on everything from capital and liquidity to accounting and climate change, which they argue are hampering their ability to respond to the coronavirus crisis. Chief among their concerns is the introduction of new international capital rules known as Basel IV, which is due to come into full effect by 2027 but will force banks to build up capital levels from next year. (FT)
  • Yelp has withdrawn its first quarter and full-year 2020 forecast since public life is being restricted by state and local governments. OpenTable, an online restaurant-reservation service, said total seated diners in March fell 45% in Seattle, 40% in San Francisco, 30% in New York, and 25% in London, Los Angeles, and Chicago. (Investopedia)

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.