The Fed Goes to 0%
Posted by Eddy Elfenbein on March 15th, 2020 at 5:14 pm

In a surprise Sunday announcement, the Fed has cut interest rates to a range of 0% to 0.25%, and announced a $700 billion QE program.

The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.

In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements. More information can be found on the Federal Reserve Board’s website.

CWS Market Review – March 13, 2020
Posted by Eddy Elfenbein on March 13th, 2020 at 7:08 am

”The system is not really geared to what we need right now.” – Dr. Anthony Fauci

This week has been one of the most dramatic in Wall Street history. The entire world is waking up to the fact that the coronavirus is a serious public-health challenge for everyone, and that includes the world of markets.

The stock market has been getting crushed. Thursday was the fourth-worst day for the Dow in percentage terms in its 124-year history. Poetically, the Dow fell by 9.99%. The only days worse than that came in 1929 and 1987.

Twice this week, trading was halted after the S&P 500 fell 7%. Under the rules of the New York Stock Exchange, trading is halted for 15 minutes after a 7% decline. Trading is halted again after a 13% decline. If the market falls 20% in one day, then the exchange is shut down for the day. These “circuit breakers” are designed to stem a runaway market. I’m doubtful that they can be effective, but we’ll see.

The First Bear Market in Eleven Years

I’m looking over the numbers, and it’s truly been a gruesome time for the market. Over the last six sessions, the S&P 500 has fallen over 20%. On Thursday, the S&P 500 closed down more than 20% from its all-time highest close from just three weeks ago. That’s the unofficial definition of a bear market. As it turns out, Monday was the eleventh anniversary of the bull market that started in 2009. It is no more.

While it’s true that the stock market is not the economy, they are related. In the last 93 years, the Dow has had 13 bear markets. Only twice did the economy not go into a recession. This is also the fastest bear market in history. We’ve had faster 20% declines but not from the peak.

The stock market is clearly on edge. Traders weren’t reassured by President Trump’s remarks on Wednesday, nor were they comforted by the Fed’s actions on Thursday. The indexes just continued to fall. I’m afraid the Fed is pouring gasoline into a car that doesn’t have wheels.

I think it’s very likely that the U.S. economy has entered a recession. The problem is that the economic numbers we get tend to be lagging. I suspect that over the next few months, we’ll see a drop-off in production for U.S. businesses. Unfortunately, that will also lead to a rise in unemployment. I’ll be keeping a close eye on the jobless-claims reports.

Here are same stats: On Wednesday, the S&P 500 fell by 5%, making it one of the worst days for the market in history. Remarkably, it’s been the least volatile day of this week thus far. On the NYSE, there were 2,376 new lows on Thursday and just two new highs. The Volatility Index, or VIX, got up to 76 on Thursday. That’s the highest in history.

Here’s a quick quiz for you. Guess how many stocks in the S&P 500 are currently more than 10% off their 52-week high?

The answer: 502.

That’s not a misprint. Nor are my math skills failing me. There are 500 companies in the index but 505 stocks. (Side note: I did have my math corrected this week by Nassim Taleb.)

On Thursday, 338 stocks in the S&P 500 reached a new 52-week low. Not one got to a new 52-week high. In particular, energy stocks have been creamed of late. I sent you a special alert after Monday’s dramatic decline. That selloff was sparked by the price war for oil between Russia and Saudi Arabia. At one point on Monday, West Texas Crude was going for $27.34 per barrel. That’s down from $65 per barrel earlier this year.

It’s not over. In fact, I think we could see a major oil company go under. Or they might be forced into a merger. As bad as the energy stocks have performed, they’ve been a gold mine compared with the cruise industry. Those stocks have been absolutely decimated.

The impact on the bond market has been quite dramatic. At one point, the entire U.S. Treasury yield curve was under 1%. The Federal Reserve cut interest rates on Monday. On Thursday, the Fed said it would inject liquidity to prevent “unusual disruptions” in the markets.

Every day we hear something new. The World Health Organization has officially called it a pandemic. The NBA has suspended its season. Baseball probably will do the same. Broadway has shut down. Ireland canceled St. Patrick’s Day, if you can imagine that. There was even a conference on the coronavirus that was canceled due to the coronavirus. I think schools will soon close. Heck, the entire country of Norway has basically shut down. Jim Cramer said the government should suspend all taxes.

What About Our Buy List?

What about our stocks? Well, there’s been very little company-specific news for us. I’m happy to say that our Buy List has been largely outperforming the market. Of course, we don’t have any energy or cruise stocks, so that helps. Also, our stocks tend to be much higher quality. On Thursday, our Buy List beat the S&P 500 by 1.13%. That’s pretty good for a single day.

Fiserv (FISV) said this week that it will postpone its investor conference scheduled for March 25. The company said it expects to have greater synergies from its First Data acquisition.

Fiserv also stood by its previous guidance for internal revenue growth of 6% to 8% and EPS growth of 23% to 27%. CEO Jeffery Yabuki said, “We remain comfortable with our outlook for the full year based on the diversity and resilience of our business along with our current view of the market.”

The stock has outpaced the market each day this week.

Moody’s (MCO) reaffirmed its 2020 guidance range of $9.10 to $9.30, but Moody’s now expects to be toward the lower end of that range.

“We are revising Moody’s Investors Service’s full-year 2020 revenue guidance from mid-single-digit to low-single-digit percent growth reflecting ongoing uncertainty related to the coronavirus,” said Raymond McDaniel, President and Chief Executive Officer of Moody’s. “We will continue to monitor and proactively manage our response to the situation as we work to meet stakeholder expectations.”

Moody’s is down 28% over the last six sessions, but it may be due for a bounce soon.

Disney (DIS) said that Disneyland is closing down through the end of March.

Shares of Globe Life (GL) are down more than 42% over the last three weeks. That’s very surprising, since the stock is normally so quiet and well-behaved.

AFLAC (AFL) closed Thursday at $31.42 per share. That’s an extraordinary bargain. The stock now yields over 3%.

Our best-performing stock this year is Hershey (HSY) and that’s down 9.6%.

Eagle Bancorp (EGBN) is now half of its 52-week high. EGBN is down 29% over the last six trading sessions.

The selloff has largely wrecked all our Buy Below prices. I plan to gradually adjust them back to reality, but that may take some time. Have patience with our stocks. This, too, shall pass.

What to Expect from Here

The market will remain volatile. You can expect to see big swings. Bear-market rallies are common, so don’t get too happy when the market zooms on a day with little news. It may not last.

I think the Fed will soon go to negative interest rates. There’s a meeting next week, and they’ll almost certainly cut rates again.

Well-run companies tend to adapt well to a new environment. That’s what I’ll be curious to see.

Things will get better once the coronavirus starts losing. It won’t be the Fed or politics that causes the turn. The economy will be hurt as consumers start avoiding masses of people. We may have to spend a few weeks riding out the storm. From what I understand, the people of South Korea have already showed signs of beating the virus. I hope we’ll do the same!

That’s all for now. Next week will be another hectic week for stocks. The Federal Reserve meets on Tuesday and Wednesday. The Fed will also update its economic projects for the next few years. I think Fed members will be much more cautious with their estimates. On Tuesday, we’ll get the retail sales report for February. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Morning News: March 13, 2020
Posted by Eddy Elfenbein on March 13th, 2020 at 7:04 am

Europe’s Central Bank’s Steps to Stem Coronavirus Damage Leave Investors Cold

Italy’s Nightmare Offers a Chilling Preview of What’s Coming

Bitcoin Drops 50% in Epic Two-Day Tumble

The Pitiful Oil Market the Saudis and Russia Are Fighting Over

Buffett Bet That Infuriated Icahn Is Hit Hard by Oil Crash

Texas Shale Heartland Rattled by Coronavirus and Oil Price War

Clamor Grows for Trump to Cut China Tariffs in Coronavirus Response

Fed’s Economic Forecasts to Give Window Into Extent of Coronavirus Fears

Airlines Cancel Flights and Lay Off Workers as Stocks Plummet

Late-Night Shows From New York Will Go Dark Next Week

Nick Maggiulli: 3 Things I Learned from the Coronavirus Crash

Joshua Brown: Hello Darkness My Old Friend

Howard Lindzon: Panic With Friends – A Chat With Brian Norgard …and Some Signs Of Selling Exhaustion

Michael Batnick: Animal Spirits Emergency Podcast: Preparing For a Recession & Everybody’s Talking About It

Ben Carlson: Creating an Overreaction Plan for the Coronavirus

Be sure to follow me on Twitter.

Morning News: March 12, 2020
Posted by Eddy Elfenbein on March 12th, 2020 at 7:07 am

Global Stock Rout Continues and Heads for Bear Market

With Trump’s Europe Travel Ban, World Economy Takes Another Hit

Dow Ends 11-Year Bull Market as Coronavirus Defies Economic Remedies

Trump’s Error-Laden ‘Foreign Virus’ Speech Has Investors Spooked

Trump’s Payroll Tax Cut Would Dwarf the 2008 Bank Bailout

Corporate Credit Risk Heightens as Coronavirus Impact Spreads

Insurers Face Double Whammy from Coronavirus Crisis

Why Energy Experts Are Watching Crypto as Oil Wars Emerge

PepsiCo Agrees to Buy Rockstar Energy for $3.85 Billion

Joshua Brown: The 9/11 Analog & Biden Can Win

Howard Lindzon: Panic With Friends – Jim O’Shaughnessy

Roger Nusbaum: Market Crash Aphorisms

Jeff Carter: Recent Data Bringing the Wrong Conclusion

Ben Carlson: The Relationship Between Recessions and Market Crashes

Michael Batnick: Bear Market Rallies & Animal Spirits: Oil’s 1987 Moment

Be sure to follow me on Twitter.

Another Bad Day
Posted by Eddy Elfenbein on March 11th, 2020 at 8:06 pm

Another terrible day for stocks. The Dow fell 5.86% today or 1,464 points. The Dow closed more than 20% below its highest closing mark. That’s the unofficial definition of a bear market. The S&P 500 lost 4.89% but it hasn’t reached bear territory just yet.

Fiserv (FISV) said it will postpone its investor conference on March 25. The company also said it expects to have greater synergies from its First Data acquisition.

Fiserv also stood by its previous guidance for internal revenue growth of 6% to 8% and EPS growth of 23% to 27%.

CEO Jeffery Yabuki said, “We remain comfortable with our outlook for the full year based on the diversity and resilience of our business along with our current view of the market.”

Moody’s (MCO) reaffirmed its 2020 guidance range of $9.10 to $9.30, but Moody’s now expects to be toward the lower end of that range.

“We are revising Moody’s Investors Service’s full year 2020 revenue guidance from mid-single-digit to low-single-digit percent growth reflecting ongoing uncertainty related to the coronavirus,” said Raymond McDaniel, President and Chief Executive Officer of Moody’s. “We will continue to monitor and proactively manage our response to the situation as we work to meet stakeholder expectations.”

At Noon, the S&P 500 is Down 4.1%
Posted by Eddy Elfenbein on March 11th, 2020 at 11:59 am

The stock market has given back much of yesterday’s big rally. Today’s selling seems to be more broad-based and not confined to one or two sectors. The Dow is on the cusp of dipping below 24,000. Oil is back down again.

There’s been talk of the IRS pushing back the April 15 tax-filing deadline. That should be fairly easy to implement.

Here’s an interesting story on how Eagle Bancorp (EGBN) slightly altered the language in its annual report:

Eagle Bancorp Inc., the parent company of Bethesda-based EagleBank, announced it was the subject of multiple government investigations this past July. In each disclosure since then, it has included the same phrasing when discussing the impact of those investigations: “Other than these increased [legal] costs, we do not believe at this time that the resolution of these investigations will be materially adverse to the Company. ”

In its latest annual report released March 2, however, it removed that phrase, which no longer appears in the filing. Instead, it added new language that does discuss the potential for a materially adverse impact on the company.

The company is probably just being prudent but it’s interesting to note.

Morning News: March 11, 2020
Posted by Eddy Elfenbein on March 11th, 2020 at 6:59 am

Lebanon’s Slow, Painful Slide Into Financial Meltdown

Oil Falls as Saudi Aramco Aims to Increase Output Capacity

ECB’s Lagarde Warns of 2008-Style Crisis Unless Europe Acts

Bank of England Cuts Rates in Emergency Move

It’s Not 9/11 or a Housing Crash. So What’s the Coronavirus Fiscal Playbook?

Let’s Talk About Bailouts, Before We Need Them This Time

Fed Faces Headache, Taps Epidemiologists in Hunt for Policy Clues

U.S. Farmers Still Dependent on Trade Aid After China Deal

Dow Futures Are Slumping Because Fiscal Stimulus Can’t Come Soon Enough

Super-Safe Treasuries Can Also Be Risky, Wall Street Warns

Coronavirus May Light Fuse on ‘Unexploded Bomb’ of Corporate Debt

Nick Maggiulli: The Worst Day of Our Investment Lives

Howard Lindzon: Panic With Friends

Ben Carlson: The One Guarantee in the Stock Market

Michael Batnick: Is the Stock Market Predicting a Recession?

Be sure to follow me on Twitter.

Morning News: March 10, 2020
Posted by Eddy Elfenbein on March 10th, 2020 at 7:01 am

Saudi Oil Price Cut Is a Market Shock With Wide Tremors

U.S. Sanctions Have Idled a Quarter of Iranian Oil Rigs

Shale’s New Reality: Almost All Wells Drilled Now Lose Money

Economy Faces ‘Tornado-Like Headwind’ as Financial Markets Spiral

Stocks Rally After Biggest Rout Since Financial Crisis

It’s a ‘Swimming Naked’ Moment: The Financial System Has a Real Test

Infineon, Cypress Shares Jump After Deal Wins CFIUS Clearance

Blackstone in Talks to Take Developer SOHO China Private in $4 Billion Deal

Nissan to Pull Out of Venture Fund with Renault in Cost-Cutting Drive

Joshua Brown: I’m Here, to Remind You

Ben Carlson: A Random Watch Down Wall Street: The Founder & Some Random Thoughts on a Big Down Day in the Stock Market

Michael Batnick: Putting Things in Perspective & The Fastest Bear Market Ever

Jeff Carter: This Isn’t A Typical Market Meltdown

Roger Nusbaum: The Market Is Crashing And I Don’t Care

Howard Lindzon: Momentum Monday – A Panic For The Ages

Be sure to follow me on Twitter.

CWS Market Review – March 9, 2020
Posted by Eddy Elfenbein on March 9th, 2020 at 9:05 pm

Today was a very dramatic day on Wall Street, and I wanted to send you a special update to let you know what happened. The stock market had its worst day in more than a decade. Let me explain what happened.

It all begins in the oil market. For the last few years, Russia, a non-OPEC member, has cooperated with OPEC in keeping oil prices up. The cartel wanted to have more production cuts. Russia said no and walked out of last week’s meeting in Vienna. In their mind, any production cut only serves to help American shale companies.

The thing about a cartel is that everybody has to work together. One weak link ruins the whole thing. That’s what happened.

The Saudis responded by declaring a price war. They’re trying to punish Russia with much, much lower oil prices. Combined with weaker demand due to the coronavirus, the price for oil plunged. At one point, oil was down over 30% today. That’s the biggest drop since the Gulf War 30 years ago.

That impacts a large part of the world economy. This morning, trading volume in Europe was three times the average. The U.S. stock market opened much lower. After four minutes of trading, the S&P 500 was down by 7%. That triggered a circuit breaker where the exchange was shut down for 15 minutes.

The market then reopened, but things were far from calm. The Dow eventually closed down by 2,000 points. For context, that’s more than the whole thing was worth in 1988. The yield on the 10-year Treasury fell below 0.4%. The VIX, or volatility index, reached 62 today. Just to give you an example of how extreme trading was, shares of Haliburton were halted three times today.

The stock market had its worst day since December 2008. The S&P 500 lost 7.60%. The S&P 500 High Beta Index was down over 12%. The Energy Sector had its worst day ever. Fortunately, we don’t have any energy stocks on our Buy List. For the day, our Buy List fell 6.74%. Bad, but well ahead of the rest of the market.

The entire U.S. yield curve was under 1%. I think the Federal Reserve will move soon. Perhaps it will be a coordinated effort with other central banks like the ECB, BOJ and BOE. We’re not done just yet. You can expect more volatility ahead.

One more thing: today is the eleventh anniversary of the bear market low in 2009. It was also a Monday. I’ll have more for you in our next regular update.

– Eddy

Oil Monday
Posted by Eddy Elfenbein on March 9th, 2020 at 11:07 am

This is a very dramatic day on Wall Street. Let me explain what’s happening.

For the last few years, Russia has cooperated with OPEC in keeping oil prices up. The cartel wanted to have more cuts. Russia balked and said no and walked out of last week’s meeting. In their mind, it only serves to help American shale companies.

The Saudis responded by opening the floodgates of production. Combined with weaker demand due to the coronavirus, the price for oil plunged. At one point, oil was down over 30%.

The stock market opened much lower. After five minutes of trading, the S&P 500 was down by 7%. That triggered a circuit breaker where the exchange was shut down for 15 minutes. Hopefully, that should cool things off. The market has since reopened and we’re sitting on big losses.

Some energy stocks are down 20% or 30% today. If I were CEO of an energy stock, I would halt all new drilling, cut my dividend and hold off on new capex. I think we’ll see some layoffs in that sector very soon.

One more thing: today is the eleventh anniversary of the bear market low in 2009.