I’ve compiled a bearish case for why stocks will start dropping, probably on Monday. If not Monday, within the next 3 weeks. I expect new lows within 2 months and I expect the S&P will hit 1000-1500 within the next 18 months. Unfortunately, we are potentially looking at massive permanent changes in the structure of our society. There will be no “V” shaped recovery. Settle in, it’s a long read.
The Virus was man-made (Genetically Modified)
Here you go: project-evidence.github.io/#%28part._the-end%29
My personal belief is that they were experimenting with the ability for Bats to carry the virus without getting sick. Apparently the Navy carrier that had a huge outbreak has a 60% rate of asymptomatic cases. South Korea has a bunch of positive cured cases. A homeless shelter in Boston just had a ton of cases with zero having symptoms. We really don’t know what will happen to them in the long run – will their immune systems just kill the virus? Will they spread it unknowingly for weeks, or will it reappear months or years later? Will they suddenly turn symptomatic at some point or become more or less susceptible to wave 2 or other diseases? The long term effects are unknown and that is a risk.
Also the scientist who discovered Aids also believes it is man-made www.zerohedge.com/health/covid-19-man-made-virus-hiv-discoverer-says-could-only-have-been-created-lab
The Vaccine isn’t coming
Vaccine’s aren’t easy to make. Is there a vaccine for AIDS or the Common Cold? Also, this virus is spreading quickly which is making it more likely to mutate. In fact, there are already tons of mutations which makes it exponentially more difficult. All this talk about one in the works is mostly just hope, providing an excuse to pump the market. On the positive side, the scientific community seems to believe that it is more likely that it will mutate into a less deadly form, like the common cold.
Also the treatments that are being hyped may not work as effectively as hoped. The Gilead action was clearly a fake pump and Remdesivir has been known for a couple months as a potential treatment, but not a cure all. Hydroxychloroquine may help but studies are mixed, such as this report from Bloomberg just this morning. Again, it’s not a miracle cure.
The lockdowns aren’t meant to eradicate the virus. They are meant to control it and allow the healthcare system to handle the stress. Some areas may contain the outbreak but probably only temporarily. And even if entire countries get it under control, they will need to keep their borders shut to avoid another outbreak. Good luck getting the virus under control in poor countries, especially when the wealthy countries are trying to contain it themselves. Look at all the lockdown protestors out and about lately? Does that look like a lockdown to you? It looks like the start of a another wave to me. Global travel is essentially dead and trade is severely impacted.
When the politicians say the lockdowns will be in place for another month, they really don’t know. They hope that will happen but most likely they will just keep moving out the date. And they know that if there is another outbreak, the lockdown becomes wasted.
What this also implies is that unless we can come up with a vaccine, this is our new reality, possibly for a few years. Otherwise, we will eventually reach herd immunity or it will be contained but I estimate it will come at a cost of a death rate of 1% to 3% of the global population.
BRRRR Money Printing and Inflation
Without the Fed directly buying stocks, there is no real money moving directly into stocks. The Fed doesn’t want hyperinflation and they don’t want deflation either. They want stability and control. Even if they were buying stocks, that doesn’t mean the market has to go up. Just look at how that is working out for the BoJ who has been buying ETF’s for years.
The amount of stimulus thus far isn’t enough to spark major inflation. It may be enough to prevent deflation but it’s still early to tell. Everyone thought we would have massive inflation in 2008 but that didn’t materialize because of the trickle up effect. You may think the $1200 stimulus and unemployment benefits will have an impact; they won’t. Once people panic buy at temporarily high prices, there will be an oversupply of junk we don’t need, thus once again, preventing inflation.
Also some food for thought – What asset class will benefit from deflation? Bonds, specifically treasuries. What does the Fed mostly own? Bonds. What asset class gets wrecked with inflation? Bonds. Do you really think the Fed wants inflation?
Debt and Share Issuance and the Impact on EPS and future EPS
All of these companies getting bailouts and issuing more debt and shares to raise capital are all taking a bite out of their future earnings. Recession/Depression/Expansion whatever, if you double your share count, EPS is cut in half and it takes years to even get it back to what it was before. Debt leads to the same problem as share raises. That debt is eating away at earnings and forcing the company to repay debt instead of buyback shares. And as you may realize, buybacks have been a major driver for higher EPS and share prices over the past number of years. This is now over. This is why I am comfortable being short even if I am ultimately wrong. The upside is limited. I think Dip Buyers at this level are forgetting about this.
The Psychological Aspect
Whether or not a person or business survives this period in time, they will be permanently scarred. Everyone is impacted. Those who lost jobs, those who watched their investments crash, those who got sick or knew someone who passed. Everyone will or has gotten hurt. This applies to finance because people will now want a bigger safety net and this is a good thing. But it comes at the cost of deleveraging – paying down debt and making less risky investments. And deleveraging is not good for the stock market and economy. The psychological impact also carries over to…
Real Estate, WFH and other Trends
A lot of people are realizing that working in an office is not necessary. This will cause a permanent decrease in the demand for offices. Retail is also impacted and although the demand loss might not be as big or as permanent, the short term effects are much stronger due to all the bankruptcies and closures.
AirBnB’s are also screwed. No one is renting them now and some of the owners are over-leveraged and will now be forced to sell or rent. If they rent it out, they are probably no longer cash flowing after debt servicing. Also most major cities rely on property prices increasing to justify investment as most condo units don’t cashflow with a mortgage.
And lastly, the fact that so many businesses and people have already not paid rent in Month 1 of the lockdowns is a very ominous sign. Residential real estate will also take a hit
The Real Estate market is much bigger than the stock market and the debt that backs it up is equally as massive. What happens when the lockdown is over and people and companies start selling their real estate holdings?
We have witnessed an era of record high valuation metrics for a number of years now. Do you really think we deserve to have those same metrics in an era of uncertainty and sharp revenue drops? Valuations will come back to earth.
Tech and the Nasdaq will Fail
Eventually, fundamentals will matter for Tech. Although these companies will survive, they will be punished. Google, which derives about 80% of its revenue from advertising will see those revenues evaporate. Advertising is an easy expense for most companies to cut. I could see advertising revenue drop by 20 to 50%. Facebook has the same problem. Apple can feel the pain in multiple ways – supply chain disruptions, cost conscious consumers and margin compression. Netflix and Amazon will both do relatively well. But how do you justify buying those if Apple drops to a 10x P/E for example? All tides rise and fall.
TLDR: Everyone will soon want to hoard cash (or pay down debt) and this translates to deflation as well. Also I believe JPM just stopped approving new HELOCS.
Warren Buffet is not buying to save America
In fact, he is raising cash and selling some stakes. Berkshire’s insurance business will likely struggle and some of the weaker businesses will be closed entirely. They won’t be buying until valuations are much cheaper to justify the extreme risk.
VT World 50% Retracement
Many people are using the Dow or S&P to determine levels that may create or support or resistance and start a reversal. What these technicians fail to realize is that this is a global pandemic and thus the global market is a much better indicator. Unlike 2008/2009, it’s not just US Banks and a few other places that overleveraged – China was and emerged as a key component of the recovery. This time, China is at the epicentre of the problem and although the virus has faded in China, their economic problems are just beginning.
The World is now at the 50% retracement level. It closed at $68.11 and the exact 50% retracement is $68.47. It may have already hit this in theory when it was closed and futures spiked Thursday night/Friday morning. Or it may hit it this in the upcoming week and then retrace.
SPY’s Friday After Hours Close $286.66
SPY’s all time high was 339.08. S&P’s 2009 low was 666.79. Notice all the multiples of 3? This is how the real insiders mark their charts and signal each other to indicate reversals and advances. I’m not saying the selling starts Monday, but I’d say within the next couple of days, maybe weeks.
And some Advice:
Stop buying naked, short dated calls and puts. It’s so easy for the market makers to screw you. Let me give you a simplified example of how easy it is: 2 market participants, each with $1MM. Player A thinks the market will go down, so he buys $1MM worth of puts. Player 2 sells him those puts, collecting $1MM in premium. Player 2 then buys $2MM worth of stock. Stock goes up due to no selling pressure, puts expire worthless. Obviously simple but think about it. Instead, buy longer dated options, use spreads, etc.
TLDR – Stocks going down. All time highs are years away. Downside Risk is much higher than the upside. The next couple of years will be miserable for everyone.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.