Bulls Return Serve After Massive Down Day on Monday
As mired as stock markets are in uncertainty during these times, and as much as they have fallen, things could be a whole lot worse if not for all the buying of these dips.
With stocks moving so much off of the all-time highs we were at not so long ago, due to the fears of a pandemic, this might remind a lot of people of what happened to the stock market in 2008, which was plenty ugly indeed. Over half of the value of stocks were lost back then, and it took a few years to recover.
The sheer velocity of this current move is plenty startling, even though we only have a minor issue driving the market down this time instead of a genuine financial crisis. When we add in Monday’s fall, the biggest we’ve seen since the days of the real crisis, and sat on the edge of an official bear market, perhaps with no end in sight, it would be understandable that many would become scared.
Others have seen this as an extreme oversold condition. Oversold here means that the magnitude of the losses has been disproportionate with reality, which is what tends to happen when we act out of fear. There’s been plenty of that to go around as this virus has much of the world’s population terrified, and it doesn’t help when public officials such as Dr. Anthony Fauci of the NIH are so eager to fan the flames.
Fauci, the director of the National Institute of Allergies and Infectious Diseases, is leveraging his moment in the sun to try to stir the people into even more of a frenzy than they already are. He’s telling people that they should avoid large gatherings, among other things, and took a jab at large political events in particular, and the stark contrast between his views and that of President Trump are making the rounds in the media now.
If we were dealing with a real pandemic, that might be prudent advice, but it seems that only one of these gentlemen have any sort of grasp of elementary mathematics, the most elementary actually, the kind they teach you in grade school. We’re pretty sure that Fauci knows how to use a calculator but why he has put it away is what the real mystery is all about here.
Trump, on the other hand, apparently hasn’t forgotten his grade school math, the sort of thing you would use to try to get an idea of what the actual risk of contracting this virus would be give its present incidence. All you do is take how many people in the United States and divide by the number of infected and come up with the number.
What we are not entitled to do is to make up some huge number that we just make up with no regard to sensibility or even possibility and use that, perhaps even using the 5-20% of Americans that get the flu each year, and then derive our risk rate of infection from that. If such a day ever comes, then this number becomes appropriate, but the risk at any given time always needs to take into account present infection rates.
We are appalled by the remarks of Fauci and other officials as they continue to misrepresent the actual risk involved so grossly. Meanwhile, Trump is getting roasted by simply stating what should be obvious to anyone, that the risk to Americans from this virus is “low.” Low isn’t even the right word, as extremely low would be a much better description.
Since this frenzy of fear is playing not only in the streets but on Wall Street as well, and investors have so much riding on making the right decisions here, investors need to pay particular attention to what is actually going on behind the façade that we are given by both the media, whose business it is to entertain by scaring, and public officials, who should never fall to the level of such sensationalism.
We often compare COVID-19 to the flu, and this is actually quite instructive since the two have so much in common, other than the flu being many times more of a threat to public health than this coronavirus is. In any given year, we will see anywhere between 16 and 65 million Americans contract the flu. Even the low end of this during the lightest of influenza seasons has 1 in 20 people getting it during this time, and while they don’t have it at the same time, the chances of running into someone out in public, especially at large public gatherings, are pretty high.
This is why we get up to 65 million Americans contracting it some years, because we come in contact with people who have it and are infectious so frequently. Oddly, this doesn’t worry us much and we usually don’t give this a second thought, aside from perhaps getting a flu vaccine which have not even been shown to make much of a difference in infections.
In order to measure the risk of a virus, we do need to see how concentrated the rate is, and flu concentrations are plenty high. The rate of infection among Americans with the coronavirus is only 0.0003% right now, which is actually a completely meaningless number, or at least should be meaningless if we are in our right minds.
We Need to Measure Risk to Understand It
Within those currently infected, which number a thousand in the whole country, many of these folks are out of the general circulation, in institutions such as nursing homes or other institutions or other situations involving segregation. This still leaves a fair number in the wild so to speak, but our 0.0003% is not even representative of the actual probability of our encountering an infected individual in this country, and as minute of a risk this is, it’s actually inflated.
One person in a million would be a fair number to use, and even that might be overstating things. At large public gatherings, a sporting event for instance with 20,000 people in attendance, a basketball or hockey game for instance, we’re obviously not going to be in close proximity to all of these 20,000, as we will only be close enough to a tiny percentage of these. When you consider how much space people are told to give others these days in the face of this, this number gets reduced even more, so we’re down to perhaps 10 or 20 or even less.
There are other events that have people moving around more and perhaps even coming in close contact with a hundred people, as we might expect at a political event. We’ll use 100 here for the purposes of fleshing out this risk. Given that there is only a one in a million chance that any of these 100 are infected, this cashes out to 1 chance in 10,000 that you’ll run into one of these people at such an event.
This does not mean that we will even become infected merely by being close to an infected person, as we need direct transmission such as having someone physically touch you or sneeze close to you.
If the worst does happen, unless your immune system is considerably compromised, such as with many elderly people or those with diseases that make them much less able to fight this virus off, this presents similar to the flu, where you get sick for a little while and then recover. The same people die from the flu as well, although the flu takes a lot of lives of children and COVID-19 does not. Worldwide, over 100 times people die from the flu than have died so far from the coronavirus, and this number cannot possibly grow to anything beyond being a tiny fraction of the threat of the common flu.
If this all doesn’t qualify as low risk, we’re not sure what does. We’re up to 31 deaths, but we can’t just conflate the risk factors and assume that we’re all in the same boat, and those under 60 with no serious medical conditions have virtually no chance of getting anything other than the regular flu from this.
The chances of getting murdered in the United States during any given year is far greater than this. About 17,000 Americans get murdered every year, and even though these 31 deaths will certainly grow, even if we had as many as China ended up with, the coronavirus should be considerably less of a concern than worrying about being murdered, and especially not anywhere near close to the worry about dying in a car accident on any given day.
Even with the risk of being murdered is so much higher, we don’t tell people to stay in their homes to avoid this threat. There are all sorts of other perils out there, from accidents to getting robbed and injured and from natural events, but we bear these risks since the risk is just so low and the benefits far outweigh the risks. Sometimes we lose all sense of proportionality though.
People are also told not to get on planes now by some officials, even domestic flights. People are being segregated merely because they have flown in from another country, but the chances of any given person in China being actively affected and out and about instead of in a hospital is also incredibly low, even lower than the one in a million risk that the U.S. population is under. This is because China’s cases are virtually all segregated with only a small percentage of their active cases not quarantined, as evidenced by the very small new cases that they are seeing each day.
If we were on such a plane, we aren’t going to come into contact with all of the several hundred on it, although even if we did, that risk would be extraordinarily low. Unless you feel the need to go and shake everyone’s hand on the plane, the number that you’d be at risk from would be only a handful at best.
President Trump probably has no idea of just how low the risk is of this, and if he did, he’d never use a word that so greatly exaggerated the threat such as “low.” All we need is the simple math that we’re giving you here to serve as a complete antidote to this pandemic of terror.
The stock market hasn’t received the antidote, at least the majority of participants have not, but there are enough folks who are not under the thumb of this fantastic level of hysteria and can muster up enough courage to buck this trend. You do have to be pretty confident to want to jump into a building that at least appears to be burning by the vast majority, but looking at Tuesday’s results, with the Dow rebounding by over 900 points, not everyone is scared of this.
Tuesday’s trading was interesting in that the futures market gave U.S. stock indexes a bigger head start than this, but U.S. markets frittered away 1000 points over the first part of the market trading day and we even went below Monday’s dreadful close for a time. We actually dropped 1300 points from the high of the overnight futures session to the low point of trading Tuesday, but we made this all back during the second half, sending a strong message to the market that the bulls were still around and not sitting on their hands.
Stocks and Bonds Are Both Set to Reverse Course Hard Soon
As the number of coronavirus cases continue to increase, this will continue to put daily pressure on stocks. Stock prices are all about beliefs, and with so many people holding crazy beliefs these days, that’s going to be a strong influencer for some time. There is real value to be had here even entering on the way down, because this simply cannot go on for all that much longer, perhaps two or three weeks before we finally peak. Along the way, the tide will turn.
With this virus threat dissipated, people will shake free enough of their fear to take a practical view of the aftermath, and see how crazy it actually was to trim so much off of stock prices. Sure, there will be real consequences of this, but they are nowhere near as big as the market is pricing in.
Markets always overprice fear though, but what stands out so much is just how much this is being overpriced. It is not even that we have responded with rate cuts and the coming economic stimulus from Trump that matters as much as the sheer temporary nature of whatever economic effect that will come out of this in the end.
The price of a stock represents its overall long-term potential to deliver future earnings, and even taking a whole quarter off as some are predicting still doesn’t add up to much in the grand scheme of things, which are what stock prices ultimately focus on. This is a disease of staying home, but as people turn off the horror movie that they are watching as this problem goes away, they will dare to go out again and things will completely return to normal.
We’re actually in a fairly neutral phase with the stock market right now, coming out around even last week. We are still down by half of Monday’s move so far this week, but the perceived crisis in oil contributed a lot to that, and unlike the coronavirus story, that one has already been told and priced in.
Tuesday’s rebound is quite encouraging, even though we are still left to guess at the twisted path that this situation may take before it finally runs out of gas. Instead of falling though, we’re wiggling now, and there’s less chance of falling and hitting your head even harder than those who are still long stocks have already.
Energy stocks are another thing though, and with the lower oil prices we have now, things are even more grim for them, with the outlook not being very good at all. At least some of them are finally going to be slashing their dividend, out of necessity now, and it is amusing how much chagrin this is causing with some investors and commentators, where we’re reading things like this was the only reason to be in these stocks and now that will be taken away.
Anyone who thinks that these dividend payments could possibly make up for the huge losses that these stocks have caused their unfortunate victims to suffer really need their heads examined. The fact that they are being so discouraged by these dividend cuts but not at all by these stocks plummeting is almost impossible to believe.
As hot as treasuries have been, white hot as far as these things go, as we’ve been telling you, there are limits to these bull runs. When you blow away the all-time records like we have, there surely can’t be much left in this market’s voracious appetite because you eventually satisfy it.
Treasuries are starting to get a little too risky now, especially with Tuesday’s bad showing. When you see rates tumble down the hill since February 19 and then stop and bounce this hard, the fun may be over already. The 10 year was at 1.50 back then, and dropped all the way to 0.42% on Monday, and now sits at 0.76%. This sure looks like a bounce and suggests that the market is finally tiring.
Seeing Trump announce his stimulus and seeing the stock market up so much in overnight trading, and seeing a recovery throughout Monday’s bond trading continue on should have been enough for us to take our profits and move on. Sometimes there’s just nothing good to invest in and the smart money just sits and waits, and this is as good of a time as any to do that.
The treasury play that we’ve been talking about since the coronavirus panic started was never anything we expected to last very long, and we were as shocked as anyone to see just how low the market was prepared to drive yields down to. This move was virtually straight down up until the opening on Monday, getting dangerously close to going underwater, but as we told you, there isn’t much risk of that because at these levels, the low yields start to matter more.
The main reason for this is due to the risk expansion that this huge move in treasuries lately has caused, as the higher these bonds go up, the further and quicker they fall. You just don’t see moves like moving 34 basis points in just two trading days, and we may not have seen the end of this move yet. This is a matter of waiting for markets to equalize with reality, and reality simply cannot be postponed forever.
This is why, as we always say, that you really need to be paying attention when investing, even with treasuries, and perhaps especially with treasuries right now. Bond investors just took a real haircut, but the barber has not even warmed his scissors up yet compared to what is to come.
Back during the heat of the 2008 financial crisis, the 10-year yield dipped as low as 3.41%, and this was a real crisis and a real recession risk. It wasn’t just a risk back then, it was a certainty. Sure, traders have driven yields down a long way, but traders reverse, and we may be in the midst of this already.
This leaves us economic peril to rely on to stay so low, and when we look at where they were at the last time we were in genuine peril, there isn’t much standing in the way of these yields experiencing some huge growth and reducing the value of these bonds very substantially.
This is no time to be sad if you were in on this fabulous move up with treasuries, because when they are as volatile as they are now, a reversal just brings about another big opportunity. While some may not want to go with leverage here, due to their wanting to be cautious, no one should be scared of treasuries even up, at least in principle anyway, even though the risk on either side is much higher than normal.
You can go in either direction with treasury ETFs, and the ProShares Short Treasury ETF stands ready to have us jump on board with them should we feel that the time is right. After bottoming on Monday, this ETF gained 4.6% on Monday. For those a little more daring and skilled, ProShares also offers a 2X and 3X version of this, where we can really rake in some big money once treasuries move back down to reality.
These are exciting times indeed and not in a bad way like the coronavirus fears are, unless you are also afraid, which does indeed lead to some big messes.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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