If you aren’t sticking to a consistent strategy of index investing and not buying/selling, and think you can outsmart the market, then make sure you read the full stimulus bill as the details are very important. The media is focused on raw dollar amounts and what families get, they don’t focus much on the details of how the business stimulus works. Link here:
Yesterday, I was bearish seeing the 20% rally over 3 days. I thought the market was stupid – how could a fiscal and monetary stimulus package fix the economy when businesses will stay closed, supply chain is disrupted, etc? So I went and made a big post about how loans aren’t to magically fix the underlying problems companies are experiencing, and will have a long term impact on earnings as they struggle to pay it back, limiting expansion.
Having talked to our CFO and then after reading parts of the bill that pertain to business, I realized it’s MUCH more complicated.
To give just one example, you may have heard from the media that $300 billion is for “Small business loans”. That’s misleading- It’s so much more generous than just a loan, because it can be forgiven.
The U.S government will cover up to
2 (edit: 4) months of payroll expenses, debt payments on prior debt, leases, etc, up to $10 million per small business under 500 employees, and then forgive the loan, essentially making it free money. The only condition for forgiveness of the loan is any laid off employees or cut pay for workers making under $100k over the next few months will reduce the forgiveness amount. So basically, just hold off on any layoffs or pay cuts for a few months, and you are basically guaranteed to profit.
As far as I can read, the only eligibility criteria for the forgiveable loan is that the business make a good faith claim that they’re negatively impacted by uncertainty. I don’t see any text in the bill that actually requires that the business actually shut down to be eligible, just that there are economic concerns.
The deals for large businesses? A lot less generous, but still helpful. I’m not a lawyer so it was a bit hard to read, but it sounds like these will be handled on a more discretionary basis, with the government negotiating deals that involve the government benefiting from future profits, such as stock options in exchange for cash. These will likely prevent some bankruptcies, but shareholders could get diluted as a result depending on the terms of the individual deals.
In addition, another commentor in my last thread commented that there may be a large inflow to equities on Monday or Tuesday from institutional funds rebalancing their portfolios, something I had not considered.
At this point, I’m no longer bullish, or bearish, just uncertain. After selling yesterday at the peak, I decided to buy back in this afternoon while it’s was down 3-4%, not because I’m bullish, but because I personally wanted to shift towards a more passive long term strategy due to uncertainty. The only thing I’m certain of is volatility.
Currently, the only speculative, short-mid term investment I’m making is shares in $SLV, a Silver ETF. My rationale for that is that lots of fiscal/monetary stimulus combined with supply chain disruptions due to shutdown will cause stagflation. Silver performed very well during the last recession and early recovery due to low interest rates, and performed extremely well during the stagflation of the late 70s, even with high interest rates. In addition, it’s still trading at roughly the lowest its been in 10 years.
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.