Q1 2020 Market Update – “Everybody has a Plan…”

To put it mildly, the markets just experienced the full wrath of a Mike Tyson punch to the mouth…


As a result we have seen an endless parade of “Talking Heads” on TV, all trying to explain how “nobody could have possibly seen this coming”…

However, if you paid attention to my “Q4 Market Update – Connecting the Dots”, you may have already seen the trend changes leading up to what we just experienced. Here are some examples below:

The ratio of Corporate Debt Vs GDP hit an all-time record high recently as you can see in the chart below. However, in late 2019 it was already showing signs of rolling over.

Also last year, millions of investors were forced to face up to the fact that not every new start-up is profitable, including companies who grow to the point that they can raise money in an IPO.

In fact, it is quite coincidental that we recently hit the exact same levels of “Lossmaking IPO’s” as we did at the peak of the DotCom Bubble. Maybe that was also telling us something???

“Enough about the past already” I hear you saying. “We want to know where are we headed from here. The nice man on TV says that we are going right back to those all-time highs. Is that true?”

Well, if you consider the fact that in 2020, Goldman forecasts that compared to 2019 levels, S&P 500 dividends will fall by 25% and buybacks will plummet by 50%.

Since buybacks have represented the single largest source of US equity demand in each of the last several years (dark blue line below), then what could this mean for the fortunes of the markets moving forward?


Danger Will Robinson, Danger!!!


As buybacks, the last main pillar of support for the stock market, is withdrawn…

And don’t think for a second that the Real Estate arena is going to be spared either.

As Bloomberg reports, “mortgage lenders are preparing for the biggest wave of delinquencies in history. And unless the plan to buy time works, an even worse crisis may be coming: mass foreclosures and mortgage market mayhem.”

Also, according to estimates by Moody’s Analytics chief economist Mark Zandi, as many as 30% of Americans with home loans – about 15 million households – could stop paying if the U.S. economy remains closed through the summer or beyond.”

“This is an unprecedented event,” said Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania. She also points out another way the current crisis is different from the 2008 GFC: “The great financial crisis happened over a number of years. This is happening in a matter of months – a matter of weeks.”

You also need to consider that even though “Homebuilder Sentiment” ran higher over the last number months, what good is that if nobody is buying? As in recent days “Homebuilder Sentiment” catches down to the “Homebuyer Sentiment” plunge in March.

YES things are getting very REAL, very fast…

The US Conference Board’s leading economic index crashed 6.7% in March – the biggest monthly drop since the series began in 1959…


Below is the same series of Leading Economic Index on an annual basis that I showed you in my Q4 2019 Market Update below  compared with where things stand as of today… (I did show that this was coming.)

       Q4 2019 Update Chart

Where We Are Today


The US economic data has suffered its worst monthly crash ever…

Jobless Claims have gone absolutely bonkers. Three weeks ago it was a record 3.3 million initial claims;  two weeks ago it was an additional (upwardly revised) 6.875 million in initial claims; last week there were another 6.606 million claims, and then this week another uptick of 5.245 million claims.

That is 22 million jobless claims in 1 month.

The last 4 weeks erase all jobs created since The Great Recession.



As for “continuing” jobless claims? The highest level of continuing claims ever…

“The three-week tally implies an unemployment rate of around 13% or 14%, surpassing the 10% peak reached in the wake of the last recession as we have lost 1132 jobs for every confirmed US death from COVID-19 (14,817). This is simply stunning.” – ZeroHedge.com(ZH)

Or put another way:

“The U.S. labor market is in free-fall,” said Gregory Daco, chief U.S. economist at Oxford Economics in New York. “The prospect of more stringent lockdown measures and the fact that many states have not yet been able to process the full amount of jobless claim applications suggest the worst is still to come.”

You must now be asking “Surely the “Great American Consumer” is still fighting the good fight aren’t they? That’s what Financial TV keeps telling me”

The straight answer is NO!!!

The latest data from University of Michigan is a bloodbath… This is the biggest crash in the current conditions index ever…

“So hang on a sec…” you say, “If all this bad stuff is happening, why is the stock market roaring higher? It must be because of fundamentals right?”

Nope!!! That is definitely not it, as forward looking “Earnings-Per-Share” estimates are being absolutely decimated…

The answer is quite simple. The Fed has injected $440BN in just the last week and their new balance sheet total is now $6.3 trillion.

“In fact, in just the past month, the Fed balance sheet has increased by $2 trillion, more than all of QE3, when the balance sheet increased by $1.7 trillion over the span of a year. The balance sheet increase has also been faster on a weekly basis than anything observed during the financial crisis.” – ZH

And here is what the Central Bank “Farce” (I mean Balance Sheet) looks like going all the way back to 2008…

“Now that the Fed has effectively nationalized the bond market, through their direct buying of Bond ETFs (don’t worry, stocks are next just like in Japan, it’s just a matter of time) all the way down through junk bond issues and CLO tranches (which will no longer reflect the true underlying fundamentals but merely what the mood of the Fed is in on any given day). The only thing that matters for traders now is how to frontrun the Fed? So to make sure that the Fed’s helicopter money paradrop is utilized by everyone in the most efficient way, here is a breakdown of everything the Fed will be buying to make sure the bond prices of fallen angels (firms which spent trillions on stock buybacks instead of even considering a downside case) trade near Par, even as the underlying cash flows drop to near zero.” – ZH

Bottom Line – free markets are dead.

Even Guggenheim’s Scott Minerd summed up exactly what The Fed has done with its actions: “The Fed has made it clear that it will not tolerate prudent and responsible investing.”

“The Fed’s latest “shock and awe” nuclear bomb announcement (which includes purchases of junk bond ETFs and muni debt) sent the S&P as high as 2,818. And, in doing so, the forward PE multiple on the S&P has risen from the record 19.0x reached in February to a new all-time high of 19.4x.” – ZH

In other words, the market has NEVER been more overvalued than it is right now…

“So congratulations Jerome Powell: you have succeeded in the impossible – with the US economy entering a depression, with US GDP set to plunge as much as 50%, with US unemployment already 15% and set to hit 20% or more, the Fed chair has single-handedly disconnected stocks from all fundamental anchors and made the S&P the most overvalued in history as its forward P/E hits the highest number ever recorded.” – ZH

Finally as Mercutio McG (@JAMcGinley), noted so poignantly, “if the market gets back to ATHs while we are shutdown, it only proves the bears right. That the whole thing was a giant Fed fueled ponzi.”

I think this following video sums up quite nicely exactly what is occurring between Jay Powell’s Federal Reserve and the “markets” right now…


Maybe that is why the USA’s Sovereign Credit Risk is starting to blow out…


Some Final Thoughts

The Corporate Profits chart below (posted in my Q4 Market Update) shows the disconnect of the S&P 500 (Green Line) from economic fundamentals (Corporate Profits – Red Line), and hence a precursor to the crash we just experienced. However, with the S&P currently hovering around the 2800 level we are a mere fraction of the way to catch down to where economic fundamentals will eventually be.

As the US heads into Recession/Depression and the economy continues to crumble, just how far down could Corporate Profits plunge? My expectation is that the S&P 500 will eventually “catch down” to economic fundamentals (after the Fed loses control again), just like it has the last two “Bubble Cycles”.  More specifically, since the begining of March I have been telling people that in my view the S&P 500 could very easily drop to around the 1300 level.

You think that’s crazy talk? Indeed. So lets hear it direct from the mouth of a “Big Firm” heavyweight, Guggenheim’s Scott Minerd :

“Investors who are sitting out there right now who rebalanced a few weeks ago and moved from fixed income to equities should probably think about rebalancing again…The market at this level based upon where earnings are doesn’t represent any kind of intrinsic value…  It is being entirely propped up by liquidity. [The]S&P could [reach] 1,500, 1,600, 1,200.”

-Scott Minerd

Stay Frosty my friends…


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