US equities made the most of the holiday-shortened week.
As I put it on Thursday afternoon, markets “did not go quietly into that Good Friday”.
In addition to all the fireworks (jobless claims, Fed action, the OPEC+ teleconference), stocks tacked on 1.5%, bringing the weekly gain to 12.1%, the best advance since 1974.
To be clear, you don’t have to be an incorrigible market skeptic to call this a bear market rally. It fits the description in almost all respects, and even if, by the grace of the monetary and fiscal gods, we don’t revisit the local lows, there are almost surely more harrowing days ahead.
It won’t surprise you to learn that SocGen’s Albert Edwards isn’t convinced by the 25% bounce off the March nadir.
“The equity market rally is raising hopes among investors that the worst of the bear market is over — already!”, he exclaims, in his latest weekly missive, before noting that “like many others”, he suspects this is “nothing more than an early stage, bear market rally — before the real bear market begins”.
Albert also isn’t shy about stating the obvious, even as almost everyone else is. “Governments are, in the famous words of Mario Draghi, committed to doing ‘whatever it takes’ and the transition to direct monetary financing of government deficits is now really a foregone conclusion”, he writes.
While Edwards and I generally do not agree on the relative desirability of this kind of overt, monetary-fiscal union (I think it’s wholly desirable, while he, like most readers, harbors serious reservations) Albert has been ahead of the curve in predicting the inception of MMT or MMT-like policies. Indeed, his notes over the years are replete with references to QE being little more than thinly-veiled direct financing. After all, if the balance sheet can never be unwound (or at least not without crashing the market), then QE is just deficit financing with a primary dealer intermediary for the sake of optics.
Naturally (and here, I mean “naturally” not in the context of Edwards’s predisposition for bearish musings, but in the sense that profits do matter!), Albert notes that earnings will almost surely collapse.
“To be sure these are extraordinary times, especially with the authorities transitioning to full blown, permanent monetization of government deficits [but] while ruling nothing out, I would find it incredible if it turns out that the equity market has already hit bottom”, he writes, before referencing his colleague Andrew Lapthorne, whose commentary on “flash” versus consensus EPS expectations I’ve likewise referenced of late.
“Andrew Lapthorne notes that if profits do, as seems likely, collapse, it would be most unusual for equities to resist the undertow”, Edwards says, drawing your attention to the chart below.
(SocGen)
As I wrote last weekend (and it’s even more true after this week’s remarkable rally) it still feels as though most market participants haven’t quite come around to the idea that when it comes to corporate profits in the second quarter, we’re flying almost completely blind.
To recap, I do think it’s possible that many will simply “look through” the next quarter or two — to write off (figuratively and in some sense literally) what are sure to be God-awful numbers as a kind of “sunk cost”. After all, that’s how we’re supposed to look at the GDP numbers, I’m told. It’s an “engineered” shutdown, and therefore maybe doesn’t count as a “classic” recession or depression.
I get that. It does make sense if you’re looking at it from a dispassionate perspective, either safe in your employment or otherwise comfortable in your financial position. It makes even more sense if you’ve got dry powder and have been patiently waiting for years on a decent opportunity (like Howard Marks, apparently).
But remember, for the millions of people who have lost their jobs, it will seem very real indeed.
“It is a big ask to expect investors to try to look through these events and shrug them off perhaps more so for negative prints of core CPI than a profits slump”, Edwards goes on to write, noting that “if the current rate of implied inflation expectations follow any slump of core CPI into negative territory a Rubicon will have been crossed in more ways than one”.
(SocGen)
But when it comes to stocks, Albert (only half-jokingly) notes that the link between the fundamentals (any fundamentals) and prices may soon be severed entirely.
“Maybe direct Fed buying of the S&P might break the link”, he says. “Indeed, bang on cue this week, Janet Yellen called for Congress to give the Fed the authority to buy the equity market!”
Hours after the timestamp on Edwards’s weekly note, the Fed said it would begin buying junk bonds and high yield ETFs.
Read more: Janet Yellen – ‘This Is A Huge, Unprecedented, Devastating Hit’
Earnings have not mattered for years. Why now?
Because they may be zero. lol.
that’s a joke, but you know what I mean.
Hmmm, what kind of P/E ratio would that provide? Nah, Just buy the dip.
Keeping the lizards from stealing the matches this morning Heisenberg?
Because now you are scrambling for cash.
They matter in a bear market. We still seem to be in a Bull market attitude. Momentum and free money
Once the mandate for Political and Financial institutions to levitate stock prices is rooted deep enough there will be no limits to the rhetoric to justify MMT, monetization or Fed purchases of any or all financial products irregardless of any established past norms..
Kind of reminds me of the scenario surrounding North Slope Drilling 40 years ago…Opposition just gave up when the Arab oil embargo occurred……Same will be in this case….
And of course, any money directly benefiting the American people, will be met with wailing and hand wringing. F%*K THEM ALL.
Shiller p/e soon to be a laughable antique. Valuations are for suckers. Really? Maybe. We have no choice but to believe in Fiat money.
In all things human. “Follow the money”
Considering how much some companies have leveraged themselves, does zero earnings mean dividend cuts?
The companies I would worry about the most are those which have too much financial leverage, coupled with high operating leverage. The latter is the killer that drops profits fast when the firm suffers even small declines in revenue. Airlines, hospitality, for-profit medical, cruise lines and other firms that have high fixed costs are going to have cash problems, pressuring the dividend. Especially bad when high debt obligations.
A number of companies in those industries have cost structures that are, in extremis, much more variable than we usually think. While the cost structures are largely fixed in normal times, if you close the hotel and furlough all the staff, you can cut out a huge amount of the cost structure. Same if you close the restaurant and lay off all the staff, dock the ships and ditto, and so on. Stop marketing spend, lay off 20% of corporate staff, cut everyone else’s salary, stop paying dividend, cut maintenance and capex to bare minimum. Sure you’re not going to be running too well when you reopen, but some of your competition will have gone away too.
But if they have too much interest expense, operating lease expense, union contracts that prevent mass furloughs, debt maturities – that’s genuinely fixed and can make them one of the competitors that goes away, and similar if they have certain types of debt covenants.
If you are an investor, it is a bad idea to sell everything in panic. But it is a good idea to look at your financial situation and if necessary reduce your risk now that we have had a rally. If you manage a portfolio for a living, now is likely a good time to make adjustments both up and down the risk ladder. As Mr. H says, the flip side is if you have raised cash like Howard Marks, this may be a golden opportunity over the next year.
Not looking forward to it, but iIf MMT is the way of the future, I would hope Universal Income will be provided along with the Fed buying the SPY. Just to demonstrate a semblance of balance.
Regarding the notion of market participants “looking through” bad earnings reports…
Are they currently looking through an expected 2 or 3 quarters of bad reports, in order to justify SPX 2,800 as a “fair value/price” ?
If so, what happens when we discover that there are probably 4-8 quarters of “bad” reports coming…?
Seems like the largest miscalculation occurring right now is How Fast We Spring Back To Normal (…as we used to know “normal”).
As Tom Keene likes to say… We have no visibility as to the “X-axis” on this contraction.
Well I very much appreciate the simplicity in the explanation of historic MMT even as we contemplate a “new” era of MMT.
Incorrigible skeptic of the market I am, have been for some time. It lead me here. I have always been a proponent of buy while the blood is running in the street. You gotta have dry powder to do that. You also have to like what you are buying in case you essentially become married to it should things go south.
I am not a fan of churn. I am adjusting for the future days. Having dry powder when i needed and executing it well is an a achievement of a lifetime. I intend to protect it. I can not day trade. I was there when the beast fell and jumped allover the kill, stopped by the colorful flint quarry afterwards. I am heading back to the cave next to the spring carrying the food and materials I need to keep on trucking with fire.
Imagine where I would be without the perspective of it all. I am lucky I tend to get off of the beaten path where you can still find some low hanging fruit of knowledge.