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TWELVE o'clock TUESDAY – 3/17/2020 - Stock Market Report

Updated: Mar 18, 2020


Bearish, for now … rating of 3 (rating was 2 last week, 0 - 4 is bearish, 5 is neutral, 6 - 10 is bullish). There is so much I could write about this week, so I’ll share some of my thoughts. This letter is a little longer than most and may occasionally use slightly technical jargon, which is unavoidable.


1. Last week, the Federal Reserve fulfilled its role as lender of last resort, offering up to $500B to the sluggish $15T Treasury securities market. When Treasury securities, considered to be nearly “risk-free” all over the world, are illiquid and difficult to trade, that is a very significant symptom of how bad things are. We got past this and the market rallied a bit. Yet, it went unnoticed by the general public.


2. CNBC reports that a) the $1T commercial paper market is illiquid and shut; and b) the Fed is offering a c/p funding facility to keep that market functioning. You can’t do International trade without letters of credit. You can't do domestic trade without commercial paper. This is a symptom of how bad things are. We got past this one and the market rallied a bit. Even more obscure to the general public.


3. Wall Street professionals are having trouble projecting the economic and S&P 500 earnings decline. For example, no measure translates the number of people exposed to coronavirus into a numerical decline in S&P 500 earnings. When there is no rational way to project price, that’s how bad things are. We are struggling to get past this; I offer my attempted solution, next.


4. What I can do, is pick earnings decline numbers and calculate how far the market would go down in response. Again, no one is confident which numbers are “probably the correct ones” to use. So, I must guesstimate, but as a CFA, I’m skilled in making judgements and calculations, and I have run the numbers in-light-of both current and historical data. This is a symptom of how bad things are. Keep in mind - no one knows the future. My biggest concern is – have I been too conservative?



The key guesstimates: a) earnings decline 5% in Q1, 10% in Q2 and Q3, and 5% in Q4 before returning to normal next year, and b) market capitalization decreases as investor confidence falls. The result: the calculated market decrease is -31%. More than a symptom, this attempts to measure how bad things really are. Please keep in mind: a) psychological and behavioral factors can cause price swings greater than calculated, i.e., greater than -31% and b) my judgements may prove conservative.


5. The idea that Gold or cryptocurrency would be a great hedge against a systemic calamity proved to be remarkably wrong. In many ways, this week was the first such test in the age of modern markets. While the markets declined sharply, neither of these two hedges went up in value. Another sign of how bad things are – shortcomings of, or outright disproved, “long-standing axioms”.6. Last comment – I project that when a measure of confidence arises that the coronavirus is “under control”, we will have reached the bullish inflection point that will permit the market to rise back to prior levels over what I believe will be a 15 month period.


To see prior editions of this blog letter, go to http://www.defensiveadvisor.com


Opinions voiced in this post are for general information only and are not intended to provide specific advice or recommendations for any individual, without complete knowledge of that individual’s total financial profile. To determine what is appropriate for you, consult a qualified professional financial advisor. No strategy assures success or protects against loss.#StockMarket . #Investing . #TwelveoclockTuesday

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